The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
September-October 1962
y
Our Unemployment Yardsticks:
Concepts and Measurement
. .
. page
3
Postwar Trends in
District Bank Earnings .
. page 10
Current Statistics
.
.
.
.
page 16
ll ~SFjR \ E H\ K
OF KrlJS s llTl
~JJUEll \
Subscriptions to th e Mo TIILY I EV 1Ew are available to the public without charge. Additional
copies of any issue may be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
Our Unemploymen Yardsticks:
Concepts and Measurement
ow TO achieve a full utilization of resource · leading to rapid economic growth
without inflation is generally acknowledged to
be the major domestic economic problem facing this Nation. To those who follow clo ely
the economy' performance, the underutilization or available manpower r ourc . has been
or particular con ·ern. Interest, however, has
be ' n by no means confined to prof · ional
analysts. With major policy decisions framed
in the context of statistics on employment and
unemployment, general public interest has
mounted to a point exceeded only by that in
the great depression of the thirties.
Current public attention and interest in general labor force developments were aroused by
the high level of unemployment during 1960
and 1961. After mounting steadily during
most of 1960, the unemployment rate failed
for nearly a year to respond t the general
recovery in the economy. This provoked a host
of editorial comments and articles on the problem. More recently, the unemployment situation ha recorded some improvement, but
change for the better has been slow and faltering. The improvement has been obscured,
moreover, by a pronounced slowdown of labor
force growth during the past year.
Two avenues of discussion, in general, have
arisen from the current interest in unemployment. One is concerned with the appropriate
policies, both public and private, designed to
return to an environment of more rapidly expanding demands for manpower and of reduced rates of unemployment. The second
area of discussion is aimed directly at the
adequacy of the statistics describing employMonthly Review •
September-October 1962
ment and unemployment conditions. While the
matter of measurement has been constantly
subject to technical examination, it is probably
safe to say that never before has the public
been so involved in the problem. Unfortunately, the discus ion have not re ulted in clearcut gains in understanding. videncc f gro s
misunderstandings cone ming unemployment
data arc evident in variou · widely circulat d
publications. Jn addition, it has been common
to confuse the evaluation of unemployment
concepts and measurements with attitudes
toward policy decisions utilizing the statistics.
Because unemployment figures are so important in general public discussion of economic developments, it is essential that the
concepts and methods of measurement, as well
as the purposes of the information, be widely
under tood. This article, by directing attention
to what i being measured and why, has been
designed to extend public understanding of unemployment statistics.
y
From the standpoint of total national output, statistics measuring unemployment provide a measure of unused potential. When manpower resources are idle, the goods and services they could have produced are lost forever.
Excessive unemployment thus constitutes a
wa tc of productive services. By reducing unemployment to a minimal level, a larger total
of output and real income can be produced,
a suming other resources also are available.
Shortly after World War II, certain broad
economic goals of the American people were
reaffirmed in the Employment Act of 1946.
3
The Act delegates a responsibility to the Federal Government "to promote maximum employment, production, and purchasing power."
It also gives the Federal Government a responsibility for creating an environment in which
"there will be afforded useful employment opportunities, including self-employment, for
those able, willing, and seeking to work."
Thus, as a tradition of a free society and as
subsequently embodied in national legislation,
emphasis in the American economy has been
given to work and the avoidance of involuntary unemployment, as well as to high and rising levels of income and output. It is readily apparent that adequate employment and unemployment sta ti tic ar a ncces ary rcqui ite for
th typ of analy i which will m asurc the
progress toward such goals and provide the
basis for policy decisions to help in ure their
attainment. Recalling the period of the thirties,
it will be remembered that valid labor force
statistics were lacking altogether and various
unemployment estimates differed by millions.
This deficiency was a serious handicap at that
time. Fortunately, a major advance has been
made since then and direct statistical measurements of unemployment are available on a current basis.
In addition to the objective of knowing the
extent to which manpower resources are being
utilized, labor force data are of interest as an
economic indicator. Unemployment figures are
a significant key in the analysis and discussion
of the economic situation. Together with other
labor force measures, they provide a record of
the operation of the economy over time. Thus,
the data are used extensively in the study of
cyclical movements in economic activity.
In describing these two reasons for measuring unemployment, it may be noted that need
of the individual or family has not been mentioned. While need may induce an individual
to seek employment, knowledge of the motivation prompting the action is not relevant to the
unemployment count desired for the uses
4
identified. The need may be great; or, the desire for greater wealth may govern the action.
Indeed , the range of motives for seeking employment is undoubtedly extensive. The point
being made, however, is that the loss of national output and income arising from unemployment is not dependent upon the circumstances of the individual.
It i true that unemployment is frequently
thought of in terms of the need or hardship
caused the individual. While this may be done,
it is well to point out that economic hardship
is influenced by many factors other than unemployment. Savings, other sources of income,
second ary worker contribution to family income, numb r of depend nt , durati n of un mploym nt, and oth r on idcrati n arc nc essa ry to form judgments on need or hardship.
To illustrate the significance of this requirement for additional information, it may be observed that the needs of some employed individuals and their families may be greater than
the needs of some unemployed persons.
y
M
N
TS
Truly, then, there are legitimate differences
as to who should be counted as unemployed.
onsequently, the way in which unemployment
i defined and mea ured affects the statistics
themselves . Much of the misunderstanding concerning the data undoubtedly grows out of the
failure to distinguish the purposes and the concepts governing the enumeration of unemployment in the United States.
The major purposes designed to be served
by current labor force concepts are those relating to the performance of the economy.
They provide a measure of resource availability and utilization and serve as an economic
indicator. While they do reveal some information for making judgments on need and hardship, they are not intended to be a complete
measure of need.
Unemployment is not measured by itself.
Rather, it is part of a system of concepts on
the labor force. The system is related, in turn,
to the population in a definite way. Measurement of labor force participation is based on
that part of the population 14 years of age and
over and not in institutions. While it is recognized that youngsters of 14 and 15 are not
likely to be working or looking for work in
substantial numbers there is intere t in learning of their number and occupations.
This part of the population is classified into
four groups: (1) in the armed forces, (2) employed, (3) unemployed, and ( 4) not in the
labor force. The fir t three categories constitut th total labor force, while the second and
third groups comprise the civilian labor force.
Inf rmation on th labor force statu of
ivili ans is provid 'd by the urr nt Population Survey and is reported in the U. S. Department of Labor publication, the Monthly
Report on the Labor Force. The survey is
taken for one week each month ( the calendar
week ending nearest the 15th of the month)
by asking questions about the activities of each
member of a sample of households. The total
labor force is obtained by the addition of the
armed forces to the civilian labor force count.
The concept of the civilian labor force i
d igned to includ tho e per ons who are
economically active in the labor market. They
are either participating or actively seeking to
participate in the production of goods and
services for pay or profit. Housewives and
students, it may be noted, are not engaged in
economic activities and therefore are not
counted in the labor force.
The civilian labor force numbered about
73 .5 million persons at midyear. Of these the
majority, about 69.5 million, were employed.
The concept of employment i based primarily
upon the activity of working for gain during
the survey week. It include , however, persons
who have jobs but were absent from work due
to illne s, vacation, inclement weather, labor
disputes, etc. In addition, the concept includes among the employed those unpaid famMonthly Review •
S
ten b r U
ily workers who worked 15 hours or more a
week on a family farm or in a family business.
Under this concept, for reasons which will
be clarified at a later point, persons need not
work full time in order to be listed as employed. Working as little as one hour for pay
or profit during the survey week qualifies a
person to be listed as employed. Because
part-time employment may be related to parttime unemployment, information is collected
a to the reason for part-time work. Some persons may desire, or be able to accept, employment only on a reduced ba is from the usual
J ngth of the workw ck. Others, on th other
hand, may desire full -time employment but
w rk less than that b cause f conomic factors r ulting in a lack of demand for labor.
An activity test al o governs the determination of person counted as unemployed. Those
who did not work during the survey week and
were actively looking for work are unemployed.
The status of unemployment is more difficult
to identify than this definition may suggest,
however, and certainly it is more difficult to
measure than is employment.
A person may be out of work, but is he
unemployed? While the answer depends primarily upon the activity of seeking work, it is
recognized that the attitudes and motives of
the person himself influence the answer. Suppose that a construction worker on a highway
project is laid off when the work is completed
in the early winter. If, in response to the question as to whether he is looking for work, he
says "yes," he is unemployed. If "no," he indicates that he has withdrawn from active participation in the labor force.
The case assumes more controversial aspects, however, if the reply is that he has decided not to look for work because he doesn't
think there are any jobs in his line of work
in the community. In this instance, he is counted as unemployed. It is important to understand that such a person is placed in the unemployed category only when this information
5
Our Unemployment Yardsticks:
is volunteered. Persons who reported they did
not seek work in the survey week are not explicitly asked whether they would if they had
believed work was available. In addition, when
a person volunteers that his job-seeking efforts
were temporarily interrupted by illness or that
he was awaiting the results of a job inquiry
made within the previous 60 days, he is listed
as unemployed .
Another exception to the "looking for work"
concept concern those who are on temporary
layoff or waiting to start new jobs. Take the
case of a man who has been laid off temporarily with notification that he will be called
back to w rk within 30 days. It is relatively
easy to d tcrmin h is not working, but is h
un employed or has he temporarily left the
labor force? In this in tancc, an exception is
made to the "seeking work" concept and the
man is counted as unemployed whether he is
actively looking for other work or not. In
similar fashion, persons waiting to start a new
job within 30 days are listed as unemployed
until they actually begin to work. A student
waiting to take a new job, however, continues
to be classified as not in the labor force.
Largely because of the measurement difficulty, but also because they are smaller than
employment total , unemployment figures are
le s accurate. When unemployment was reported recently at 4 million persons, the true
figure as revealed by a complete census might
have varied from that sample result. It may be
stated, however, that true unemployment lay
between 3.8 million and 4.2 million, with 95
per cent certainty of being correct. While this
lack of preciseness might be disappointing to
some, the measure is highly useful.
A noted above, the civilian labor force is
defined as the total of the employed and the
unemployed. The unemployment rate is formed
by dividing unemployment by the civilian
labor force.
Persons listed as not in the labor force include all civilians 14 years and over who are
6
not classified as employed or unemployed.
For the most part, housewives and students
constitute the great majority of the persons
not in the labor force. In addition, persons
may be retired , disabled, or have other personal
reasons for not being in the labor force.
The household survey is our sole source of
nationwide totals on the labor force , employment, and unemployment, as well as on major
demographic features of the totals. This information may be supplemented with nonfarm
establishment payroll records and claims for
unemployment insurance . Indeed , an assessment of labor ma rket conditions would rely
upon all three sourc s. It should b not d ,
how vcr, that the hou sehold surv y data ·ire
derived independently of the two other sources
and arc designed to serve pecific analytical
purposes.
THE
N
VIF
The questions used in the monthly survey
are designed to elicit information in accordance
with the underlying conceptual system. Trained
enumerators conduct the survey among a
small list of scientifically selected households
scattered throughout the United States.
ach month , 42,000 hous holds in 333
areas in 641 counties and cities are selected
for urvey by the U. S. Bureau of the Census.
This number is reduced by about 7 ,000 units
due to vacancies and other reasons which make
an interview with permanent residents impossible. The resulting sample of about 35,000
households is assumed to be representative
of the population of the country as a whole.
Part of the sample is rotated each month, primarily to avoid the problem of lack of cooperation. Under the procedure used, 75 per
cent of the sample cgments are common from
month to month and 50 per cent from year
to year.
Classification of the sample into the three
basic groups-employed, unemployed, and not
in the labor force-is determined by the re-
Concepts and Measurement
sponses of the person bei ng interviewed to a
sta nd ard set of questions. The enum eration
procedure is designed to yield a maximum degree of conformity between a similar set of
circumstances and que tionnaire answers, rega rdless of who asks or an wers the questions .
In order to contribute to a better understanding of the e numeration procedure, the
portion of th e urrent Popul atio n Survey relatin g to employment status is reproduced on
an accompanyi ng page. 1 Any responsible person, usu ally th e housewife, may answer question relating to the activitie of other memb L o f th e househ Id who arc not present a t
th ' time of th , interview.
Foc usin l on un employme nt fo r th moment,
th questionnaire provides two opportunities
wh rcby a per on may disclo e hi. work- eeking tatus. The first question dealing with labor
force activities ( question 19 in the survey)
asks what the person was "doing most of last
week" (i.e., the week ending nearest the 15th of
the month ) . If the reply is "looking for work,"
a second question (number 20) is asked in
order to establish whether any work at all was
done during th e survey week. If he worked
only an hour a nd spent th e rest of the week
looking for a job, he would be counted as employ d. This i beca use of the system of priorities which has been establi hed . The system
puts at work first, looking for work second,
with a job but not working third, and not in
the labor force fourth. Thus, the labor force
categories are exclusive as well as exhaustive.
If the answer to the first question is neither
working nor looking for work and working is
denied in the second question, a third and more
direct question i as ked- "Was this person
looking for work?" l f the an wer is affi rm ative,
he is considered unemployed. The question is
not asked, a is sometimes ass umed, "How
1
In order to permit reproduction on a page of thi
R eview, one slight ch ange in arra ngement and the
elimination of the alternative categories in items 27
through 32 have been necessary.
Monthly Review •
September-October 1962
many people here want a job?" Such a question would definitely lead to an overcount of
the unemployed. As noted earlier, volunteering
certain information about why he was not seeking work may cause a person to be classified
as unemployed.
A large number of details, as may be inferred from the questionnaire, are provided
a bout th e employed and the unemployed each
month in addition to the total numbers. For
the employed, several characteristics are determined, including industry, occupation, age, sex,
and ma rital status. Jn addition, the survey obtains inform ation conce rning the number of
p rsons working less th an 35 hours a week
and wh th c r this was due to p rsonal preferenc or bcca u c of c anomic reasons. For the
unemployed, as well , several demographic
characteristics are obtained. It may be learned
also whether they are looking for their first job
or are experienced members of the labor force
with occupational skills and industrial attachment. Information on the duration of unemployment is also provided by the questionnaire.
The amount of detail available each month
on characteristics of the employed and the unemployed pe rmits those wishing to use somewhat different concepts to do so. Within the
limits of th e basic conceptual framework and
the amount of detail provided, it is possible
to tailor specific definitions of employment and
unemployment for particular purposes. Such
rearrangements may be helpful in understanding a given economic situation or conditions of
employment.
In the final analysis, complete and accurate
survey information depends upon the skills of
the enumerator. Accordingly, the Bureau of
the en us devotes a great deal of time and
effo rt to a program of quality control. New
interviewers are given special training-classroom lectures, discussion, and review materials
- during the first 3 months. Experienced personnel are given several hours of home study
prior to each monthly survey, and day-long
7
LABOR FORCE STATUS QUESTIO NAIRE
Fill for ci11iliart AouseAo lJ •eoober• 14 year• of ose ort d 0 11er.
20. Did . . . do any work at all
LAST WEEK not counting
work around the house? /
18. LINE NO . THIS PERSON
Yes
No (Skip
0
19. What was ... doing most
of LAST WEEK Workin g
KHping house
Going to school
Or something e lse?
Work ing (Skip
10
ing to
hoo l . .
Unobl to work . . . .
(0 111 i1 20 . 26)
3 0 0
00
/{w ee!.
0
s
9
Other (SpecifrJ . .... OT
If 1 - 34
l&owr, in
21, fill
21A - B -
0
()
,.. 11.,,...
0
0 ()
00
c iuili a11
0 0
j ob .
35 hours or more o wHk at this job?
■
0
On voca tion . .. . ....
0
0
How many weeks ago
was ... laid off?
Labor dispu te .. . . . . .
0
Re cord art•wer lrt /um 23
T emporory layoff
(L
th an 0 day ) .
()
so
10
25A
How many weeks ago
did . .. start look ing
for a job ?
0 0
8 0 0
9 0 0
Own i I lness . ... .
Bod wea ther . ...... .
011d
N w 106 t b in
within 30 day s .....
u
0th r (Specifr ). .. .. . •
0
Re co rd a11swer i11 Item 23
a,od so lo 25A .
-
~
IF FORKED LESS THAN JS HOU RS LAST J'EEK (I . 34 i11 Item 21)
21A. Does ... usually work
(O mil 25 • 26)
25. Why was ... absent from wodt last wHk?
0 0 0
I 0 0
2 0
3 0
••ip lo
26 a,od
If 35 or •ore Ao11r•
i11 21 , dip 1o 26
a,od e ,ol er jo b
wo r/,;ed ol la•t wee/,; .
C/
0
■ ·
O 0
1 00
2 0 0
u 0
No
0
been looking for work?
•ar/,; ed ,
H
Yes
0
23. How many wHks has . . .
With a 10 6
but not at work ..
Ke p,ng h us
If J i 11 19, o m ii 24 and so lo 25 .
24. Even though ... did not work LAST WEEK , does he have
o job or business?
No ( Ask 24 )
0
0
0
L ooking for work. . LK
Yes
22)
0
21. How many hours
did .. . work
last wHk
o
(at all jobs)?
·■
21) WK
10
If LK irt 19 , s /,; ip 10 23
22. Was ... looking for work?
(Include special casesy
- - - -
-
- -
t
-
- - - -
-
If entry in 25, always fill 25A .
0
No
----~- 7
-~-
21 B. Whot is the reason . . .
worked less than
35 hours LAST WEEK?
I
0
21C. What is the reason ...
y
USUALLY works less
than 35 hours a wHk?
R
E
I
liar/,;
0 110
Mater ial shortages
0
0
Plant or
machine repai rs
0
Slack work .... . . . ... .
circle be low
N
■
D
Labor dispute . .. .
Own i I lness ..........
On vocation .. . .......
0
Job terminated
during week ...... . ...
Could find only
port -time work .. . . . ..
(Name of company, busi ne ss, orgonizc t ion, or other employer)
B. What kind of bvslness or industry was this?
u
Holiday
(lega l or religious).
Bod weather . . . ......
New job started
during week ....
0
0
0
0
0
Ye
s
T
R
y
()
For example : TV and radio mfg., retoi I shoe store, Stole Labor Dep t ., form
No
C. What kind of wodt was .. . doing?
0
Se lf .
employed
Too busy with house·
work , school, etc.
.... 0
0
Did not wm t
full -time work .. . ....
0
Full- t ime wa ne week
under 35 hours . ... . .
Other reason (Specifr) .
0
0
0
i
(For example : civil engineer, stock clerk, typist, former, etc.)
D. CLASS OF WORKER
27.
LINE
NO.
so lo 26 o,oJ erolu job wor/,; ed 01
28.
RELATIONSHIP
TO HOUSEHOLD
HEAD
la•I
'29.
0
Was tfi is person -
An empl oyee of PRIVAT company, business, or indiv idual
for wage s, sa lary, or commi ssion . . . . . . . . . . . . . . . . . . . . . . . . . . .
P
A GOVERNM NT employee (Federal , State, coun ty, or local)....
G
Sel I-empl oyed in OWN bus ine ss, professional practice, or fo rm. . .
0
Working WI THOUT PAY in family business or form.............
WP
NEVER WORKED ... .. ........ . . .... ... .. . .. ....... .. ...... NEV
If e•try i• 218 or C,
-
If ur ry in It em 25
25A. Is . .. getting
wage s or
salary for
any of the
lime off
lost week?
A. For whom did ... work?
p
L
0
- -
26. DESCRIPTION OF JOB OR BUSINESS
E
M
Yes
-
0
0
0
0
0
Co lo /10111 26
and e,iler 10 b
held lo.r week
wee/,; .
AGE
LA ST
BIRTH DAY
30.
MARITAL STA TUS
31. RACE
32. SEX AN D
WORLD WAR II
V ETERAN ST A TU S
Our Unemployment Yardsticks: Concepts and Measurement
group training is conducted at least four times
a year. About twice each year, the interviewer
is accompanied by a supervisor who observes
his application of the current concepts and procedures of enumeration. The reinterview of
a sample household by a supervisor provides
an ev n broader quality check. In this manner,
the general accuracy of the survey may be
evaluated in addition to the performance of
the specific interviewer. Also, the completed
questionnaires are inspected each month so that
appropriate training materials may be sent to
the enumerator. Ultimately, if an interviewer
cannot m et the pre cribed standards of quality h i r placed .
THE CONTINUING
au
With improved understanding of the basic
concepts of employment and unemployment
and of the procedures used in their measurement, public concern about the statistics seems
destined to subside. The statistics are basically
sound and the concepts are suitable for the
Monthly R view •
September-October 1962
major purpose for which they are wanted. This
does not mean that there is no room for improvement. On the contrary, many major
changes have been made in recent years and
others undoubtedly will be coming. Also, there
continues to be a relatively large number of
unsatisfied needs among users for additional
information.
Several years ago, the Review of Concepts
Subcommittee, established by the U. S. Bureau of the Budget, undertook a fundamental
review of concepts and measurements. Its recommendations provided the direction for subequent change and improvements in labor
f rce tati tic . More rec ntly, the Pre ident
appoint d a ommitt to Appraise Employm nt and Un mployment Stati tics. Thi committee is compo ed of men from outside of
Government who are university economists or
users of statistical data. Their report is to be
published shortly and it is certain to bring
forth new tdeas for improving and extending
the usefulness of the basic labor force statistics.
9
Post~ar Trends in
District Bank Earnings
ATES OF RETURN on commercial bank
assets have risen sub tantially since the
end of World War II, reflecting both the upward drift of interest rates on bank loans and
investments and the marked shift of bank
assets from liquid instruments of low earning
power to Joans and investments with higher
yields. Member bank in the Tenth Fed ral
Reserve District have participated fully in th s
developments. During each of the past 3 y ars,
the aggregate ratio of net current earnings to
assets at all District members was more than
twice as high as in 1946.
This article reviews in broad outline the trend
of District member bank earnings over the
postwar years. Such a review appears timely
in light of the possibility that forces shaping
the trend of bank net income may currently be
undergoing a rather significant alteration. Interest rates on newly acquired bank earning
assets have failed to advance significantly during the current economic upswing, contrary to
earlier cyclical experience, and arc presently
well below peak levels attained in 1959. Cost
pressures, meanwhile, have intensified in the
banking system, partly as a result of increases
in rates paid on time deposits. Taken together,
these two factors generate a question as to
whether net earnings rates of banks are likely
to continue to advance in the immediate years
ahead.
A discussion of pa t experience cannot, of
course, disclose whether these recent developments herald a fundamental change in the
trend of bank earnings rates. It may, however, help to place these developments in a
more appropriate perspective.
RATIOS OF CURRENT EARNINGS
AN
ST TO AS TS
District member banks, like banks elsewhere in the Nation, entered the postwar period
with an asset structure heavily weighted with
liquid assets of low earning power-especially
U. S. Government securities. In the intervening years, the composition of their assets has
been shifting almost continuously toward loans
bearing higher yields. The dimensions of that
shift may be seen in Table 1, which lists major
classes of assets held by all District members at
year-end l 946 and 1961. Total loans in the
15-ycar period increased from 17 to 43 per
cent of total assets, while Treasury security
Table 1.
STRUCTURE OF AS ET
All Tenth District Member Banks
Dec.31 ,1946
Millions
of
Type of Asset
Dollars
Per Cent
of
Total
Total Loans, Gross
1,003
455
123
172
168
85
2,754
314
1,799
5,870
17.09
7.75
2.10
2.93
2.86
1.45
46.92
5.35
30.64
100.00
Business Loans
Loans to Individuals
Farm Loans
Real-Estate Loans
All Oth er Loans
U. S. Government Securities
Other Securities
Cash and Miscellaneous Assets
Total Assets
• includes loans to nonbank financial institutions.
10
Dec.30 ,1961
Millions
of
Dollars
Per Cent
of
Total
4,569
1,734*
943
876
673
343
2,627
805
2,675
10,676
42.79
16.24
8.83
8.21
6.30
3.21
24.61
7.54
25.06
100.00
I
t
Postwar Trends in District Bank Earnings
ownership was reduced from 4 7 to 25 per
cent and cash and other misceJlaneous assets
fell from 31 to 25 per cent.
This phenomenal restructuring of asset portfolios would itself have produced a substantial
rise in gross rates of return on bank assets, but
another powerful factor working in the same
direction was the increase in gross yields on
bank loans and investments that accompanied
the advance of market rates of interest on virtually all categories of debt instruments. Unfortunately, data relating to rates of interest
charged on each individual class of bank loans
and investments arc not available. The information submitted by banks in Lhcir earnings
and condition reports can, however, be used to
compute gross yields on th e three major classes
of earning assets - loans, U. S. Government
securities, and other securities. Table 2 shows
figures for 1946 and 1961 which indicate that
gross yields at all District member banks advanced 1. 7 5 percentage points on Treasury securities, 1. 61 percentage points on loans, and
.96 percentage points on securities other than
Treasury issues.
The result of these twin forces- the restructuring of asset portfolios and the rise in rates
of interest- was an increa e in gro s earnings
on total assets of District member banks from
less than 2 per cent in 1946 and 194 7 to over
4 per cent in 19 60 and 1961. As the chart
indicates, 1961 was the only year during this
interval in which the aggregate ratio of gross
earnings to assets at District member banks
declined . A reduction in the growth rate of this
Table 2.
GROSS YIEL
All Tenth District Member Banks
In Per Cent Per Annum
Loans
U. S. Government Securities
Other Securities
NOTE : These gross
banking figure s by
for the ful I year by
tion reports for the
1946
4.29
1.36
1.94
1961
5.90
3.11
2.90
rates of return are computed from aggre~ate
dividing the appropriate category of earnings
an average asset figure based on three condiyear .
Monthly Review • September-October 1962
RATIOS OF EARNINGS AND COSTS
TO
SS T
All Tenth District Member Banks
Per Cent
5
4
Gross Earnings
3
~
2
/
/
Total Operating
Expenses
~
~~
---------
0
,
1946
Net Current Earnings
I
'49
'52
•
l
'55
J
'58
'61
ratio, induced by recessionary declines in interest rates and sharp increases in bank holdings of lower yielding earning assets, can be
noted in 1954 and again in 1958, however.
The chart also indicates that while ratios of
net current earnings to assets rose- the level
in each of the 3 years 1959-6 l was more than
twice as high as in 1946, as noted earlier-the
growth in net earnings rates was less, absolutely, than the increase in gross earnings . This
reflects, of course, the increase in operating
expenses relative to total bank assets. The pace
of advance in net current earnings rates also
was more irregular. The decline in 1961 was
not the first but the third since 1946. Net
current earnings rates fell both in 1954 and
in 195 8, when the growth rate of gross earnings slowed down.
Factors Underlying the Growth of Bank Costs
Since an important part of the rise in gross
earnings rates shown in the chart resulted from
a shift in the composition of assets from liquid
instruments to Joans, it is not surprising that
11
Postwar Trends in
the increase in gross rates of return on bank
assets did not carry through fully to net current rates of return. Administrative costs of
granting loans generally are higher than those
of acquiring investments, and therefore the
change in the structure of bank assets would be
expected to increase bank costs as a per cent
of assets. The increase in the ratio of total
operating expenses to assets shown in the chart,
however, was affected by other forces as well.
It is desirable to identify the various factors responsible for increasing costs and to obtain
some idea of their relative importance.
A breakdown of total operating expen es
into its major components is di play d in Tabl
3 for 1946, I961 , and 2 in term diat yea rs. All
major categori of xp ns s incr a d as a p r
cent of assets between 1946 and 1961 , but by
far the largest relative increase was in interest
on deposits . The marked rise in this expense
item began about 1951, when Federal Reserve
policy switched from "pegging" interest rates
on Treasury securities to operating as a stabilizing force on economic activity. Interest rates
on nearly all classes of financial assets trended
upward in subsequent years, and rates on time
deposits, though less flexibl e than market rates
of inter t in the short-run, have followed a
broadly parallel course of movement over the
past decade. With the ratio of time to total
deposits also increasing, interest payments on
time accounts nearly doubled from 1951 to
1956, and more than doubled between 1956
and 1961.
Table 3.
The rise in wage and salary payments shown
in the table was the product of two dominant
influences. Average wage and salary payments
per employee advanced, and the number of
employees per dollar of bank deposits increased. Data for 1946 and 1960 suggest that
average wage and salary payments per employee ( including officers as well as nonofficial
employees) at District banks have approximately doubled since the end of the war, while
the number of bank employees per $1 million
in aggregate deposits has risen about 14 per
cent- from 2.2 to 2.5. 1 This latter change
rcfl cts, in the main, the al tered character of
b·mking activities implied by the sharp increase
in th e rehtive magnitud of loan in bank ea rning a ·s t portfolios. On th ba i f these data,
it app ar that about four fifths of the increase
in the ratio of total wage and salary payments
to total assets resulted from increasing rates
of remuneration to bank personnel; the remainder is accounted for by the rise in numbers of employees per dollar of bank deposits.
Sources of the rise in "other expenses" per
dollar of assets are not easily determined with
any precision. Included under this broad category are a host of items such as supplies, advertising expen es, postage and freight, outlay
for in urance, purchases of furniture and equipment, fee paid for legal and accounting services, and so on. Prices of nearly all of these
items must have risen along with the general
price level of commodities and services during
the postwar years, however, and this presumably accounts for the bulk of the increase.
RATIOS OF OPE A
G EXPENSES
0 AS TS
All Tenth District Member Banks
In Per Cent
1946
Ratio :
Total Costs to Assets
.98
Wages and Salaries to Assets .49
Interest on Deposits
to Assets
.08
Other Expenses to Assets
.41
1951
1956
1961
1.41
.75
1.90
.97
2.55
1.12*
.12
.54
.23
.70
.55
.88*
* Ratios for 1961 not entirely comparable with those for previous
years due to changes in the report of income and dividends.
12
1 These figure are ba ed on wage and salary outlays
and number of bank at year end for all bank with
over $2 million in depo it . mailer banks were eliminated from the calcu lation becau e informatio n on
number of emp loyee at the ·e bank wa inadequate.
The terminal yea r used for the calculation wa 1960
becau e, as indicated in the note to Table 3, changes
in the income a nd dividends report for 1961 make the
wage and alary data not trictly comparable with
those for pa t years.
District Bank Earnings
Table 4.
RATIOS OF EARNINGS TO CAPITAL
AND CAPITAL TO ASSETS
All Tenth District Member Banks
In Per Cen t
Ratio of:
1946-47
Net Current Earnings to Capital 14.98
Profits Before Taxes to Capital 15.23
Profits After Taxes to Capital 11.19
Capital to Total Assets
4.89
1960-61
18.11
17.16
10.02
8.51
Change
+3.13
+1.93
- 1.17
+3.62
PROFITS ON INVESTED CAPITAL
It may come as something of a surprise, in
view of the marked increase in net earnings as
a per cent of bank as ets, to learn that the rate
of aftertax profits on invested capital at District member banks has not ri en at all during
the po twar p riod . A a matt r f fact, po ttax profits of all District m mbcr avcrag d
s m what lower, as a p r cent of capital a counts, in the 2 year 1960-61 than in the 2
years 1946-4 7. The tale of "where the profits
went" is told in Table 4.
A major factor in the failure of aftertax
profits to increase relative to bank capital was
the decision of District banks to build up their
capital accounts. The capital-asset ratio for all
District members rose from 4.89 per cent in
1946-47 to 8.51 per cent in 1960-61. Had
the ratio of capital to assets remained contant over this period, aftertax profits would
have amounted to 17.44 per cent of capital in
the years 1960-61 - more than 50 per cent
larger than in 1946-4 7. Ratios of net current
earnings to capital, and profits before taxes to
capital, also would have risen much more had
bank capitalization ratios remained stable.
There is no doubt that the expansion of net
income in relation to bank assets since the end
of the war presented the banks with an excellent opportunity to enlarge their capital po itions from internally generated sources. The
only question is why the bank chose this disposition of earnings rather than di tributing
the enlarged income stream to bank stockholders.
The motives of bankers cannot be deduced
from these statistics, but a view prevails that
Monthly Review • September-October 1962
bankers have pursued this course of action for
three principal reasons. In the first place, bank
capitalization ratios were widely regarded as
unusually low at the end of World War II as a
consequence of the squeeze on bank current
income throughout the 1930's and during the
war years. Thu , banks welcomed the opportunity to restore capitalization ratios to what
they considered more nearly normal levels. A
second reason is that bank ownership of risk
assets-assets other than cash and Government
securities-has been on the upswing since the
end of the war and conservative banking practices, along with the encouragement of the
upervisory authoritie , would dictate adding
to apitaliza tion ratios in th s circumstan e .
Still a third motiv underlying th ub tantial
ri e in capital accounts wa the desire of banks
to enlarge their legal lending limits to individual
borrowers. The growth of business, farm, and
individual credit requirements during the postwar years, together with the expansion in size
of businesses and farms, has exerted strong
pressures on banks to increase the amounts
they can lend to individual borrowers by adding to their capital accounts.
Table 4 also indicates that two other considerations, in addition to the rise in capitalization ratios, prevented the increase in net current earnings as a per cent of assets from being
reflected in ratios of aftertax profits to capital.
A minor factor was the failure of profits before
taxes to advance in step with net current earnings. Detailed data on additions to and deductions from net current earnings indicate that
the smaller increment to profits before taxes
was due mainly to rather large recoveries on
loans and securities in the early postwar years.
Such recoveries are added to net current earnings in the computation of net profits before
taxes, and raised the magnitude of pretax
profits to unusually high level in relation to
net current income during 1946-47.
The more important factor holding down
the expansion of posttax profits at District
13
Postwar Trends in
As a per cent of total assets, net current
earnings of District members exceeded the
national average ratio in 1946-4 7 and again in
1960-61, both ratios displaying about the same
amount of gain over the 15-year interval.
Among the seven District states, the largest
increases in the ratio of net current earnings to
assets were recorded in Missouri and Nebraska
- states in which the ratio was well below the
District average in 1946-4 7. The smallest increase was in New Mexico, which enjoyed
unusually high net current rates of return
on assets at the beginning of the postwar
period. This small gain in New Mexico is
due in part to an unusually sharp decline in net
current rates of return on assets in 1961. In
1960, member banks in New Mexico achieved
a ratio of net current earnings to assets surpassed only by banks in Wyoming. Nevertheless, it is clear that the past 15 years have
witnessed an appreciable narrowing of the wide
dispersion in ratios of net current earnings to
assets that existed in 1946-4 7.
As the third column of the table indicates,
capitalization ratios at District members since
1946-4 7 have risen much more sharply than at
all member banks in the United States, with the
result that net current earnings in relation to
capital accounts increased less . Total capital
accounts at all District members rose 175 per
banks between 1946-4 7 and 1960-61 was the
larger share of pretax profits taken by income
taxes. These tax outlays comprised less than
30 per cent of pretax profits in 1946-47, but
over 40 per cent in 1960-61. The Federal tax
rate on corporate income was higher in the
later period, of course, and in addition a larger
share of bank income was subject to the 22 per
cent surtax on corporate income, since total
bank income was greater and taxable income
of many smaller banks had risen above the
$25,000 level.
SOME COMPARI ONS
A comparison of District bank earnin gs performance during the postwar years with that
of member banks throughout the United States
indicates that profitability of banking in this
region has grown about as much as in other
sections of the country. Table 5 shows comparative rates of return at member banks in the
Tenth District and in the United States, and
also in the various District states for the years
1946-4 7 and 1960-61. Net current earnings
rates are used as the basis for comparison because, as noted above, the increase in profits
figures before and after taxes over thi period
is subject to special influences which make difficult a meaningful evaluation of relative performance.
Table 5.
COMPARATIVE
ARNING
RATES
United States and Tenth District Member Banks
In Per Cent
Ratio of Net
Current Earnings
to Tota I Assets
All Member Banks, U. S.
Tenth Dist. Member Banks
Colorado
Kansas
Missouri*
Nebraska
New Mexico*
Oklahoma*
Wyoming
*Tenth District portion only.
14
Ratio of Net
Current Earnings to
Total Capital Accounts
1946-47
1960-61
1946-47
.72
.73
.74
.70
.58
.67
1.02
.90
.81
1.52
1.54
1.54
1.49
1.55
1.52
1.48
1.59
1.60
11.53
14.98
15.61
15.08
12.52
14.65
25.00
15.77
15.30
1960-61
18.48
18.11
20.41
17.00
17.64
17.59
23.20
17.06
20.54
Ratio of Total
Capital Accounts
to Total Assets
1946-47
1960-61
6.22
4.89
4.75
4.65
4.60
4.58
4.07
5.73
5.27
8.22
8.51
7.55
8.74
8.76
8.67
6.38
9.29
7.79
District Bank Earnings
cent between 1946-4 7 and 1960-61, or about
three times the relative gain in total a set .
At all member banks in the United States, the
relative growth of capital accounts wa somewhat less than twice the percentage rise in total
as ets. It was in Nebraska and Western Missouri, among the Di trict states, that capital
account increased the mo t rapidly in relati n
to asset . Member banks in both of these states
experienced a relative rise in total capital funds
about five times as large as the percentage gain
in total assets. These two states also, it will
be noted, experienced the greatest improvement in net current earnings as a per cent of
ass ts- pointing up a 1 ain the importanc · of
r tained earnings as a primary source of ad ditions to bank apital.
PRO P CTI F
N
lt seems quite unlikely that the next decade
and a half will witnes a repetition of the
remarkable gains that have been made over the
postwar years in District bank earnings. The
doubling of net current earnings as a per cent
of assets that has occurred at District banks
since 1946 was generated, in part, by striking
alterations in the structure of earning asset
portfolios that can scarcely be expected t
recur. The increase in loans as a per cent of
total as ets, and the corresponding decline in
relative amounts of Government securitie and
cash held by banks, point to reduced liquidity
cushions and increased risk positions which
weigh importantly in bank management decisions. Furthermore, the long-run increase in
interest rates on individual earning assets of
banks that has played such a prominent role in
enlarging bank income during the po twar years
may well have run it cour e.
Year-to-year changes in gro and net curr nt rates of return on a set at District banks
hown in hart J indicate that during years in
which the ratio of gross earnings to assets has
grown relatively little-such as in 1954 and
19 5 8 - the ratio of net current earnings to
Monthly Review •
September-October 1962
assets has declined. Accordingly, it might be
thought that if gross earnings ratios of District
banks were to level out at existing rates of
about 4 per cent of total assets and remain
there for a considerable length of time, prospects for net current earnings rates would be
quite bearish.
Such a view would re t on the assumption
that costs would continue to increa e as a per
cent of bank assets in line with the postwar
trend, an assumption that might well prove to
be excessively pessimistic. For one thing, it
fails to take account of the fact that a significant portion of the long- run increa e in costs
experienced by banks in the postwar years has
been intimately connected with fore s respon sible for th· expansion in bank gross earnings
rate . Viewed in long-run perspective, for example, the ri e in intere t payments on time
deposits at District banks since 1951 appears
to reflect the general advance of interest rates
on nearly all classe of financial assets. Thus,
if these rates did not advance markedly further,
the growth of time deposit expenses could be
expected to slow down. Absence of further increases in bank loans as a per cent of assets
also would serve to temper the increase in wage
and salary outlays as a per cent of asset .
Additionally, ri ing wage rates and prices of
other commodities and services banks use
clearly have been important factors in boosting
bank costs in the postwar years, but here, too,
the more moderate advance of overall wage
rate and price levels that has been in evidence
since about 1958 offers room for optimism.
What does seem clear, however, is that a
leveling out of gross rates of return on bank
earning as ets near current levels would imply
a di tin ct change in the environmental factors
determining bank net income po itions. In such
circum tances, significant improvements in net
earnings rates would be reserved to tho e banks
that are succe ful in increasing operating efficiency, thereby warding off the encroachment
of rising input prices on net income.
15
I
BANKING IN THE TENTH DISTRICT
Loans
Reserve
City
Member
Banks
District
and
Country
Member
Banks
Reserve
City
Member
Banks
Country
Member
Banks
August 1962 Percentage Change From
States
I
Loans
Deposits
R~i~;e
Member
Banks
l
Deposits
Country
Member
Banks
R~i~;e
Member
Banks
Country
Member
Banks
July 1962 Percentage Change From
July Aug. July Aug. July Aug. July Aug. June July June July June July
June July
1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961
Missouri*
t + 11 - 1 , + 12
t i + 9!
t i +8
+ 2 + 12
t + 18 + 2 +10 + 2 + 13
+ 1 + 30
t + 14
t + 30 - 1 + 6
t + 8 - 1 + 11
t + 6 +l + 9
~: !r::: ico*
~;
Oklahoma*
Wyoming
- 1 1+ 11
TenthF. R. Dist.
Colorado
Kansas
t j + lll +1 + 11
t + 91 t + 17
- 3 + 17 + 5 + 6
+ 1 +9 +1 + 13
1
+:! ~! : ~~, .: ~: :~ :: ~•
*"'
u
- 3 1 + 6 - 3 + 11
t + 13 **
..
t + 10
t +5
;;l -i
+ 1 + 7]
+ 3 +8
t +8
- 2 +2
+
+
+
+
21 + 8
3 + 12
4 +5
1 +7
+ 11+ 12
t + 10
+ 1 +7
:~J.: ~: :~::
- 1 + 14 - 2 + 10
..
**
t + 13
**
*
* Tenth Di strict portion only. * * No reserve cities in this state .
t Less than 0.5 oer cent.
NOTE: Due to the reclassification of cntain Topeka and Wic h ita banks on Au gust 23 , 1962, from reserve city to
country bank status, data for August 1961 have been ad j usted to produce comparability with current figures.
PRICE INDEXES, UNITED STATES
r
Index
Consumer Price Index (1957-59 = 100) ..............
Wholesale Price Index (1957-59 = 100). .............
Prices Received by Farmers (1910-14 = 100) ....
Pri ces Paid by Farmers (1910-14 = 100). .......... .
_j__
Aug.
July
1962
1962
105.5
100.5
244
305
105.5
100.4
240
305
I
June
Aug.
July
1962
1961
1961
105.3
100.0 r
239
305
104.3
100.1
240
301
104.4
99.9
235
300
1
r Revised .
TENTH DISTRICT BUSINESS INDICATORS
Value of
Check
Payments
District
Value of
Department
Store Sales
and Principal
Percentage change from previous year
Metropolitan
Areas
Tenth Federal Reserve District.. ... .. .
~~;~~~:::::::::::::::::::::::::::::::::::::::.I
Kansas City.................................
!
~~: ~;~;··~i~~·························································I
Tulsa ....................................... ... .1
l.
16
Aug.
July
Eight
Months
Aug.
1962
1962
1962
1962
+8
+8
+6
+7
+8
+ 12
+6
+2
0
- 3
+7
+3
+4
+4
+6
+4
- 1
+6
+ 15
+ 18
+2
+9
+6
+2
+ 10
+ 11
+9
+7
l1
Eight
Months
July
1962
+4
+ l
- 1
+9
+3
+8
+7
..J__
I
.L
1962
+3
+1
+1
+7
+1
+6
+4
@FedFRASER