Full text of Economic Review (Federal Reserve Bank of San Francisco) : July 1955

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M
TWELFTH

FEDERAL

RESERVE

DISTRICT

F e d e r a l r e s e r v e Ba n k o f S a n F r a n c is c o

JULY 1955

THE TWELFTH DISTRICT AUTOMOBILE MARKET
u s in e s s

developments in the nation and District dur

ing both the 1953-54 recession and the succeeding
B
upturn point to changes in consumer purchases of auto
mobiles as a major source of instability in the economy.
From July 1953 to January 1954 total retail sales in the
country (seasonally adjusted) dropped $800 million, with
new and used motor vehicle sales accounting for approxi
mately 65 percent of the decline. During the subsequent
revival from January to June of 1954, automobile pur
chases again accounted for about 65 percent of an $800
million rise in seasonally adjusted total retail sales. And,
since the summer of last year, a continued high level of
automobile sales has been— along with the housing
“ boom” — a major source of strength during the current
high level of general business activity.
Available data suggest that fluctuations in the dollar
volume of sales by District new and used automobile deal
ers— recently accounting for about one-sixth of the na
tional figure— have probably had a similar impact on total
retail sales in this region. A special retail trade report
compiled by the Bureau of the Census for the Federal Re
serve System indicates that the dollar volume of sales by
automobile dealers is currently of about the same relative
importance to total retail trade in the District as in the
nation. Also, annual statistics on new passenger car reg
istrations from 1947 to 1954 show that fluctuations in the
District series closely paralleled changes in the country
as a whole. However, during the first quarter of this year,
new passenger car registrations in California, which last
year accounted for about 70 percent of the District total,
were 54 percent above the first quarter of 1954 compared
to a corresponding period rise of 30 percent in the nation.
Per capita car ownership higher in the District
than in the nation

As indicated in Table 1 per capita passenger car regis
trations in 1954 were slightly more than 25 percent
greater in the District than in the country as a whole. Ari
zona, the only District state below the national average,
had 29 passenger cars per 100 persons while Nevada and
Oregon were both at the upper extreme with 42 pas
senger cars per 100 persons. California, which accounts
for about two-thirds of total passenger car registrations
in the region, had 40 cars per 100 persons.

able

T o t a l N u m ber o f P r iv a te ly O w n ed P a sse n g e r C ar
R e g i s t r a t i o n s P e r 100 P e r s o n s 1
T w e l f t h D i s t r i c t a n d U n i t e d S t a t e s , 1941 a n d 1954
1954

Utah ..................................................
W ashington .....................................

1941s
24
37
27
32
33
23
30

Tw elfth District ............................

United States .................................

1 Privately owned includes commercial cars, e.g., taxicabs.
2 Includes both public and privately owned passenger cars. Publicly owned cars
are estimated to be less than 1 percent of total automobile registrations in 1941.
Source: Automobile Manufacturers Association, Automobile Facts and Figures,
and United States Department of Commerce, Bureau of Public Roads.

The high per capita passenger car ownership in the
District reflects a greater distribution of car ownership
combined with a relatively larger number of multiple
car owners in this region than in the nation as a whole.
The 1955 Survey of Consumer Finances estimates that
about 77 percent of the “ spending units” in the West
(Mountain and Pacific Coast states) owned one or more
automobiles compared to approximately 67 percent in
the nation. As for multiple car ownership, 11 percent of
the spending units interviewed in the West owned two
or more cars compared to a national figure of 8 percent.
Comparison of pre- and postwar data indicate that all
District states— to somewhat varying degrees— shared in
a national postwar trend of a higher ratio of automobiles
to population. Though the District had a larger percent
age increase (85 percent) in total passenger car registra
tions than the nation (64 percent) from 1941 to 1954,
the difference was more than offset by a faster rate of
population growth in this region. As a result, the per
centage increase in per capita automobile registrations
Also in This Issue

The Role of Bankers’ Acceptances in
International Trade and Finance .

Unemployment Insurance Benefits As
a Stabilizing Force During
Recessionary Periods.......................... 90

July 1955

FEDERAL RESERVE BANK OF SAN FRANCISCO

was smaller in the District than in the country as a whole,
Nonetheless, as shown in Table 1, the District ratio was
actually greater in 1941 than the national figure in 1954.
The greater rate of increase in total passenger car registrations in the District relative to the nation apparently
did not result in this region's gaining a larger share of
the country’s new car market. New passenger car registrations in the District accounted for about the same fraction (11 percent) of national new car registrations in
1954 as in 1941. The upward trend in new passenger car
registrations in the District was about equal to that in
the country as a whole. The differential rates of growth
between new and total passenger car registrations thus
point to this region as an important used car market.
f
,
,
.

mobiles indicate that the average scrappage age is probably greater in this region than in the country as a whole,
a s shown in Table 2, approximately 27 percent of the
automobiles registered in the District during 1954 were
over 9 years old compared to about 19 percent in the nation. In contrast, the proportion of cars registered in
the 4 to 9 year and the less than 4-year age groups were
smaller in the District than in the country as a whole,
The percentage of war and prewar cars was larger in
each of the District states than in the nation. In California, slightly less than 28 percent of the cars registered
were 10 years old or older. A similar comparison of the
importance of prewar cars only shows about the same percentage point difference between this region and the
entire country because of the small wartime production
^ automobiles

Further comparisons between the District and nation
also indicate something about the relative importance of
major sources of demand for new automobiles. Sales of
new passenger cars represent the sum of sales to new
owners, replacement sales, and purchases by persons
wanting another automobile. For the country as a whole,
the Survey of Consumer Finances estimates that 86 percent of the spending units buying new cars during 1954
either traded-in or sold a car. The greater distribution of
automobile ownership in the District strongly suggests
that replacement demand is even more important in this
region than in the nation.
Studies of the automobile market1 have found that,
after taking account of other factors, replacement demand
for new cars has been closely associated with scrappage
age of automobiles. As an indication of trend in the scrappage age of cars, the Automobile Manufacturers Association (using national scrappage estimates) approximates that the average life of motor vehicles scrapped
during 1952 was 14.3 years compared to 10.2 years during 1941. Though similar estimates for the District are
not available, statistics on the age distribution of auto-

Lar9 e real per capita income in District important
factor in high per capita car ownership

Differences in real per capita incomes, suburbanization, and automobile prices are probably the three most
important factors accounting for differences between the
District and nation in per capita car ownership and the
age distribution of automobiles. A greater degree of suburbanization and higher real per capita incomes in this
region have contributed to the higher per capita car
ownership in the District relative to the country as a
whole. On the other hand, generally higher automobile
prices in the West have probably been a damper on both
per capita car ownership and new car sales in this region
compared to the nation.
Changes in both the total number of passenger cars in
use and in new car registrations have, in the past, been
closely associated with movements in the level of consumer incomes after taxes and adjusted for price
changes. Estimates from 1947 to 1953 indicate that real
per capita income payments in the District have remained consistently higher, but have increased at a
slower rate, than in the country as a whole. The higher

1See, for example, “ Markets after the Defense Expansion,” United States Department of Commerce, 1953 and “ Dynamics of Automobile Demand,” C. F.
Roos, et. al., published by General Motors Corporation, 1939.

l e v e l o f r e a l p e r C a p ita i n c o m e m a y t h e r e f o r e a c c o u n t , in
j:
f i__ l Q rfTpr
r a r cViir» i n
D ie
p a r t , IO r t n e l a r g e r p e r C a p ita C a r O W n e r S m p m m e U 1S

Replacement demand an important factor in
District automobile market

T a b l e
A

g e

is t r ib u t io n

o f

P a s s e n g e r

C a r s —

e l f t h

is t r ic t

a n d

n it e d

S t a t e s , J u l y

1, 1941

a n d

J u l y

1, 1954

,------------------------------------1954------------------------------------N ,------------------------------------ 1941------------------------------------ x
T o ta l
T otal
num ber o f
3 y ears
4-9
10 years
num ber o f
3 years
4-9
10 years
autom obiles
o r less
years
or m ore1
autom obiles
o r less
years
or m o re 1
(in thousands)
(percent distribution)
(in thousands)
(percent distribution)

A r iz o n a ..................................................................................................
C a lifo rn ia ..............................................................................................
Idaho .....................................................................................................
N e v a d a ...................................................................................................
O r e g o n ..................................................................................................
Utah .......................................................................................................
W a s h in g to n ..........................................................................................

259
4,439
202
71
580
224
803

23
22
25
28
23
23
21

54
50
54
51
52
57
53

23
28
21
21
25
21
26

Twelfth D is t r ic t .................................................................................

6,576

United States .....................................................................................

44,387

1 Automobiles unindentified as to year of manufacture are included in “ 10 years
Note: Figures may not add to totals due to rounding.
Source: Automotive Industries, January-June 1942 and 37th Annual Statistical

108
2,457
120
33
323
117
483

26
26
28
33
29
28
26

48
48
47
48
44
50
46

3,642

25,968

or more” groups
Issue, March 15, 1955.

July 1955

M O NTHLY REVIEW

trict than in the nation. And, the movement towards
equality of real per capita incomes between this region
and the nation may partially explain the decline in per
capita new car sales in the District relative to the country
as a whole.
Annual changes in new passenger car registrations
have also been found to be closely associated with— and
highly sensitive to— differences in the rates of changes
of real per capita disposable income. This probably ex
plains, in part, the close parallel movements in new pas
senger car registrations between the District and the na
tion. Plotted real per capita income payments over the
postwar years also show a very close parallel movement
between this region and the country as a whole. The data
also indicate a fairly similar pattern of annual fluctuations
in new car registrations among the District states.
Generally higher automobile prices in this region,
owing in large part to greater freight costs, have prob
ably contributed to differences in both per capita new
car sales and the age distribution of automobiles in use
between the District and the nation. Statistical studies
for the nation indicate that new car sales are probably
sensitive to differences in prices of new automobiles,
among other things. This suggests that the failure of the
District dealers to gain a larger share of the country’s
new car market— despite large wartime and postwar inmigration— may, in part, be due to the generally higher
level of new car prices in this region relative to those in
the country as a whole. Also, higher automobile prices
mean higher replacement costs. Thus, unless individuals
are willing to get less transportation for their dollar in
this area compared to individuals in most other regions
of the country, they have to “ stretch” the durability of
their automobiles.
The greater use of automobile credit is still another
important factor explaining the higher level of automo
bile ownership in this District. The amount of credit in
volved in automobile purchases is apparently more im
portant in the District than in the country as a whole.
This is largely due to both the higher price of automo
biles and the more liberal credit terms during recent
years in the West. According to the 1955 Survey of Con
sumer Finances, approximately 37 percent of car owners
in the West owed debt on their automobiles compared
to 31 percent in the country as a whole. As to size of
debt, the Survey estimates indicate that about 22 percent
of car owners in the West have debts on their cars of
$500 or more compared to a national figure of 15 per
cent.
Suburbanization an important long-run
factor in District automobile demand

Population distribution is probably one of the major
long-run factors explaining high per capita car— and
particularly multiple car— ownership in the District. The

1950 Census of Population indicates that a large pro
portion of total District population— especially in the
Pacific Coast states— was concentrated in urban areas.
And, a large percentage of the inhabitants in the District
living in urban areas resided in suburbs rather than in
large concentrated central cities. The relative importance
of suburban living in this region is shown by the fact that
approximately 23 percent of total District population
lived in suburbs compared to 14 percent in the country
as a whole. The large degree of suburbanization in the
District, often accompanied by inadequate public trans
portation, has perhaps made the automobile more of a
transportation necessity in the West than in the country
generally.
Increases in the number of households formed also
help to explain the long-run upward trend in automobile
sales. Changes in the number of automobiles in use are
generally associated with changes in the number of
households rather than changes in total population. Sta
tistics on population changes and new housing starts sug
gest that there has recently been a larger increase in
household formation in the District than in the nation as
a whole. In 1954, new housing starts in the 11 western
states accounted for about 24 percent of the national
total, yet these states account for only approximately 14
percent of the population in the country. The West, in
fact, is the only area in the country where the ratio of
regional to national housing starts was larger than the
regional to national population ratio. And this apparently
is a continuation of a postwar trend.
Summary and outlook

During the postwar years total passenger car registra
tions have increased at a faster rate in the District than
in the country as a whole. However, the larger rate of
growth in this region has been primarily marked by a
greater rise in used rather than in new car registrations.
New car registrations in the District were, in fact, about
the same proportion of new car registrations in the en
tire country in 1954 as in 1941. The data also suggest
that annual fluctuations in new car sales in this region
very closely parallel changes in the country as a whole.
A breakdown of the age distribution of cars shows a
larger proportion of prewar cars registered in the Dis
trict than in the nation. This suggests that the generally
higher price of cars in this region compared to most
other areas in the country may, in part, be resulting in a
greater average scrappage age for automobiles in the
District states than in the country as a whole. The greater
degree of suburban living in this region has probably also
contributed to the greater importance of multiple car own
ership— and thereby to the big used car market— in the
West relative to other areas in the country.
As for the outlook, the statistics indicate that by far
the largest proportion— perhaps somewhere in the range

FEDERAL RESERVE BANK OF SAN FRANCISCO

of 90 percent or more— of new car sales in the District
is to meet replacement demand. Automobile marketing
studies have found that in the past new car sales have
been closely associated with the scrapping of older cars.
To the extent that this is generally true, the District has
a sizable pool of prewar cars which may not be too far
from their final mile. Also, recent declines in used car

July 1955

prices may, in many cases, make it cheaper for individ
uals to scrap and replace older cars with new and later
models than to repair them. Among the long-run factors,
a continual trek to District suburbs accompanied by an
increasing number of households could mean a growing
demand for multiple car ownership as well as an increase
in new owner sales.

THE ROLE OF BANKERS’ ACCEPTANCES IN INTERNATIONAL TRADE AND FINANCE
1949, and in particular during 1954, there has
been a significant growth in the use of bankers’ accept
ance financing in the United States. Bankers’ acceptances
are particularly well suited to, and are used primarily for,
short-term financing of international trade. Despite the
fact that they were once of considerable importance in
this country and are widely used abroad, they are not at
present a well-known credit instrument in the United
States, not even among bankers except those in some of
our major financial centers. The recent growth in the use
of bankers’ acceptances, however, indicates a growing
interest in this type of financing. This increased interest
has also been in evidence in the Twelfth Federal Reserve
District, which has had a greater relative increase in
bankers’ acceptance financing than other parts of the
country.
The renewed interest in bankers’ acceptances has been
welcomed in many quarters. Growth in the volume of
bankers’ acceptances outstanding can be expected to ex
pand the supply of private short-term dollar credit avail
able to finance foreign and international trade. Not only
could this encourage the growth of trade but it should be
of assistance to those countries endeavoring to relax con
trols over trade and payments and by so doing restore the
convertability of their currencies.
Early in April of this year the Federal Open Market
Committee of the Federal Reserve System began to pur
chase moderate amounts of bankers’ acceptances from
dealers. By including bankers’ acceptances in the open
market operations of the Federal Reserve System, it is
hoped that the development of the market for these short
term investments will be encouraged and interest in this
type of financing increased.
in c e

Historical background

The bill of exchange, a draft drawn by the seller of
commodities on the purchaser, is virtually as old as trade.
If such drafts provide for payment at a deferred date, and
the debt is acknowledged by the purchaser through his
acceptance of the draft, a trade acceptance is created. The
bankers’ acceptance is a further refinement of the bill of
exchange in which the draft is drawn on and accepted by
a bank and the bank name replaces that of an individual
or firm. It also has a long and interesting history. In the
United States, however, the history of bankers’ accept
ances is a relatively short one and for practical purposes
dates back only to the enactment of the Federal Reserve

Act in 1913. Prior to that time national banks and most
state banks were without specific authority to create
acceptances. In the United Kingdom, on the other hand,
the bankers’ acceptance was a major factor during the
nineteenth century in the development of London into
its position of pre-eminence as the world’s leading
money market, a market in which the major part of the
world’s trade was financed, including a significant part
of that of the United States.
The history of the London money market during the
last half of the nineteenth century and up until the eve of
World War I has long been of major interest to students
of monetary policy and international finance. This period
was the “ golden era” of foreign trade during which the
London money market provided a mechanism for mobil
izing short-term private capital, capital which was free to
move from country to country in response to relatively
small changes in short-term interest rates. It was the
availability of this stock of extremely mobile short-term
capital which had led many to believe that the gold-standard mechanism was indeed the final answer to monetary
stability and provided a means of automatically adjusting
short-term balance of payments disequilibria.
During the period between the two world wars, how
ever, the movement of short-term funds, rather than
assisting in adjusting balance of payments problems, be
came perverse as a result of political and economic in
stability, first during the 1920-21 commodity crisis and
to a much greater extent during the world-wide depres
sion of the 1930’s. Such perverse capital movements were
accentuated as fears of impending war developed. As a
result most countries instituted direct controls over the
movement of private capital. Such controls were strength
ened during World W ar II and were carried over into
the postwar period.
More recently significant progress has been made in
the relaxation of direct controls over trade and payments
and in the restoration of currency convertibility. This im
provement has been made possible by the restoration of
production to or above the pre-World W ar II level over
most of the free world. It is hoped that in this more
favorable environment a reservoir of short-term private
capital may be built up, not only to finance an expanding
volume of world trade and to replace to a large extent
Government financing but also to provide a source of
short-term capital which can move between countries in
response to interest rate differentials. These short-term

July 1955

M O NTHLY REVIEW

capital movements would assist in the correction of tem
porary balance of payments disequilibria.
One of the ways in which this short-term capital might
be mobilized is through an increase in financing by bank
ers’ acceptances. It should be noted, however, that in a
number of respects the situation today with regard to the
development of acceptance financing, and through this
medium the encouragement of equilibrating short-term
capital movements, differs significantly from earlier peri
ods. Before considering these differences and the role
that bankers’ acceptances might play in an expansion of
privately financed foreign trade, it would seem appropri
ate to consider first the mechanics of acceptance financing
and the nature of the bankers’ acceptance market in the
United States.
What is a bankers' acceptance?

A bankers’ acceptance is a time draft (bill of exchange)
which has been drawn on and accepted by a bank. When
a bank accepts such a draft by stamping it “ accepted” on
the face, it is committed to pay the amount of the draft at
maturity to the person presenting it for payment. A bank
ers' acceptance thus is two-name paper, that is, it carries
the name of the drawer and that of the accepting bank.
What has occurred in effect is that the name and credit
of a bank has been substituted for that of the bank’s cus
tomer. Once a bank has accepted a draft it may be sold
at a discount by the holder and immediate funds acquired,
the discount being the interest paid for the use of the funds
for the period until the acceptance matures. A bankers’
acceptance may also become three-name paper if it is sub
sequently resold with the endorsement of another bank
or dealer in bankers’ acceptances. By such endorsement a
contingent liability is incurred. Such a third name is of
importance in certain countries where banks are per
mitted to invest only in three-name paper, and also in
those instances when the accepting bank may be a foreign
bank or a bank unknown to the purchaser where the en
dorsement of a local bank or well-known bank becomes
highly desirable.
While bankers’ acceptances may have a maturity of as
long as 180 days, most acceptances mature within a period
of 90 days or less. Furthermore, they are never renewed.1
Thus they are an extremely liquid investment. Because
of their liquidity and relatively riskless nature bankers’
acceptances are virtually the commercial counterpart of
Treasury bills.
Types of transactions which result in the
creation of bankers’ acceptances

Because the buyer and seller in foreign trade are often
not well known to each other, the bankers’ acceptance is
a particularly attractive method of financing. As a result
1 Under the standstill agreements with Germany beginning in September 1931,
United States and other foreign banks were required to maintain credits, with
the substitution of new paper for maturing acceptances. Some of this indebted
ness was not paid until after World War II, and earlier payments had been
made in types of German marks which could only be converted into dollars at a
discount. United States banks, however, made prompt and full repayment to
holders of their acceptances which had been undertaken for German customers
or at the request of German correspondent banks.

most bankers’ acceptances cover transactions in foreign
trade. Very few acceptances are created to support do
mestic trade transactions, but a considerable volume is
created to support the domestic storage of certain com
modities.
Bankers’ acceptances in foreign trade most often arise
from the issuance of a letter of credit. Under a letter of
credit a bank is committed to pay drafts which arise out
of specified transactions occurring within a particular
period of time. If the letter of credit specifies sight drafts,
then such drafts are paid upon presentation and no accept
ances are created. However, if time drafts are specified,
they are accepted upon presentation and paid at maturity.
In a typical transaction a United States importer will
go to his bank with a request that a letter of credit be
opened in favor of his foreign supplier covering a par
ticular shipment or series of shipments and specifying the
credit terms— sight, 30, 60, 90, etc., days. The United
States bank then notifies the exporter either through its
foreign correspondent or foreign branch or subsidiary
that the credit has been established. Upon shipment the
exporter draws a draft which is forwarded with appro
priate documents for acceptance by the United States
bank. Upon acceptance the exporter can either sell the
draft at a discount and obtain immediate payment or hold
it as a short-term investment. The importer is expected
to put the bank in funds before the draft matures.
Letters of credit which give rise to bankers’ acceptances
may also be opened in the United States at the request
of foreign customers or correspondent banks covering
imports, exports, or transactions between foreign coun
tries. Such letters of credit may specify drafts drawn
either in United States dollars or foreign currencies.
Today by far the largest part of all foreign trade is
financed through the issuance of bank letters of credit. A
large proportion of these letters of credit call for sight
drafts and do not result in the creation of bankers’ accept
ances. However, with more normal trading conditions in
world markets and the relaxation of governmental con
trols on international payments, a larger proportion of
time drafts relative to sight drafts can be expected.
Another method by which bankers’ acceptances come
into existence is through the execution of an acceptance
agreement between the bank and its customer. Accept
ances drawn under such agreements may cover a wide
variety of transactions in foreign, international, and do
mestic trade and may also cover the storage of commodi
ties both in the United States or abroad.
For example, a United States exporter may have an
agreement with his bank to accept drafts drawn by the
exporter up to a certain amount covering the export of
goods. The exporter discounts the acceptances and ob
tains immediate funds, and the proceeds as received from
the foreign purchaser are utilized to pay the bank as the
acceptances mature. On the import side, commodities may
be imported under sight draft terms and then refinanced
under an acceptance agreement whereby the importer can

FEDERAL RESERVE BANK OF SAN FRANCISCO

draw drafts on his bank to cover brief periods of sale or
distribution in the United States.
While only a very small volume of domestic trade
is financed by bankers' acceptances, there has been a
relatively large volume of domestic commodity storage
financed in this manner in recent years. In this case the
owner of the commodities enters into an acceptance agree
ment with his bank or banks whereby he can draw drafts
on the bank, secured by warehouse receipts, which upon
acceptance and discount make it possible to finance stor
age until sale or export. Similarly the foreign storage of
commodities can be financed either for United States or
foreign customers or at the request of foreign corres
pondent banks.
In all of the examples mentioned thus far bankers’
acceptances have either arisen out of a particular trade
transaction or have been secured by commodities held in
storage. Thus, in principle, bankers' acceptances are selfliquidating. One exception is in the case of the so-called
“ dollar exchange" acceptances or bills. Such acceptances
are not supported by a particular transaction or storage
but are for the purpose of creating dollar exchange. This
facility is extended by United States banks only to banks
in certain foreign countries and is for the purpose of per
mitting these foreign banks to draw dollar drafts in order
to obtain dollar exchange to finance their importers dur
ing seasons of low dollar export earnings. The accept
ances are repaid during seasons in which dollar earnings
are high. The volume of “ dollar exchange" bills, however,
is not at present an important part of the total outstand
ing.
The co st of financing by bankers’ acceptances

Acceptance financing differs from other methods of
financing in that the cost to the borrower is made up of
two segments. When a bank accepts a draft drawn on it
by a customer, it charges a fee or commission for the use
of its name, or in other words for its guarantee. At the
present time and for a period of many years this commis

sion for assuming the credit risk has been 1y2 percent per
year or y& of 1 percent per month. This rate is the mini
mum rate and thus it might be assumed that it is available
only to prime borrowers, but in practice this rate is given
to a much wider number of borrowers than would be
eligible for the prime rate on a direct loan. In the case
of drafts accepted at the request of foreign correspondent
banks, a rate as low as 1 percent per year is common.
The second segment of the cost of acceptance financing
is the discount charged for selling the acceptance. By the
act of accepting a draft a bank extends no funds but merely
assumes the risk of ultimate payment. The actual funds
extended are furnished by the purchaser or holder of the
acceptance and the discount at which it may be purchased
is the charge for the use of the funds, since the risk factor
is virtually eliminated.
At the end of July dealers in bankers' acceptances in
New York quoted a buying rate for bankers' acceptances
of iy% percent for maturities up to 90 days which, as
pointed out earlier, includes most of the acceptances
which are currently being created. For longer maturities
the discount was somewhat higher— by
percent up to
120 days and an additional
up to 180 days. There is a
y% percent spread between these buying rates and the
dealers’ selling rates. These rates apply only to the ac
ceptances of well-known, or prime, banks. Actually, how
ever, these are the only rates quoted and virtually all
banks currently accepting drafts are given these rates.
The sum of these two segments, that is, the 1y2 percent
acceptance commission and the discount of 1 ^ percent
totaled 3 ^ i percent, and this was the cost of acceptance
financing to the borrower. Since these rates are minimum
rates, the relevant comparison for purposes of determin
ing the relative attractiveness of alternate methods of
financing would be the rate for prime bank loans, which
was 3 percent at the end of July. Despite the fact that the
cost of acceptance financing was
percent above the
prime loan rate, there were undoubtedly many borrowers
that would have found acceptance financing cheaper. This

BANKERS’ ACCEPTANCES OUTSTANDING BY TYPE OF TRANSACTION, 1949-1955
(End of quarter)

1 Financing of goods stored in or shipped between foreign countries.
Source: Federal Reserve Bank of New York, Monthly Acceptance Survey.

July 1955

M O N TH LY REVIEW

is due to the fact that the minimum acceptance commission
is more widely available than the prime loan rate.
Concurrently with the expansion of the volume of bank
ers’ acceptance financing in the United States there has
been a narrowing of the differential between the cost of
acceptance financing and the prime loan rate. In December
1948 this differential was Y percent per year, with the
prime rate lower. By early 1954 the costs of these two
methods of financing were equal and between March 1954
and January 1955 the cost of acceptance financing was
Y% percent less than the prime rate. Two increases during
the current year of
percent in the dealers’ buying rate
on acceptances, one in January and the other in April,
while the prime loan rate remained unchanged, eliminated
this cost advantage of acceptance financing.1
From the standpoint of the investor of short-term funds
the relevant rate is the discount at which acceptances can
be purchased, or, in other words, the dealers’ selling rate
which was 1 percent at the end of July. Because of their
characteristics of liquidity and safety, bankers’ accep
tances are virtually the equal in attractiveness of United
States Treasury bills of similar maturities. The appropri
ate rate comparison to the investor, therefore, would be
between bankers’ acceptances and Treasury bills. In re
cent months the yield on 90-day Treasury bills has fluctu
ated between 1.6 and 1.3 percent which has been relatively
near the yield on bankers’ acceptances.2
Advantages and disadvantages of
bankers’ acceptance financing

From the standpoint of the borrower the advantages
stem primarily from the fact that the name and credit of
a bank is substituted for that of the trader or firm. This is
of particular advantage in foreign trade where credit in
vestigation and the collection of other commercial intelli
gence are costly and time consuming. To the borrower
who is eligible for a direct loan at the prime rate, accept
ance financing is at present at a slight cost disadvantage,
although at one time within the past year the cost of ac
ceptance financing was below the prime rate. Among the
disadvantages to the borrower, two are most commonly
mentioned. First, the mechanics of financing through the
bankers’ acceptance are somewhat more complicated and
entail more paper work than the negotiation of a direct
loan. Second, the bankers’ acceptance is less flexible than
a direct loan in that it carries a fixed maturity. Payment
before maturity with an interest credit is ordinarily not
possible as in the case of a direct loan because the holder
of an acceptance will not present it for payment until the
maturity date. Although some banks will allow a partial
rebate of their acceptance commission to customers who
put them in funds prior to presentation of an acceptance,
this practice is not standardized. The use of acceptance
financing, in other words, means that the borrower must
1 Early in August the rate for prime bank loans was increased from 3 to 354
percent and the dealers’ buying rate on bankers’ acceptances was increased from
1 fg to 1 Y\ percent. As a result the cost of financing by these two methods was
equalized at 3 54 percent.
2 Reflecting increasing money market rates, Treasury bills issued as of August 4
were sold to yield 1<85 percent.

calculate much more carefully the dates at which funds
will become available to cover maturing obligations than
would be true if he were being financed by direct loans.
From the standpoint of the lender possibly the greatest
advantage of acceptance financing is the fact that a bank
can accommodate a customer without advancing any of its
own funds. The importance of this advantage to the lender
would be directly related to the availability of loanable
funds. At times when a bank has no excess reserves, ac
ceptance financing would appear to be highly desirable.
On the other hand, at times when excess reserves are
available, a bank probably would prefer to extend direct
loans. As is true in the case of the borrower, the more
complicated mechanism of acceptance financing is a dis
advantage from the standpoint of the bank and increases
its cost over that which would be entailed in processing a
direct loan.
For the investor of short-term funds, the decision to
invest in bankers’ acceptances or Treasury bills would
appear to be largely a matter of yield, since both have
similar characteristics of liquidity and safety. To the
foreign investor, however, bankers’ acceptances have a
tax advantage over Treasury bills in that income re
ceived from investments in bankers’ acceptances is not
subject to United States withholding taxes. The extent of
this tax advantage would depend upon the particular
foreign country in which the investor is resident and the
reciprocal tax treaty in effect between his country and
the United States. In some of these treaties the withhold
ing tax has been reduced or eliminated. For the nonbank
investor in the United States the main factor limiting
investment in bankers’ acceptances during recent years
has been the fact that they have been in such limited
supply. Most of the available acceptances have been pur
chased by banks for their foreign correspondents or ac
cepting banks have bought their own acceptances. As a
result, few have been available for other investors. A
final disadvantage for all investors is the fact that bank
ers’ acceptances are very often drawn for inconvenient
denominations since they cover particular transactions.
The United States market for bankers’ acceptances

The development of a market for bankers’ acceptances
in the United States had its beginning for all practical
purposes with the passage of the Federal Reserve Act in
1913 which authorized member banks to accept drafts
drawn for certain purposes. The initial development was
a rapid one with the total volume of bankers’ acceptances
outstanding reaching the $1 billion mark by 1920. The
volume of acceptance financing fell off sharply during the
1920-21 recession, and it was not until 1927 that the total
outstanding again reached $1 billion. There followed
another period of rapid expansion and in 1929 an all-time
high of over $1.7 billion was reached. During the depres
sion of the 1930’s acceptance financing again declined
sharply along with world trade and business activity. This
decline continued up until the beginning of World War II
when the amount outstanding was less than $200 million.

FEDERAL RESERVE BANK OF SAN FRANCISCO

The major part of the most recent expansion in the
amount of bankers’ acceptances outstanding has taken
place since 1948. At the end of December 1948 the total
amount outstanding was $259 million. By the end of
December 1954 this total had increased to $873 million.
While this has been a 237 percent increase in six years,
the total amount outstanding at the end of 1954 was still
only slightly more than one half the level reached in 1929.
The most rapid expansion occurred during 1954 when
there was an increase of $299 million. Most of this ex
pansion, however, took place in bankers’ acceptances
drawn for the domestic storage of commodities, which in
creased from $64 million to $290 million, rather than in
acceptances drawn for purposes of foreign financing. The
most important single commodity involved was cotton, a
major part of which was being assembled and stored
prior to export. Other domestic acceptances have re
mained virtually unchanged in amount since 1948.
During the first six months of 1955 the total amount of
acceptances outstanding has decreased seasonally and as
of the end of June totaled $655 million, some $66 million
greater than a year earlier. Out of the total decline of
$218 million since the first of the year, $178 million was
accounted for by a decline in acceptances for the domestic
storage of commodities, reflecting in part a seasonal run
off of cotton bills which had expanded so rapidly during
earlier months.
While there has been a relatively rapid expansion in
the total volume of bankers’ acceptances outstanding since
1948, there apparently has been little change in the num
ber of United States banks which regularly accept drafts.
D O L L A R B A N K E R S ’ A C C E P T A N C E S O U T S T A N D IN G
(End of month figures)
1949 to 1955
M illions of d o lla rs

July 1955

Most of the acceptances outstanding have been created by
a small number of large banks in major cities, with New
York City playing a dominant role. The very nature of
the acceptance business and the necessity for foreign con
nections have precluded most small banks and even larger
inland banks from engaging in this type of financing.
The New York market for bankers’ acceptances also
has the advantage of having a small group of dealers who
regularly buy and sell bankers’ acceptances. The accept
ance business of these dealers, however, is usually a
sideline to their main business of dealing in Government
and other securities. In their acceptance activities these
dealers actually act in a brokerage capacity, deriving
their profit from a
percent spread between their buying
and selling rates and seldom carrying any acceptances for
their own account. Customarily banks sell to these dealers
their own acceptances which they have discounted at the
dealers’ buying rate, deriving no profit from this trans
action. In turn they purchase, at the dealer’s selling rate,
acceptances of other banks primarily for the account of
foreign customers and foreign correspondent banks to
which they add their own endorsement for a fee of 1/16
to 34 percent. Foreign investors with short-term dollar
balances to invest have a traditional preference for such
acceptances bearing the names of two banks.
The dominant position of New York in the United
States acceptance market is indicated by the fact that the
New York Federal Reserve District in recent years has
accounted for approximately 70 percent of the total bank
ers’ acceptances outstanding. Of the remainder, the San
Francisco, Boston, Chicago, and Philadelphia Districts
account for all but a minor fraction.
Bankers’ acceptance financing in the
Twelfth Federal Reserve District

San Francisco is one of the few cities outside of New
York where the bankers’ acceptance has continued in use
as a credit instrument all during the years since 1913.
Since W orld War II the Twelfth Federal Reserve Dis
trict has been second to the New York District in the
total amount of bankers’ acceptances outstanding, and for
the first six months of 1955 the total outstanding has been
larger than the combined total of all other Federal Re
serve Districts outside of New York.
The total value of acceptances outstanding in the
Twelfth District increased from $34 million to $125 mil
lion between December 1948 and December 1954. This
three to fourfold increase exceeded that for the country
as a whole, being slightly greater than the percentage
increase for the New York District and almost twice as
large as the increase for the rest of the country.
Federal Reserve participation in
the bankers’ acceptance market

Soifrce! Federal Reserve Barik of New York, Monthly Acceptance Survey

Provision for the establishment of a bankers’ accept
ance market in the United States was a key feature of the
Federal Reserve Act of 1913. Not only were member
banks given thdr first specific authority to accept under

July 1955

M O NTHLY REVIEW

the Act but Federal Reserve Banks were also authorized
to rediscount and purchase such acceptances in accord
ance with regulations of the Board of Governors.
The Federal Reserve Banks began purchasing accept
ances in 1915 and continued to do so until 1934. After that
year and up until the current year only occasional pur
chases were made. During the period of relatively high
activity in the bankers’ acceptance market in the 1920’s
the Federal Reserve Banks along with foreign central and
commercial banks were the main purchasers.
In practice each Federal Reserve Bank has had a mini
mum buying rate approved by the Board of Governors, at
or above which it would set a buying rate which would
fluctuate with changes in the market rate. During the
period in which Federal Reserve Banks were buying
bankers’ acceptances in volume their buying rates were
only slightly above the dealers’ buying rates. In later
years, however, these rates have been sufficiently above
the dealers’ rates as to make them ineffective.
During the 1920’s dealers in bankers’ acceptances were
also assisted by the Federal Reserve Banks through re
purchase agreements or “ sales contracts” under which
the dealer agreed to repurchase bills sold to the Federal
Reserve Banks within 15 days. This assured dealers that
funds could be obtained if needed.
Because the Federal Reserve buying rates during this
earlier period were usually below the Federal Reserve
discount rate, bankers’ acceptances were not offered for
rediscount. All purchases by Federal Reserve Banks were
outright purchases for immediate delivery and they were
held until maturity. The acceptances themselves were all
three-name paper, that is, they contained the additional
endorsement of a bank or recognized dealer, and a prac
tice of not buying directly from the accepting bank was
followed.
In April 1955, after many years of inactivity, the Fed
eral Reserve System again assumed a more active interest
in the bankers’ acceptance market. Under the direction of
the Federal Open Market Committee the Federal Reserve
Bank of New York has begun to purchase moderate
amounts of bankers’ acceptances at market rates. It is
hoped by this activity that a greater interest and wider
participation in the market for bankers’ acceptances can
be encouraged. These purchases have been quite moderate
and total holdings have fluctuated between $10 million
and $20 million. Federal Reserve holdings will tend to
vary in relation to general credit policies and seasonal
swings in the bankers’ acceptance market. There is no
intention, however, to interfere with established market
relationships or to determine market rates.
The bankers’ acceptance and international
movements of short-term capital

One might very well inquire as to why there is so much
interest in developing the use of bankers’ acceptance
financing in the United States. If foreign traders have
alternative methods of financing, such a:s direct loans, why

is the further development of a bankers’ acceptance mar
ket considered to be an important objective?
An answer to this question has two aspects which, al
though directly related, should be considered separately.
One has to do with the growth of privately financed
foreign and international trade and the other has to do
with smoothing out fluctuations in the flow of this trade.
During the post-World War II period a major por
tion of the world’s trade has been closely controlled
and financed by governments. Such controls and official
financing were necessary in order to restore circulation
to the channels of world trade, not only to heal the war
damage and thus restore production but also to overcome
the effects of years of an abnormal trade environment and
to restore confidence among the private traders of the
world.
Today with production above the pre-World War II
level throughout most of the free world and with impor
tant progress being made by many governments in the
relaxation of controls over trade and payments, it is
reasonable to assume that private trade and finance will
assume a more important role. Furthermore, private
capital can be expected to play an increasingly important
role in any future expansion in the flow of trade.
At the present time the United States is by far the most
important potential source of an increase of private cap
ital, both short- and long-term. Short-term capital would
help finance the flow of trade and long-term capital would
be used for developmental projects which are needed to
support a growing volume of trade.
An expansion in the bankers’ acceptance market in the
United States would provide an additional means of
mobilizing needed short-term capital. A larger bankers’
acceptance market need not compete with other means
of mobilizing short-term capital for foreign and inter
national financing but it could supplement other existing
mechanisms.
Even under the most favorable economic and political
environment, world trade is subject to fluctuations and
individual countries may be expected to face temporary
balance of payments problems. The vagaries of nature and
changing consumer preferences alone can assure this. If
such temporary fluctuations are to be weathered without
the necessity of instituting or continuing controls over
trade and payments, it is necessary that trading countries
have adequate reserves of gold and foreign exchange, or
that their reserves can be augmented by an outside source
of short-term funds. More active acceptance markets in
world financial centers would assist in the shifting of
short-term funds from countries where there is a surplus
to those countries where there is a shortage. For a country
experiencing a deficit in its trade, higher short-term inter
est rates might be expected to attract short-term funds
from outside the country and at the same time encourage
their traders to shift their financing to other countries
where costs would be lower. Both of these forces would
help to reduce pressure on the country’s balance of pay

FEDERAL RESERVE BANK OF SAN FRANCISCO

ments. The development of a stock of mobile short-term
capital sensitive to interest differentials between markets
in various countries, which was of sufficient magnitude to
play a significant role in adjusting temporary balance of
payments disequilibria, would require reasonably stable
domestic and international monetary conditions.1 It would
perhaps be unrealistic to assume that conditions which
prevailed prior to World War I, when London was the
financial center of a highly effective world trading sys
tem, can be duplicated in the modern trading world. T o
day’s trading system has become vastly more complicated
and the problems which have given rise to balance of pay
ments disequilibria in many countries are of the sort
which are not amenable to adjustment through the move
ment of short-term funds. Nevertheless, an increase in the
availability of short-term funds in international financing
channels, particularly United States dollars, could be an
important stabilizing factor and of great assistance to
those countries endeavoring to restore their currencies to
full convertibility.
It should also be noted that the transfer of funds
through the medium of bankers’ acceptance markets is
only one of the available methods of transferring short
term funds between countries. Investors of short-term
1For a discussion of some of the additional factors involved in the transfer of
short-term funds between countries as well as a more detailed discussion of
bankers’ acceptance financing, see “ Bankers’ Acceptance Financing in the United
States,” Federal Reserve Bulletin, May, 19SS.

July 1955

funds desiring to transfer them from one country to
another can also do so through the medium of interestbearing bank deposits or Treasury bill markets.
The growth of the Treasury bill market in the United
States since 1929, as well as its increased use abroad, has
an important bearing on the potentialities of developing a
larger volume of bankers’ acceptances. Prior to 1929 bank
ers’ acceptances were a preferred investment medium for
United States banks. Many banks customarily held bank
ers’ acceptances as secondary reserves and adjusted their
reserve position through the purchase and sale of these
acceptances. Since 1929 United States Treasury bills have
taken over this function formerly performed in part by
bankers’ acceptances; therefore, this reason for a large
bankers’ acceptance market no longer exists. It is doubt
ful, therefore, that bankers’ acceptances will be able to
regain the relative importance in the United States money
market which they held in the late 1920’s. Nevertheless,
considerable expansion in the bankers’ acceptance market
is possible. If present efforts to broaden the market do
create additional interest in this type of financing, a useful
supplementary short-term investment for private invest
ors will become more readily available. In addition, such
a development will have the desirable effect of increasing
the availability of short-term credit for the support of an
expanding volume of foreign and international trade.

UNEMPLOYMENT INSURANCE BENEFITS AS A STABILIZING FORCE DURING RECESSIONARY PERIODS
h e

original intent of the unemployment insurance

program was to help sustain a portion of a worker’s
T
income lost during a period of involuntary unemploy
ment. However, in addition to aiding the individual, the
program has since been recognized for its role in stabil
izing the income level of the economy, particularly dur
ing a period of economic decline. During a recession
when wages and salaries are declining, the diminishing
income stream is supplemented by the payment of bene
fits to the unemployed. Concurrently, contributions by
the employer to the unemployment insurance fund, which
are based on payrolls, tend to decline. During a period of
rising economic activity, on the other hand, benefits de
crease and contributions tend to increase. These contracyclical changes in benefits and contributions tend to oc
cur automatically, thus providing a built-in stabilizer for
the economy.1
The compensatory effect of the unemployment insur
ance benefit program during the recent recession was
limited by the incomplete coverage of the nation’s work
ing population as well as by the limited income replace
ment provided by benefit payments. Somewhat less than
aThe use of experience rating plans, however, reduces the compensatory effects
of contributions. Under such plans, a lower contribution rate is awarded to an
employer with low unemployment experience, e.g. smaller unemployment bene
fit payments are charged against his account relative to his contributions. Con
sequently, as business declines, experience ratings deteriorate and contributions
per payroll dollar increase, particularly during recessions of considerable dura
tion. Similarly, as business improves, contributions for some employers de
cline. Nevertheless, the level of contributions still tends to vary directly with
changes in wages and salaries.

one-quarter of the decline in total wages and salaries was
offset by the payment of unemployment insurance bene
fits. Even recognizing the limitations of the unemploy
ment insurance benefit program in offsetting the wage
loss during a recessionary period, this program is con
sidered one of several significant compensatory devices
operating during periods of economic fluctuation.
In the discussion which follows, the nature of cover
age, the benefits accorded the individual worker, and the
effect of benefits on the economy are examined. This will
provide a background for assessing the effectiveness of
unemployment insurance.
The Social Security Act of 1935 and
unemployment insurance

Under the provisions of the Social Security Act of
1935, the states were encouraged to establish systems
of unemployment insurance. To accomplish this a Fed
eral unemployment tax was levied on employers’ pay
rolls. However, if an employer paid unemployment taxes
to a state unemployment insurance system which met the
minimum standards of the Federal law, the employer
could offset the tax paid to the state against all but 10
percent of the Federal unemployment tax. Under this
stimulus, the states rapidly established programs of un
employment insurance.
A second system, the Railroad Unemployment Insur
ance system, was established in 1939 to provide benefits

July 1955

to railroad workers. With the passage of the Veterans’
Unemployment Allowance Program after World War
II and the Veterans’ Readjustment Assistance Act after
the Korean war, special unemployment benefits have
been paid to veterans under specified conditions. How
ever, as the latter type of benefit program is a temporary
measure, it has been excluded from this discussion.
The unemployment insurance provisions of the Social
Security Act (now provided for in the Federal Unem
ployment Tax A ct) do not extend to all persons in the
economy. Among the persons originally excluded from
the Federal Act, by way of the taxing provisions, were
those who were employed in nonprofit (religious, chari
table, and educational) organizations, government serv
ice (state, local, and Federal), the maritime service, and
in very small firms with less than 8 workers. Farmers and
domestic workers were also excluded as were railroad
employees who were later covered under a separate sys
tem. Subsequent Federal legislation extended unemploy
ment insurance coverage to Federal maritime workers
as of July 1, 1953, to Federal Government workers as of
January 1, 1955, and to workers in firms of 4 or more
employees (instead of the present 8 or more) as of Janu
ary 1, 1956.
The coverage provisions of the state unemployment in
surance system generally follow the pattern established
in the Social Security Act. All states, in order to receive
the tax offset referred to earlier, include at least employ
ment subject to the Federal unemployment tax. But
some states extend coverage to workers who are ex
cluded from coverage in the Social Security Act and
thus not subject to the Federal unemployment tax. For
example, unemployment insurance in California extends
to workers in firms employing one or more employees
and several states cover state and local government
workers.
Unemployment insurance and the Twelfth District

Among the Twelfth District states, there are some dif
ferences in the unemployment insurance benefit pro
grams compared with the average for the nation as a
whole. Differences occur in regard to over-all coverage,
level of benefits, and benefits as a percent of wages as
well as in duration of benefits, eligibility for benefits, and
supplements for dependents. In 1953 a slightly greater
proportion of total civilian employees of the Pacific Coast
states, as a group, were covered by state unemployment
insurance programs than were covered in the nation
(60.5 and 59.2 percent, respectively).1 This greater cov
erage was due entirely to California where 62 percent of
the civilian workers were covered. In Oregon, coverage
was considerably below that of the national average (51
percent) ; whereas in Washington coverage was about
equal to the national average. From 1947 to 1952 cover
age of Washington’s workers was greater than the na
tional average, but recently Washington’s advantage has
been steadily declining.
*Data on total employment (nonagricultural and agricultural) are available for
only these three District states.

M O NTHLY REVIEW

These differences in coverage are the result of several
factors. In all three Pacific Coast states, coverage is ex
tended to employees of small firms— firms of one or more
employees in California and Washington and firms of
four or more employees in Oregon. In the country as a
whole half of the states cover only employees in firms of
6 or more workers. As only California has coverage
greater than that of the national average, other factors
must have reduced or offset the effect of small firm cov
erage in Washington and Oregon. The industrial com
position of the work force is one such factor. In Califor
nia, a smaller proportion of workers in the typically non
covered sector of agriculture and a higher concentration
of workers in the trades and services, which are gener
ally covered in California because of the provisions for
employees in small firms, contribute to the inclusion of a
relatively larger number of workers in the unemploy
ment insurance program than in the nation. In Wash
ington, the distribution of workers in the trades and serv
ices and agriculture more closely resembles the pattern
of the nation than does that of California. Possibly ex
plaining Oregon’s lower than national coverage is the
greater concentration of workers in trades and services
than in the nation and the exclusion of large groups of
these workers from coverage through the minimum size
firm provisions. The significance of the exclusion of a
portion of this group is well illustrated by a comment of
the Oregon Unemployment Compensation Commission
which said if coverage were extended to employers of
one or more workers, service and trade lines would con
tribute about 67 percent of the additional members. Ore
gon also has fewer workers employed in manufacturing
and construction— industries with a high proportion of
their members covered by unemployment insurance—
than does the nation.
Further differences in the unemployment insurance
program between the District states and the national pat
tern are evident in the benefit provisions. Differences in
required qualifying wages, minimum and maximum
weekly benefits, and minimum and maximum total bene
fits payable in a year are reflected in the average weekly
payments. For the District as a whole, average weekly
payments are only slightly higher than in the nation. As
indicated in the accompanying table, Nevada, Utah, and
T

able

B e n e fit P a y m e n ts a n d W a g e s— T w e lf t h

D is tr ic t a n d

U n i t e d S t a t e s , 1939 a n d 1953
A v era ge w ee k ly
w age o f covered

A v era ge w eekly
benefit

t -------- w o rk e rs--------^ f -------- paym ent-------- ^

1939
California .................. $30.40
W a s h in g t o n ................
26.92
O r e g o n ........................
28.81
Arizona ......................
24.52
N e v a d a ........................
26.87
Utah .............................
23.92
Idaho ..........................
21.60
26.15
Twelfth D is t r ic t ____
United S t a t e s ...........
26.15

1953

1939

1953

$78.92
75.63
75.83
72.52
78.42
66.35
64.96
73.23
72.98

$10.99
11.82
11.90
11.19
12.94
10.32
11.21
11.48
10.66

$23.34
24.43
22.84
21.23
26.86
25.39
23.18
23.90
23.58

Benefits
as a percen t
,— of w ages—>\

1939
36.2
43.8
41.3
45.6
48.2
43.1
51.9
43.9
40.8

1953
29.6
32.3
30.1
29.3
34.3
38.3
35.7
32.6
32.3

Source: United States Department of Labor, Bureau of Employment Security,
Labor Market and Employment Security.

FEDERAL RESERVE BANK OF SAN FRANCISCO

Washington granted average weekly benefits in 1953
which were above the average for the nation; average
weekly benefits in the remaining District states were
below the national average.
More indicative of the adequacy of benefits is the ratio
of average weekly payments to average weekly wages of
covered workers. Twelfth District payments as a percent
of wages were substantially the same as the national aver
age in 1953, but were considerably higher than the na
tional average in 1939. During this period, District
wages increased more and benefits less than those for the
nation as a whole. In part the District lost its advantage
because the statutory limitations on maximum weekly
benefits were raised on the average less in District states
than in the nation generally between 1939 and 1953.
Measuring the role of unemployment
insurance in the national economy

The role of unemployment insurance within the na
tional economy is suggested by the extensiveness of cov
erage of the nation’s labor force and by the proportion
of the wage loss which is offset by benefits. Unemploy
ment insurance extends to a major proportion of the
labor force and its role in the economy has grown as the
comprehensiveness of the system has been enlarged. But
at the same time that the coverage of the system has been
extended, the portion of the average individual worker’s
wage loss offset by unemployment benefits has been de
creasing.
Measured either in terms of workers covered or pay
rolls covered, unemployment insurance has become more
comprehensive since its inception. The proportion of em
ployed persons in the civilian labor force covered by un
employment insurance programs— both state and rail
road— had climbed from 52 percent during the early
years of the program to 62 percent by 1953. The recent
extension of unemployment insurance to Federal Gov
ernment workers and to workers in firms of 4 or more
employees will increase coverage to about 68 percent of
the working population, according to the Bureau of Em
ployment Security. An even larger proportion of civilian
wages and salaries are covered by unemployment insur
ance. In 1953 payrolls covered by state and railroad un
employment programs accounted for 77 percent of civ
ilian wages and salaries in contrast to 68 percent in 1939.
The greater coverage of payrolls than of employment
principally reflects the relative wage levels in the covered
and noncovered industrial sectors. Covered employment
includes more of the higher wage industries such as
manufacturing and construction and largely excludes
lower wage groups in agricultural work, domestic serv
ice, and in small service and retail outlets.
Another peculiarity in the data results from the sen
sitivity of manufacturing, construction, and transporta
tion to business swings. As business activity declines, for
example, the three industries mentioned suffer declines
in employment much greater than do many of the non
covered sectors, thereby causing the ratio of covered em

July 1955

ployment to total employment to decline. As a result
there are cyclical swings in the ratios of covered employ
ment which coincide roughly with swings in business
activity.
Another and perhaps more significant way of meas
uring the coverage of unemployment programs is pro
vided by the proportion of unemployed people receiving
benefits. This measure is influenced not only by the num
ber of unemployed persons covered by the program but
also by benefit exhaustions, ineligibilities for reasons
such as failure to accumulate enough wage credits, and
retirements from the labor force. On the other hand, sta
tistical and definitional difficulties make this measure, as
well as the one above, somewhat imprecise. In 1953, 62
percent of the total unemployed received benefits under
the state and railroad programs but only 58 percent re
ceived benefits in 1954.
These measures of unemployment insurance coverage
based on average annual data partially conceal the de
cline in coverage during recessionary periods. The de
cline in the effectiveness of the program the longer the
recession continues is better illustrated by quarterly
data. For example, during the recent recession the pro
portion of unemployed receiving benefits fell from 70 per
cent in the fourth quarter of 1953 to 58 percent in the
third quarter of 1954. In part, at least, this decline re
sulted from the increase in the number of beneficiaries
who exhausted their benefits. This number increased
from 800 thousand in 1953 to 1.8 million in 1954.
Unemployment insurance benefits as an offset
to the wage loss of the unemployed worker

When the unemployment insurance system was first
instituted, it was suggested that it would be desirable to
have an average of 50 percent of the unemployed work
er’s wage offset by unemployment benefits. In 1939 av
erage weekly benefits were equal to 41 percent of the
average weekly wage of covered workers. But by 1953
average weekly benefits of $23.58 offset only about 32
percent of the average weekly wage of covered employ
ees.
It should be noted that this type of measure of the off
set provided by benefits most probably understates the
income replacement received by the individual unem
ployed worker. If it were possible to determine the aver
age weekly wage previously earned by an unemployed
worker, which presumably would be less than that of the
average covered worker, the average offset of benefits to
the unemployed workers’ wages would be somewhat
larger.1 Similarly, if benefits were considered in relation
to net spendable earnings, the relative offset to the real
reduction in purchasing power also would be greater.
Nevertheless, the decline in benefits as a percent of
wages has reduced the effectiveness of unemployment in1Several factors suggest that the previously earned average weekly wage of the
unemployed worker would be lower than that of the average covered worker.
Probably the principal factors are a higher rate of unemployment among un
skilled and lower paid workers (as indicated by census data) and earlier loss of
jobs by less skilled and newer workers.

July 1955

M O NTHLY REVIEW

surance for the individual worker. Between 1939 and
1953, the rise in average weekly benefits, due in part to
a statutory increase in the maximum benefit allowable by
state law and in part to the rise in wages of which bene
fits are a calculated percentage, has not been as great as
the increase in wages. Although benefits have not kept
pace with rising wages, benefits have increased some
what more than the cost of living between 1939 and 1953,
as shown in Chart 1.
RELATIVE CHANGES IN WAGES, UNEMPLOYMENT BENEFITS.
AND PRICES—UNITED STATES. 1938-1953
(1938-100)

Percent

300

250

200

150

100

50
Source: United States D epartm ent o f Labor, Bureau o f Em ploym ent Security
and Bureau o f Labor Statistics.

The use of average benefits as a percent of average
weekly wages of covered workers as a measure of income
loss offset by benefits conceals the variations among
workers and among states. In 1953, the higher paid
worker might have received benefits considerably less
than 32 percent of his weekly wage because of the stat
utory maximum limit on benefits. Conversely, the lower
paid worker might receive more than 32 percent of his
weekly wage if he could qualify for maximum benefits.
And among the states, the ratio of benefits to wages
ranged from 27 percent in Delaware to 41 percent in
North Dakota in 1953.
Unemployment benefits— a stabilizing force
for the economy

In addition to the major function performed by un
employment insurance — providing the unemployed
worker with partial benefits in lieu of wages lost through
involuntary unemployment — unemployment insurance
benefits also contribute to the income stream of the econ
omy in a contra-cyclical manner. When unemployment
benefits are considered relative to total wages and sal

aries, disposable personal income or personal consump
tion expenditures, their contribution to the income stream
appears small, as indicated in Table 2. If we turn our
attention to the proportion of wage and salary loss which
unemployment benefits offset we get a quite different
picture.
Estimates of the proportion of the wage loss for the
economy as a whole compensated by unemployment in
surance benefits during recent recessionary periods have
varied from 10 to 25 percent, depending in large part
on the method of measurement used and on the period
selected. Two examples will show the substantial dif
ferences in results which may be obtained from various
methods of measurement. For example, the wage loss in
private wages and salaries during the 1948-1949 decline
was greater than the wage loss in total wages and sal
aries because of the increase in Government payrolls
during this period. Thus, measuring benefits in relation
to wage loss in the private sector would yield a smaller
relative offset than measurement against the total wage
loss. Again illustrating the effect of different measures,
the longer the time period used to measure wages and
salaries, the greater the likelihood that the degree of
change will be obscured. If quarterly data were used
instead of monthly data to measure wage loss, the peak
would be lower and the trough higher than the corres
ponding values based on monthly data because of the
averaging process, unless all the monthly values in either
the high or low quarter were the same.
The effect of benefits in offsetting the decline in total
wages and salaries (which account for close to 70 per
cent of total personal income) has been illustrated just
recently. During the last recession the cumulative loss in
total wages and salaries between the peak month of July
1953 and March 1955 was $7.3 billion.1 This measure
of wage loss includes income effects due to increases in
wage rates and declines in hours worked as well as losses
due to unemployment and should be considered as only
a rough approximation of wage and salary loss due to
unemployment. During the comparable period, state and
railroad unemployment insurance benefits increased $1.6
billion, offsetting about 22 percent of the wage loss.
During the 1948-49 recession, the wage loss replace
ment provided by benefits, calculated on the basis of
monthly data, amounted to 25 percent of the wage loss.
In contrast to the experience during the two most recent
periods of economic decline, only about 11 percent of the
total wage loss during the 1945-47 post-war adjustment
period was offset by state and railroad unemployment
*The calculation of wage loss during a recession is based on the difference be
tween wages and salaries in the peak month before the recession and wages and
salaries during each succeeding month until the original peak is reached again.
The loss for each month between the pre-recession peak and the return to this
original peak is cumulated. Seasonally adjusted wage and salary data were used
to exclude loss of income due to normal seasonal factors. Changes in benefits
are calculated on a comparable basis. The dates used to measure wage loss dur
ing the three periods discussed are July 1953 to March 19SS, November 1948 to
April 19S0, and March 1945 to August 1947. This method is presented by
Daniel Creamer in a study entitled “ Importance of Government Offsets to
Cyclical Losses in Personal Income” which is to be published by the National
Bureau of Economic Research.

FEDERAL RESERVE BANK OF SAN FRANCISCO

benefits. The diminished compensatory effect of benefits
during this period is largely explained by the large ex
odus of temporary war workers from the labor force and
the decline in the military forces, resulting in a signifi
cant wage loss for the economy which was generally not
compensated by state or railroad unemployment insur
ance benefits. The Federal Government, however, did
provide some unemployment payments to veterans in
1945-47, offsetting about 8 percent of the military wage
loss.
The income replacement provided by benefits for the
economy as a whole amounts to far less than the average
relative wage offset received by the insured unemployed
worker (as measured by average weekly benefits as a
percent of average weekly wages). The reasons for this
T able 2
S tate

R ailroad U nemployment I nsurance B enefits
P ercent of I ncome , E xpenditures, and W ages

and
a

U nited States— Selected years
D is p o s a b le
personal
in com e

1939 ............................................................62
1944 ............................................................04
1946 ............................................................71
1948
44
1949
97
1952
44
1953
40
1954
86

Personal
consum ption
expenditures

T o ta l
w ages and
salaries

.64
.06
.77
.46
1.01
.47
.44
.93

.95
.05
1.01
.61
1.36
.56
.51
1.12

Sources: United States Department of Commerce, National Income Supplement,
1954 and Survey of Current Business; United States Department of Health,
Education, and Welfare, Social Security Bulletin.

are several. The wage loss incurred by noncovered work
ers or part-time workers (except in special cases) is not
compensated by unemployment insurance benefits. More
over, a portion of the covered workers may not qualify
for benefits. Finally, compensation would no longer be
forthcoming after a worker had exhausted his benefit
rights.
Unemployment insurance benefit payments do not ap
pear to be either comprehensive enough or sizable
enough to be relied upon as a sole or even major eco
nomic stabilizer during a period of business decline.
Nevertheless, benefit payments do inject limited support
into the economy and maintain to a degree the purchas
ing power of some of those individuals who are unem
ployed. Moreover, this injection of supplementary in
come into the economy occurs automatically and as soon
as unemployment arises.

July 1955

Conclusion

To date the effectiveness of the unemployment insur
ance program has been tested only during recessionary
periods of moderate intensity, namely, the postwar ad
justment period, the 1948-49 recession, and the most cur
rent period of economic decline, 1953-54. During these
periods the impact of the benefit program has been esti
mated to have offset approximately 10 percent of the
wage loss in the 1945-46 period and roughly 25 percent
in the latter two periods. But unfortunately this experi
ence to date gives us little indication of what the effective
ness of the program would be during a major depression.
Several factors would limit the adequacy of the unem
ployment insurance benefit program during a major de
pression. The reserve funds held by the various states
might not be able to withstand a severe depression involv
ing large numbers of unemployed persons who were with
out jobs for long periods of time. Moreover, the statutory
limitations on the amount of benefits as well as on dura
tion of benefits would also limit the compensatory effect
of unemployment insurance particularly as the depression
was prolonged. States pay benefits for a maximum of 16
to 26 weeks, but in a major depression unemployment
would probably continue for a longer period. Even dur
ing 1949, a year of moderate recession, the average dura
tion of unemployment was 12 weeks, and about 2 million
persons exhausted their benefit rights before finding
jobs. The ability of the unemployment insurance program
to withstand the demands of a major economic decline
would of course vary among states, in view of the vary
ing levels of reserves and the variations in statutory pro
visions.
The future effectiveness of the unemployment insur
ance benefit program during periods of declining business
activity must also be considered in terms of other limiting
factors. Some 30 percent of the working population is
still not covered by unemployment insurance programs
(excluding Veterans’ Assistance programs). Moreover,
there has been a decline in the proportion of benefits to
wages. And the contribution rates to the unemployment
insurance funds have been declining because of experience
rating provisions and generally good employment condi
tions since the institution of the program. All of these
factors would tend to limit the adequacy of unemploy
ment insurance benefits in offsetting declining wages and
salaries in a major depression.

M O NTHLY REVIEW

July 1955

BUSINESS IND EXES— TW ELFTH DISTRICT1
(1947-49 average=100)
I n d u s tr ia l p ro d u c tio n (p h y s ic a l v o lu m e )2
Y ear
and
m o n th

L um ber

P e tr o l e u m *
C ru d e R e fin e d C e m e n t

Lead3

C o p p e r»

W heat
f lo u r 3

T o ta l
C ar
n o n a g ri- T o ta l
D ep * t
R e t a il
m f ’g
lo a d in g s s t o r e
c u ltu ra l
fo o d
s a le s
E l e c tric e m p lo y e m p lo y ( n u m
p r ic e s
i. 5
b er)2
pow er
m e n t4
(v a lu e )2
m ent
___

80
42
34
45
61
60
65
77
77
74
74
61
80
94
102
104
116
115
111
119
111

87
57
52
62
71
67
67
69
74
85
93
97
94
100
101
99
98
106
107
109
106

78
55
50
56
65
63
63
68
71
83
93
98
91
98
100
103
103
112
116
123
119

54
36
27
33
56
56
61
81
96
79
63
65
81
96
104
100
112
128
124
130
132

165
100
72
86
114
93
108
109
114
100
90
78
70
94
105
101
109
89
86
74
70

105
49
17
37
88
80
94
107
123
125
112
90
71
106
101
93
115
115
112
111
101

90
86
75
87
84
91
87
87
88
98
101
112
108
113
98
88
86
95
96
96
99

29
29
26
30
38
40
43
49
60
76
82
78
78
90
101
108
119
136
144
161
173

1954
M ay
June
July
August
September
October
Novem ber
December

123
97
79
87
109
124
117
130

107
107
106
104
105
104
104
105

123
119
118
115
121
116
119
119

143
140
143
137
138
143
132
132

67
69
63
73
69
70
73
69

103
105
91
75
97
110
116
114

96
96
92
101
108
105
104
101

174
183
179
174
174
176
177
173

120
120r
119
119
120
121r
121
122r

1955
January
February
March
April
M ay

135
133
121
120
120

105
105
106
106
106

116
122
120
118
115

119
131
137
149

74
76
82
77
77

118
130
130
127
131

107
112
108
97
96

173
179
188
191

122
122
123
123
124

1929
1931
1933
1935
1937
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954

'i ô ô
101
96
95
99
102
99
103
111
118
122
120

W a te rb o rn e
fo re ig n
t r a d e 3» •
E x p o rts Im p o rts

102
68
52
66
81
77
82
95
102
99
105
100
101
106
100
94
97
100
101
100
96

30
25
18
24
30
31
33
40
49
59
65
72
91
99
104
98
105
109
114
116
113

64
50
42
48
50
47
47
52
63
69
68
70
80
96
103
100
100
113
115
113
113

190
138
110
135
170
163
132

124
80
72
109
119
95
101

"¿9
129
86
85
91
186
171
140
131

"57
81
98
121
137
157
200
308
260

137r
138r
132r
131r
137r
138r
139r
140r

97
96
88
90
97
102
98
106

114
114
115
115
110
116
114
118

114
114
113
113
113
113
111
111

158
141
144
96
115
112
118
113

271
237
331
282
262
277
196
313

140r
140r
140
141r
143

106
99
104
106
110

124
115
116
122
122

112
112
112
113
113

163
183
163

287
263
240
290

"47
60
55
63
83
121
164
158
122
97
100
102
97
105
122
132
139
136

BANKING AND CREDIT STATISTICS— TW ELFTH DISTRICT
(amounts in millions of dollars)
C o n d i t i o n I t e m s o f a ll m e m b e r b a n k s 7
Y ear
and
m o n th

U .S .
Loans
and
G o v ’t
d is c o u n ts s e c u ritie s

T o ta l
D em and
d e p o s its
tim e
a d j u s t e d 8 d e p o s its

1929
1931
1933
1935
1937
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954

2,239
1,898
1,486
1,537
1,871
1,967
2,130
2,451
2,170
2,106
2,254
2,663
4,068
5,358
6,032
5,925
7,093
7,866
8,839
9,220
9,418

495
547
720
1,275
1,270
1,450
1,482
1,738
3,630
6,235
8,263
10,450
8,426
7,247
6,366
7,016
6,415
6,463
6,619
6,639
7,942

1,234
984
951
1,389
1,740
1,983
2,390
2,893
4,356
5,998
6,950
8,203
8,821
8,922
8,655
8,536
9,254
9,937
10,520
10,515
11,196

1,790
1,727
1,609
2,064
2,187
2,267
2,360
2,425
2,609
3,226
4,144
5,211
5,797
6,006
6,087
6,255
6,302
6,777
7,502
7,997
8,699

1954
June
July
August
September
October
Novem ber
December

9,049
8,989
8,977
9,054
9,048
9,343
9,422

6,981
7,190
7,574
7,610
8,014
8,089
7,973

10,087
10,310
10,257
10,463
10,749
10,937
11,158

8,428
8,444
8,501
8,555
8,651
8,596
8,663

9,510
9,612
9,696
9,657
9,810
10,102

7,998
7,693
7,390
7,756
7,690
7,446

11,246
10,945
10,733
11,060
10,951
11,023

8,725
8,765
8,837
8,833
8,885
9,026

1955
January
February
March
April
M ay
June

B ank
ra te s on
s h o rt-te rm
b u s in e s s
lo a n s 9

M e m b e r b a n k r e s e r v e s a n d r e l a t e d I t e m s 10
R eserv e
bank
c r e d i t 11
__
+
+
—
+
+
+
+
+
+
—
+

3.2Ô
3.35
3.66
3.95
4.14
4.01
4.14
4 .08

+
+
+
—
+
—
+

34
21
2
2
1
2
2
4
107
214
98
76
9
302
17
13
39
21
7
14
2

C o in a n d
C o m m e rc ia l T re a s u ry
c u r r e n c y in
o p é r a t i o n s 12 o p e r a t i o n s 12 c i r c u l a t i o n 11
0
154
110
163
90
192
148
596
—1,980
—3,751
- 3 ,5 3 4
- 3 ,7 4 3
- 1 ,6 0 7
- 510
+ 472
- 930
- 1 ,1 4 1
- 1 ,5 8 2
- 1 ,9 1 2
- 3 ,0 7 3
- 2 ,4 4 8

+
23
+ 154
+ 150
+ 219
+ 157
+ 245
4* 420
+ 1,000
+ 2 ,8 2 6
+ 4 ,4 8 6
+ 4 ,4 8 3
+ 4 ,6 8 2
+ 1 ,3 2 9
+ 698
- 482
+ 378
+ 1 ,1 9 8
+ 1 ,9 8 3
+ 2 ,2 6 5
+ 3 ,1 5 8
+ 2 ,3 2 8

—
+
—
+
+
—

21
29
18
16
9
1
0

+
-

254
307
28
170
138
244
127

+
+
+
+
+
+

277
170
12
196
142
342
175

—

34
15
10
60
55
27

+
-

150
26
401
306
51
449

+
+
+
+
+

77
57
362
261
195
429

4.01

3.98

+
+
+

3.99

+
+

+
+
+

+
+
+
+
+

—
+
+
+
+

R eserv es

B a n k d e b its
In d ex
31 cities*» 18
(1947-49= .
100)2

6
48
18
14
3
31
96
227
643
708
789
545
326
206
209
65
14
189
132
39
30

175
147
185
287
549
584
754
930
1,232
1,462
1,706
2,033
2,094
2,202
2,420
1,924
2,026
2,269
2,514
2,551
2,505

42
28
18
25
32
30
32
39
48
60
66
72
86
95
103
102
115
132
140
150
153

15
3
7
8
23
27
23

2,413
2,308
2,317
2,368
2,364
2,440
2,505

157
145
154
152
150
158
173

79
13
1
15
50
35

2,481
2,447
2,418
2,432
2,476
2,439

161
166
177
165
170
178

1 Adjusted for seasonal variation, except where indicated. Except for department store statistics, all indexes are based upon data from outside sources, as
follows: lumber, various lumber trade associations; petroleum, cement, copper, and lead, U.S. Bureau of Mines; wheat flour, U.S. Bureau of the Census;
electric power, Federal Power Commission; non agricultural and manufacturing employment, U.S. Bureau of Labor Statistics and cooperating state agencies;
retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census.
* Daily average.
8 N ot adjusted for seasonal variation.
4 Excludes fish, fruit, and vegetable canning.
* Los Angeles, San Francisco, and
Seattle indexes combined.
6 Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and Washington customs
districts; starting with July 1950, “ special category” exports are excluded because of security reasons.
7 Annual figures are as of end of year, monthly
figures as of last W ednesday in month or, where applicable, as of call report date.
* Demand deposits, excluding interbank and U.S. G o v’t deposits, less
cash items in process of collection. M onthly data partly estimated.
9 Average rates on loans made in five m ajor cities during the first 15 days of the month.
n Changes from end o f previous month or year.
12 Minus sign indicates flow of funds out of the District in the
mEnd of year and end of month figures.
case of commercial operations, and excess of receipts over disbursements in the case of Treasury operations.
18 Debits to total deposits except interbank prior
to 1942. Debits to demand deposits except Federal Government and interbank deposits from 1942.
r— Revised.

Full text of Economic Review (Federal Reserve Bank of San Francisco) : July 1955

FRASER