The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
BANKING AND ECONOMIC PROGRESS
Address
by
Delos C. Johns
President, Federal Reserve Bank of St. Louis
Before the
Seventy-first Annual Convention of the
Missouri Bankers Association
Hotel Muehlebach, Kansas City, Missouri
Tuesday, May 16, 1961
BANKING AND ECONOMIC PROGRESS
If you have thought a moment about the subject selected for the
discussion to be presented in the next few minutes, it may have occurred to
you to wonder whether I propose to attack the subject on the banking flank or
on the economic p r o g r e s s flank.
Both possibilities have their attractions.
If the objective were to capture the audience's favor by flattery, one might
allege and set about proving that without p r o g r e s s i v e and efficient banking
there will be no satisfactory economic p r o g r e s s .
when told how important we are.
Most of us do not recoil
On the other hand, if the objective were
only to emphasize the virtual certainty and unquestioned importance of
economic p r o g r e s s as a national goal, an argument could be made that as a
matter of self interest banking must maximize its contribution to economic
progress.
The two ideas are not separate; the difference between them, if
any, is one of emphasis.
Therefore, let us attack on both flanks, viewing
banking in two ways: (1) as an industry producing and selling s e r v i c e s in a
progressing national economy; (2) as a career opportunity for men and
women of integrity, intelligence, resourcefulness, ambition, and the will
to work.
Let me emphasize this point: I shall be talking most of the time
about banking as an industry, not about particular institutions.
It s e e m s to me that there is an old stereotype of banking which we
need to examine as a point of beginning.
There s e e m s to be an impression
in some quarters, in and out of banking, that banking is a kind of static
industry, without encouraging evidence of growth and development in the past,
- 2 -
and without s a t i s f a c t o r y p r o s p e c t for the future.
This m o r b i d i m p r e s s i o n
is exemplified, I think, by often-heard complaints that it is h a r d to a t t r a c t
bank capital, and by another, and p e r h a p s m o r e frequent, complaint that it
is h a r d to a t t r a c t p r o m i s i n g young people to banking a s a c a r e e r .
Let us
c o m p a r e that old s t e r e o t y p e with the c o n t e m p o r a r y image of banking a s
an industry.
Special situations in p a r t i c u l a r banking institutions, I r e p e a t ,
a r e not p a r t of this examination.
We shall inquire how banking c o m p a r e s
with other i n d u s t r i e s in value of s e r v i c e s produced, for e x a m p l e , in
a g r i c u l t u r e , manufacturing, and i n s u r a n c e .
We shall inquire whether
b a n k i n g ' s growth, in t e r m s of s e r v i c e s produced, h a s b e e n slower or faster
than the a v e r a g e for the nation.
We shall inquire what t h e r e is in the n a t u r e
of the s e r v i c e s banking p r o d u c e s and s e l l s that c o n t r i b u t e s to understanding
of p a s t p e r f o r m a n c e and offers clues to the future.
Thus we shall work
back and forth between the two flanks of our subject: what we know about
banking, and what we know or believe about a p r o g r e s s i n g national economy.
It m a y s t r i k e you a s queer to ask f i r s t what the p r o d u c t s of the
banking industry a r e .
You know what they a r e .
F o r p u r p o s e s of a n a l y s i s
and exposition, however, it is n e c e s s a r y to begin with fundamentals,
a s football c o a c h e s have to begin with fundamentals.
even
Let us group the
p r o d u c t s of the banking industry, for the p u r p o s e s of this d i s c u s s i o n , into
three classifications.
F i r s t , banking furnishes the m e a n s by which
m u l t i f a r i o u s and, I will say c o u n t l e s s , t r a n s a c t i o n s in our m a r k e t economy
- 3 are consummated.
We don't know what proportion of all market transactions
is completed on the books of banks, but we know the proportion i s large
and probably increasing.
I have heard and seen it estimated at more than
ninety per cent, which I would guess i s not exaggerated.
Making the proper
entries, keeping things straight, and doing all the varied things required
in that connection make up a truly enormous, and enormously important,
service produced by the c o m m e r c i a l banking system.
And let m e interpose
one small claim: the Federal R e s e r v e has a part in it.
This banking service
of which I am speaking can be easily overlooked by the general public,
because so much of the work i s done behind the scenes.
The public s e e s
and has personal dealings with t e l l e r s and lending officers, for example,
but we know, if we count heads, that most m e m b e r s of bank staffs are back
in the work r o o m s , bookkeeping, transit, and so forth, busily carrying out
the wishes and orders of customers.
As a quick means of appraising the
importance of this classification of banking s e r v i c e , i. e. , consummating
transactions, consider for a moment what the consequences would be if all
the bookkeeping and proof machines in all the banks of the country were to
break down today and remain inoperative for a while.
used to say, " P e r i s h forbid.
M
A s a certain comedian
The American economy would slow to a crawl.
A second general c l a s s of the products of banking consists of
s e r v i c e s rendered in the channeling of savings into investment.
Traditionally,
the banking industry has made available to qualified borrowers the idle funds
of other people, safeguarding, of course, depositors 1 funds that have been
- 4 entrusted to it.
In doing this, banking has had its effect upon economic
p r o g r e s s by selecting the u s e s to which the loaned funds were put.
It would
be difficult to overstate the importance of that allocative function of bankers,
but there i s no use to labor the point here.
More important in the present
context i s the value of this s e r v i c e , and of the skills required to produce it,
to all persons concerned, borrowers and depositors alike, and ultimately
to the whole economy.
Thus some of the profits of banks and the salaries
paid to bank personnel are compensation for the vital service of managing
money.
{Sometimes when people speak of managing money, they are thinking
only of the role of the monetary authorities.
We must never forget that
commercial banking also has its role, and it is the larger role.
In our third general classification of service produced by banking
we will include a variety: trust s e r v i c e s , fiscal s e r v i c e s for the Government,
handling foreign exchange transactions, and all the rest, which you know
perfectly well.
About each of them a great deal could be said, but need not
be said to this audience.
Having all these s e r v i c e s in mind, is it not reasonable to say that
growth in demand for them i s a manifest characteristic of a p r o g r e s s i v e
and progressing economy? As the economy grows and becomes more
complicated, is it not inevitable that more and more market transactions
will have to be consummated?
As wealth i n c r e a s e s and the volume of
financial a s s e t s burgeons, i s it not sure that need for the s e r v i c e s of banking
and other financial institutions will grow? I venture to a s s e r t that in the
- 5 future, as in the past, the volume of service produced and sold by the
banking industry will depend in important part upon how quickly and how
efficiently banks recognize and adapt to the public's growing and changing
demands,
I think it safe to say that the public's demands will be satisfied.
To the extent that banking fails to satisfy them, somebody e l s e will.
Not let us turn to the past - the postwar past - and observe how
banking has performed.
Since the United States has a free market economy,
we have convenient m e a s u r e s in dollar t e r m s for comparing the values that
the public places upon various goods and s e r v i c e s .
One good measure for
comparing industries over time is the dollar value of the part of g r o s s
national product produced in each industry.
In the c a s e of banking, the
measure consists of total wages and s a l a r i e s paid by banks plus the total
profits accruing to the owners of banks, i. e. , dividends plus retained
earnings.
This is the measure of what the nation pays for the s e r v i c e s
produced and sold by banks.
Note parenthetically that expenses of banks
for supplies and equipment are not included, because under the scheme of
the national income accounts they appear elsewhere in the value of goods
and s e r v i c e s produced by other industries.
In the postwar period, 1946-60, the part of our g r o s s national
product that was produced in banks grew faster than the national total, thus
contradicting any notion that banking i s not a growth industry.
You might
be surprised to know that employment and wages and salaries in banking
grew more than the corresponding national totals.
Furthermore, bank net
- 6 profits after taxes increased more than did total profits after taxes of all
corporations.
The growth of banking 1 s product has been at a steady rate.
In the 1953-54 and 1957-58 r e c e s s i o n s , growth persisted, although the rate
slackened a little.
The value of farm production, by contrast, declined
over the fifteen-year period, and in addition showed some instability.
Automobile manufacturing increased sharply from the war's end to 1950, and
has since shown little growth and wide cyclical swings.
The value of s e r v i c e s
produced by insurance c a r r i e r s rose faster than that of banking until 1949,
and since then has roughly paralleled banking, but at a slightly slower growth
rate.
I shall not multiply examples; many others could be cited.
Average annual income per bank employee, however, has not grown
as fast as the average in other industries.
In banking the total number of
people employed has grown faster than total wages and salaries have grown.
The experience of certain other industries has been exactly the r e v e r s e .
More about this later.
The aggregative measure of banking performance in the postwar
period as revealed in the national income accounts presents on the whole a
gratifying record.
The old stereotype of banking to which I referred in the
beginning is found to be inaccurate and misleading.
The banking industry
has not been static; on the contrary, it has exhibited dynamic characteristics
comparing favorably with those in other industries.
For purposes of
analysis, it would be interesting if we could interpret this performance in
t e r m s of c o s t s and earnings, especially the c o s t s of and earnings on particular
s e r v i c e s or categories of s e r v i c e s .
But this i s not an easy matter.
Difficulties
- 7 are encountered when we attempt to identify in the conventional income
statements of banks the payments for the major s e r v i c e s discussed earlier,
and the net returns earned thereon.
I shall have to be content with indicating
a few points that the statements suggest.
Both current operating earnings and current operating expenses
have shown growth in the postwar period, and both have grown at almost
exactly the same percentage rate.
In each r e c e s s i o n there was a slight falling
off in the rate of increase of operating earnings, reflecting, no doubt, declines
in interest rates and contraction of loan volume.
actually increased in each recession.
Net profits, however,
There is no need to point out to bankers
that this reflected capital gains realized upon s a l e s of securities, a sort
of reciprocal of declining interest rates.
This behavior of bank net profits
is remarkably different from the experience of other corporations.
developments in the postwar period deserve mention.
Two other
There has been a
decline in the relative importance of interest on Government securities as
a segment of bank earnings; and interest on loans has risen in relative
importance.
Attention i s attracted also by i n c r e a s e s in miscellaneous sources
of income, for instance, service charges.
A notable aspect of operating
c o s t s is the r i s e which occurred in interest paid.
No comment on causation
i s n e c e s s a r y as to that.
On the whole, it may be said in summary that the income of banks
has kept pace, or more, with rising c o s t s .
In this we find corroboration
of other evidence that banking has displayed the dynamic characteristics of a
- 8 growth industry.
In addition, its net profits have presented a resistance to
cyclical downswings of economic activity that may well be called unique.
Why, then, does one hear it said that banking is a static industry whose
prospects are likewise static?
bank capital?
Why does one hear that it is hard to attract
Why does one hear that it i s hard to attract bright young people
to banking as a c a r e e r ?
Is there something in the outlook for the future
that b e l i e s the past? My crystal ball i s no better than anybody e l s e f s , and
probably not so good as most, but as I continue to view banking as an
industry, as distinguished from looking at particular banks, I think some
interesting things can be said with fair confidence.
Let me iterate a statement already made.
Growth of demand for
banking s e r v i c e s i s a characteristic of a p r o g r e s s i v e and progressing
economy.
We may expect this to continue.
As there are more and more
market transactions to be consummated, the clearing and bookkeeping
activities of banks will continue to expand whether bankers want them to or
not.
However, we should not expect all banking growth to occur in the
s e r v i c e s presently and traditionally rendered.
I do not hesitate to predict
that the public will want and demand, as the years go by, new kinds of
financial and banking s e r v i c e s we have not yet imagined.
It is to be hoped
that banking itself will take the lead in most, or at least some, of these
innovations.
Take a current example.
In some places a start has been
made in providing credit for financing students in institutions of higher
learning.
A casual examination of population figures and projections, of
education c o s t s , and of national goals for education of our young - these
- 9 things and others suggest that this small start may only scratch the surface
of a large area of financial service which somebody i s going to take over.
Heaven knows how many such new areas there are or will be.
Those who paint a dark picture of banking as a static industry point
to one example or another in which it is alleged that banking m i s s e d the boat.
Concede, for the sake of the argument at least, that there were such instances.
Who i s there that has not muffed an opportunity somewhere,
sometime?
Nevertheless, the record of banking, as we have seen, reveals growth and
dynamism in spite of shortcomings.
It i s the nature of the industry and of the
s e r v i c e s it produces to grow and expand as the economy p r o g r e s s e s .
Only
one thing can prevent banking from continuing on a similar course in the future,
a failure to keep abreast of changing times.
Banking must keep abreast; it
must sharpen its awareness of change in the public's demands; it must not m i s s
the boat in the current technological revolution in such things as data processing
and paper handling.
Let me revert for a moment to a fact noted in passing
a few minutes ago.
We observed that in banking the average annual income per employee
has not grown as fast as the average in other industries.
Assuming that bank
employees are fairly paid in relation to their productivity - I assume no banker
will want to controvert this assumption - one must conclude that productivity
has not kept pace in banking, as compared with other industries.
Therefore,
in the technological revolution that is taking place, affecting banking as well as
nearly everything e l s e , bankers will discover, if they have not already done
so, that adding m o r e employees to handle the expanding volume of work i s
no longer enough.
Wage rates are likely to continue rising, as a consequence
- 10 in p a r t of productivity i n c r e a s e s in other i n d u s t r i e s .
Since banks m u s t
compete for employees in the s a m e labor m a r k e t s frequented by other i n d u s t r i e s ,
it is obvious that banks will be at penalizing disadvantage u n l e s s they take
effective s t e p s to i n c r e a s e productivity in t h e i r own industry.
Considering
the c u r r e n t revolution, which I keep mentioning, in p a p e r handling and data
p r o c e s s i n g , it m a y well be that banking now h a s before it the challenging
p o s s i b i l i t y that it can effect growth in the future at a faster r a t e than in the
p o s t w a r period, not only in t e r m s of total value of s e r v i c e s produced but a l s o
in a v e r a g e annual income p e r employee.
To those who w o r r y about the
difficulty of a t t r a c t i n g bank capital and a t t r a c t i n g b r i g h t young people to c a r e e r s
in banking, I suggest this as one of the m o s t hopeful of all a p p r o a c h e s .
A good s t a r t h a s b e e n made by A m e r i c a n banking in the d i r e c t i o n of
i n c r e a s i n g productivity in the l a r g e s t volume o p e r a t i o n s of all banks: check
collection and bookkeeping.
Many of you will r e m e m b e r only too well how
during World War II, when manpower was s c a r c e and banking had no p r i o r i t y
in c a l l on available r e s o u r c e s , the b u r d e n of paying checks or r e t u r n i n g t h e m
unpaid on day of r e c e i p t b e c a m e unduly heavy.
Delayed posting and delayed
r e t u r n of unpaid i t e m s w e r e expedients adopted in e x t r e m i s , though all
a g r e e d that to introduce delay in collection p r o c e d u r e s would be a b a c k w a r d
step.
C a m e the end of the w a r and eventual r e p l e n i s h m e n t of manpower
r e s o u r c e s available to b a n k s , but the b u r d e n s of p a p e r handling and bookkeeping
grew and grew.
Banking was in a bind.
Expansion of demand for its p r o d u c t
was c a u s e for satisfaction; but concomitant growth in the b u r d e n of dispatching
the work was c a u s e for w o r r y .
Someone r e m e m b e r e d , I m a k e it up in my
-11 imagination, that n e c e s s i t y i s the mother of invention; and he said, "Let us
have machines, mechanical, electronic, or whatever it takes, to save us
from this m o r a s s of paper handling and bookkeeping. " This may sound
fanciful, but I think it is the e s s e n c e of the story behind MICR, the magneticink-character-recognition s y s t e m of high speed check handling, for which
equipment is now in the development and testing stage.
The development
of electronic computers and high speed printers for use in many b u s i n e s s e s
for many purposes now offers assistance to banks in their problems of
bookkeeping and recordation, as well as teaming up with MICR in the
processing of checks.
Banking can not afford to let this MICR development project lag
or fail.
I have no fear that it will fail so far as the engineers and technicians
are concerned.
Those fellows have a way of doing the impossible.
The
critical factor is in the area of bank and bank-customer cooperation.
There
is no use to perfect MICR or any other automated system of handling checks
unless banks see to it that checks are in a form the equipment can handle.
is no good to keep the machines busy kicking out rejects.
Thus there is
work for banks to do, not only with respect to the checks that they procure
and furnish to customer's, but also with respect to checks that customers
procure for t h e m s e l v e s .
routing symbol campaign.
faster than before.
It can be done; this was proven in the uniform
It must be done again, and it needs to be done
This i s banking's project; it is not just a Federal
Reserve effort, although the Federal R e s e r v e System i s doing all it can by
It
- 12 way of cooperating with and assisting the American Bankers Association.
This i s , on one big front, American banking's attack upon the problem of
productivity, which I have tried to show is of such great importance to the
banking industry,
and to officers, employees, and stockholders of banks.
You will pardon me, I hope, if I s e i z e upon another subject of
current interest to illustrate the kind of alertness than can serve banking
well in the time ahead.
It i s scarcely n e c e s s a r y to remind you that the
American people have rediscovered a thing called balance of international
payments.
This is a complex subject comprised of a bundle of complex topics.
Suffice it for my purpose to say that the realization has come home to us with
whacking impact that our balance of trade, one of the complex components of
the bundle, is obviously not predestined to be always favorable.
We have to
work to make it favorable and work some more to try to keep it so, at least
a good part of the time.
In plain Missouri talk, that means we have to export
more goods and s e r v i c e s than we import.
In turn that means our products
have to be competitive both abroad and at home.
But given satisfaction of
these requirements, the export transactions of our producers have to be
financed.
Financing is the business of banking.
At this juncture let me
depart momentarily from the resolve to look at banking only as an industry,
not at particular banks.
There are, of course, many banks in this country
that are already admirably staffed and equipped to handle foreign exchange
transactions.
When I consider, however, the dispersion of industry which
i s taking place here and the vast amount of effort that goes into the attraction
of industrial units to smaller communities, it strikes m e that there i s
- 13 opportunity - indeed, persuasive incentive - for many more banks to devote
some part of their r e s o u r c e s and efforts to the encouragement and financing
of export trade.
In cooperation with city correspondents who already have
the know-how, and with the Export-Import Bank of Washington, which e x i s t s
for this purpose, I suggest that a new field of profitable endeavor i s awaiting
your entry.
In a p r o g r e s s i v e and progressing economy, this may be a
hallmark of your individual p r o g r e s s i v e n e s s and p r o g r e s s .
We have spent about as much time as I propose to take now in
looking at banking as an industry producing and selling s e r v i c e s in a
progressing economy, though some of the points I have tried to make would
bear elaboration.
Let me summarize briefly.
We have seen that the banking
story of the last fifteen y e a r s offers no b a s i s for long-faced p e s s i m i s m about
the outlook for banking, unless we assume some radical change in circumstances
beyond our power to master.
Absent valid reason for such an assumption,
I prefer to adhere to the doctrine that growth in demand for banking s e r v i c e s i s ,
and will continue to be, characteristic of a progressing economy.
We have
indicated that if bankers will exert themselves to continue to grow in alertness
and resourcefulness, they may accelerate banking's rate of growth beyond the
average of other industries.
We have argued that an important objective of
banking must be to improve productivity within the banking industry; and though I have
said it before, I say it again: the opportunity to improve productivity in banking
could hardly be wished better.
There is enough on the drawing boards and in
the factories already to offer high promise of unprecedented gains.
Given a
- 14 fair distribution of the fruits of increased productivity, repair of the lag in
incomes of banking employees, as compared with those in other industries,
would s e e m to be within reasonable expectation.
What deterrent to selection
of banking as a career can be deduced from all this? I find none for those
who p o s s e s s the qualifications I postulated in the beginning: integrity,
intelligence, resourcefulness, ambition, and the will to work.
@FedFRASER