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The RMA Journal is the only periodical that provides in-depth treatment of subjects devoted exclusively to the risks and opportunities in the business of lending. Produced 10 times per year, The RMA Journal is read by risk professionals at every level of experience at institutions ranging from community banks to global, complex institutions. Widely read in North America, the Journal is expanding its readership in the global financial centers of Europe, Australia, and Asia

The content addresses emerging issues in enterprise risk management, many of which are tied to the current economic environment while others remind readers of the importance of the Five C’s of credit. Liquidity and capital adequacy, fraud, managing the commercial real estate portfolio, and addressing interest rate risk are among the topics frequently featured. About 18,000 RMA members receive the Journal and pass it among coworkers. Its estimated secondary readership is 100,000. Continuously published since 1918, The RMA Journal is one of the top five North American banking magazines in terms of circulation.

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The following article was published in the August 1919 issue of Confidential Bulletin, the precursor to today’s RMA Journal. At the time, the publication was little more than a newsletter. However, as the article below shows, even in those early days RMA was focused on improving credit risk management, whether through the sharing of information, collecting data in a scientific way, or simply promoting relationships between bankers. 

Alexander Wall, a Harvard-educated Milwaukee banker, was appointed Secretary Treasurer of the Robert Morris Club, a title he held until his resignation in 1944. Wall served with RMA for the first 30 years of its existence. His achievements include (1) developing the basis for RMA’s Annual Statement Studies, (2) emphasizing the importance of RMA’s Journal of Commercial Bank Lending (today known as The RMA Journal) and (3) offering educational and training seminars to credit personnel. He sees the organization’s membership grow from 82 bankers to 780 bankers (called associates) representing 390 institutions; its annual budget grows from $800 to more than $43,000.

Notes by the Secretary

The growing complexity in business and the growth of commercial paper purchases bring to bank credit men a peculiarly intricate problem in the proper diagnosis of many different lines of business, a good many of them foreign to their own communities. The Robert Morris Club1 has brought about, since its organization in Salt Lake City,2 a close personal relationship between the bank credit men who make up its membership, such that it has become practically a first-name organization.

There is a problem which has been touched upon only in a very undeveloped way that should be of great interest to bank credit men. This is the understanding of different lines of industry from a basic standpoint. Time is given to few of us to take up and study, in a basic or intensive way, different lines of business in which the customers directly connected with our own banks may be active. It is more difficult to find the time to develop a sound and complete study of different lines of business.

Recognizing this condition, the officers and directors of The Robert Morris Club made arrangements prior to the meeting held in Philadelphia, over a year ago, to have presented to the members in attendance at that meeting three brochures on different lines of business—tanning, lumbering, and milling. The first of these, tanning and lumbering, has been published in book or pamphlet form and formed the first two of what is hoped will develop into a library of bank and credit information and practice.

At the June meeting this year, there seemed to be a well-developed opinion that The Robert Morris Club should do this work in more concrete form than it has in the past; that it should establish a central office of its own, with a secretary giving his whole time to the different activities of the organization; and that there should be established a group membership, which might be termed research members, of men from banks who were willing to pay advanced dues so that the necessary funds could be raised to make economic excursions and careful examinations into basic industries and to compile statistics covering trade and sectional conditions and such other information as might be interesting to bank credit men.

To make this development possible, it became necessary to incorporate in our bylaws certain changes that would make possible a proper financing. The action taken at the June meeting was favorable to this development, and a committee was appointed to draft a new set of bylaws, which, according to present rules, have been submitted to the directors and have been voted on affirmatively by them. These bylaws are printed in a different part of this bulletin, and you will find enclosed a postal card ballot which you are asked to fill out at once and mail to the secretary so that he may have the full postal vote required by our present bylaws as to whether or not the new bylaws as submitted at this time shall be substituted for those now in existence.

Some of the proposed activities have been outlined by the committee on research organization and form the bulk of this bulletin. 


Credit Research

The growth in commercial paper purchase brings to bank credit men a consideration of many lines of business foreign to their own communities and with which they have scarcely a speaking acquaintance. The only basis for judging statements of offerings is broad, general rules regarding the current ratio; the relation of cash and accounts to current debt and of liabilities to capital investment; and analysis of the supplemental figures of sales, profits, and dividends. These rules are usually applied indiscriminately to all statements, without allowance for a wide and logical variation between specific industries or between the manufacturer, distributor, and retailer.

The thoughtful credit man feels an immediate need for reliable information regarding the customs of the different trades with particular reference to financial practices and the resultant effect on the balance sheets. He wishes a standard balance sheet of a given industry by which he can measure the exhibit of a particular note under consideration. The pressure of his duties requires that such information shall be accessible, condensed, and capable of producing the desired comparison with a minimum expenditure of time and effort.

“A standard balance sheet” does not mean an ideal balance sheet but only the kind of balance sheet which a well-managed business in a chosen industry would exhibit under normal conditions. The operation of the law of greater numbers would produce such an exhibit for a selected period if there could be gathered in a composite balance sheet the figures of a sufficient number of representative houses in a given line of business. 

Credit Barometrics

For several years past, Alexander Wall, manager of credits, National Bank of Commerce, Detroit, has been working on this theory by computing the ratios of certain groups of statement items in all the balance sheets of open market borrowers and ascertaining the averages for given industries and for trade divisions of the country.

The initial public results of his studies were set forth in an article on “credit barometrics,” which appeared in the March number of the Federal Reserve Bulletin. They were offered as a target and as such have drawn fire. They have been criticized as inconclusive, as based on too few statements, as purely theoretical, and as without practical application. They have been commended by economic journals for outlining business tendencies and by practical credit men for revealing financial practices heretofore believed to exist in certain sections and by showing the results of crop conditions and natural phenomena acting on given industries.

Trade Terms

Parallel with a complete analysis of the results would go a statement of the buying and selling terms of each industry and the seasonal variations in business. This is data which every credit man desires but which only a few have had the facilities and opportunity to secure and tabulate. 

Basic Industry Study

Statistics will in a measure explain balance sheets, but a proper understanding of industrial organization requires a far broader knowledge. There are many technical articles on the different industries, but as a rule they have not been written from the credit viewpoint. For our uses they are therefore too long and too short—that is, they contain many details which the credit man does not need, however much he may be interested in them, and they omit many facts essential to his purposes.

Basic industries can best be studied at first hand. The origin, handling, and financing of the various raw materials as well as the distribution of the finished product and the disposition of the byproducts can be traced and tabulated by a trained credit man so as to produce in tabloid form information desired by other credit men.

The Robert Morris Club has conducted such studies and has produced creditable exhibits on tanning and lumbering. It has, however, been dependent on the volunteer services of its members, and that has prevented any rapid expansion of its investigations.

The value of such studies authoritatively and intensely made would be increased by periodic revision and continuing reports on the conditions within the industries. 


There is a limited field for a monthly publication bringing to bank credit men the boiled down results of  statistical investigations; the experience of other credit men with office problems; reports of current literature dealing with credit topics; and the personal comings and goings of men who are known to each other through this “first-name organization.” The progress of this new movement could thus be recorded for the information of all members. The possibilities of such a periodical develop with its use. 

Local Chapter

In a few cities the local bank credit men have been gathering periodically, chiefly for social purposes, but the talk has naturally drifted to “shop,” and many abuses have been corrected and misunderstandings have been wiped out by frank discussions. The proposed constitution of the club provides for the organization of such chapters under charter from the parent organization. A permanent secretary would be invaluable in creating and assisting such chapters.

How Can These Suggested Activities Be Undertaken?

At the Detroit conference in June 1919, the members attending directed the board of directors to formulate the plans to make possible some of the activities outlined above. A new set of bylaws is submitted with this bulletin, designed to accomplish this. The purposes served are as follows:

1. The Robert Morris Club is continued in the same form and with the same activities as at present.  

2. A Research Section is created for those members who feel the need for closer credit data than is now available.  

The regular members will receive for their dues all of the present privileges and, in addition, the proposed bulletin. It is proposed that they should be entitled to purchase the special research papers at stipulated rates. The club will benefit by having a permanent secretary to arrange the periodic conferences and create cohesion without additional expense.

The enlarged program will be financed and conducted by so-called research members, who will pay dues of $50 if capital and surplus of their employing institutions is $2,000,000 or less and $100 if over $2,000,000. This financial support will be pledged for two years in order to give the plan a fair trial. Alexander Wall will contribute the work done and experience thus far gained in his credit barometrics research. The office will probably be located in one of Philadelphia’s convenient suburbs,3 giving access to the best mail service at the least expense.

The estimated annual cost of conducting such an office is $15,000. The support offered at Detroit indicates that this amount can be raised in time to get the office operating before the fall. 


  1. The Risk Management Association was founded in 1914 as The Robert Morris Club. Naming the club after Morris, the founding father known as “the financier of the Revolution,” was the idea of Alexander Wall, a key figure in the early days of RMA. See this article’s sidebar for more information about him.

  2. In 1915, The Robert Morris Club met in Salt Lake City to adopt its bylaws.

  3. Two months after this piece was published, The Robert Morris Club opened its first office in Lansdowne, Delaware County, Pennsylvania, just outside of Philadelphia.


The following article was published in the April 1925 issue of The Robert Morris Associates Bulletin, the precursor to today’s RMA Journal. The piece notes, “Bankers should encourage the adoption of budgets as a benefit to borrowers and a protection to lenders.”

The Robert Morris Club established a permanent headquarters in the Lansdowne National Bank Building, Lansdowne, Pennsylvania. Alex Wall reported that the club held as assets the following office furniture: one double flat-top desk, three office chairs, a five-drawer file, a Royal typewriter and stand, and an Addressograph machine with stencils. In 1964, when the RMA president gave his 50th anniversary speech at the annual conference, he noted that some of those desks were still in use at the headquarters.

Business Budgets and Credit Safety

By Homer N. Sweet, C.P.A., of the firm of Lybrand, Ross Bros. & Montgomery, Accountants and Auditors

This reports the principal points covered in an informal talk made by Mr. Sweet before a meeting of the New England Chapter, February 19, 1925.

Eighty percent of failures in business, as Bradstreet’s statistics show, are traceable to faults of management. Only one failure in five arises from conditions or events which management is powerless to avert, such as competition, debts of apparently solvent debtors that fail of collection, and disasters of all kinds. To forestall avoidable losses is one purpose of a budget. It is relied upon also as a means of augmenting the profits. The president of the Walworth Manufacturing Company, which earned substantial profits in 1924, states in his annual report that “had it not been for our method of budgetary control, which made it possible to forecast both the decline and increase in orders, thereby maintaining a fairly even production throughout the year, in all probability no profit for the year would have been realized.” Bankers should encourage the adoption of budgets as a benefit to borrowers and a protection to lenders. The value of the budget to the borrower lies in its definition of the operating program best calculated to yield the highest profits and enhance the financial standing of the business. For the lender, the use of budgets by borrowers lessens the credit risk. The purpose of this article is to describe what a budget is as applied to a mercantile or manufacturing business and what it may accomplish to the advantage of both borrower and lender.


The Budget Defined

The budget is a prearranged plan of the operations of a business. A complete budget for a mercantile or industrial business is summarized in three schedules:

•  Estimated balance sheet for a future date.

•  Estimated income and expense statement for a future period.

•  Estimated statement of cash receipts and payments for a future period.

Each of these statements is compared later with the actual figures when they become known.

Five classes of estimates enter into the composition of the budgetary schedules, all being for a given future period:

•  Estimate of sales and other revenues.

•  Estimate of cost of materials and merchandise to be received and shipped and consequent changes in inventory.

• Estimate of operating costs and expenses.

• Estimate of plant additions, betterments, replacements, and repairs.

• Estimate of dividends; short- and long-term borrowings, maturities, and conversions; capital stock issues, redemptions, and conversions; and sinking fund requirements.

These estimates are made both on the accrual and cash basis. The translation of the estimates into the three summary schedules of the budget is an accounting process which need not be discussed in this article.


Trial Budgets  

The final budget that is adopted as the program for a future period is agreed upon only after consideration and adjustment of many tentative budgets. The tentative or preliminary budgets may be called trial budgets. The first consolidation of estimates into a trial budget will rarely be an acceptable budget. The ultimate effect of the preliminary estimates cannot be gauged in all their ramifications until they are assembled in a trial budget. The trial budget reveals wherein the component estimates are disproportionate and need to be revised. But estimation is not the sole foundation of the budget. There are many factors wholly within the discretion of the management not subject to the vagaries of trade. It is for the executives to decide what sum to appropriate for advertising. The salaries and expenses of the salesmen can be predetermined within fairly close limits—so, too, the salaries and expenses of the administrative staff. Additions to plant may be made or not as the executives resolve. All these elements of the budget are dictated by the management itself as matters of policy and are not in the class of forecasts which may not materialize as anticipated. In great measure, then, the policies of the management dictate many of the factors in the budget. A budget should forecast the transactions of a future period of not less than six months; preferably, the period should be for one year. But a final budget, so-called, seldom serves its full term; more likely, it will be superseded early by another “final” budget. The budget of the federal government does fix the limits of expenditure for the next fiscal year; yet the Budget and Accounting Act provides that the President may submit emergency and deficiency estimates for expenditures omitted from the budget with a statement of the reasons for the omission.


Applicability to Lenders

In a business, too, the budget is amended whenever there is good reason for the omission. Sudden fluctuations in prices of goods, in costs of materials, in demands of the trade, and in the tactics of competitors, not foreseen when the last budget was adopted, may justify or compel immediate changes in plans and policies. No budget should be so rigidly administered as to prevent modifications which the executive committee in the exercise of their best judgment perceive to be desirable. The budget coordinates all the activities of a business. If all the proposed and estimated transactions for a future period, as first assembled in the trial budget, do not indicate fair net earnings and sound financial condition for the period ahead, that budget is amended until the most satisfactory budget permitted under prevailing business conditions has been attained. No proposition of any magnitude should be approved or disapproved as an isolated issue, but should be considered as an element of the complete budget along with all other transactions which, in combination, will affect the balance sheet and income statement. Coordination, therefore, implies these two aims: first, a positive one, which is that the efforts of all divisions or departments of the business shall be adjusted to a unified program planned with a definitive objective; and second, a negative one, which is that no single decision of any consequence shall be reached without consideration of its probable effect on the budget. A budget resolutely administered by a borrower is a protection to the lender. The lender can repose more confidence in the fiscal management of a company after it has adopted the budget as an integral part of its accounting and statistical system. Not only will the need for loans be critically reviewed from all angles in the process of setting up trial budgets and agreeing upon the final budget, but the time and means of repayment will be prearranged. The budget charts the borrowings and repayments. The budget introduces the custom of reviewing the estimates each month in the light of actual results. Operations that would entail excessive expense can then be arrested or adjustments in other directions can be devised to counteract the threatened inroad upon profits and drain of assets. Should revenues fall behind the volume which the sales manager himself set out to secure, then there is an incentive for him to redouble his efforts to make up the deficit. If the cash account does not accumulate as large a balance at any date as was anticipated, reexamination of the resources and obligations may reveal avenues of recovery that otherwise would be overlooked.


Making Comparisons

It is the monthly scrutiny of the income statement and balance sheet in comparison with the budget that reveals the shortcomings of management. Executives depend upon this comparison to uncover their errors in policy and to point the way to adjustments that will conserve the assets and augment the earnings. Any concern that operates on this principle is a safer credit risk than it would be if it muddled along without a budget. It is not prudent for an executive to merely compare the operations of the current year with those of the preceding year. Successive years differ widely in the possibilities offered to make a business yield fair profits. If the prior year was a poor one and the current year is a prosperous one, comparison of the two may engender higher hopes in the success of the current year than the conditions of that period truly warrant. A more significant relation lies in a comparison between the actual operating results of the current period and the budgeted figures that give effect, as fairly as can be estimated, to the conditions of trade for the same period. The important question is whether the concern is making as much money as it should in this year, not how much better it is doing this year than it did last year. In the memories of the oldest textile men, the year 1924 was the worst for cotton mills of New England since the Civil War. The outlook for 1925 is more hopeful. Operations of cotton mills in 1925 should not be judged by contrast with 1924. A better criterion for 1925 is a budget based upon a fair forecast of the possibilities for that year. The final budget fixes the responsibility for every item of income and outgo upon a certain individual. This principle of an organization is another factor of safety to the lender. It minimizes the chances for expenditures to run in excess of the amount that pre-calculations have shown the business is able to stand. For every class of expense there is an individual in the organization whose ability to discharge his duties satisfactorily is judged in part by his success in keeping the expenditures within the limits of the budget. The motive to conform with the budget makes for an economy that could not be attained to the same degree were it not for the budget. And there is also the responsibility of the sales staff to reach the mark set by the budget—to bring in the orders at the prices figured to yield the desired profit. The strive of the responsible men to equal the budget and excel it is a real force that energizes the business in the direction of the greatest earnings and judicious handling of assets. It should strengthen resources and credit standing.


Advantages and Possibilities

The advantages of a budget which have been described are those that flow from a complete budget. Many concerns that profess to have budgets have only budgets for overhead expenses or for sales. Partial budgets are steps in the evolution of a complete budget, and the evolution is a process of months rather than weeks. Successful administration of a budget is attained as experience is gained in forecasting trends of the business and the organization becomes perfected. If the budget is to be instrumental in bringing about retrenchment on the approach of a period of depression, the budget must have been previously in operation; it cannot be installed and made serviceable on short notice. Such are some of the possibilities of budgeting. Executives of the largest corporations do not venture to manage their operations without budgets. Thousands of business managers will undergo heavy losses before being convinced that budgets pay; but many progressive executives can be persuaded from the experience of others to begin directing their operations according to budgetary plans before it is too late. Bankers, by virtue of their position and the confidence which businessmen have in them, can be influential in extending the use of budgets and thereby minimizing credit losses, to the great advantage of their institutions and the business community at large.


The following article was published in the 1931 issue of the Robert Morris Associates Bulletin, the precursor to today’s RMA Journal.

In 1939, RMA membership grew to over 350 banks, and the organization celebrated its 25th anniversary.

The Business Outlook

By Harland H. Allen, Economist, Foreman-State National Bank, Chicago

Every painful recovery period in business has had its own antecedent “credit orgy” with the resultant inflation of prices and production. Obviously, the one sure way to prevent business depression is to prevent business inflation; and the one effective way to prevent business inflation is to keep credits under control. The great mystery about the present depression period is that so few people felt it coming on. The country usually recognizes a pronounced and rapid rise in the price of, say, real estate, or manufactured goods, or farm products, or securities; and the extent of the inflation is appraised roughly by contrasting these prices with the more stable values in uninflated fields. This time the inflation was less obvious, and the contrasts were less striking because inflation was taking place in all fields at the same time. There was relatively little warning except in the case of securities. The 1928-29 inflation was going on all around us, unheralded to most, because it was a “relative” inflation instead of an absolute one. Prices did not rise, except in relation to costs. The point is that costs of production had been falling for nearly a decade, but prices were being maintained by artificial means and with the help of constantly inflating securities values. It is, of course, just as unhealthy and dangerous an inflation for prices to hold when costs have declined as it is for prices to rise with costs steady. Of the six or more major causes of the depression that took hold of business in the fall of 1929, all but one were either directly or indirectly related to credit expansion. The most widely recognized of these major causes was overproduction, or disproportionate production as I prefer to call it. Related to overproduction—in part a cause of it and in part the result—was excess capacity in industry and the continuing tendency to over-finance industry. Security inflation unquestionably ranks high among the causes of this depression. Related to that was the abnormal credit expansion, inaugurated by rising security prices and in turn becoming the cause of further inflation. The bidding for more credit to buy more rising securities first exhausted the legitimate credit supply of the security markets. Then, rising interest rates drew the funds of industry and commerce from all over the country, while a further bidding up of interest rates sucked into the security markets of the United States a larger share of the short-term credit and working capital of the whole commercial world.


Excessive Financing Distorts Purchasing Power

Another corollary of rapidly rising security prices was the unprecedented volume of new security financing in this country from 1926 to 1929. One result of that was to greatly increase the amount and proportion of total national income distributed as interest and dividends. Publicly reported interest and dividend payments increased from $4,391,000 in the prosperous year of 1926 to $8,217,000 in the depression year of 1930. The percentage of national income distributed as interest and dividend payments was probably twice as large in 1930 as in 1926. It follows, then, that the percentage of income distributed as wages and salaries was seriously reduced. In other words, as a direct result of the uncontrolled volume of new financing in recent years, wages and salaries are unable to buy their usual proportion of consumption goods. The piling up of surplus inventories under such circumstances is inevitable, and deflation to remedy the situation is equally inevitable. A third major cause of this depression, and one differentiating it from all those preceding it, was the part played by the extraordinary expansion of consumer credit during the years immediately preceding 1929. This was manifested largely in the expansion of installment buying and in the large-scale development of the so-called consumer finance companies. While consumer credit is expanding, consumers are manifestly offering more than their current earnings in the market for consumption goods. This results both in the inflation of retail prices and in the stimulation of additional production—beyond the normal capacity of consumers to buy. An ever increasing shortage in the world’s gold supply must be written down as another factor contributing to the deflation in 1929. I am not one of those to blame all our troubles on the gold situation. To do so is, in effect, to give every other aspect of economic mismanagement a clean bill of health. But we cannot get away from the fact that the supply of monetary gold in the world is being increased annually by only about half the rate at which we are increasing the manufacture of goods and the consequent volume of commerce. Thus the need for monetary gold—in measuring values and effecting exchange—is increasing twice as fast as the quantity of gold, and a cumulative shortage (assuming the continuance of present gold usage and price levels) seems almost inevitable. Moreover, during the last 10 years, this shortage has been intensified by the fact that many commercial nations that were on an inflation basis during the war years have now been returning to a gold basis and have been requiring more and more gold for their currency reserves. Added to this is the fact that, during this decade, France and the United States have been receiving reparations and other war debt payments in the form of gold instead of goods. These two countries have in fact been absorbing more than all of the world’s new monetary gold, with the result that outside nations actually have less gold in 1931 than they had in 1921, yet their volume of trade and commerce to be financed by this gold is a third larger.


Pegged Prices Postponed Deflation

The gold shortage—less gold and more goods—has constituted a continuing and almost irresistible force working for lower price levels. Yet prices didn’t decline materially for seven years—from 1922 to 1929. They were supported in part by the inflation of security credit and security prices. In part they were maintained or “pegged” by such interests as industrial cartels, trade associations, pools, various forms for monopoly, and in numerous cases by governments themselves. Silk, coffee, copper, sugar, wheat, rubber, tin,  and sulfur are but a few of the many world commodities that appear to have been maintained at an artificial price level—one out of  line with the trend of prices as they would have been determined by the free play of demand and supply. This false situation could not be maintained, by even the most powerful groups, after security inflation was punctured. One by one, these prices have collapsed, and gradually we have come to realize that artificial commodity prices constituted another major cause of the business depression of 1929-30. Still another factor unsettling the economic structure of the world was—and still is—the war debt settlements and reparations payments, which have grown during recent years to very large proportions. For a while, these war debt settlements were balanced by large international loans to paying nations, particularly to Germany. This was only postponing the real problem, however, and we have lately been facing the fact that billions in war debt settlements mean colossal, one-sided economic transactions. Whatever we may think of the moral questions involved in debt payments from the Allies to the United States (and from Germany to all these nations), as an economic problem, and from the point of view of the mechanics involved, every $1 million that must be paid across international lines without a compensating return flow throws the economic structure of the world just that much out of balance. And, of course, there cannot be a compensating exchange flow of goods or gold in such cases, else no debt transfers could actually be effected. The situation is somewhat similar to the maladjustment of water level that might take place between several Great Lakes if billions of cubic yards were pumped from one into the others without permitting a return flow. Assume for the moment that Germany is Lake Ontario, that the middle lakes are the Allied countries, and that Lake Superior is the United States. Billions of cubic yards of water (dollars) are pumped from Ontario (Germany) into the middle lakes (Allies), and much of that in turn is pumped into Superior (United States). Moreover, none is permitted to flow back—else there would be no net payments. This is made possible by huge locks (tariffs) and other devices that must be reinforced and built higher continually if other commerce, besides these payments, will continue to be carried on between these lakes of increasing disparity in water level. If tariffs are burdensome now, it is well to remember that the continuation of war debt settlements will probably require that they be made higher and higher. And if the maldistribution of the world’s gold has already reached a point that not only endangers the commodity price level but the whole gold standard, it is well to remember that, at present, the war debt settlements require both France and the United States to continue receiving gold or goods, in excess of their total exports, and in very large annual quantities until the year 1988.


What Corrections Have Been Made?

It should be worth our while to check back over those major causes of the depression to see what progress has been made toward eliminating them—toward creating a world situation in which commerce and industry will have a chance to develop normally, once business recovery gets under way. We have already seen that no progress at all has been made toward relieving the pressures growing out of war debt settlements. Moreover, the situation has been greatly aggravated during the last year and a half by the decline in commodity prices. Because commodity prices have declined approximately 25% since the Young Plan was ratified, it manifestly requires a full third larger quantity of goods to meet annual payments in 1931 than it did in 1929. In other words, the burden of annual debt payments and reparations is at least 33% heavier now than two years ago and the dislocation of world commerce and the world gold supply is that much more intense. It is equally true that no absolute progress has been made toward equalizing the gold reserves of the world. The new Bank for International Settlements has come into play during this period and is already the leading sponsor of methods to economize gold. More than offsetting all this, however, has been the fact that the United States has drawn more gold out of world channels during the last year than the total amount of new gold mined, which was available for monetary purposes.


Most Raw Materials Are Deflated

The artificial commodity price situation is, on the other hand, very much relieved. The most notorious of the “pegged” prices have, in fact, been deflated substantially more than the average of all commodity prices, or than all other commodity prices. In some commodity lines, like wheat, for instance, great financial resources have been marshalled and are still fighting a losing battle to sustain prices at a level unwarranted by lower world production costs. Such situations lead the thoughtful observer to question whether, despite great temporary price reductions, real progress has been made toward a saner price policy—toward a general recognition of the fact that unwarranted price restraints will ultimately bring their own undoing and that, as long as these restraints are permitted to continue, other industries are suffering a proportionate handicap. Consumer credit has been going through deflation. Except in the automobile business, it is probable that the proportion of consumer credit to total consumer expenditures is smaller now than 18 months ago. Herein is a clear-cut illustration, however, of the chief weakness of consumer credit, both from the standpoint of business and of consumers themselves. Beyond certain well-defined limits of defensible use, consumer credit tends to expand when consumers need it least, and to contract when they need it most. So just at the time when there are already too many other factors working toward price inflation and eventual collapse, consumer credit expansion intensifies inflation—and also, when depression comes, the quick curtailment of the use of consumer credit intensifies deflation. We need, of course, devices that will hold the use of consumer credit within bounds on the way up, and then preserve its availability on the downswing of business to help maintain buying power against reduced income.


Credit Genius Wanted

One of these days a credit genius may come along, someone who will invent a method for expanding consumer credit in hard times—when the consumer needs added purchasing power most and when business needs it most. But it will be a method that will keep consumer credit under rational control in good times. That would do more to stabilize business and prosperity than anything else I can imagine. That inventor’s name will be writ large and high among the benefactors of mankind. Security inflation has probably been corrected in a more thorough way than any of the other major causes of depression. This is true also with regard to security volume. At the beginning of 1931, brokers’ loans are but a small fraction of what they were at the peak of 1929. Even the collateral loans of commercial banks have been substantially reduced, despite the fact that these loans are now believed to contain relatively small proportions of purely speculative support for security prices. Insofar as the excessive issuance of new securities became a depressing factor in business conditions, the situation has been slowly self-correcting. Depressed stock prices have naturally reduced the attractiveness and thus the marketability of stock issues. The erratic course of bond prices during the last year has kept the volume of new high-grade bond issues measurably well under control, while the precarious nature of business throughout 1930 kept the bond market frowning on all borrowings of the second- and third-rate groups. Overproduction is still with us in some lines, but it has been greatly reduced in most. Control and a scaling down of output in raw materials have naturally been much slower than for manufactured products, for two principal reasons: 1) Far greater numbers of people are involved in raw materials production; and 2) the average cycle of production is a full year or more for raw materials, yet only a few months or weeks in the case of most manufactured goods. Consequently, inventories of manufactured goods are in many instances the lowest they have been for years (this is particularly true of those lines that have deflated their prices in line with the trend of the times), while the world’s supplies of many raw materials, like cotton, copper, sugar, silk, wheat, and coffee, are still oppressively heavy.


A “Good Dose of Iron”

Not so much headway has been made in the correction of disproportionate production. Business thinking still seems to run in terms of stimulating the already over-stimulated industries and of expansion along the very lines that have been over-expanded (in terms of a well-balanced industrial setup) during the years just past. This is well illustrated in a current news item reviewing steel developments early this year: “Orders came through in substantial volume, but they were mostly of a miscellaneous character.” The inference continues that this was a disappointing feature. Let us take the “but” out of the above sentence and read it as, “Steel orders came through in substantial volume, and from a wide variety of sources.” That is good news, not bad news. It means that the whole “body economic” was getting a good dose of iron. It means, moreover, that no one industry is running away with all the improvement this spring; that recovery, slow as it is, is setting in on a broad basis and a sound foundation. Insofar as “excess capacity” in industry constituted a burdensome overhead in 1929 and offered continuous temptation—and even pressure—toward overproduction, that factor has been greatly reduced, by the mere passage of time, through obsolescence, wear and tear, and other depreciation. The slow recovery of our financial markets, while disappointing on the one hand, has nevertheless had its compensations, in that we have escaped the temptation to revive business by building added millstones around its neck in the shape of more excess capacity.


The Present Situation

The present situation is, of course, an outgrowth of the factors and events preceding it. Nevertheless, there is value in attempting to appraise the present in terms of its own characteristics, as well as by those that have contributed to it. Such a double check on the situation should increase the likelihood of our understanding of it and of our devising methods and means to improve it. We are going forward into 1931 with the advantages and the handicaps of this year, not those of last year and the year before. What the year 1931 will record in the way of progress for business and finance depends very largely on how squarely we face the facts of 1931 and with what measure of sane vigor we attack its problems. The outstanding characteristics of business in the first quarter of 1931 are reduced purchasing power and underemployment. Purchasing power began to be inadequate before the break in 1929, but in its accentuated form today it appears to be more the result of deflation than the cause of it. In spite of that, business recovery waits upon the strengthening of purchasing power; hence, expanding purchasing power must now become a stimulant to and a contributory cause of recovery. Buying power has been curtailed chiefly through unemployment and price declines. But since unemployment resulted from declining demand for the good that this labor produced, it is unlikely that employment will improve radically or quickly except through factors unrelated to it. The other principal factor affecting purchasing power is the commodity price situation. The price declines of the past year and a half have reduced the demand for goods, and thus the demand for employment, in at least three distinct ways:

1.  Falling values in raw materials throughout the world have reduced buying power in the principal foreign countries, such that the markets for our exports have been greatly curtailed.

2.  Distortion of the price structure has resulted from the fact that few commodity prices have fallen at exactly the same rate. In fact, some prices have actually risen while others have been falling, so now there is great disparity and seeming inconsistency. This has created uncertainty in the minds of buyers everywhere and has paralyzed demand.

3.  The decline of wholesale prices, although much slower than for most raw materials, has been much faster than the decline of retail prices. Raw material and wholesale prices are, to a very large extent, the measure of purchasing capacity of producing classes; retail prices, on the other hand, represent what must be paid in the market. If income has declined 23% (with wholesale prices) and the cost of living has declined but 10% or 12% (with retail price averages), then the power of producers to buy has been reduced by the difference—at least 10%. Agricultural prices as a whole have suffered much worse than other wholesale prices, with the result that farm purchasing power has been reduced by at least 25% through this disparity in the price decline.

Clearly, the reduced purchasing power that is due to price disparities is of a very different type than that produced by unemployment. It is self-corrective in large measure. For just as purchasing power is reduced through disparity in the price decline, it becomes stronger as falling prices find a new level and become reestablished in their normal relationships. Purchasing power is already improving with every readjustment of specific commodity prices to the general commodity trend and with every gain made by retail prices in overtaking the decline of wholesale prices. January, by the way, was the first month since 1929 in which retail price averages appear to have made genuine headway in overtaking wholesale prices.


Proposals and Remedies

The prolonged period of commercial and industrial activity and lower profits had goaded business leaders into an analytical study of the situation and has infused the rank and file of businessmen with a determination to work their way out of this depression. The most optimistic aspect of business in the early months of 1931 is this change in mental attitude—this disposition to survey the conditions impeding recovery and to attack the problems that beset business in a scientific manner. Among the proposals being advanced by determined business leaders are the following: 1) deflation of wages to conform with price declines; 2) a scaling down of the war loans; 3) veterans’ bonuses and other relief measures; 4) the stabilization of silver through concerted international action; 5) more consolidation of industry, with particular emphasis on the railroads; 6) expansion of foreign loans; 7) expansion of building activity, particularly of residential construction; 8) a continuation of low interest rates; and 9) more conformity in the decline of commodity prices. Time does not permit an examination of the merits and demerits of such an array of proposals. Some are undoubtedly sound; others either would be helpful, if practicable, or are thoroughly unsound. The scaling down of war debts or the expansion of foreign lending would undoubtedly bring relief to business. Either should improve international trade, strengthen the currency of Western Europe, and lend some stability to prices throughout the world. But business recovery is unlikely to be assisted, during the period when it needs assistance most, through the early fruition of either of these remedial measures. War debt reduction continues to meet tremendous political resistance, and increased foreign lending continues to meet tremendous economic resistance. There is good reason to hope that the world situation will be improved by progress in both these directions in the not-too-distant future, but business must look to other approved methods of speeding recovery if it is to make satisfying progress in 1931. There is clearly something to be said on both sides of the proposition to deflate wages along with commodity prices. There are undoubtedly inequalities in the wage situation, particularly between certain types of labor, which may have to be ironed out in the best interests of labor and of business in general. There will be some instances and perhaps some whole industries (where the production economy is substantially less advanced than in others) in which wage costs will have to be reduced or production curtailed to the point where intensified demand will pay higher unit prices for the product. It is fallacious to assume, however, that such special cases prove the need for a general wage production program. Insofar as commodity price weakness was a result of lowered costs of production, clearly the lowering of wages would further reduce costs and hinder price recovery rather than help it. Moreover, insofar as price weakness has been due to a weakness in purchasing power, it would, of course, only accentuate this weakness and make a bad matter worse to scale wages down in a general movement. The farther we go in analyzing proposals for remedying the business situation, the more apparent it becomes that price reconstruction is not only the most logical but the most hopeful way out. The readjustment of prices to a new level 25% or 30% or 35% below the pre-depression level will 1) correct the inflation which made the price level unsound two years ago, 2) restore confidence in business by restoring confidence in prices, 3) restore purchasing power by the re-grouping of prices in their normal relationships and by closing the gap between retail and wholesale prices, and 4) restore employment and normal business volume through restored purchasing power. Remembering that average wholesale prices are now 25% below the pre-depression level and that the average of world raw materials is about 40% below pre-depression levels, I will, for the near future, regard it as prima facie good news when I hear that a given price has gone down if that price has not previously taken as much as a 25% decline since this depression started. And I will consider it prima facie good news to hear that a given price has risen if that commodity has previously declined in excess of 40%. From now on this year, I will endeavor to measure business risk in terms of whether or not the business concerns involved have taken the deflation and written off commodity prices in line with the trend of the times.


The following article was published in the February 1943 issue of The Robert Morris Associates Bulletin, the precursor to today’s RMA Journal.

1944: A Meeting Creates Two Organizations

The International Monetary Fund and International Bank for Reconstruction and Development are established after the meeting at Bretton Woods.

Business After the War and Its Financing

By Arthur R. Upgren, Vice President and Economist, Federal Reserve Bank of Minneapolis

(Secured for the Associates by Minnesota Chapter)

During World War I, U.S. commercial banks financed a very major part of businesses’ needs and directly loaned to the government only a very minor part of its needs. In fact, during the years of that war, bank loans increased about four times as fast as bank investments in government bonds. In the present World War [II], after a short period of increases, banks are now experiencing a steady decline in loans. In contrast, bank investments in government bonds have very greatly increased. It is the government that now, in addition to financing direct war expenditures, is also financing an immense amount of indirect production. This, to be sure, is one manifestation of total war. Because of their excellent work during the war, banks have again secured a marked position of leadership. It is believed that the postwar opportunities for business can be, on balance, extremely favorable. It is therefore incumbent upon all bankers—and particularly all bank credit men—to prepare quickly to meet the postwar challenge and grasp the opportunities for bank financing leadership after the war. In this way, the kind of economy that is wanted by everyone can be restored. What are the prospects for business after the war? What investigations and studies are needed during the period of war? Only if these questions are answered will banks be prepared as soon as the war is ended to play the great part that they should in restoring a free economy. Finally, it is important that the postwar situation be well understood to prevent a period of hesitation by the banks, which would probably result in a perpetuation, if not an extension, of the types of governmental financing that have been adopted for the war emergency.


Deferred demand for housing: $3.7 billion

Deferred demand for consumers’ durable goods: $8.7 billion

Private business construction and equipment deferred demand: $5.2 billion

Deferred private maintenance: $2 billion

Deferred demand for consumers’ semi-durable goods: $3 billion

Deferred public works: $2.7 billion

Deferred public maintenance: $600 million

Total estimated deferred demand at June 30, 1944: $25.9 billion

Changes in the Economy During the War

There can be little question that the most striking development of the wartime period is the steady and rapid rise in the national income of the American people. From a level slightly in excess of $70 billion in 1939, the national income increased to $76 billion in 1940, to $95 billion in 1941, and to more than $115 billion in 1942. Further increases can be confidently expected, and in fact, Secretary Jones of the Department of Commerce recently estimated the national income for 1943 at $135 billion. This is one of the central wartime changes in our economy. Our government has work for everyone who is able to contribute to the war program. It will find the means to pay for its expenditures. Its payments make incomes high. Through the year 1941, consumers were reasonably free to spend their new, higher incomes on purchases of consumer goods. Since 1941, however, even though incomes have been rising, consumers’ expenditures for many kinds of goods have been falling. It now appears that in the present year, 1943, because of widespread shortages of goods, consumers’ expenditures in almost all lines will decrease greatly. This situation is reflected and has its complement in the growth of Americans’ total savings. These increased in 1942 to a level of no less than $26 billion, up from $12 billion in 1941 and only $7 billion in 1940. It is, of course, to be hoped that the majority of consumer savings will be invested in government securities in order that inflation may be checked. As a result of these changes, private residential housing is almost nonexistent except for defense workers. Consumer expenditures for all kinds of durable goods—automobiles, electric refrigerators, household appliances (in fact, anything made of the new precious metals)—will have been reduced by probably three-fourths of the annual level before Pearl Harbor. Many other kinds of expenditures of consumers, and of businesses as well, are being drastically reduced. In fact, civilian industries may not even be able to spend their depreciation allowance for plant and equipment to make good the wear and tear of wartime years. The importance of even just these replacement expenditures is indicated by the fact that American industries’ annual total depreciation charges are more than $5 billion.

The Significance of Wartime Changes for Business

There exists an increasingly wide realization that an immense amount of deferred demand will have been accumulated during the war years. In a recent article (Harvard Business Review, Autumn 1942), Professor Sumner H. Slichter estimated the amounts of deferred demand that would be accumulated by June 30, 1944. These amounts are listed in Table 1. Not only will these huge amounts of needs be accumulated during the war, but the public simultaneously is accumulating buying power that, in light of the “potential” but never realized deferred demand of the 1930s, can make this huge wartime-forced deferred demand into effective market demand when the war is ended. In a recent speech (New York Times, January 15, 1943), David C. Prince, vice president of General Electric Company, cited figures indicating that a backlog of buying power of $32 billion would be accumulated by consumers by the end of 1943. In the depression years of the 1930s, in contrast, consumers’ debts were high and their savings were low, accompanied by huge losses in their capital resources. In the present wartime period, however, consumers are sharply increasing their savings, their investments, and their bank deposits, while substantially reducing their debts. Reliance for a high level for business after the war is by no means to be placed wholly upon accumulations of deferred demand, even though they may be fully backed by increased savings and prepared for by debt retirement. An even more significant factor is that the national income will be high throughout the years of the war. If reasonably high-level incomes can be maintained after the war, the buying power such current incomes can generate will prove to be the greatest source of support for business. In addition, the combination of a high-level national income and accumulated financial resources gives excellent promise that business activity itself will be enough to offer strong assurance of maintaining the national income’s high level.



Expenditures for…

Estimated Consumer Expenditures in 1941

Projected Postwar Expenditures of Consumers

(assuming a national income of about $115 billion)

Manufactured foods and like products



All other nondurable commodities



Total nondurable goods



Clothing and accessories including shoes



All other semi-durable commodities



Total expenditures for all services (health, education, recreation, etc.)



Consumers’ durable commodities



Residential construction



Total consumers’ outlays



The Nature of Consumer Wants Based on a High National Income 

In 1941, when the national income was about $95 billion, total purchases of consumer and producer goods for private account were at their maximum for recent years. Since 1941, as indicated above, the national income has further increased substantially to a level of about $115 billion. We have reasonably adequate figures as to the quantities of goods the American people purchased in 1941 with the incomes they then enjoyed. Can we obtain an idea of what they would buy if free to dispose of a higher income than they’ve ever had to spend in the past? Table 2 compares the amounts of various classes of goods that were actually purchased in 1941 with the amounts that would be purchased if a larger income of $115 billion could be freely spent on consumer goods. A simple way of stating how such expenditures would be made as to various classes of goods, in view of the fact the people have not been free to purchase with such higher incomes, is the assumption that Americans do follow the practice of “keeping up with the Joneses.” By this is meant that, with a higher national income, a larger number of people enjoy incomes, for example, ranging from $2,000 to $2,500 and a smaller number enjoy incomes of $1,500 to $2,000. The directions in which the larger number of people would spend their higher incomes is based on the belief that, as the one group moves into the higher-income group, their outlays for goods and services take the budget pattern of the latter. Since budgets are known in advance by inquiry into the expenditures of all income groups, we can determine the new totals for consumers’ expenditures based on their higher-level incomes. In Table 2, it is the increased expenditures that are indicated in comparison with the outlays of consumers in 1941. The figures in Table 2 are not to be reconciled directly with the national income because they are not given on a comparable basis with figures for the national income. This owes to the fact that the net national income is always calculated after deduction for various items—in other words, it is a net figure including particularly, for example, that part of output that is required to make good depreciation of durable goods. The economy produces some goods for consumers’ replacements and they are a part of total production and of total consumers’ takings, but they are not a part of the net national income. Consumer expenditures, as listed above by classes for 1941, therefore embrace quantities taken both for replacement and for ordinary consumption. However, since the same basis has been used in the estimates for consumer demand in the postwar years, the comparison is appropriate to show amounts and directions of the increases in outlays consumers would make when they again will be free to dispose of their incomes in accordance with their free choices. The higher level of national income would result in a total enlargement of consumer takings of $25 billion. These estimates are given not as forecasts but as a way of approaching the problem of the markets that business may expect after the war, and as a way of inquiring into the problems of financing business that will come to the fore when war production ceases. Business itself, on its own superior knowledge, will make its final estimations by individual companies and individual products. When this is done, more reliable figures will be available for the financial advance budgeting that is needed. It is this kind of planning that is needed and that will be approved by everyone.

Methods of Analyzing Prospective Business Financing After the War 

The approach to an analysis of business financing that will be needed after the war involves a consideration of three distinct time periods. These are, in chronological order, the period until the war is ended, the period required for reconversion, and the first postwar year or two in which reasonably full civilian output is achieved. The period of the war may be taken to have its end when war expenditures cease to be the dominating factor in the economy. Analysis or advance budgeting is necessary to determine the condition of liquidity for business that will prevail when war contracts are terminated and reconversion in civilian production begins. In order to project budgets (balance sheets and income statements), it is obvious that some knowledge of operating accounts under war conditions must be obtained. It is also necessary in the projection of the balance sheet—and especially the working capital position—to make certain assumptions with respect to 1) inventory quantities, 2) profit margins, 3) price levels for raw materials, 4) wage rates for labor, and 5) the extent of plant expansion or contraction. While assumptions for each of these factors (and there are others) cannot be made with accuracy, the value of the work is not impaired given that, as time passes, the assumptions can be continuously corrected to accord with actual developments. Moreover, the methods used will yield results that may very well require revisions in the assumptions first used. For this work it would be suggested that a period of two years be considered as the “wartime period,” not because the war can be expected conveniently to end December 31, 1944, but because this advance budgeting during the war period can be moved ahead in accordance with prospects for military victory. With the statements prepared for the war period, a financial position is arrived at for the beginning of a second period—the period of reconversion. For this period, it is necessary to estimate the cost and time period required for reconversion of plant. It is also necessary to give effect to the termination of war contracts and the resulting effects of such conversion upon the working capital position. In the event that plant facilities have been provided by special government arrangement, the statement of the operating accounts and balance sheets should be modified in accordance with the final disposition of such facilities, which may or may not be purchased by the business. Where applicable, allowance must be made for special wartime and immediate postwar charges for depreciation at the special higher rates (20%) that have been approved for the war emergency. In addition, allowance must be made for any new capital costs involved in the reconversion of plant to an efficient basis or peacetime production. It is abundantly clear that a large number of additional problems are involved, such as policy with respect to special development charges in connection with new products, new marketing and distributing arrangements that may be adopted, etc. With the completion of the advance budgets for the war years in this way extended through the period of reconversion, the financial position of the company is estimated for the beginning of the third period, in which industry is able to undertake the production of full postwar civilian output. The analysis of markets for individual producing companies, which has been indicated above in broad outlines only, is directed toward an understanding of the volume of business the company may expect in the postwar period. With such determination of markets, the financial needs for enlarging civilian production to amounts that will be wanted in the first postwar years can be estimated. It is this level of business, determined both by general economic analysis and by specific market analysis by companies themselves, that will provide the basis for banks’ judgment of the financing needs of companies after the war.


The great importance of the work outlined above is that thoughtful study of these problems can result in banks being prepared to grasp the opportunities that will present themselves in the postwar years—opportunities which must be exploited to the full if banking and business are to survive with the freedom and in a form in which they can contribute their full share to a high-level income and its accompanying full employment after the war. Not only this, but studies of this kind can become the basis for an intelligent approach to the question of which broad governmental controls (and in what form) should be preserved over the period of transition until they can be finally terminated. Illustrations are afforded by price control, inventory control, rationing, and the allocation of raw materials that have been necessary during the war. In this way, banking and business can accept still wider responsibilities for the development of governmental control itself along the lines that will achieve the objectives of the American people and the collective goals they have set for themselves.


The following article was published in the November 1952 issue of The Robert Morris Associates Bulletin, the precursor to today’s RMA Journal.

1956: BHC Act Passed

The Bank Holding Company Act establishes new regulations for bank holding companies to purchase banks, prohibits interstate bank purchases, and prohibits bank holding companies from engaging in nonbanking activities.

Financing New Television Stations

By Shaler Stidham, The Philadelphia National Bank, Philadelphia, Pennsylvania

The Federal Communications Commission has announced a plan that will permit the ultimate establishment of about 2,000 television stations. Under that plan, provision has been made for television channels to serve most of the nation. Permits are being issued by the FCC for new stations in existing service areas and in areas that do not have any television transmission at present. Some of the new stations will be what are known as very high frequency (VHF) transmitters and others as ultra high frequency (UHF) transmitters. Most standard television receivers can be modified so that they will receive UHF as well as VHF. There is no question that many new television transmitting stations will be set up in the next year or two. A number of operators will require financing. This article makes suggestions for how a bank can approach the decision of whether it should finance a particular new television station.


Equipment Financing by Manufacturers

Manufacturers of radio transmitting equipment have for many years financed the sale of their own equipment, but such transactions have also been financed by the purchaser’s bank. It is believed that little, if any, loss has been experienced on this type of financing, even though it is true that some radio stations were temporarily embarrassed financially during the early 1930s. Financing of television transmitting equipment by the manufacturers has been just as successful as that of radio transmitting equipment. The financing by the manufacturers is usually done based on one-fourth to one-third down, with the balance payable in 24 to 48 months. Inasmuch as a new television station should anticipate an initial loss period, some manufacturer installment contracts provide for a larger down payment, with the provision that the first installment is payable perhaps four to seven months after delivery, rather than the normal practice of having the first installment mature 30 days after delivery. The manufacturer is usually secured by a conditional sale or chattel mortgage agreement.


Station Franchise Value

In addition to the normal factors to be considered in a bank loan arrangement, due weight should be given to the station franchise value. The establishment of a broadcast station is subject to FCC issuance of a construction permit, based on evidence that the proposed station is in the public’s interest. This method of controlling the number of stations and preventing their indiscriminate establishment creates a significant asset: franchise value. This franchise value and the related earning potential have, in the past, made it possible to sell a broadcast business at a favorable price, even if it has operated at a loss. The intangible asset value that was proved in AM broadcast activity has already been established in the TV broadcast field.


Early Planning of TV Stations

Many purchasers of broadcast and television transmitter equipment have preferred to seek local financing, and bankers are receiving an increasing number of inquiries for such arrangements. Any banker receiving a request to finance a television station would be well advised to write immediately to the Engineering Products Department, Radio Corporation of America, Camden, New Jersey, and ask for a copy of the May-June 1952 issue of Broadcast News. On pages 24 to 37 is an article called “Considerations in the Early Planning of TV Stations,” by J. Herold, television station planning consultant. It would also be helpful to ask for a copy of the pamphlet “TV Station Operating Costs,” also written by Herold. (The remainder of this article, for the most part, is a summary of the data and suggestions contained in the above-mentioned publications.) Herold lists nine basic steps in planning a new television station. The banker should sit down with the prospective operator of the new station and together they should explore each of these nine steps. When the banker has finished this analysis, he will be in a position to independently forecast the degree of success the station should have. Furthermore, he will be in a position to decide whether the prospective operator of the new station will have the ability to manage it successfully.


Step 1: Estimating Potential Income

The first step is to estimate the potential income to the station. Generally speaking, a station must have a potential audience of 80,000 to 120,000. The market area to be reached by the station must be determined and data secured as to the dollar retail sales in the market area. If a station is already operating in the area, figures should be obtained on the number of television receivers in the area. The effects of competition from existing stations and from others that might have been authorized by the FCC must be studied. Data on the number of television receivers in an area, rates of existing stations, and a listing of additional stations authorized by the FCC can be obtained from the “Television Fact Book,” published semiannually by Radio News Bureau, Wyatt Building, Washington 5, D.C.


Step 2: Selecting the Site

The second step is to select the site for the transmitter and decide the height of the antenna and the power of the transmitter. The studio may or may not be located at the same point as the transmitter. One importation consideration is always that of designing the layout so that the facilities can be expanded with a minimum of additional cost. The considerations involved in this second step are, of course, highly technical in nature. A prospective operator of a new station should lean heavily on the manufacturer of the equipment for guidance. Also, it would be good to retain the services of a technical consultant. Lists of names and addresses can be obtained from the “Television Fact Book.”


Step 3: Determining the Sources of Program Material

The third step is to determine the sources of program material. There are four major sources: network, film and slides, live studio programs, and remote originations. The latter two sources involve considerable expense, and the planner must keep in mind that the amount of program expense to be incurred must be properly related to anticipated income. Provision must be made for adequate facilities to support whatever sources of program material have been selected. Items to be considered are studio size, lighting, acoustic treatment, air conditioning, stage, scenery, properties, special effects, cameras, camera dollies, audio systems, intercommunications systems, mobile units and microwave facilities for remote originations, and availability of network connections.


Step 4: Estimating Total Capital Investment

The fourth step is to estimate the total capital involvement that will be required. 




1. Transmitter (including tubes)


2. Antenna system (including transmission line)


3. Frequency and modulation monitors


4. Studio technical equipment (including microphones, transcription equipment, and other equipment used in the production of TV programs)


5. Land acquisition


6. Acquiring or constructing buildings


7. Other items


Total estimated cost of station



Step 5: Estimating Yearly Operating Expenses

We are now ready for the fifth step: estimating the yearly operating expenses. For a reasonably accurate calculation of these expenses, reference should be made to the procedures outlined in J. Herold’s “TV Station Operating Costs.” We are now ready to relate the first step (estimating potential income) to the fifth step. As already indicated, a new television station cannot be expected to operate profitably at the outset. It is unusual for it to be on a profitable basis in three or four months. It generally takes around a year before income exceeds expenses. 


Step 6: Filing an Application with FCC

The sixth step is to file an application with the FCC for approval to construct the new station. A period of three months to a year or more will be required before action is taken on the application, depending on channel availabilities, conflicts with other applications, conflicts with FCC regulations, and CAA approval of antenna site and height. The cost of processing an application with the FCC can be as little as $3,000 if it is a simple case and as high as $100,000 if it is a case with considerable conflicts. During this period, basic planning should continue in preparation for permit approval. The permit specifies a date for commencement and another for completion of construction. The FCC must be convinced that there is a need for the proposed station. In addition, the FCC requires that sufficient capital, in its opinion, be made available. It also wants to be convinced that the programs will be of service to the community. The ability of the applicant to operate a television station properly, always a question considered seriously by the FCC, is of increased importance if there are competing applications for the same channel.


Step 7: Projecting Future Expansion

The seventh step is to project probable future expansion. Planning should anticipate the use of the basic building as a nucleus, as is, for a long time, with additions at later periods made on a horizontal plane whenever necessary.


Step 8: Determining Personnel Requirements

The eighth step is to determine the requirements for personnel and the setting up of a training program for the individuals who will be hired. The shortage of experienced workers in this business is quite acute, and steps should be taken at an early date to train key personnel. Television seminars, conventions, and inspection trips to existing television stations are most helpful. Whenever possible, it is good planning to provide cameras and equipment for preliminary training and experimental purposes considerably in advance of the “on the air” date. The personnel problem for a television station is a serious one and will continue to be the number one issue for some time.


Step 9: Planning the Installation

The ninth and last step is to design the buildings and prepare plans for the technical installation. If at all possible, an architect with experience in television station design should be employed. This individual should lean heavily on the experts working for the manufacturers of the equipment. A general consideration to keep in mind: It is far better to begin with a sound basic operation and expand slowly rather than quickly. Each step in the considered expansion should be analyzed for its long-term place in the operation. A sound basic television station plan is one that matches the market, with an investment neither too high nor too low, and a plan for growth in keeping with the potential of the market.  It should be kept in mind that there are only four networks. [Editor’s note: The networks of the day were ABC, NBC, CBS, and the former DuMont Network.] If a television station will not have available to it the programs of a network, it will have to develop its own programming of a quality that can compete with the network’s. It should be obvious that this will require considerable additional capital investment and result in higher yearly operating expenses. Let us suppose that the banker went through the nine steps described above and became convinced that the proposed television station would operate successfully under the management of the proposed operator. The banker then went ahead and assisted in the financing of the station. As time went on, however, it became evident that the operation was not going to succeed. What then? The answer is that it should not be difficult to find several other individuals or groups who would be eager to buy out the interest of the unsuccessful operator, put additional capital into the business, and assume the unpaid installment obligation to the bank.


The following article was published in the May 1968 issue of The Robert Morris Associates Bulletin, the precursor to today’s RMA Journal.

1960: Merger Bill Passes

The Bank Merger Act requires federal regulation of mergers and consolidations.


1962: Comptroller Gets New Powers

Authority over the trust powers of national banks is assigned to the Comptroller of the Currency.


1969: 24-hour Banking Arrives

Chemical Bank installs the first ATM in the U.S.

Bank Credit Cards: Their Impact on Business

By Walter W. Perlick, M.S., and John R. Kreidle, Ph.D.
College of Business, Northern Illinois University, DeKalb, Illinois

In the past year, considerable emphasis has been placed on the impact of bank credit cards on consumers and consumer spending. With the introduction of the bank credit card in the Midwest, banks have found it necessary to explain to consumers the purposes and functions of this type of credit and to point out the advantages of its use. In addition, numerous articles are dealing with consumer acceptability of this new credit-buying concept. However, little has been done to assess the impact of bank credit cards on the individual businessperson. In an attempt to assess the effect on the business community, a survey was conducted of all the retail concerns in DeKalb, Illinois. DeKalb is a medium-sized community of approximately 30,000 inhabitants, located between Chicago and Rockford and situated in the heart of the Illinois agricultural community. DeKalb is also a thriving industrial center and home to a large Midwestern university.

The distribution of the DeKalb business firms involved in this study was as follows:

Restaurants: 37

Service stations: 36

Clothing and furnishings: 20

Foods: 15

General merchandise: 11

Auto agencies: 10

Pharmacies: 8

Hardware: 6

Total: 143

The questionnaire used in this survey consisted of three sections. The first dealt with the general effect of credit cards on individual business firms. The second section asked about the internal business problems facing the participating retailers. And the final section covered customer problems with the cards. Since the purpose of the study was to investigate the initial impact of bank credit cards on all businesses in the area, no attempt was made to delimit the inquiry to specific firms. A few concerns, notably the automobile agencies and carry-out restaurants, reported little or no use of the cards, but their responses were still included in the survey results. With the exception of the above mentioned businesses, however, nearly 60% confirmed they were using a bank credit card plan.


General Economic Impact

For the most part, the general effect of the card has been favorable. Almost one-third of the survey respondents thought the card was having a favorable effect on their business, while the rest stated that it was too early to tell. The respondents claiming a favorable effect closely paralleled the number of respondents reporting an increase in sales since adopting the bank credit cards. Likewise, the two-thirds that felt it was too early to identify the effect closely approximated the number of respondents reporting little or no effect on their businesses. Interestingly, only one respondent stated the card was having a detrimental effect on his business. It appears certain that not all firms are going to enjoy an increase in sales simply by adopting bank credit cards, given that many businesses had a credit policy in effect long before the advent of this plan. Almost 93% of the firms that adopted the bank credit card extended credit prior to the introduction of the bank card in the DeKalb area. However, those firms now instituting a credit plan (through the bank card) for the first time will probably be the ones to enjoy an increase in sales. These firms accounted for just 7% of the total respondents.


Specific Business Problems

Perhaps the first question that comes to mind is that of cost. What specifically does it cost the business to belong to the bank credit card plan? In considering the answers to this question, it must be remembered that there are two direct costs: the initial cost of the card plan and the discount charge levied by the banks on the businesses’ credit sales. The initial cost of joining the plan was, surprisingly, quite low. In most instances, no fee was charged to join; where there was a charge, the reported fee never exceeded $30. With reference to the discount charged by the banks, the overwhelming majority of firms (92%) stated that the rate was 2%. In no instance was the discount greater than 2%, although a few firms reported a lower rate. It has been rumored and also reported in the press that the discount was as high as 5%. In addition to the direct costs mentioned above, indirect costs, such as added bookkeeping and clerical work, were a major concern for some respondents. Another indirect cost of concern was the expense of maintaining the business’s own credit plans while also using the bank credit card. One would expect that the private plans would be terminated and all credit sales transferred to bank credit cards. This, however, is not happening. An overwhelming number of firms (93%) that had their own credit plan in existence prior to the bank plan still maintains their own private plans. At this time, it appears that businesses are reluctant to revoke a service if such an act might be greeted with disfavor by some customers. Thus, there may be some validity to the concern expressed about the total cost of the bank plans. Another facet of business operations that has become important and is of some concern to businesspeople is the speed with which sales are credited to their account. The average businessperson cannot afford delays between the time of a sale and the time that he or she receives credit for that sale. Approximately 83% of the responding firms stated that the sales slips from bank credit cards were deposited daily, but only 77% of these same firms stated they actually received credit for the sales within 24 hours. The remaining 23% of all respondents reported that it took as long as three days to receive credit. These statistics are important because businesspeople are interested in getting the maximum mileage out of their dollars. If delays of this nature continue, the ultimate success of the cards may be curtailed. Revealing another potential problem, 74% of respondents claimed it took at least as long to get cash back into the firm with the card as it did without the card. Only 26% of respondents claimed that use of the card actually sped up the flow of cash to the firm. Part of the problem can be attributed to the nature of credit card sales. One-third of respondents that used the cards claimed they had a corresponding reduction in sales by cash and checks. Since these two methods of selling are as liquid as is possible, it is easy to see why it would be difficult to increase the cash flow to the business. One interesting point learned from responses to the questionnaire concerned the use of the additional funds received by the one business in four that reported an increase in cash flow. The results of the questionnaire revealed that one prime use of the extra funds was to pay off outstanding bank loans. From a banker’s viewpoint, one might begin to question the real value of the bank credit card. If the result is to be a reduction in interest income from business loans, it may tend to negate any increase in income from the credit card plans. This, of course, overlooks the gains in revenues that may result from financing additional consumer credit.


Customer Problems

While businesspeople may be alert to the internal business problems created by the credit card, they are also concerned with the impact of the credit card on the customer. The advantages and disadvantages of having customers use the bank credit card in lieu of other methods of payment is of utmost concern to all businesspeople. Practically everyone acknowledges, for example, that a prime reason for using a credit card is the ease with which purchases can be made. But the question remains: Why the bank credit card? There are several reasons for the use of a bank-sponsored plan. First, in most small towns and communities, the number of banks is relatively small. Many people have their savings and checking accounts at the same bank. A card sponsored by this bank facilitates the centralization of collection facilities for the business community. A second reason for the use of a bank card involves the use of the bank’s credit-checking facilities. Since banks are particular about the people they give credit to, it is safe to assume that a credit check has been made on these cardholders and that potential bad-debt losses would be minimized. Likewise, studies have shown that credit card users tend to have higher disposable income than non-credit card users, thus increasing the probability of higher sales. A third reason for using the bank credit card is one that may be peculiar to Illinois. The unit banking structure in Illinois suggests that the local banker may have personal knowledge of the cardholder’s credit status. Because of this knowledge, the banker would be in an excellent position to determine whether or not to waive the credit ceiling for a customer, should the occasion arise. The importance of this is illustrated by the fact that as many as 18% of the respondents indicated they had requested such a credit extension. Despite the various reasons favoring the use of a bank credit plan, many businesses reported having some particular problems with the cards. Some firms using bank credit cards have been criticized for not permitting customers to purchase all items in their place of business with the cards. Many stores have, for example, restricted the use of credit cards in purchases of large items such as automobiles and agricultural equipment. Part of the reason for this restriction, of course, is the credit ceiling imposed by the issuing banks. Another apparently developing problem concerns the multiplicity of cards. Roughly half of respondents stated they honored all bank credit cards. The remainder reported they would accept somewhere between two and five cards. As the number of different cards increases, it is conceivable that any cost problems evident upon installation of the bank credit card system will increase proportionately.



Regardless of the many advantages to using bank credit cards, there are those businesses that refuse to accept them. Their reasons for refusal are interesting. Some of the comments were “Don’t approve of this easy credit” and “Most of our customers pay cash.” Other businesses were concerned about internal operating efficiency. They mentioned the fear of having to increase the labor force to handle credit cards, their worries about too much paperwork, and the fact that operating expenses would be too high. It is interesting, however, that some businesspeople look on the bank credit card as a solution to problems rather than as a cause of additional ones. For example, many small businesses are, by their very nature, unable to enforce their credit policies. As a result, many of their accounts receivable remain uncollected for unwarranted periods of time. As the bank credit card increases in popularity, the small businessperson may be able to reduce the dollar investment in outstanding accounts receivable. As we approach our much-talked-about moneyless society, devices such as credit cards are bound to increase in use. Certainly a card sponsored by the banking system would hold the most promise for future success.


The following article was published in the December 1974 issue of The Journal of Commercial Bank Lending, the precursor to today’s RMA Journal.

1978: Congress Gives Fed New Authority

Congress passes the International Banking Act and delegates the regulation and supervision of foreign banks in the U.S. to the Federal Reserve.


1978: New Way for Workers to Save

The section of the Internal Revenue Code that makes 401(k) plans possible is enacted into law.


The Economic Consequences of the Energy Crisis

By Bruce K. MacLaury, President, Federal Reserve Bank of Minneapolis

This article is based on remarks by Mr. MacLaury at the 13th annual Convention of the National Association of Truck Stop Operators.

Half a century ago Lord Keynes wrote a small book called The Economic Consequences of the Peace, outlining why the provisions of the Versailles Treaty, following the First World War, were unworkable. For at least a decade thereafter, economists debated whether the debts piled up following that conflict could in fact be repaid as called for by the treaty. As so often happens, history didn’t follow a neat course that would allow this intellectual argument to be unequivocally resolved. But you’ll recall that after several moratoriums, the issue of war debts became lost in the shuffle as the former combatants took up new positions that eventually led to the Second World War. I cite this bit of history for a couple of reasons. First, Prime Minister Wilson of the United Kingdom recently characterized the “oil blow” to most of the world’s nations as “more severe than has been caused by any event in their histories short of direct involvement in war.” And second, this particular blow, like the Versailles Treaty, looks like it’s going to lead to the piling up of massive debts by oil-importing countries to the relatively few oil exporters, debts that could cast a pall over economic relationships for years to come.

The Initial Impact of the Energy Crisis

Not that one should extrapolate the present situation into another world war, but I think it’s fair to say that the world is facing a variety of economic problems as a result of the quadrupling of the price of oil, problems that are going to tax the very limit of the adaptability and cohesiveness of our economic and financial system. Although in some sense we are only beginning to cope with the problems created by the energy crisis, I think we can take some encouragement from the fact that we have, after all, weathered some pretty severe shocks already and we’re still in business. I recall the consternation with which we learned of the Mideast oil embargo—only when threatened with the loss of a major industrial input do we realize how vulnerable our sophisticated economy really is. The first question, naturally, was whether there would be enough energy to keep the wheels of industry turning and people employed. And if this was a major concern in the U.S., it’s easy to imagine how much greater the shock must have been in Europe and Japan, which rely much more heavily on Mideast supplies. Yet as the winter months went by, we found to our relief that through a series of ad hoc and on the whole pretty reasonable decisions from the Federal Energy Office, some good luck in the weather, and cooperation from the public, the immediate crisis—in the sense of inadequate fuel—could be surmounted. Not without substantial strains, of course; if the wheels of industry by and large kept turning, the industry of wheels almost didn’t! There’s no denying, for example, that the auto industry was hit very hard, that truckers in particular found their profits squeezed, and that Winnebago nearly was done in. In fact, I find it quite remarkable that the sharp dislocations in different industries resulting from the energy crisis haven’t had more of a domino effect on the economy as a whole. Yet it’s hard to fault the priorities adopted by the administration in the face of the oil embargo—to reserve as much fuel as possible for industry and the jobs associated with it by conserving on fuel used in transportation and in residences. Likewise, I concur with the tough decision to let the shortage be reflected in sharply rising fuel prices, despite the embarrassment of skyrocketing oil company profits. The alternative, it seems to me, would have been rationing and other disruptive economic controls.

The Subsequent Problems

With the lifting of the embargo this past spring, attention shifted from the issue of fuel adequacy in a physical sense to the questions raised by the higher price. Here, the ramifications seem almost endless, and the likelihood of relief in the near future much less certain. Starting at home with the most obvious consequence, energy in every form costs more—and in some forms, a lot more. In fact, the energy component of the consumer price index, as best we can measure it, accounted for about 2.4 percentage points of the year-over-year increase of 10.7% in the CPI. (Food and agricultural products accounted for another 3.9%.) Thus, while double-digit inflation by any name would spell trouble, I think it’s worth pointing out that, so far as the energy component is concerned, the traditional remedy of slowing the economy is likely to have little impact in reducing what, for the time being at least, is a world monopoly price. (It’s also true, of course, that simply the absence of further increases will help slow inflation in the months ahead—sort of like the relief someone feels when he stops banging his head against the wall!) I’ve already alluded to the varying impacts of sharply higher fuel prices on different industries in this country. Similar differences show up for different income levels within the U.S., with lower-income groups feeling the pinch of higher fuel costs proportionately more. And the analogy can be carried over to international comparisons, where countries vary greatly in their access to alternative energy sources and where the poorest nations are proportionately much more seriously affected by the increased cost of, say, fertilizer than we are. In addition to the obvious effects of dramatically higher petroleum prices on the cost of fuel, the cost of products derived from petroleum (such as fertilizers), and the price level in general, I think we can understand the broader economic consequences of the energy crisis only if we focus directly on what’s happened to incomes as a result of these higher prices. Perhaps the easiest way to illustrate the potentially depressing effects of increased petroleum prices on the pace of economic activity around the world is to think of the price increase as a very large increase in excise taxes on fuel and related products. It doesn’t take much Keynesian economics to see that such a tax siphons off spending power from the world’s income stream, and unless that income is somehow replaced in fairly short order, the stream diminishes, with a consequent depressing effect on world demand. The problem is greatly complicated by the fact that, in this case, the “tax” is being levied by a relatively small group of countries—the oil exporters—on the rest of the world in a very helter-skelter fashion. In effect, the tax payments are determined by a country’s relative dependence on imported oil, and no allowance is made for ability to pay. If the oil exporters were able to spend their new “tax receipts” on imports from the rest of us, and do so in a way that exactly matched, country by country, our tax payments to them, then the siphoned-off income would be reinjected, and exactly where it was needed to maintain world production. Note, however, that even if this fantasy of income redistribution were possible, there would still be a very sharp wrench in relative, and probably absolute, living standards. You and I would still be employed, but we’d be producing a sizable amount of goods and services for Arabs instead of ourselves. The fact is, of course, that the estimated jump in oil revenues—from $27 billion last year to $95 billion this year (a $70 billion increase)—cannot possibly be spent immediately, especially since some of the biggest gainers, such as Saudi Arabia, have small populations and limited spending possibilities. So a sizable share of the “taxes” will end up not spent in the usual sense, but instead invested in financial assets owned by a relatively few countries.

Are We Headed for a World Recession?

In this situation, is the world’s income stream diminished? Or more crassly, are we headed for a world recession? Not necessarily. Theoretically, we could keep the world’s economies ticking along if we were all prepared to borrow from the oil producers (and they were prepared to lend!) what they weren’t ready to spend themselves. We would sustain production, in other words, by going into debt. In this case, the oil “tax money” would theoretically be channeled back to where it came from, not by earning and spending, but by borrowing and lending through financial institutions. Indeed, it is just this sort of “recycling” of oil monies that has been receiving a good deal of attention in international financial circles recently, not because it’s a particularly happy solution, but because there aren’t many alternatives in the short run. The unfortunate fact is that this solution raises a whole host of questions that, to my mind, make so-called recycling a hazardous game. The problems derive, essentially, from the fact that vast sums of money are being diverted from their normal channels, where risks are known, and pushed through new circuits that may—or may not—be able to carry the load. For example, banks that are perfectly sound institutions in the normal course of business may quickly become overextended if suddenly faced with huge new deposits.

The Consequences for the Banks

Now it may sound odd that banks could run into problems trying to swallow deposits since they’re usually out clamoring for more. But like greedy boys, banks can suffer indigestion. After all, deposits don’t come free; they have to be paid for. So banks have to find ways of lending and investing the new deposits safely, yet at a rate of return sufficient to cover their costs. This is not so difficult when growth takes place in an orderly fashion, but we’re not talking about normal growth. Let me tick off some of the kinds of “indigestion” that can result from abnormal growth:

1. A given amount of equity capital that has been adequate in the past to ensure confidence for a billion-dollar institution may not inspire the same confidence (or more basically, the same protection to depositors against losses from larger, and perhaps riskier, loans) if the institution almost overnight grows by, say, 20%.

2. Taking on large amounts of short-term deposits and lending these funds to long-term borrowers can expose the bank to substantial risks from interest rate fluctuations, or just plain sudden deposit withdrawals.

3. Quite apart from the risks of illiquidity (that is, taking short-term funds and lending long), there’s a question of whether banks can find borrowers for these vast funds who are, in fact, capable of making repayment. This problem may be acute in the case of some countries that are less developed, but it represents a real credit risk in the case of some industrialized countries as well.

4. And finally, large amounts of the oil monies are likely to be channeled through the so-called Euro-dollar market, where bank supervision is less well organized and where there is no lender of last resort corresponding to the role played by the Federal Reserve System in this country: to shore up institutions that get into difficulties.

Again, I should emphasize that banks face these same sorts of risks every day and, by and large, cope with them successfully and without danger to the public. What makes the situation different in this case is the suddenness with which institutions are being asked to cope with a major rechanneling of financial flows. Of course, there’s a close parallel between the potentially disruptive effects of the diverted income streams (for example, through “excise taxes”) on patterns of world spending and the similarly disruptive effects, potentially at least, on the financial institutions from their greatly expanded role as intermediaries for this transferred wealth.

The Balance of Payments Consequences

A different facet of the problem we’ve already been talking about—the uprooting of previous patterns of income and financial flows between countries—deserves some specific comment: namely, the severe distortions in the countries’ balances of payments. Obviously, oil-exporting countries as a group will see the value of their oil exports jump by some $70 billion this year if the earlier cited figure was right. While their imports will also certainly rise to some extent, we must expect their trade surpluses to grow by perhaps $40 to $50 billion, which implies increased trade deficits of the same size for the rest of the world. While rechanneled oil monies in the form of capital flows to deficit countries could theoretically compensate for the trade balance shifts, it’s most unlikely that the timing of such flows would coincide with trade deficits, with the result that some countries would see their reserves and/or their exchange rates dropping rapidly in the short run. And since the process of adjustment to the new petroleum prices is going to be a protracted affair at best, there’s no telling how long this “short run” may last. In the meantime, as deficit countries try to respond to their new, and in some cases precarious, situations, there will be a strong temptation to try to right one’s own position at the expense of one’s neighbors—a game that deficit countries as a group can’t win. In the process, exchange rates could be subject to wide day-to-day fluctuations, as indeed they have been in recent months, and thus present an open invitation to currency speculation and, I’m afraid, exchange losses such as we’ve seen. I guess the point of this catalog of economic problems stemming from the energy crisis is to show, if it needed showing, that the effects of higher fuel prices aren’t limited to those felt directly by truck operators. The ramifications raise real questions about our ability to control inflation, and not just in this country but worldwide, while at the same time minimizing the deflationary effects of what amounts to a substantial tax increase levied on us by the oil exporters. There’s no avoiding the conclusion that the energy crisis, in this sense, has significantly increased the risks of economic and financial instability at a time when 1) national governments are by and large politically weak, and 2) we are less certain about our economic policy prescriptions than at any time since Keynes taught us how to manage the economy.

Some Prescriptions for the Problem

I think Harold Wilson was right—the world has suffered a severe blow that will test to the utmost its ability to absorb shock and recover. I also think that former Secretary Schultz was exactly right in saying that the response of the rest of the world cannot be a helter-skelter effort to strike individually profitable deals with the oil exporters, tempting as that may look, or concentrate all our joint efforts on recycling oil monies, necessary as that may be in the short run. Instead, our focus must be on coordinated efforts to bring the price of oil back down by placing far more emphasis than to date on sustained efforts at energy conservation, and by investing in the joint development of alternative energy sources to reduce our dependence on unreliable supplies. As general injunctions, these prescriptions sound obvious, and almost easy. In practice, of course, they are not. Reconciling sharply conflicting interests among oil-importing countries is no easy task. Achieving sustained conservation without greatly increased government intervention in economic processes is an elusive goal. Developing huge investments in alternative energy sources without reducing present levels of consumption, and without doing unnecessary harm to the environment, will tax our ingenuity to the utmost. Yet the alternatives are no more attractive. In the meantime, since there is no obvious way of avoiding a very sizable shift of wealth from oil importers to oil exporters over the next few years, we should be concentrating our efforts on getting those monies invested in ways that will minimize the risks of financial instability. This means, in effect, getting the oil countries to invest their newly acquired funds in direct investments, in equities, or at least in longer-term bonds, rather than in 90-day or shorter deposits in Euro-banks. Again, this is more easily said than done, but there are some signs that this kind of shift is beginning to take place. The economic consequences of the energy crisis over the next year or so, then, derive primarily from the $50 billion wrench to income streams—of individuals, industries, and countries—brought about by the fourfold increase in the price of oil and the massive rechanneling of financial flows accompanying this shift. The risks include a worldwide economic slowdown, self-defeating attempts to shore up one economy at the expense of others, severe economic distress for the poorest countries, and potential instability among financial institutions. An unhappy catalog by any definition. Lest we be inclined to toss in the sponge and resign ourselves to economic disorder, let me emphasize that these are only risks, not certainties; that we have already survived some of the energy shocks; that there is evidence that some countries in the Mideast are becoming aware that their own interests would not be served, even in a narrow sense, by an economic or financial collapse among developed countries; and that the developed countries themselves are aware of the risks and are formulating policies to defuse them.

The Longer-Run Implications

No discussion of the energy crisis can end without a word about the longer-run implications of what we’ve been through and what we face. At the risk of repeating the obvious, let me join the chorus of those pointing out that the Arab oil embargo—and the accompanying jump in price—only dramatized the fact that we were already on a collision course in the supply and use of energy. As the preliminary report of the Ford Foundation energy policy project points out, energy consumption in the U.S. grew at an average annual rate of about 3.5% from 1950 to 1965, then increased to 4.5% annually. Domestic production grew about 3% between 1950 and 1970 and has been at a virtual standstill since then. One obvious consequence of these diverging trends and the growing U.S. energy gap was that while last year only about 15% of our total petroleum consumption came from the Mideast, we were dependent on that region for nearly 100% of the growth in our consumption. There’s no time to go into all the ramifications of this situation, but I commend to you the Ford project report called “Exploring Energy Choices” as a good summary of the issues and alternatives. I’d like to conclude with just a few observations about the longer-run consequences of “higher-cost energy” (for I think that’s the more accurate way to describe the “crisis” over the longer pull). First, I don’t see that there’s any way of avoiding the conclusion that the U.S. will have to devote relatively more of its output to investment in energy production than it has in the past. This implies either that other investments will have to be curtailed, which I don’t think is desirable, or that consumption will have to grow less rapidly, which could be seen as part of a conscious program for energy conservation. Second, in the past, our rising standard of living has depended on increasing output per worker. In turn, rising labor productivity has, to a considerable extent, been made possible by supplying workers with more energy inputs to get the job done. If we have now reached a point where the trade-off between energy and manpower is less favorable, then it seems likely that our standard of living—at least as traditionally measured—is going to rise less rapidly in the future. Third, I find it difficult to avoid the conclusion that as fuel becomes relatively more expensive, there will be a shift back toward more energy-efficient modes of transportation. As you know, transportation accounts for about 25% of our total energy consumption, with autos representing 13% and trucks about 5%. In terms of BTUs per ton mile, rail transport is four times more efficient than trucks and 63 times more efficient than air freight. Obviously, fuel is only one component of costs in moving goods, and any change in historical patterns will come slowly. But I think that the recent success, after a long fight, in getting some funds sprung from the Highway Trust Fund for use in public transit is a sign of things to come.

Ending on an Upbeat

Lest all this sound like a gloomy outlook, I’d like to end with an upbeat quote from a recent speech by Walter Wriston in which he cogently takes the prophets of doom to task. This is his cautionary tale: Few Americans even remember that from the time of the American Revolution until the Civil War, a major source of artificial lighting was the whale oil lamp. No one should have needed a Congressional commission to predict that the supply of whale oil could not forever keep pace with the demand of a growing nation. The tragedy of our Civil War disrupted whale oil production and its price shot up to $2.55 a gallon, almost double what it had been in 1859. Naturally there were cries of profiteering and demands for Congress to “do something about it.” The government, however, made no move to ration whale oil or to freeze its price, or to put a new tax on the “excess profits” of the whalers who were benefiting from the increase in prices. Instead, prices were permitted to rise. The result, then as now, was predictable. Consumers began to use less whale oil and the whalers invested more money in new ways to increase their productivity. Meanwhile, men with vision and capital began to develop kerosene and other petroleum products. The first practical generator for outdoor electric lights was built in 1875. By 1896 the price of whale oil had dropped to 40 cents a gallon. Whale oil lamps were no longer in vogue; they sit now in museums to remind us of the impermanence of crisis. This cycle, repeated in thousands of other instances, is one which the rulers of the Persian-Arabian Gulf area might well bear in mind. Life has never been easy for the entrepreneur, especially the small businessman. His survival has always depended on his ability to sense trends and adapt to them since his power to influence the broader sweep of economic events is, by definition, quite limited. The fact that small businessmen have survived—and in many cases, I’m sure, have prospered—is witness to their agility and enterprise in the face of changing circumstances. I have no doubt that these same attributes will stand us in good stead as we work our way through the admittedly tough problems of the next few years.

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