Bureau of Business & Economic Research university of montana • missoula naa uies t l Wi er 1970 r te in 'W rly rte a u Q Business ontana M i MONTANA BUSINESS QUARTERLY

WINTER 1970 VOLUME 8 NUMBER 1

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Dean, MONTANA BUSINESS QUARTERLY School of Business BUREAU OF BUSINESS AND ECONOMIC RESEARCH Administration RUDYARD B. GOODE UNIVERSITY OF MONTANA MISSOULA, MONTANA 59801 Director, Bureau of Business and Economic Research RUDYARD B. GOODE

Editor The Montana Business Quarterly, published by the Bureau of Business and Economic Research, School of Business Administration, is a service of the RAUF A. KHAN University of Montana, Missoula. The contents of this publication may be re­ produced without the consent of the publishers and/or the authors. Proper credit Editorial Board should be given the Quarterly and its contributors for the use of any published m aterial. Ma c k e y b r o w n Contents of the Quarterly reflect the views and opinions of the authors and Pa t r ic ia p . d o u g l a s do not necessarily represent those of the Bureau, the School of Business, or the University. Wil l ia m d . d i e h l Application to mail at second-class postage rates is pending at Missoula, MT. m a x in e c . J o h n s o n 59801.

In This Issue

I K. Ross Toole FROM THE DIRECTOR’S DESK

10 Harry N. Jackson CREDIT AND COLLECTIONS

Maurice C. Taylor REALIGNING MONTANA COUNTY GOVERNMENTS

20 Joseph R. Mason COMMERCIAL BANK SUPERVISION AND EXAMINATION

37 Ronald S. Paul THE SCIENCE BUSINESS

From The Director’s Desk . . .

Environmental Degradation in Montana

K. ROSS TOOLE

In this day and age (and perhaps it has al­ As early as 1885, the women of Butte organ­ ways been somewhat true) the debate about ized the counterpart of today’s “GASP” and serious issues tends to get quickly polarized. protested to the mayor. But from the 1870s One finds oneself pushed from the middle until 1891 the mining companies in Butte con­ ground where, historically, most solutions lie— tinued to roast ores in open pits. In the latter pushed left or right by emotionalism, oversim­ year, when the Boston and Montana Company plification and the passion involved in the issue. began roasting an unusually huge mass of ore, Like the introduction of flourides into our fifteen people died within forty-eight hours and drinking water, sex education in the schools, hundreds grew violently ill. Then, and only and the ABM, the mere title of this paper imme­ then, were the mining companies enjoined from diately lends itself to extreme views, vehe­ open-pit roasting. mently expressed, pro and con. In Montana’s Constitutional Convention of Let me confess at the outset that I hold strong 1889, W. E. Burleigh of Custer County, in ar­ opinions and that I propose to express them guing against Butte and other mining centers vehemently. I have, in other words, been polar­ as the location for Montana’s capital said, “A ized. I can only defend my vehemence with the man there has to resort to whiskey to slake his assertion that for the past year and a half a thirst for fear of being poisoned with the water group of graduate students and I have been in­ that percolates down through the poisonous soil vestigating the history of air and water pollu­ and the guts and gutters of the country.” He tion in Montana, specifically, and in the North­ described Butte at high noon, with all the street west, more generally. We have made repeated lights on, “. . . yet,” he said, “you could not see efforts through this investigation to find the a gleam of light from either side of the street. middle ground where rational men have often I retired to my bed. I had not been there thirty worked out solutions—and we have thus far minutes before I felt that some demonical fiend been unable to do so. The evidence, both his­ was there injecting boiling lime into my lungs.” torical and scientific, keeps pushing us not only There was, said Burleigh, one advantage to liv­ toward categorical statements, but also toward ing in Butte, “It must be very consoling to know growing indignation. that the transition from this world to hell will Air and water pollution in Montana are very be so slight that you will never notice it.” old. One commentator described Butte in the W. A. Clark answered Burleigh by asserting 870s thus: “. . . on a windless day the smoke that “... the ladies are very fond of this smokey ay so heavy at mid-day that lamps were burned city . . . because there is just enough arsenic and thieves were as fearless at noon as at mid­ here to give them their beautiful com­ night.” plexion. ...” Clark went on to say in all serious-

r‘ R°ss Toole is Professor of History, Department of History, University of Montana, Missoula.

Winter 1970 6 K. Ross Toole

ness, citing the best medical opinion, that huge and sparsely populated land simply ab­ Butte’s smoke was a disinfectant, that it pre­ sorbed the pollution. Public anger was periodic vented diptheria and other diseases. “It de­ but ineffective; land, livestock, rivers, and stroys microbes,” he said, and added, . . it people were ruined, but anger and the demands would be a great advantage for other cities to for abatement simply withered in the face of have a little more smoke and business activity the power of industry, the enormity of the and less disease.” country: the great open spaces, and the seem­ Throughout all these years, the mining indus­ ingly limitless natural resources at the beck of try spewed tons of arsenic and other poisons anyone with the guts and money to exploit across the countryside, killed vegetation, live­ them. But that was then, and this is now, so let stock (and people) without hindrance or let; it me address myself to today. polluted rivers and arrogantly resisted all pres­ Some Montanans hold the view that we must sures to abate or improve the situation. explicitly define what we mean by clean indus­ In 1911 the Anaconda Company was sued by a tries; that attractive living conditions by them­ group of farmers in the Deer Lodge valley for selves are not going to attract industry; that damage to their crops and livestock. The deci­ clean air and water and recreation should be sion, in this “Bliss Case,” went against the regarded as “bonuses,” while the only cogent farmers: one, because the company in 1903 had question is, can industry make a profit in Mon­ erected a large smoke stack and was reclaiming tana? tons of arsenic from new flues; and, two, be­ cause, “. . . the operation of the smelter and the But a clean industry is easily defined: it does mines . .. constituted one of the chief industries not contaminate the air or the water. If that is of the state on which a large part of the popula­ too simplistic, then let us consider the alterna­ tion of Butte and Anaconda depended, directly tive. Does a kraft pulp mill foul the air and or indirectly, for a livelihood.” water? Is a glue factory placed in a valley of This lawsuit was preceded by the direct demonstrated inversion conditions going to at­ threat of President Theodore Roosevelt, via the tract further industry? A vast bulk of scientific Department of Justice, to force the Anaconda data demonstrates beyond peradventure that Company to clean up its operation. Indeed, the we have dangerously fouled our own nest. Attorney General of the United States did file We have, for instance, oil refineries in Mon­ a bill of equity against the company providing tana polluting both the air and water. Let us for an injunction until the company “modified examine their general record. The oil industry its operations to prevent injury to vegetation in America is spending about a million dollars and public forest lands.” The Attorney General a year on the study of the effects of sulfur asserted that the company had resisted all ef­ dioxide as a pollutant. (Independent research forts to change its smelting practices. The gov­ clearly indicates, incidentally, that sulfur ernment alleged that 1,000 square miles in Mon­ dioxide is a deadly and pernicious poison and tana had been blighted by fumes and poisons. pollutant.) The industry is proud of its expen­ But the Bliss Case decision was rendered in 1911 ditures on this study. Yet the combined net and the federal government dropped its suit. income of the 26 leading American oil com­ The pressure exerted by Anaconda and allied panies in 1967 was $5,310,733,000.1 So the indus­ industries on the Department of Justice was try is spending on this vital research (vital from enormous. It is equally evident, however, that the public’s point of view) l/50th of 1% of their only the threat of federal involvement brought combined net income; need one mention what a response from the company. And, even at good this small investment has done in the that, it took the explicit and publicly expressed Santa Barbara channel affair? Might one sug­ agitation of the President of the United States gest that this is inadequate and nothing much to get action. The action, as it turned out, was to be proud of? minimal. For another example, in 1957 in Missoula a I do not intend to review here the monoto­ nously similar incidents in the history of Mon­ tana’s air and water pollution. In substance, the *C. C. Gordon, Testimony Before the Governor’s Air Pollution Council, July 19, 1958.

Montana Business Quarterly Environmental Degradation in Montana 1

hearing was held on the proposal to establish a and the plant put in a settling pond, which pulp plant in the Missoula area. Testimony at subsequently proved inadequate. that hearing, both by representatives of the in­ There is no point in chronicling the inter­ dustry and of the state planning office indicated minable incidents, the law suits, the bitter re­ that such a pulp plant would (1) stabilize the action of Missoulians. The pulp plant, of course, lumber industry in the area and (2) contribute was featured in Life magazine, in full color, as directly to the economy of the area via its pay­ an example of rampant pollution in the Big Sky roll and purchases. Country. On many days Missoula still lies com­ The plant did stabilize the lumber industry; it pletely hidden in a yellowish-gray, vile-smelling has contributed to the economy of the area. smog. Missoulians sought it eagerly. But at that hear­ Clean air, clean water, wilderness areas, and ing Missoulians were assured that the plant beautiful countrysides are not “bonuses” any would be an “ultramodern structure of revolu­ longer. America is running out of these com­ tionary design;” Missoulians were assured that modities—and fast. It is trite, but man does not plant operations would be “practically a closed live by bread alone and no planner should for­ cycle,” and that “approximately two-thirds of get it. The “quality of life” may not attract in­ the possible air and stream pollution will be dustry, but neither should industry be solicited eliminated”—and Missoulians were further as­ which destroys the quality of life. “Planners” sured by Dr. Willis Van Horn, of the Institute are the custodians of that “quality” for future of Paper Chemistry, hired by the pulp plant, generations. that “no appreciable amount of stream or air It is therefore imperative that politicians, pollution would be encountered.”2 State plan­ businessmen, and all of us, now recognize that ners had previously told the Chamber of Com­ the planning arms of government (local or merce that the plant’s design would mean the otherwise) are not the instrument of any pri­ virtual elimination of undesirable water and vate sector and that the planner is not the mere air pollution.”8 subaltern of industry. The planner’s first and So, the plant was built and Missoulians wel­ overriding responsibility is to the “public sec­ comed it with open arms. Immediately the tor,” that is, the people, individually and col­ trouble started; great yellowish-gray blankets lectively. of acrid smoke settled over Missoula, the foul I do not propose that we build a wall around odor of cooking cabbage permeated everything. Montana and keep it pristine; I am aware of Plant officials met angry questions with the the necessity for economic growth. I share with statement that this was due to the “shakedown planners a desire for an expanding economy, period, but that all would be well when new but I share, too, with an increasingly vocal num­ equipment “costing several hundred thousand ber of Montanans (probably now a majority), a dollars” was installed. But all was not well. dread of further ecological destruction and en­ The smoke and stench continued. vironmental degradation. In August 1958, thousands of fish turned I also share with planners and businessmen belly-up downstream from the plant and the a concern that our per capita income has in­ stench from decaying trout equaled the stench creased only 27 percent since 1960 while in the of pulp. Green slime covered the Clark Fork nation as a whole it has increased 44 percent. River. Biologists reported that this was to be I share the general concern that in the same expected, that it had occurred routinely at other period our population has grown only 3 percent pulp mill sites. But the president of the plant while the national average is 11 percent. But reported that “in my estimation no definite even the devil can quote scriptures and anyone connection between the fish kill and discharge can abstract statistics from the whole picture of wastes has been established.”4 Biologists that fail to reflect the larger scene. Popula­ quickly established such a connection, however, tion growth alone, means very little unless one also asks, at what cost—and what kind of pop­ eMissoulian, April 25, 1957. ulation? Per capita income is only a partial August 8, 1956. measure of things. Must we play the numbers 'Missoulian, August 13, 1958. game? Let me cite an example:

Winter 1970 8 K. Ross Toole

In the period from 1900 to 1920, Montana’s pany and others make much more stringent ef­ population shot from a quarter of a million to forts to do so, how much more expensive will it over half a million. The number of farms in­ ultimately be not to do so? There is abundant creased from 7,000 to 46,000. Between 1910 and evidence that we are not merely poisoning live­ 1918 about 80,000 homesteaders flooded into stock, trees, birds, and fish, but that with dread­ eastern and central Montana. But this “growth” ful acceleration, we are poisoning ourselves. was illusory. By 1924, 217 banks had failed; No matter how planners wish to define “clean 11.000 farms had literally vanished, blown by a industry,” regardless of how economists wish to hot wind into North Dakota; the average value calculate the cost of a clean environment, how­ of farm land in the state fell 50 percent in 3 ever legislators wish to tack the phrase “if years; farm tenantry increased five-fold; our technically practicable and economically feas­ bankruptcy rate was the highest in the country; ible” onto pollution control legislation, we, the 60.000 farmers fled the ruined land. people of Montana, must consider the dangers Industry—in the form of the railroads and of holding to these guidelines. large land companies, plus state planners—in Montana is one of the last places in America the form of Montana Dapartment of Labor, where “final” decisions have yet to be made Agriculture, and Industry, had done much to regarding our remaining natural resources. We encourage this “land boom.” So had chambers have the rare opportunity to include in our of commerce. We had played the numbers planning and our growth, provisions for “clean” game. We vastly increased our population, but industry. At long last we have an experienced because we ignored what the land could really planning officer with an adequate budget. So sustain and what resources we could safely ex­ it is a question of recognizing as the philosophi­ ploit, we produced a catastrophe of tragic pro­ cal foundation of all planning: (1) that we are portions. as concerned about the year 2000 as we are Today economists are prone to assert that, on about 1970; (2) that the cost of continuing en­ the basis of their calculations, the average Mon­ vironmental degradation may far exceed the tanan grossly underestimates the costs of clean­ profit to the state which accrues from short- ing up our air and water and keeping clean range industrial development, if that develop­ what is already clean. I do not for a moment ment contributes to environmental degradation; doubt that such is the case, but the cost of filth (3) that the planning arm of state government and environmental degradation are not so easily has a far greater obligation to “the public” as a calculated—which is doubtless why economists whole as an integrated, if amorphous, entity spend so little time trying to arrive at them. than to any private sector thereof, however It is not, however, a matter of putting a price powerful; (4) that in view of the warning flags on mere aesthetics. We have long since passed flying all over America with respect to the the time when all that we are devaluing is the deterioration of our ecosystems, that planners, aesthetic. The osprey population has been re­ politicians, businessmen, economists—and all duced in Montana in recent years by roughly those groups who have the power to influence 50 percent. Residual DDT. Most Montanans the course of events, acquaint themselves with have never seen an osprey and will not suffer the abundant scientific evidence of a clear and if they never see one. But we, like ospreys, are present danger. creatures with warm blood, nerves, and muscles; Probably nothing can save the Hudson River we too can ingest DDT. which, “a little too thin to cultivate and a little Perhaps we should look into what may be a too thick to drink” has become the stinking kindred fact: the number of deaths from lung sewer of industry in the disintegrating valleys cancer in the Anaconda area is 29 times greater through which it courses. Probably nothing can than in the Gallatin Valley, an agricultural restore the thousands of square miles in West area, and 12 times greater than the national Virginia, Pennsylvania, and Kentucky which average. How do you figure that cost? were made into barren wasteland because state _ ^ ^ is expensive to remove flourides from our and local government and planners failed to air and to insist that the Rocky Mountain Phos­ control strip coal mining—as state government phate Co. and the Anaconda Aluminum Com­ has thus far miserably failed to do in Montana.

Montana Business Quarterly Environmental Degradation in Montana 9

Must Montana, slowly and inexorably, in the public know that the decisions are near at hand name of industrial development, per capita in­ —and that all together, we must make them in come, profit and progress, take the same course the interests of our children, and theirs—and which elsewhere has led to blight and decay? their children. We do not really own this earth, Do we have only the options of remaining its rivers and riches; we hold them in trust. We underdeveloped, a sort of scenic park—or of have not managed that trust well—and even laying waste to our countryside and converting now we are reaping the whirlwind in a thou­ the Clark Fork River into the Hudson? I think sand ways. not. We have options. There is a way to be But, as Cassius said, “the fault lies not in our selective, to balance our desires today against our obligations to the future. stars but in ourselves.” And, therefore, it is The way we are to go will be determined in correctable. Perhaps the ultimate strength of the next few years. I trust, and occasionally man lies in some capacity to look into himself pray, that all our planners, the Governor, the and out at the world—and change things. That, legislators, enlightened industrial interests, and at least, is our best hope—and it may well be above all an increasingly alert and indignant our last.

NEW PUBLICATION

Professional Accounting Practice in Montana

This up-to-date survey reviews the varied accounting services performed for different types of clients, fees charged for particular services, gross billings of accounting firms, and annual income of practitioners. A similar survey was made ten years ago, and the current monograph compares the results of these two studies in an effort to measure the progress of the accounting profession over the past decade.

46 pages — $2.00

BUREAU OF BUSINESS AND ECONOMIC RESEARCH UNIVERSITY OF MONTANA MISSOULA, MONTANA 59801

Winter 1970 HARRY N. JACKSON

Credit and Collections

A tool for servicing two customers— the buyer and the seller.

Credit is an efficient and binding relation­ make certain that none of the important func­ ship between the consumer and the retailer tions are overlooked, I have worked out a set which serves as an economic medium of ex­ of guidelines that encompass various facets of change for the fulfillment of their individ­ the credit department’s responsibilities. Each ual needs and desires. It acts as a line of guideline is necessary to accomplish the total communication between the two forces and credit philosophy—none can be overlooked or provides the vehicle by which they can ac­ minimized without doing a less than adequate complish the purposes of their association. job of acting as the binding relationship be­ tween the buyer and the seller. The guidelines This credit philosophy defines the principal are broken into two main subdivisions—For the reason for having a credit operation and stresses Consumer and For the Company. Please note the important fact that there are two customers that there is a direct relationship between the to serve, not just one. The credit department is guidelines for the consumer and those for the in a position to mediate between the seller and company. In some instances they are identical, the buyer as an independent factor between although the emphasis may be in a different the two. Too often credit people take a position direction. on one side and represent only one of the forces. We tend to ignore the consumer, simply to pro­ tect ourselves from unknown problems of de­ linquent accounts and subsequent bad debts. For the Consumer We may fail to extend courteous service to the Guideline I: Maintain a comprehensive and consumer, by treating her as an incidental part flexible system of accounts that offers a our operation rather than the prime reason choice of payment schedules which satis­ for having a department at all. But if we be­ fies various economic levels of spending come insensitive to the selling departments and and individual purchases. ignore the salespeople who have a product to sell, we violate the basic philosophy of the The retail credit industry has gone through credit department—to act as a medium of ex­ a series of revolutionary changes in the develop­ change between the buyer and the seller. ment of a credit plan. No one pat formula fits To implement the credit philosophy and to all stores; credit plans should be patterned to Mr. Harry N. Jackson is Corporate Credit Manager at Dayton Hudson Corporation, Minneapolis, Minnesota.

Montana Business Quarterly Credit and Collections 11 fit the needs of the consumers. Most stores still because of simplicity, speed, convenience have a thirty-day charge account which must and complete confidence in the outcome. be kept current each month. The revolving, or budget, account has gained wide acceptance This second guideline to a good relationship over the past twenty years and has replaced the with the customer is often the most difficult to thirty-day charge account in many stores. It is follow. It is difficult because a time schedule set up to require payment of a portion of the must be maintained under a heavy volume of total amount outstanding each month, rather accounting documents that must be processed. than the total outstanding. The payment re­ A medium-sized store will produce 100,000 quired is usually a percentage of the balance statements a month, with an average of 3 post­ and varies from store to store. The most recent ings per statement for a total of over 3% million addition to the conglomeration of new credit transactions a year. Add to this the problem of plans is the “option account” which combines common names, and in some instances common the thirty-day charge account and the revolving addresses, and you have a monumental task. account into one. The customer can pay in full each month, or—at her option—-pay a portion The ability to produce a simple, easily under­ of the balance. With both the revolving and stood, error-free statement is of paramount im­ option accounts, a carrying or service charge is portance to a good relationship with the cus­ added to cover the increased handling costs in­ tomer. Nothing the credit department does will volved. have a greater impact on future sales than troubling customers with mixed-up statements. Another common account in many stores is A customer will often temporarily halt her the installment, or contract account, used pri­ buying until the error is corrected or until she marily for big ticket merchandise such as tele­ understands what the credit department is try­ vision sets, appliances, and furniture and is set ing to tell her. Automation has done much to up for a predetermined number of months that overcome the amount of such errors by utilizing allows the customer to pick her monthly pay­ controls and checkpoints that can flag poten­ ment within the limits set by the store. tially dangerous practices and allow constant It is not uncommon for a store to have two, review and appraisal of troublesome proce­ and often three, credit accounts available to the dures. Automation has also helped to system­ customer. The decision is largely based on the atize the mailing of monthly statements which type of merchandise sold and the demands of helps to increase the confidence of the customer. the customer. Recognizing the importance of Much more can be done in this area to produce the young customer many stores have also an accounting system that is trouble free for added one more account, known as a teen or the customer, and research is being contin­ student account, which offers limited privileges uously conducted to attain such a system. to this ever-increasing segment of the retailing economy. Another procedure that can destroy the con­ fidence of the customer is the way in which This proliferation of types of accounts among large sales are authorized. Most retail stores retail credit departments indicates a desire to have a limit on sales and when this limit is accommodate the customer and satisfy all levels exceeded, the salesperson is required to call for of economic spending. A well-run credit depart­ additional credit approval. The procedure is ment must continually sense the market and try intended to prevent excessive buying on a mar­ to determine the needs of the consumer. The ginal or delinquent account, and as a protection competition must be constantly studied for new against fraudulent buying. However, the wait ideas and evidence of greater acceptance of their while a purchase is authorized can sometimes credit plans. A credit plan that does not satisfy be annoying to the customer and may impede the needs of the consumer is as worthless as her from purchasing additional merchandise. unacceptable merchandise stored on the shelf. A good authorizing system should, therefore, minimize the waiting period with fast service Guideline II: Provide an accounting proce­ from an up-to-date account file that allows dure that produces a satisfying experience immediate decisions. Some retail stores have

Winter 1970 12 Harry N. Jackson introduced automated authorizing which an­ confidence in our operation. To that end, it is alyzes the account and sends the decision back necessary to follow the guidelines discussed to the salesperson in a fraction of a second. above and to create a warm and friendly atmo­ One can hope that future refinements in the sphere in which the customer feels that she will field of authorizing will reduce the aggravation receive complete satisfaction in using her charge to the customer and eventually eliminate it account. altogether. These three guidelines are for customer num­ The vital consideration in any accounting ber one—the buying consumer. She represents and control procedure is to make it so simple the primary reason why the credit department and unassuming that the customer is virtually exists, and she is the one who should be given unaware of it; anything less than that will re­ more and better service than we are too often duce the effectiveness of the credit operation willing or able to provide. But there is a second and contribute to lost sales. Guideline III dis­ customer, the seller—the salesperson, manager, cusses other aspects of customer service. or owner. While we cannot exist without the buyer, we Guideline III: Provide a personal and also cannot function without the seller. The friendly relationship with each customer seller needs an efficient and practical method who contacts the department, and act as an for closing a sale that will assure him of a means outlet for questions and complaints on com­ for disposing of his inventory at a profit. His pany policies and procedures. decisions on the type of merchandise to buy (including colors, sizes, models, and quantities needed), plus delivery problems, advertising, The customer’s impression of a store comes and other decisions, leave him little time to de­ from the two people that she contacts most vote to the problems of closing a sale. frequently, the salesperson and the customer To help him, and to help us perform the other service representative. The salesperson is not half of our function in credit, I have established generally the best contact for general questions a set of guidelines for the company. These or complaints. The customer is aware of the guidelines are specifically geared to the selling power of her charge account, and therefore, the department, although they generally define the credit department becomes the logical place to responsibility of the credit department to the seek out help or advice. Thus the credit depart­ entire company. ment can play a very vital role for the com­ pany. Using sympathetic understanding and patience in dealing with a customer’s problem, the credit department can often solve the prob­ For the Company lem and leave the customer completely satis­ Guideline I: Maintain an efficient support­ fied. Perhaps the customer is not always right, ing operation for merchandise and service but when she is wrong, a pleasant and under­ departments that contributes to a maximum standing credit employee can straighten out sales effort at a reasonable expense rate— the confusion without embarrassing the cus­ by (1) providing a tool that offers a simple tomer. Many stores recognize the importance and convenient means for closing a sale, of this aspect of credit and are selective in em­ and (2) establishing flexible authorizing ploying people who have a good rapport with and collection procedures which encourage customers. Training programs and follow-up sales growth and are consistent with sound sessions are conducted to create an awareness credit practices. of the importance of good customer service. In the credit department we sell basically This guideline recognizes the critical impor­ what our competitor sells; the primary differ­ tance of the point of sale to the merchant and ence lies in how we merchandise the product. the need for an easy exchange between the We must dedicate ourselves to the philosophy buyer and the seller. If there is any place that we can grow and be successful only if the where credit can create a bottleneck in a retail customer continues to feel comfortable and have store, it is at the point of sale. To prevent this,

Montana Business Quarterly Credit and Collections 13 the policies and procedures must be constantly is made on accounts that have far exceeded the reviewed to keep them in harmony with both limits established as guidelines for reasonable customers of the credit department. It is dif­ control. When severe guidelines have been es­ ficult to maintain a program of two or three tablished or where little judgment is used in credit plans that adequately meets the needs weighing other considerations that may alter of each selling department and is at the same the limits or the condition of existing delin­ time economically practical. One common solu­ quency, ill will may be created with good cus­ tion is to develop an account program with tomers. enough latitude to cover most of the point-of- It was mentioned earlier that authorizing, sale situations, and to provide exceptional credit when improperly managed at the point of sale, terms for special promotions, such as a deferred has a direct influence on the customer. The billing schedule on the sale of preseason mer­ collection procedure has a similar psychological chandise like overcoats in the summer or air effect on future buying when a dunning notice conditioners in the winter. irritates the customer or causes her concern Efficiency at the point of sale is also influ­ because of the size of the balance owed or the enced by authorizing procedures for verifying condition of the account. Some stores have de­ the creditability of the customer. As mentioned veloped a continuous evaluation of all accounts earlier, the authorizing procedure has a signifi­ and a means of updating the limit as the age cant effect on the future buying habits of the and history of the account change. This system customer; therefore, the salesperson should be allows exceptions to the routine dunning sche­ able to execute these procedures efficiently and dule and reduces the paperwork of the collec­ without delay or misunderstanding. Credit de­ tion department. The variable characteristics partments should continually review and ap­ of account age and pay record are used to create praise the authorizing limits and procedures a formula that can be applied to modify the necessary to provide premium service to both routine dunning schedules. As an example, a customers—the seller and the buyer. customer with an account lasting 5 years and a The collection department plays a key role prompt pay record may not receive a routine in the sale of merchandise, although the role is dunning notice until they are 120 to 150 days often misunderstood or handled incorrectly. It past due. In contrast, a customer with an ac­ is thought of as a watchdog for the accounts re­ count 2 or 3 years old and a poor pay record ceivable, with its only interest being to keep the will receive stronger dunning notices at an bad debts down and delinquencies to a mini­ earlier stage of delinquency. The system is mum. In reality, this department is as impor­ geared to the individual and is intended to con­ tant to the development of sales as those who centrate greater discipline on the questionable open accounts and extend credit at the point of accounts while allowing customers who have sale. A relatively large percentage of charge proven their creditworthiness to purchase un­ account customers do not pay their bill ac­ challenged, or at least with greater latitude and cording to the arrangements agreed upon when confidence. the account is opened and yet they are reliable The degree to which collectors consider them­ and trustworthy. It is the responsibilty of the selves credit promotion specialists, with the pri­ collection department to analyze each account mary purpose of keeping the accounts active, and to react strongly to the deliberate delin­ instead of watchdogs to prevent abuse by a quencies while granting leniency to those who small percentage of the customers, will deter­ forgot to pay or who overextended for the mine the collection department’s contribution month and need a little extra time. to the merchandise sales effort. Bad debts could The collection department must identify the be virtually eliminated by maintaining very good customer and encourage additional buying strict discipline on all accounts regardless of by a selective dunning program. In most credit account age or pay record, but this would ob­ departments, dunning notices are prepared and viously eliminate a great many active purchas­ mailed on a routine schedule. Monthly notices ing accounts that are good and have caused no are sent with the statement and mid-month no­ loss over many years of association. tices are mailed separately. Special follow-up Some accounts become delinquent or over-

Winter 1970 14 Harry N. Jackson

limit to the point where they must be closed to are known as walk-ins. It is particularly im­ further purchases; some of these are charged portant to pay special attention to the walk-ins, off to bad debts, while others are eventually for they represent consumers with a special in­ paid. While it would be easier for the collection terest in your merchandise and services. The department to keep the account closed, a pro­ credit application is a very sensitive interview motion-minded collector will study each prob­ because it requires information that is normally lem account and try to work out an arrange­ known only by family members or intimate ment that will allow the customer to become friends. The information may include a ques­ active again. She has been his store’s customer; tionable credit background that, if misunder­ she has already exhibited a desire for his goods stood, could lead to an unfavorable consumer and services; she has indicated an ability and a reaction. For this reason credit interviewers willingness to pay her obligations even though should be warm in their approach and not over­ not in the generally accepted manner. The good bearing; they should use good judgment when credit manager has everything in his favor if he asking questions; and they should let the cus­ can reach an understanding on how the account tomer do most of the talking. The person they should be handled. are interviewing is a potential charge customer, Collectors are generally rated by their ability and they are not extending her the privilege of to reduce bad debts. The usual criteria are an account; rather, she is extending them the number of phone calls made, number of letters privilege of profitably selling her goods and written, dollar volume of bad debts, and other services. methods related to disciplining delinquent ac­ The walk-in customer usually comes to the counts. Very little consideration is given to credit department because she is ready to do maintaining a customer or increasing her pur­ business. It normally requires a week or more chase level. More emphasis should be placed before a credit investigation is complete and on the number of accounts reopened, average judgment can be made on the new application. balance on accounts, and possibly, total net The saying, “strike while the iron is hot” is profit on these accounts. The important point relevant; a temporary line of credit should be is that there is a sales promotion aspect to the granted for the period during which the account credit manager’s job. A conscientious approach is being processed. Such an account is called a to account analysis serves both the disciplinary courtesy charge and it may be used for a single and promotion functions. purchase, or for all purchases made during the investigation period. The important considera­ Guideline II: Develop new markets by tion here is that the account will be used the seeking out groups of consumers who are same day or in a reasonably short period, and not charge customers and create in them a the customer will become active. This courtesy desire to open an account. charge also relieves the pressure from cus­ tomers who may become impatient during the period of credit investigation and call to deter­ In retail credit it is vitally important to main­ mine the status of their account. The customer’s tain a productive program for opening new ac­ concern over her creditworthiness could inhibit counts. Approximately 20 percent of the popu­ her buying; thus, the transition should be made lation moves every year, leaving a large void as smooth and as unnoticeable as possible. As in the active accounts. These, plus normal losses stated earlier, credit is a vital line of communi­ due to death, divorce, or disenchantment add up cation between buyer and seller and should not to approximately an 8 to 10 percent loss of the cause interference or static that destroys the accounts each year. One does not want to settle purpose of the association. for a plateau in sales, so it is necessary to gen­ Although the walk-in customer is the primary erate additional accounts beyond the losses to stay ahead of the planned sales volume for the source of new accounts, their number is gener­ coming year. ally insufficient to meet the requirements for a planned growth in sales. Additional accounts Many replacement accounts come from con­ must be secured through active solicitation of sumers who request a personal interview; these those who have not expressed an outward in-

Montana Business Quarterly Credit and Collections 15

terest. Steady cash customers sometimes have current file against a telephone book or a city not had the interest or time to visit the credit directory. The remaining names are further department. A solicitation appeal will reach screened by sending them to a credit bureau for many of these customers and offer a convenient a credit check. This can increase costs—since way to apply for an account. Some reliable pro­ the largest percentage of mailings will not be grams for account solicitation are listed below. returned—but the cost must be measured Silent Application Stands. Probably the most against the harm that may ensue if the names productive and least costly method of solicita­ are not screened first, and an applicant is tion is the silent application. Credit applica­ turned down after she has expressed an interest tions are located throughout the selling depart­ in becoming a charge customer. ments in fixtures attached to the wall or in free Employee Programs. Occasionally the credit standing units. The fixtures have a sign invit­ department will turn to the salespeople as a ing the customer to take an application, and the source of new accounts, by offering them credit application usually contains a self-ad­ money or merchandise incentives for each new dressed, postage-paid envelope that eliminates account application. Although there are some the customer’s need to purchase a stamp. The obvious problems with this type of solicitation, key to the success of this type of solicitation is such as incomplete applications, irritated cus­ the fact that an in-store customer usually con­ tomers, and excessive duplications, it does pro­ stitutes a captive audience who has indicated a vide an important side benefit—a greater preference for the store’s merchandise and ser­ awareness of the salespeople as to the type and vices. operation of accounts. A salesperson who does Telephone Solicitation. Currently one of the not understand the credit plans will usually shy most heavily used methods of solicitation is by away from using them as a means of closing a telephone. It has proven successful despite the sale. general negative reaction people have to being Reactivation of Closed Accounts. As I men­ called at home. Much of this type of solicitation tioned earlier, approximately 8 to 10 percent of is handled by outside firms who specialize in accounts become inactive each year and are re­ new account promotion. They contract with a moved from the current file. Many customers store for a specific number of new applications, simply discontinue buying for no apparent and hire and train the personnel to do the tele­ reason; possibly they are upset over some inci­ phoning. Their experience in the field has pro­ dent or they have found a store which provides duced techniques that are surprisingly produc­ the type of merchandise and service they pre­ tive, with little adverse reaction from those fer. Whatever the reason, many stores attempt called. Over the years, the practice of having to gain the confidence of these customers by solicitors ringing doorbells and visiting in per­ special appeals that invite them to become ac­ son proved unproductive. Rising costs, among tive again. It is an important form of solicita­ other factors, has necessitated the utilization of tion because it appeals to customers who once the telephone as the primary contact. considered your store the place to shop. Mail Solicitation. Mailing invitations to a The methods used and the intensity of the large number of noncharge customers is a program varies from store to store, depending standby solicitation program used by many on the philosophy of the company and the pro­ stores. The original cost of the mailing is low jected sales and profits. Traditional methods of but the cost per account is generally as high as solicitation, in time, tend to become inadequate. other forms of solicitation because of the low New markets must be explored, ones which may response. Many people regard this form of so­ not be included in a current profile of the licitation as part of the voluminous junk mail charge customer. Most stores have a basic set they receive and therefore do not take time to of characteristics the customer must meet be­ read the message. General name lists from list fore establishing an account; these characteris­ brokers are seldom used because they usually tics generally include minimum age, minimum have a high percent of overlap with a store’s time on the job, minimum salary, credit rating, current account file. A more common method and certain personal information. Such basic of securing names is to match accounts from the requirements can and often do eliminate many

Winter 1970 16 Harry N. Jackson

good potential charge customers. It is impor­ customer or not. A low limit may create prob­ tant, therefore, to find new consumers and lems for authorization and produce a psycho­ make every reasonable effort to include them logical barrier in the mind of the customer in the list of potential customers. One impor­ when her credit limit is questioned before pur­ tant segment of the market that is often over­ chase. On the other hand, a high limit may fail looked is the young person between the ages of to produce the necessary warnings on an ac­ eighteen and twenty-five. They not only con­ count that is overextended and in trouble. stitute a sizable portion of the buying power The tendency of most credit appraisers is to today, particularly in ready-to-wear, cosmetic, set the limit conservatively, since such a deci­ and music departments, but also represent po­ sion will be more easily accepted by the collec­ tential future buyers when they become in­ tion department, but it has a tendency to violate creasingly productive on their jobs and begin the credit philosophy from the standpoint of to enjoy the benefits of our affluent society. both the buyer and the seller. To avoid this Many stores have introduced young people arbitrary conservatism, many stores have intro­ into their credit programs with, usually, a lim­ duced a point-scoring system into their new ited account that is more rigidly disciplined account decision-making. Technically these are until the customers reach the minimum require­ called weighted application blanks by discrimi­ ments for a regular account or until they have nate analysis, and they employ a scientific for­ proven their ability to manage credit respon­ mula for appraising various characteristics of sibly. The experience in this area has been good the customer. The system follows the concept and has contributed greatly to the value of the that historically a group of individuals with the accounts. Some stores have even solicited up­ same general characteristics will react in a sim­ perclassmen in universities and colleges with ilar fashion when presented with an identical surprising results; the students respond by situation. using the account actively during their college Briefly, the system is set up in the following years and become profitable customers after way: A representative sample of accounts is graduation. selected on a random sampling basis and ana­ Some stores move the age limit down even lyzed by a number of characteristics that are further and accept high school students for very common to all credit applications, including limited and restricted accounts to provide them occupation, age, marital status, income, whether with an education in the management of money. the customer owns or rents his home, length of The lack of understanding that many young time on job, length of time in present home, people have on matters of credit and budgeting number of children, etc. (Whether or not the is alarming. Some of them get caught in a customer has a telephone is, surprisingly, a reli­ whirlwind of debts after they are employed as able indicator of credit reliability.) Each of the adults and create hardship and misery for them­ characteristics are matched against historic data selves as well as society. A student account on the account such as paying habits, purchases, gives them a basic understanding of credit and delinquencies, and bad debt write-offs and, the need for disciplined spending, under the through the use of discriminate analysis, the guidance of the credit personnel. Problems are various characteristics of the sample are as­ rectified as they arise and the consequences are signed weights that are a numerical evaluation seldom serious enough to produce any perma­ of their importance to the recorded history of nent effect on their personal lives. the accounts. The more influential characteris­ Finally, the decision to extend credit has al­ tics are selected and assembled into a point ways been difficult to standardize through a scoring system and a scale is developed that uniform policy; the information provided is defines the course of action according to various often sketchy and supplies little data on which numbers of points. to base a decision. The decision is further com­ The use of the system is quite simple. A credit plicated by the responsibility for establishing a application is scored according to the informa­ dollar limit on the account. Every approved tion obtained about the customer and points are account has a limit placed on it for internal totaled and matched against the scale which de­ decision-making, whether it is identified to the termines the creditworthiness of the customer.

Montana Business Quarterly Credit and Collections 17

If the system is truly sophisticated, it will also at which the main thrust of the sessions is pro­ identify the account limit to be assigned to the motion of credit as a selling tool. Recently a account, and may go so far as to indicate the workshop was held in New York for controllers form of collection technique that should be used and credit managers that was entirely devoted for most effective control of the account without to one subject—credit promotion; a second jeopardizing future sales. workshop that ran concurrently had the topic, The system described above is still imperfect, “Customer Service.” Both groups were dedi­ but it is gaining greater appeal and acceptance cated to blue-skying the subjects in an attempt as refinements are added and the reliability is to generate new and better methods to serve improved. Eventually it could even be used as the customer. The meetings were provocative, a tool to predict customer’s buying habits and challenging, and produced a number of ideas to forecast his attitudes and interests related to that need further research and study. The merchandising and promotions. meeting brought home one important point— nobody knows all the answers, but a large num­ ber of credit managers and controllers recognize Conclusion the need for continual review and updating. Within a specific company, there are a num­ The foregoing briefly describes a retail credit ber of bench marks that will measure and eval­ operation—at least as it may exist at a point in uate customer acceptance of the credit program time. But it is not enough to create a system —and here again, I refer to both customers. that serves the two customers; the operation Unquestionably, the key person in the success must use an on-going review and appraisal pro­ of any selling organization is the person who gram, looking for new and better ways to meet sells the product. The success of a credit opera­ the needs of both buyer and seller. A credit tion rests, to a great degree, with the sales­ program becomes less effective with the pas­ person who is using it as a medium of exchange. sage of time unless there is a continuous effort This salesperson can best tell you how effective to update and stay abreast of changing condi­ it is in closing a sale, how well it is received tions. We should never lose sight of the fact by the buyer, and what problems it presents that credit departments are selling a product for either of them. Meetings with sales person­ much the same as the merchant is, and the cus­ nel to solicit comments and suggestions for im­ tomer will not buy obsolete merchandise. provement of the credit program offer an oppor­ There are other reasons for continuously eval­ tunity to determine how well the salesperson uating the credit program. New lines of mer­ understands the credit policy and how effec­ chandise added to the inventory may require tively he uses it to increase sales. Evaluation modifications in the account program; new of these meetings can lead to retraining classes groups of customers may enter the market. Ad­ with special emphasis on areas that are weak ditionally, changes in economic conditions may or unclear. on one hand, make a credit policy too liberal, I discussed earlier the customer service as­ leading to internal control problems, and on the pect of the credit department. There is a vast other hand, make it so restrictive that it will amount of valuable information to be had from drive customers away. the records that the credit department gener­ Whatever is happening in the market place, ates in the process of doing its job. Customer credit must be sensitive to any change or it will complaints reflect the credit department and become ineffective and even a detriment to represent danger signs that should not go un­ sales and profits. The following paragraphs de­ heeded. Proper categorizing of these complaints scribe certain steps that could be taken to keep produces a dramatic picture of weaknesses that informed about our evolving credit society. offer the credit department a tool for action. Meetings and seminars throughout the year The advent of the computer has produced by­ on all phases of retail credit can help credit products for routine accounting functions that managers become better informed and more are valuable in appraising a credit operation. effective. There are two national retail credit Historically, once the sales checks were billed organizations that conduct annual conventions onto the ledger card and the monthly statement

Winter 1970 18 Harry N. Jackson mailed to the customer, it was expensive—if not of implementing the philosophy may differ by impossible—to recapture the information for type of company, but no one can escape the analysis. The computer, today, offers a means basic concept that the health and welfare of a of selecting data for various analyses; it is pos­ company is greatly dependent upon using every sible to identify sales by department, sales trend available means to fulfill the requirements of information, changes in customers’ buying hab­ the customer. How credit departments relate to its, and other related statistics that are tools for their customers in terms of service and attitude, identifying potential problems. The data can be how flexible they are to new ideas or problem broken down by demographic characteristics to solving, and how well they maintain an up-to- determine the makeup of the customer who is date knowledge of their job will measure their acting or reacting. It is also possible to break contribution to the customers they serve and to the information down geographically so that their companies. the customer can be identified by location in In conclusion, let me summarize the six char­ the trade area. This approach has been used for acteristics of a retail credit operation as covered developing credit solicitation programs in areas in this article: which promise to be most productive from the standpoint of response and account usage. In 1. Credit serves two customers—the buyer time this data will become the basic input for a and the seller. consumer information file that will raise the level of service to both customers of the credit 2. Credit should be dynamic—not static. department. 3. Credit should be a means of communica­ Although the credit operations described here tion and interchange that creates no waves. may be typical of most credit departments across the country, each has its own unique 4. Credit should be a leader—pot a follower— characteristics because of the personality of the in developing ideas to sell merchandise. credit manager or because of the makeup of the community that it serves. The general philoso­ 5. Credit should serve as the image of the phy, however, is applicable to any credit organ­ store to the buying customer. It should be warm ization; it is applicable to a company and to an and understanding and responsive. individual who has a product or a service to 6. Credit should be a “credit” to the cus­ sell and who deals with a customer. The method tomers it serves.

Montana Business Quarterly MAURICE C. TAYLOR

Realigning Montana County Governments

Despite many difficulties involved, consolidation is a key for improving local administrations and services

It has become increasingly clear since World in making more or less arbitrary assignments War II that government and planning are ex­ of responsibility for performing functions that tremely difficult within the framework of exist­ are common to two or more jurisdictions. ing governmental boundaries. Economic and Recently a subcommittee of the Legislative social problems are no longer respecters of Council was asked to investigate the feasibility governmental boundaries—if they ever were. of combining some of Montana’s counties.3 Most Problems having to do with welfare, transpor­ of the discussion centered on an alternative tation, pollution, health, and the like spread in that “may be more feasible from a political octopod fashion across city, county, and state point of view—sharing of resources and equip­ borders. Recognizing this fact, the federal gov­ ment between local governments, such as cities ernment has embarked on a system of creating and towns.”4 However, Mr. Dan Mizner, Exe­ functional districts or regions which ignore city, cutive Director of the League of Cities and county, and state boundaries.1 Indeed, the fed­ Towns, has pointed out that existing state law eral government seems bent on requiring multi- makes such cooperation difficult.® jurisdictional coordination as a condition for The U.S. system of “grass roots” governmen­ financial assistance in planning and develop­ tal organization, whereby townships and towns ment.2 (cities) were aggregated into counties, counties The trend toward talking about multi jurisdic­ into states, and states into a federation, has no tional districts and joint planning and govern­ doubt contributed to representative govern­ ing boards often serves as an inferior substitute ment. The premise of such organization seems lor a bona fide solution such as the actual con­ to be that many, if not most, socioeconomic solidation of governmental units. Formal or problems are of a micro nature that can best informal cooperation among autonomous units be solved by local action. The national appli­ of governments frequently produces conflicts cation of this premise has resulted in the for-

'Executive Office of the President, Bureau of the Bud­ "Daniel J. Foley, “County Consolidation Study Asked,” get, Circular No. A-80 (Washington, D.C.: January 31, The Billings Gazette, October 12, 1969. 1967). ■Ibid. "ibid. “Ibid.

Mr. Maurice C. Taylor is Associate Professor of Economics at Montana State University, Bozeman. Montana Agriculture Experiment Station Journal Series No. 128. Contribution of the Department of Agriculture Economics and Economics, Montana State University, Bozeman.

Winter 1970 20 Maurice C. Taylor

mation of more than 3,000 counties, some 18,000 of Spokane in Washington Territory, in 1860. municipalities, over 30,000 school districts, and The whole area became a part of the Territory of untold thousands of township governments. Idaho in 1863 and was transferred to Montana Altogether there are about 90,000 units of local Territory in 1864.7 That part of Montana east government in the United States that have some of the Continental Divide was originally com­ autonomy in taxation, planning, and spending. prised of five counties, Choteau, Custer, Galla­ So long as the socioeconomic system was tin, Jefferson, and Lewis and Clark. simple and modes of travel and communication By the time Montana achieved statehood in were primitive, such fragmentation of jurisdic­ 1889, the original nine counties had been divided tion was satisfactory or at least tolerable. In to form an additional eight counties (see Table the complex society of today, such diversity of I and Figure 1). Seven more counties were jurisdiction seems almost intolerable. Public problems of health, education, transportation, and welfare are not contained by local govern­ TABLE I ment boundaries. Social interests and problems Population of Selected Counties Soon after Formation no longer fit into the provincial mold. Compared to 1968 Montana certainly has her share of frag­ PopulatioiIX mented jurisdiction. We have about 1,300 units % Decline First Census since of local government with taxing, planning, and Year* First Year after Estimate Census spending powers. Under frontier conditions County some such fragmentation of power and Established Formation for 1968 Year authority appeared justified. Population was C arter . . . 1917 3,972 2,000 49.7 D aniels ...... 1920 5,553 3,300 40.6 extremely sparse and facilities for communica­ G arfield ______1919 5,368 1,900 64.6 tion and transportation were limited. In 1870, Golden Valley . 1919 2,126 1,200 43.6 5 years after the Territory of Montana was es­ Judith Basin ...___ 1920 5,238 3,100 40.8 tablished, the population was just over 20,000. McCone ______1919 7,495 3,200 57.3 A large share of these people lived in “oases” Musselshell __ 1911 12,030 4,000 66.7 P etroleum ...... _ 1925 2,045 800 60.9 well isolated from one another. These oases Phillips ___. 1915 9,311 5,300 43.1 became the centers for trade and government. Powder River .___ 1919 3,357 2,600 22.5 As settlement continued and population grew S h e r id a n ______1913 13,847 6,000 56.7 and spread, other oases and oasis satellites were Stillwater ______1913 7,630 4,800 37.1 T reasure ..... 1919 1,990 1,200 39.7 formed. The new oases and satellites were con­ W heatland ..... __ 1917 5,619 2,800 50.2 sidered by their settlers to be autonomous, and W ib a u x ______1914 3,133 1,600 48.9 perhaps many of them were. But communica­ Sources: U.S. Department of Commerce, Bureau of the tion and travel were slow and cumbersome, and Census, Census of Population, 1920 and 1930. the satellite community could not effectively “Population Estimates for Montana Counties as of exercise its political muscle. The result was July 1, 1968,” Montana Business Quarterly (Missoula: agitation for local government (county) status. Bureau of Business and Economic Research, Univer­ When the first legislative assembly for the sity of Montana, Summer 1969). Territory of Montana met in 1865, nine counties ♦The first census year was 1930 for Daniels, Golden Valley, Judith Basin, and Petroleum Counties and were formed. The Montana area west of the 1920 for the remainder of these counties. Continental Divide had previously been part of Idaho and Washington. Three counties, Beaver­ formed before 1900, bringing the total number head, Deer Lodge, and Madison, were created of counties to twenty-four. Between 1900 and by the Territory of Idaho and later transferred 1910, Powell, Rosebud, Sanders, and Lincoln to Montana.6 Missoula County (originally com­ counties were formed (see Table II and Figure prising its present area plus what is now Flat- 2) . Twenty-two additional counties were head, Lincoln, Lake, Mineral, Ravalli, and formed from 1911 to 1919, and fifty counties Sanders Counties) was formed from the County were included in the 1920 Census (see Figure 3) . Daniels, Golden Valley, Judith Basin, and 6The Montana Almanac, 1959-60 (Missoula: Montana State University Press, 1958). 7Ibid.

Montana Business Quarterly Realigning Montana County Governments 21

FIGURE 1 MONTANA COUNTIES, 1890

Source: Department of the Interior, Census Office, Report on Population of the United States at the Eleventh Census: 1890 (Washington, D.C.: U.S. Government Printing Office, 1895).

Liberty Counties were organized in 1920, and population decline since their first census in Lake County was formed in 1923. Petroleum, 1920; the same is true for Wheatland, Phillips, the fifty-sixth and final county, was established Wibaux, Sheridan, Stillwater, and Musselshell in 1925. Counties. The population of Carter and Prairie Most of the counties established after 1910 Counties has declined in every census since 1930. have lost population almost continuously since population decline since their first census in formation. The first census population and the The relevant point of these statistics is that population estimates for 1968 for some of these most of the counties formed after 1910 were counties are presented in Table I. Four of the small and doomed to a population decline even 6 counties formed in the 1920s (Daniels, Golden at the time they were formed. Of the twenty- Valley, Judith Basin, and Petroleum) have lost eight counties established after 1910, only Big hiore than 40 percent in population since their Horn, Glacier, Lake, Mineral, and Toole first census. Daniels, Golden Valley, and Pe­ Counties have kept pace with the average popu­ troleum Counties have all experienced a popu­ lation growth of the state. Eighteen of the lation decline in every census since formation. counties created after 1910 have lost population The 1968 population estimate for Liberty is since formation, three have about held their about the same as 1930. Three of the 7 counties own, two counties have had moderate gains, formed in 1919 have had population decreases and five of these counties have had population of 40 percent or more since formation. Garfield gains comparable to that for the state as a whole. and Treasure Counties have had a continuous It is apparent that Montana has more counties

Winter 1970 22 Maurice C. Taylor

TABLE II gest the criteria and standards for consolidation. Formation of Montana Counties by Year The process of county consolidation is bound 1865 1893 1914 to be somewhat arbitrary. It should be possible, Beaverhead Flathead M ineral however, to set forth some more or less objec­ Chouteau Granite Richland tive criteria for guiding the process. If a county , Custer Teton Toole government is to be efficient and effective, the Deer Lodge Valley Wibaux Gallatin geographic area included in the jurisdiction Jefferson 1895 1915 must have some degree of homogeneity with Lewis & Clark Carbon Phillips respect to certain environmental factors. Madison Sweetgrass Prairie Divergence in social, economic, cultural, demo- i Missoula graphic, and political factors invites conflict 1897 1917 1866 Broadwater Carter with respect to government functions. It is Meagher Wheatland obvious that the smaller the area encompassed 1901 by a governmental boundary, the greater the 1869 Powell 1919 homogeneity within the boundary. But at the Dawson Rosebud Garfield Glacier same time the area needs to be large enough 1881 1905 McCone to permit efficient and comprehensive govern­ Silver Bow Sanders Pondera ment. The following are suggested as relevant Powder River criteria for the process of county consolidation. 1883 1909 Roosevelt Ravalli Lincoln Treasure 1. Size of County (in square miles). A county Yellowstone should be large enough to achieve efficiency in 1911 1920 administering governmental functions, yet 1885 Musselshell Daniels Fergus Golden Valley small enough to accommodate effective com­ 1912 Judith Basin munications and liaison. 1887 Blaine Liberty Cascade Hill 2. Population. Some counties are obviously Park 1923 too small to support full-fledged local govern­ 1913 Lake ment activities. Nine Montana counties have a Big Horn Fallon 1925 population of 2,300 or less and most of these Sheridan Petroleum counties are still losing population. Twelve Stillwater additional counties have a population of less Source: The Montana Almanac, 1959-60 (Missoula: than 5,000 each. There are 35 Montana counties Montana State University Press, 1958). that have less than 8,000 people.9 The average population in Montana’s 56 counties is about than can be justified on the grounds of ef­ 12,000, and, while this figure isn’t sacred, it ficiency and adequacy in county government. seems reasonable that a county ought not be But the same kind of political environment that much smaller than this. led to the formation of twenty-eight new counties after 1910 still exists. As a matter of 3. Trade Centers. Trade centers traditionally fact, the political strength for maintaining the serve as the hub for economic, social, and politi- . status quo is potentially more powerful than cal activity. It is difficult, if not impossible, for when the counties were formed. Mere inaction an area to function as a cohesive sociopolitical itself may become a powerful political force. unit without such a hub. The Upper Midwest Mr. Burt L. Hurwitz, Meagher County Commis­ Research and Development Council has classi­ sioner, has said, “The idea of consolidation of fied Montana trade centers according to the counties is very frightening to commissioners, adequacy of the goods and services provided in j but I think we should take a hard look at it.”8 the centers (see Figure 4). The categories used Unfortunately, consolidating counties is of are: (1) Primary Wholesale-Retail; (2) Secon- necessity a political process, and about all the academicians and researchers can do is to sug- ““Population Estimates for Montana Counties,” Mon­ tana Business Quarterly (Missoula: Bureau of Busi­ ness and Economic Research, University of Montana, sFoley, “County Consolidation Study Asked.” Summer 1969), p. 35.

Montana Business Quarterly Realigning Montana County Governments 23

FIGURE 2 MONTANA COUNTIES, 1910

Source: Department of Commerce, Bureau of the Census, Thirteenth Census of the United States: Population 1910, Reports of States With Statistics for Counties, Cities and Other Civil Divisions, Volume 3 (Washington, D.C.: U.S. Government Printing Office, 1913). dary Wholesale; (3) Complete Shopping; (4) such as food, drugs, hardware items, and the Partial Shopping; (5) Full Convenience; (6) like. It seems reasonable that, as a minimum, Minimum Convenience; and (7) Hamlet.10 Only a county should have such facilities if it is to fifteen of Montana’s fifty-six counties have a function as a socioeconomic-political unit. This trade center with “complete shopping” facili­ “full convenience” requirement is suggested as ties. Fourteen counties have centers with only one of the standards for county consolidation. “partial shopping” facilities, eleven counties have centers limited to “full convenience,” and 4. Rural-Urban Complexion. It is clear that sixteen counties have no center above the “min­ rural-farm areas and urban areas in Montana imum convenience” category. There are forty- face different kinds of socioeconomic problems. one Montana counties that lack a trade center The rural-farm areas are faced with economic with complete shopping facilities. The “full decline, while the urban areas are faced with convenience” category is one which includes a problems of economic growth. It should also be bank and firms supplying ordinary retail items clear that it is difficult to maintain internal harmony in governmental efforts in a situation “John R. Borchert and Russell B. Adams, Trade Cen- where a district includes significant amounts of ters and Trade Areas of the Upper Midwest, Upper both problems, especially when the urban ele­ Midwest Economic Study, Urban Report No. 3 (Min­ ment is large relative to the rural-farm element neapolis: University of Minnesota, September 1963). See p. 4 for definitions of the categories. in terms of population and economic power.

Winter 1970 24 Maurice C. Taylor

FIGURE 3 MONTANA COUNTIES, 1920

'J?pa? 7 m t. OIJcommerce. Bureau of the Census, Fourteenth Census of the United States Taken m the Year 1920: Population 1920, Composition and Characteristics Office W22) V ’ V°1Ume 3 (Washington’ D c ': U.S. Government Printing

The same would be true if the power-population Choteau County, for example, is divided by the ratio were reversed. A county should embrace Missouri River, so that parts of the county do some homogeneity with respect to ruralism and not have easy access to the county seat. Lewis urbanism, and ruralism and urbanism should and Clark and Silver Bow Counties are both not be combined in such a way that one unduly split by the Continental Divide. Many other dominates the other. For this reason it seems examples of such physical division exist, al­ desirable to avoid combining a strictly rural though it seems desirable that county combina­ county with one which is significantly urban if tion conform to physical (natural) barriers. possible. This may seem to contradict the stan­ dard above regarding trade centers, but the two 6. Political Homogeneity. Gerrymandering of factors should be weighed against each other. district borders for political advantage has been common throughout the United States. Such 5. Physical and Geographic Barriers. Even in gerrymandering is reprehensible when other the jet age, physical barriers such as mountain districting criteria are ignored, but there is ranges and rivers are significant in Montana. merit in using political homogeneity as a par­ For example, Glacier and Flathead Counties are tial determinant of county boundaries. Al­ rather effectively separated from one another though some political diversity is a good thing, by the Continental Divide, even though they combining two counties with violently opposing adjoin one another. On the other hand, some political complexions could result in friction existing counties are split by physical barriers. and disharmony. It is suggested, therefore, that

Montana Business Quarterly Realigning Montana County Governments 25

FIGURE 4 TRADE CENTERS AND TRADE AREAS MONTANA

TRADE CENTER CLASS N u m b e r of C en ters Primary Wholesale-Retail . 2 Source: John R. Borchert and Russell B. Adams, Trade Centers ★ and Trade Areas in the Upper Midwest, Upper Midwest Economic Secondary Wholesale ...... — 2 Study, Urban Report No. 3 (Minneapolis: September, 1963). ☆ ■ Complete Shopping ...... 11 0 Partial Shopping ... 17

A Full Convenience ...... 14

A Minimum Convenience ----- __ 30 • Hamlet ______271 extreme political divergency should be avoided total income and total property valuation but in the process of county combination. not in terms of property valuation per person. The 56 counties are arranged into population- 7. Adequate Economic and Tax Base. If size groups in Table III. Income and valuation county consolidation does take place in Mon­ data on both a total and a per capita basis are tana it will be for economic reasons. Some included. Adjusted gross income ranges from small counties are finding it difficult to pro­ less than a million dollars for Petroleum County vide adequate services at reasonable tax rates. to $187.9 million for Yellowstone County. Total It seems customary to consider small (in terms assessed valuation ranges from $6.6 to $347.9 of population) counties to be “poor” and large million. Median income for the 9 smallest counties to be “rich.” This is true in terms of counties is $2.6 million compared to $93 million

Winter 1970 26 Maurice C. Taylor

TABLE UI Adjusted Gross Income, Assessed and Taxable Valuation, Population, and County Mill Levy for Montana Counties, 1968

Levy for Adjusted Gross Assessed Taxable Population County Population Income Valuation Valuation 1968 Purposes Class (1968) (Per Capita) (Per Capita) (Per Capita) Estimate (Mills) 25,000 or more: C a s c a d e ______$2,041 $ 3,430 $ 933 80,700 48.39 F la th e a d _____ 2,050 3,858 1,097 38,100 26.93 G a lla tin ______1,973 3,271 938 29,200 39.10 Lewis and Clark ...... 2,402 3,632 1,025 32,300 40.08 Missoula ______...... 2,118 3,245 900 55,100 36.31 Silver Bow ______2,035 3,037 823 45,700 63.98 Yellowstone ______2,308 4,274 1,184 81,400 36.64 MEDIAN ______2,050 3,430 938 45,700 39.10 10,000-24,999: Big H orn _ —— ■ 1,157 4,510 1,284 10,200 23.91 Custer __ - - - 1,739 3,312 957 13,800 49.17 Dawson ______1,941 4,585 1,373 11,800 39.00 Deer Lodge 1,737 3,250 934 15,200 52.00 Fergus ______1,735 4,978 1,360 13,600 39.75 Glacier ______1,342 4,167 1,458 12,000 38.01 Hill 1 2,429 4,727 1,240 15,400 46.74 Lake .. ___ 1,308 3,909 1,119 14,300 47.92 Lincoln ______1,944 3,296 899 17,900 25.69 Park _____ . 1,855 3,889 1,120 11,700 40.16 Ravalli ______1,551 2,942 833 13,800 36.36 Richland ... -...... 1,645 4,495 1,299 10,700 42.48 Roosevelt ... ------1,658 4,324 1,441 11,100 Valley 38.95 ___ 1,648 4,828 1,273 12,800 44.80 MEDIAN — 1,696 4,246 1,196 13,200 40.00 5,000-9,999: Beaverhead 1,582 5,392 1,557 Blaine 7,900 41.55 ------1,276 4,303 1,211 7,600 Carbon ___ 54.03 ----1,459 5,797 2,230 7,400 Chouteau _ 30.35 ------2,938 10,797 2,750 6,400 39.16 J efferson ------1,235 4,157 1,314 Madison 5,100 29.84 ----- 1,224 4,621 1,500 5,800 Phillips __ 39.94 ...... 1,604 6,528 1,887 5,300 44.59 Pondera _ ----- 2,338 7,492 1,985 Powell __ 6,500 49.74 ----- 1,853 3,680 1,200 7,500 42.85 Rosebud _ ----- 1,333 5,127 1,683 Sanders .. 6,300 49.86 ----- 1,621 6,833 2,061 6,600 38.84 Sheridan -----2,183 6,367 2,050 Teton _ 6,000 33.25 ----- 2,167 7,817 2,133 Toole 6,000 44.68 . 2,108 7,815 2,462 6,500 39.34 MEDIAN 1,612 6,082 1,936 6,450 40.75

S ^f^tes for Montana Counties,” Montana Business Quarterly mer 1969)’, p 35 * B CSS and Economic Research, University of Montana, Sum-

1968”ty third Biennial Report of the Montana State Board of Equalization (Helena,

Montana Business Quarterly Realigning Montana County Governments 27

TABLE m (Continued)

L e v y fo r Adjusted Gross A ssessed T a x a b le P o p u la tio n C o u n ty Population In c o m e V a lu a tio n V a lu a tio n 1968 P u rp o se s Class (1968) (Per Capita) (Per Capita) (Per Capita) E stim a te (M ills) 2,500-4,999: Broadwater ...... P ______1,500 6,538 1,923 2,600 40.64 Daniels ______- ...... 2,182 6,242 1,576 3,300 44.55 F a llo n ______1,533 8,022 4,044 4,500 24.65 G r a n ite ______1,793 6,103 1,862 2,900 40.22 Judith Basin ...... _____ 1,548 9,032 2,613 3,100 37.77 M c C o n e ______1,469 7,406 2,531 3,200 36.25 M ineral ______1,545 3,303 1,030 3,300 55.26 Musselshell____ ...______1,550 5,275 1,875 4,000 31.68 Powder River .....______1,346 9,115 2,962 2,600 31.00 S tillw a te r______1,521 6,104 1,729 4,800 39.79 Sweet Grass ______1,467 6,633 1,967 3,000 43.20 Wheatland .. 1,750 5,393 1,643 2,800 45.37 MEDIAN . 1,539 6,390 1,899 3,150 40.00

Less than 2,500 C arter ...... ______1,300 8,250 2,400 2,000 48.35 G a r f ie ld ______...... 1,474 9,211 2,579 1,900 43.45 Golden Valley ...... 1,250 8,000 2,500 1,200 40.14 L ib e r ty ______3,318 11,909 3,318 2,200 40.45 Meagher ...... ______1,391 6,609 2,000 2,300 43.72 Petroleum _____ ...... 1,000 8,250 2,375 800 31.50 Prairie ______1,600 7,300 2,150 2,000 48.52 Treasure ______1,417 6,917 2,000 1,200 32.56 W ibaux ... ______1,312 10,375 4,875 1,600 30.52 MEDIAN ...... 1,391 8,250 2,400 1,900 40.45 for the 7 largest counties. Median assessed val­ counties had a median per capita land value of uation for the small counties is $15.2 million $2,083 as contrasted to $146 for the 7 largest compared to $147 million for the large counties. counties. It is usually assumed that the income Median income per capita amounts to $1,391 for from agricultural land is low in relation to land the 9 small counties and $2,050 for the 7 large values. If this is correct, assessed valuation per counties. But assessed valuation per capita capita may not be a good index of the capacity tends to be higher for the small counties than to provide public services. The relationship of for large counties. The 9 smallest counties had per capita income to assessed valuation per a median per capita valuation of $8,250 in 1968 capita lends credence to this point. Income per compared to $3,430 for the 7 large counties. capita amounts to about 60 percent of assessed In short, the small counties tend to be poor valuation per capita for the 7 large counties and in terms of income and relatively rich in terms about 17 percent for the 9 small counties. of wealth or property. On the surface this seems To use an extreme example, Yellowstone to indicate that the small counties have an ade­ County has about 100 times the population of quate tax base in terms of property. There are Petroleum County but only about 22 times the 2 factors, however, that moderate that indica­ assessed valuation. Why, one might ask, can­ tion. First, the legal limitations on mill levies not Petroleum County provide adequate public place a ceiling on revenue-producing authority. services? The answer is that it is impossible Second, the main reasons for the higher valua­ for Petroleum County to engage a small frac­ tion per capita in the small counties is the tion of a county attorney or a county assessor. greater relative importance of agricultural land And even if it could, the minimum service re­ in the small counties. In 1968 the 9 smallest quired by the county could not be performed

Winter 1970 28 Maurice C. Taylor under such circumstances. Obviously there are of the criteria are hard to measure, and it is economies of size in local government as there admittedly difficult to assign a weight to the are in other endeavors. various standards. A cursory analysis of fac­ The criteria discussed here are suggested as tors such as these indicates that Montana coun­ guidelines to be used in the analysis of poten­ ties could be combined in such a way as to re­ tial county combination. It would be nice if duce the number by half and at the same time these kinds of data could be used in a computer improve the quality and level of county govern­ program to yield an optimum combination of ment services. It should be kept in mind, how­ counties. But even if we had the required data, ever, that such consolidation is not likely to we probably wouldn’t like the computer an­ reduce the overall cost of county government. swers. There are many intangibles and im­ The gain would be largely in the form of im­ ponderables involved in such a process. Many proved administration and service.

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BUREAU OF BUSINESS AND ECONOMIC RESEARCH UNIVERSITY OF MONTANA MISSOULA, MONTANA 59801

Montana Business Quarterly JOSEPH R. MASON

Commercial Bank Supervision and Examination

A Study of Confusion and Inefficiency

Introduction this situation. Others, however, have opposed these proposed changes in the structure in favor One of the major unresolved problems in the of maintaining the status quo. sphere of commercial bank operations today The purpose of this study is to present and lies in the inefficiency of supervision and exam­ evaluate the arguments, pro and con, for the ination of the system. system as it now exists and the various pro­ This structure is cumbersome and inefficient posals for change. but, because the public has not been alerted to any imminent crisis or threat to the safety of the banking system, the matter has not become a public issue and thus inefficiency is accepted. Historical Background The problem is compounded because the pro­ The basic structure of bank supervision in the posals for change in the system interfere with United States dates back to the National Bank­ the sphere of operation of certain well-estab­ ing System. The National Currency Act of 1863, lished agencies and could threaten the loss of followed in 1864 by the National Banking Act, authority on the part of some of these agencies. established a system of supervision and exam­ In addition, the proposals for change that have ination in which national banks became the been made involve unification of the super­ responsibility of the Comptroller of the Cur­ visory and examination authority in one agency rency, while state banking authorities super­ which naturally stirs up traditional opponents vised all other banking institutions. This sys­ of centralized power or authority. Thus al­ tem basically established the dual system of though legislation for change is introduced into federal and state supervision that we have to­ every Congress—nothing has been done to rec­ day. At the time, it was relatively simple and tify the situation. unconfused—the only differences occurred be­ Currently involved in this process of super­ tween the various state authorities. vision and examination of commercial banks are The situation in banking became somewhat the Comptroller of the Currency, the Board of confused, however, in 1913 with the establish­ Governors of the Federal Reserve System, the ment of the Federal Reserve System. Under the Federal Deposit Insurance Corporation, and the Federal Reserve Act of 1913, the Board of Gov­ individual banking authorities in the fifty states. ernors of the Federal Reserve System was au­ This structure of supervision and examination thorized to examine and supervise member represents the ultimate in confusion, antiquity, banks regardless of their charter. Thus, since and inefficiency. Proposals for changes in the 1913, the Comptroller of the Currency, the Fed­ structure have been made in hopes of correcting eral Reserve Board of Governors, and the Dr. Joseph R. Mason is Associate Professor of Economics, State University College at Brockport. State University of New York.

Winter 1970 30 Joseph R. Mason various state authorities have all been involved tice Department, if it should disagree with the || in commercial bank supervision and examina­ proposed merger, has thirty days to bring suit tion. against it. Member banks with state charters \ Following the collapse of the banking system need approval for mergers from both the Board and the banking holidays of 1933, the system of of Governors and state authorities while mer­ supervision and examination was confused even ger by nonmember insured banks requires the further with the establishment of the Federal approval of the Federal Deposit Insurance Cor­ Deposit Insurance Corporation. This Corpora­ poration and state authorities. Finally, non­ tion was charged with the supervision and exam­ member noninsured banks need the approval of ination of insured commercial banks. As a re­ state authorities only. sult of this sequence of legislation, national Thus the situation in bank supervision in the banks were and still are subject to examination United States has been one that has been jerry- 1 by the Comptroller of the Currency and since all built upon a maze of legislation (which was national banks must by law be members of the designed to correct inadequacies in the banking Federal Reserve System, they are also subject system other than the supervisory and exam­ to supervision and examination by the Federal ination procedures per se) and has tended to Reserve. In addition, because all members of deteriorate rather than improve through time. the Federal Reserve System must belong to the Federal Deposit Insurance Corporation, national banks are thus also subject to examination by The System Today the Federal Deposit Insurance Corporation. Commercial banks with state charters that As the entanglement became more involved, are members of the Federal Reserve System, by a de facto system of supervision and examina­ this very same reasoning are subject to exam­ tion or areas of responsibility at the federal ination by the Board of Governors and the Fed­ agency level has evolved. Basically the sphere eral Deposit Insurance Corporation. In addi­ of responsibility spreads so that the Comptroller tion, however, the added element of state bank­ of the Currency is accountable for national ing authorities in the fifty states enters the banks, while the Federal Reserve Board of Gov­ somewhat disoriented picture. ernors supervises and examines member state The situation for commercial banks with state chartered banks, with the Federal Deposit In­ charters that are not members of the Federal surance Corporation having responsibility for Reserve System is also somewhat disjointed. In nonmember insured banks. State authorities this case the Federal Deposit Insurance Corpora­ are still relevant because of the nature of the tion and the state authorities share the super­ dual system. vision and examination responsibility. The Comptroller of the Currency examines In addition to these major developments of national banks a minimum of three times every 1863, 1913, and 1933, the tangled web deepened two years. The Federal Reserve follows a policy with the Bank Merger Act of 1960 and the of examining every member bank at least once amendment to it in 1966. a year—many times in cooperation with state In the case of bank merger, the responsibility authorities.1 The Federal Deposit Insurance is divided among the agencies, depending upon Corporation examines nonmember banks once whether the bank involved is a national bank, each year, often in collaboration with state au- < a state member bank, a state chartered non­ thorities. The examination procedures for un­ member bank, or a nonmember noninsured insured state banks depends upon the particular bank. state in which the commercial bank is char­ For national banks that plan to merge, the tered. State laws vary quite drastically.2 approval of the Comptroller of the Currency is This breakdown of the sphere of influence necessary. The Comptroller by law must then has, naturally, produced problems and conflicts obtain the opinion of the Board of Governors, between the agencies because of the lack of * the Federal Deposit Insurance Corporation, and laBanks and Their Supervising Agencies,” Banking the Justice Department. The Comptroller is (August 1968), p. 44, 45. not, however, bound by their opinions. The Jus­ *Ibid.

Montana Business Quarterly Commercial Bank Supervision and Examination 31 uniform criteria for examination purposes. Dis­ The central theme for change for the past putes have arisen and have grown more intense decade has favored the maintenance of the dual between the agencies, especially since 1960. The system but has supported change in the system lack of coordination and/or negotiation has led at the federal level because since states do grant to a cry for a change in the system. commercial bank charters, commercial banks During the decade of the sixties, the confu­ may choose to operate at the state level and not sion and the need for corrective action was join the Federal Reserve System. This has been recognized first by the Joint Economic Commit­ historically the case for the majority of com­ tee of the United States Congress in 1961 in the mercial banks in this nation. As of November Report of the Commission on Money and 27, 1968, of the total of 14,205 commercial banks Credit.* This report noted, with respect to this in the United States, a total of 8,203, or 58 per­ question, the need for one examining authority cent of them operate under state charter and for commercial banks.4 have chosen not to join the Federal Reserve In 1963, President Kennedy established the System.7 As long as states reserve the right to Committee on Financial Institutions for the grant charters to commercial banks, dual bank­ purpose of studying the possibility of “coordina­ ing supervision seems certain to exist. This, tion and possible consolidation of Federal re­ however, does not pose serious problems. The sponsibilities for supervision, examination and disorientation in the system occurs primarily at chartering of financial intermediaries, and for the federal level. regulation of merging and branching.”5 The report of this committee concluded that “prac­ tices of bank supervising and examining agen­ cies in Federal Government have not always Arguments Pro and Con been fully satisfactory in achieving needed co­ Those who favor the system as it now exists operation and coordination.”6 Again, this sec­ present the following arguments in support of ond committee recommended that further study their conclusion that this system is the most be made of the problems with the possibility desirable. that some consolidation of powers might be First, they argue that the present system al­ affected. Every year since that time, bills have lows for the working of a system of checks and been introduced into Congress calling for con­ balances and thus guards against the possible solidation of the commercial bank examination abuses of authority that might result if the su­ and supervisory functions. As a consequence, pervisory and examination function were placed congressional hearings have been held to study in one agency. This fear of concentrated power the problem and during almost every hearing is the primary argument against unification pre­ the weight of the testimony has been for some sented by both the American Bankers Associa­ change in the system. tion and the Independent Bankers Association.8 The first question that arises with respect to This argument is the traditional and well- this problem of change involves the scope of the worn defense for most decentralized systems. change needed. Should the dual banking con­ But when looked at in terms of economic reality cept of state and federal supervision be elimi­ of the 1960s, the argument seems rather shal­ nated, or is it a question of maintaining the dual low. First, the system of checks and balances system as it now exists, but changing the struc­ would still exist even if one of the major pro­ ture of supervision and examination that now posals for unification should be adopted. The exists at the federal level? dual nature of state and federal supervision and examination would be maintained. At the fed- U.S. Congress, Joint Economic Committee, Review of the Report of the Commission on Money and Credit, 7Board of Governors of the Federal Reserve System, 87th Congress, 1st Session (1961). Federal Reserve Bulletin (December 1968), pp. A19- ‘Ibid., Appendix section F, p. 471. A21. Report of the Committee on Financial Institutions to 8U.S. Congress, House of Representatives, Subcommit­ the President of the United States (Washington, D.C., tee on Bank Supervision and Insurance, Consolidation April 1963). of Bank Examining and Supervisory Functions, 89th "Ibid., p. 62. Congress, 1st Session (1965), pp. 159, 181.

Winter 1970 32 Joseph R. Mason

eral level a further system of checks and bal­ from an examination than would be the case j ances is not necessary. In fact, the very nature under one authority. This is difficult to under- ; of some governmental functions dictate the con­ stand. The examiner will be the same person centration of authority in one agency. This working under the same basic conditions in concept of concentration of authority extends either system. After all, the system of operation throughout the entire spectrum of governmen­ itself is complex with the examiner operating at tal organization from the Federal Reserve with one level, quite divorced from the ultimate au­ regard to its primary functions governing the thority. The authority might change, but does money supply through to the unique powers this mean that the mode of operation of exam­ vested in the Internal Revenue Service. In the iners will change? It will remain the same. financial sphere, for example, the Savings and The information to be formed from an exam­ Loan Industry is chartered, supervised, and ination can be ascertained by an examiner un­ examined by the Federal Home Loan Bank and der a unified authority as easily as it is in our has worked successfully down through the present system. Any special information de­ years. sired for one agency can be determined and dis­ The acceptance of inefficiency and confusion seminated. The examiner will still be open to because of the fear of the potential misuse of the intimate and often nonstatistical knowledge authority seems unwarranted. Given such derived from performing his duty. In fact, the abuse, the proper check should be a statute for general dissemination of knowledge from a sin­ legislative change of the same sort that corrects gle source might well be, and in fact would al­ abuse of any authority. most have to be, better than in the dissociated A second argument for maintaining the dual system as it now exists. system is that the present system allows for Finally, those who favor the present system differences in the functions of the various of supervision and examination base their belief agencies. in the present system on the premise that proper The former Chairman of the Federal Reserve cooperation and coordination can make the sys­ Board of Governors, William McChesney Mar­ tin, has said: tem adequate and effective, and that such co­ operation and coordination can be achieved. A Coordinating Committee on Bank Regula­ There is some question whether such provi­ sions (i.e. provisions for one authority) are an tion was established by Secretary of the Treas- adequate substitute for the intimate and often ury, Henry Fowler in July 1965. This committee nonstatistical knowledge of banks and bank­ was composed of the Chairman of the Federal ers, and banking conditions that is presently Reserve Board of Governors, the Comptroller I obtained through the exercise of supervisory responsibilities.® of the Currency, the Chairman of the Federal Deposit Insurance Corporation, and the Chair­ It is hard to discount this argument especially man of the Federal Home Loan Board. There is no evidence that this committee has been or when it is presented by a person such as Chair­ will be successful. man Martin. The very subjective nature of the argument means it cannot be proved or dis­ The claim that cooperation and coordination proved. One can, however, question how the is the key to the problem is not substantiated in intimate nature of the knowledge gained from fact today. Throughout recent years lack of sue- ] the system as it now exists would be changed cessful cooperation and coordination has led to if we move to a single authority. The statement disagreements that pertain to almost every as­ by Chairman Martin leads one to believe that pect of the sphere of commercial banking. the examiner under the present system would Currently a major controversy is centered on be better able to convey the knowledge gained the growth and control of one bank holding 1 companies. These one bank holding companies ®U.S. Congress, House of Representatives, Subcom­ are not subject to control or supervision by any mittee on Bank Supervision and Insurance, Proposed of the federal agencies. The Federal Reserve Federal Banking Commission and Federal Deposit has supervisory authority over multibank hold­ and Savings Insurance Board, 80th Congress, 1st Ses­ ing companies under provisions of the Bank sion (1963), p. 172. Merger Act of 1960 as amended in 1966. No pro-

Montana Business Quarterly Commercial Bank Supervision and Examination 33 vision, however, was made in these acts for the 6. The Federal Reserve does not allow the supervision of one bank holding companies. acquisition of stocks in foreign banks by The former Chairman of the Board of Gov­ commercial banks, while the Comptroller ernors, William McChesney Martin, and Vice of the Currency does. Chairman, J. L. Robertson, have both warned 7. The Federal Deposit Insurance Corporation against the dangers of unrestrained expansion argues that certificates of deposit are not and permissiveness relative to these compa­ insurable while the Comptroller of the nies.10 Comptroller of the Currency, William Currency rules just the opposite. B. Camp, on the other hand, favors such growth. In a speech prepared for the 94th annual con­ These represent only a sampling of the diver­ vention of the American Bankers Association, gency and dissonance that now exists or has Mr. Camp stated: existed in the past. There have been many more, ranging from disagreements on the han­ dling of loans to executive officers and lease Bankers must assert their determination to financing to a dispute on the right of the Fed­ hold the gains that have been achieved and continue the enlargement of their activities as eral Reserve to access to information in the new opportunities appear.11 Comptroller of the Currency. During the past few years, the experience in This controvery is far from settled and repre­ the United States in the sphere of bank super­ sents an instance where there is a lack of uni­ vision certainly has not reflected the degree of formity of opinion and where cooperation and cooperation and coordination necessary for the coordination does not suffice as an answer to smooth functioning of the supervisory and ex­ the problem. amination structure in commercial banking. The following is a partial list of some of the Nor do such cooperation and coordination ap­ other disputes that have occurred. pear likely in an antiquated, complex system that was formed so haphazardly that duplication 1. The Comptroller of the Currency allows of effort and inefficient use of resources have national banks to underwrite revenue bonds inexorably occurred. while the Federal Reserve does not allow state member banks to underwrite them. The fear of concentration is an incongruous argument traditionally used against unification 2. The Comptroller of the Currency treats the in any form. Secondly, under a unified system sale of federal funds differently than the one would expect that intimate and nonstatis- Federal Reserve. For the Comptroller of tical knowledge will still be available and capa­ the Currency such a transaction is not a loan and thus not subject to rules on lend­ ble of being disseminated—perhaps even more ing. The Federal Reserve System treats efficiently than is the case today. Finally, nego­ federal funds as a loan and subject to the tiation, cooperation, and coordination has not limits on lending. worked during the past few years—but even if it did, it would not justify maintaining the pres­ 3. The Comptroller of the Currency defines savings accounts as including corporate ac­ ent system. counts and allows interest to be paid. The The arguments against the present structure Federal Reserve does not. of commercial bank supervision and examina­ tion have now increased to the point where the 4. The Comptroller of the Currency considers weight of opinion accepts the maintenance of undivided profits and reserves as unim­ paired surplus while the Federal Reserve the dual concept, but leans toward unification treats such as capital. of authority at the federal level. The major move for change in the existing 5. For national banks, the issuance of deben­ structure of banking supervision is reflected in tures is allowed and considered capital, while for the Federal Reserve such deben­ two basic themes. Both of these call for the con­ tures are called surplus or capital. * solidation of the supervisory and examination function into one authority. *Business Week, October 5, 1968, p. 127. One plan asks for the establishment of a sepa­ “Ibid., p. 128. rate agency entitled the Federal Banking Com-

Winter 1970 34 Joseph R. Mason

mission. The other plan calls for the consolida­ 1. The Federal Reserve System’s primary tion of the supervisory and examination author­ function is one of guiding monetary policy ity in either the Federal Reserve System or the to achieve the aggregate economic goals of Treasury. full employment with growth, etc. . . . To place the further burden of total authority of bank supervision on it might interfere with the accomplishment of these goals. Consolidation of Authority in the Federal 2. The placing of such authority in the hands of the Federal Reserve might interfere with Reserve System the objective use of supervisory powers. The Joint Economic Committee in its Review of the Report of the Commission on Money and This last argument implies that the Federal Credit in 1961 concluded: Reserve might place priorities on the attain­ ment of aggregate economic goals at the ex­ . .. At the Federal level there should be only pense of objective examination; that the super­ one examining authority for commercial visory and examination powers vested in the banks. The Comptroller of the Currency and Federal Reserve might, at the very least, be his functions and the FDIC should be trans­ used as a tool in the form of moral suasion to ferred to the Federal Reserve System. . . “ affect member banks’ portfolio composition. The arguments in support of this conclusion This implication is very interesting since there are that such a consolidation would: is some precedence of the use of such moral sua­ sion. The most publicized recent case was the 1. End the inefficient system of duplication of attempt in the form of a letter written by the effort and the costs involved in coordina­ Board of Governors to member commercial tion and cooperation. Chairman of the banks in September 1966 in which the Board Board of Governors, Martin, in testimony of Governors used the discount window as a before the Subcommittee on Bank Super­ form of moral suasion.14 vision and Insurance stated: “I can say from personal experience that the present structure does require that considerable time be devoted to liaison, coordination, Consolidation of Authority in the United cooperation, and negotiation between the States Treasury various parts into which the structure is divided.”18 Another course suggested is to vest the au­ 2. It would improve the dissemination of in­ thority to supervise and examine in the United formation within the banking system as a States Treasury. The Washington Post in an whole. editorial on the hearings on bank examination 3. It would establish a set of uniform criteria and supervision held during 1965 noted: applicable to all commercial banks. Long before the principal personalities became 4. It would put an end to the needless disputes locked in a moral bureaucratic conflict, it was and the waste of effort and money involved obvious that the trifurcated system of Federal in such disputes. bank supervision was both dangerously ineffi­ cient and needlessly expensive.18 The arguments against unification in the Fed­ eral Reserve, in addition to those noted earlier, “When member commercial banks exercise their of course, constitute arguments against this or privilege of borrowing from the Federal Reserve such any plan for unification. They are: borrowing is entitled discounting and the act of bor­ rowing is often referred to as using the discount window. The letter dated September 1, 1966, sug­ ^.S. Congress, Joint Economic Committee, Review gested discrimination by the Federal Reserve at the of the Report of the Commission on Money and Credit discount window against those commercial banks 87th Congress, 1st Session (1961), p. 60. that did not cooperate in keeping the rate of business MU.S. Congress, House of Representatives, Subcommit­ loan expansion down. That is, loans or discounts tee on Bank Supervision and Insurance, Proposed would not be made by the Federal Reserve to those Federal Banking Commission and Federal Deposit banks. and Savings Insurance Board, 80th Congress, 1st Ses- ““Supervising the Banks,” Washington Post, editorial session (1963), p. 171. April 1, 1965.

Montana Business Quarterly Commercial Bank Supervision and Examination 35

The editorial recommended unification of au­ of government at the expense of other consider­ thority in the Treasury. ations. In fact, one might argue that in terms Under this plan the functions of Comptroller of priorities for the Treasury, such should be of the Currency would be absorbed in their en­ the case. tirety by the Treasury. The Federal Reserve Finally, this plan is also subject to the argu­ Board of Governors would have no supervisory ments of those who prefer our present system— or examination authority other than the control the fear of concentrated power and the lack of exercised by it over the twelve Federal Reserve intimate knowledge, and so forth. banks. The preceding arguments presented in favor of placing the authority in the Federal Reserve are equally valid with respect to this proposal A Federal Banking Commission (see page 34). In addition, the arguments pre­ The last proposal involving consolidation into viously noted against the vesting of power in one authority is one that Governor J. L. Robert­ the Federal Reserve have been added to the son of the Federal Reserve Board of Governors arguments in support of placing the authority first proposed in 1962. This proposal is for the in the hands of the Treasury. establishment of a Federal Banking Commis­ sion. 1. Such a plan would free the Federal Reserve Under this plan an agency would be estab­ to concentrate on its major goal—national lished for the primary purpose of supervising economic stability. and examining commercial banks. Such an 2. Under Treasury control, authority could be agency would not be subject to the arguments used objectively, without fear that it might used against the previous plans of placing the be used as a tool or moral suasion against authority in the Treasury or the Federal Re­ commercial banks. serve System: that the responsibility would be burdensome or might interfere with other ma­ The fact is, however, that the same reasoning jor responsibilities, or even that it might be used against the plan for vesting the authority used as an instrument of moral suasion. in the Federal Reserve can also be used against The plan, as outlined by Governor Robertson, placing the authority to supervise and examine would call for a structure similar to that now under the Treasury. First, it can be argued that in existence at the Board of Governors. There such an authority would simply add another would be a chairman plus a four-member board burdensome responsibility to an already over­ serving ten-year staggered terms.17 In addition burdened Treasury. Secondly, according to a to some of the same arguments used against uni­ 1965 Congressional Committee Report, “in times fication under either the Federal Reserve or the of stress, the temptation would exist to ease this Treasury, two further arguments have been difficult task [of financing the National Govern­ used against the proposed Federal Banking ment] by enforcing policies, in the supervision Commission. of banks that were calculated to facilitate Gov­ The first is that such an agency might become ernment Finance.”16 dormant and inactive and not function ade­ With regard to this last objection, the exper­ quately.18 The second is that the Federal Bank­ ience of the Federal Reserve in supporting the ing Commission might become “identified or Liberty Bond issues of the First World War and even dominated by the industry it is supervis­ its policy of supporting the Treasury from ing.”19 March 1942 to the “Accord” of March 4, 1951, certainly lends credence to the possibility of 17J. L. Robertson, “Federal Regulation of Banking: A such an occurrence. That is, that the Treasury Plea for Unification,” Law and Contemporary Prob­ might very well place priority on the financing lems (Autumn 1966). ““Supervising the Banks,” Washington Post, editorial, U-S. Congress, House of Representatives, Subcom­ A pril 1, 1965. mittee on Bank Supervision and Insurance, Consoli­ “Report of the Committee on Financial Institutions to dation of Bank Examining and Supervisory Func­ the President of the United States (Washington, D.C., tions, 89th Congress, 1st Session (1965), p. 85. April 1963), p. 58.

Winter 1970 36 Joseph R. Mason

These two arguments, of course, could be lev­ tion and supervision would be taken from the eled at any independent agency, or for that Treasury and the Federal Reserve and the pos­ matter, at the current supervisory agencies as sibility of interference with the proper exercise they exist today. They certainly are not ade­ of the supervisory and examination authority quate as reasons for rejecting this plan. for fiscal or monetary reasons would be less­ ened. The fear that a Federal Banking Commis­ sion may become sluggish or dominated by the very industry it is designed to control is not Conclusion sufficient to force acceptance of the other two The arguments used by those who favor the proposals or to continue the present system as present system of supervision and examination it currently exists. If these arguments against of the commercial banking system do not seem are found acceptable in this situation, then the valid. Of the three proposals for the unification very foundations upon which the structure of of the authority to supervise and examine com­ the Federal Government rests must be sub­ mercial banks, the Federal Banking Commis­ jected to the very same reasoning. sion seems most acceptable. If today no structure for banking supervision The plan for a Federal Banking Commission and examination existed, it is inconceivable that has all of the advantages of the other plans call­ anyone would seriously consider establishing a ing for placing the examination and supervisory structure fashioned after the one that currently functions in either the Federal Reserve or the exists. In all probability, a Federal Banking Treasury. In addition, the burden of examina­ Commission would be created.

Montana Business Quarterly RONALD S. PAUL

The Science Business

Pure and applied research and its support

Introduction field of investigation. Such study includes basic, or pure or fundamental research, and also ap­ The idea that “Science” is a “Business” seems plied research. Applied research may be equal­ repugnant to many individual scientists. To ly as good science as basic research but is moti­ them, “Science” is the seeking of truth and vated by an anticipated need for the desired comprehension about our universe in rational information for some development study. manners. Science is worthy of the most creative Development is the application of research. talents and complete devotion. How can these It brings the findings of research to bear on high commitments be combined, even in a materials, processes, systems, and devices. De­ phrase, with business concepts such as profit velopment is a design and experimentation task and loss, cost effectiveness, management con­ which usually involves a product and is part of trol, or accountability? Perhaps they really the technological cycle. cannot be at the level of the individual, for no Technology is the product of research. Tech­ one can order the making of a scientific dis­ nological expansion and effectiveness are de­ covery, or the elucidation of scientific relation­ pendent on research and development. To­ ships, in the same manner that a manager can gether, they comprise what we call research order the manufacture of some object. Yet, to and development: R&D. segments of our society—university adminis­ The growth of R&D in the modern world trators, business managers, foundation direc­ has been most spectacular in the United States tors, and taxpayers—research and development —and this especially during the last twenty-five based on science has many of the characteristics years after World War II. The U.S. now spends of business. Indeed, in the United States, sci­ 3 percent of its Gross National Product on R&D, ence by many measures is big business. a total other nations can only envy. The devel­ But no one can deny some of the businesslike opment of large hardware projects for the mili­ characteristics of science—the size and the tary and space programs has siphoned off the trends, the sources of financing, the performers, lion’s share of the funding and performance of and the operational methods. R&D; thus we have seen a faster development Research is orderly, intensive study directed of the physical and mathematical sciences and toward extending scientific knowledge in the of electronic, chemical, and aeronautical engi-

r. Ronald S. Paul is Senior Member—Corporate Staff, Battelle Memorial Institute, Seattle, Washington. This article is based on an address presented as part of a lecture series, “Business and Science,” sponsored by the Uni­ versity of Montana’s School of Business Administration on February 12, 1969, and supported by grants from perry and Hutchinson Foundation and Missoula Chamber of Commerce.

Winter 1970 38 Ronald S* Paul

neering. But at the present time the trend in Memorial Institute, the Stanford Research In- 1 emphasis may be shifting more and more to­ stitute, and the Illinois Institute of Technology j ward the life and social sciences. Research. The federal government has been the driving This paper will discuss in detail the history, 1 force in the growth of R&D in the U.S. In 1965, aims, and accomplishments of Battelle—not just 1 about one-third of the total R&D expenditure because the author knows it best, but because I was financed by the private sector, most of that it demonstrates the concept of contract re- ) by industry (and heavily weighted toward the search, a vital new area in the science business, j development of products and processes). Re­ The Battelle Memorial Institute is a testa- j search supported by the universities is gener­ mentary trust created through the Will of Gor- j ally of a fundamental nature. don Battelle, an Ohio industrialist who died in I In the performance of R&D, the federal gov­ 1923. His Will established a self-perpetuating j ernment finances about two-thirds, and does 15 board of trustees who were charged with ere- j percent of the work, while the private sector a ting an institution dedicated to the advance- ^ finances only about one-third and does 85 per­ ment and utilization of science for the benefit cent of the work. Two industries—aerospace of mankind. Gordon Battelle was a practical and electrical machinery and communications— man whose family had made their fortune in accounted for more than half of all the R&D the steel business, so his Will also called for the performed by industry 10 years ago; the vol­ making of inventions and discoveries and their ume of work performed by these industries is movement into the market place. He be­ still growing. Paper, food, and beverage indus­ queathed several million dollars for these pur­ tries are increasing their R&D contributions at poses. a swift pace. The projected monies to be spent The board implemented the Will in the late by industry on R&D suggest that companies 1920s through the creation of the Battelle Me­ plan to get more out of R&D than knowledge, morial Institute as a research laboratory in skill, and experience; therefore one may expect Columbus, Ohio. This initial small laboratory that their emphasis will be more on develop­ engaged in metallurgy, ceramics, and general ment and technology than on fundamental sci­ materials sciences research. entific research. The Institute was not an industrial enterprise, The R&D performed by government is done nor was it an orthodox academic institution; yet in mission-oriented laboratories like the Bureau it was closely linked with both industry and of Standards, NASA, the Atomic Energy Com­ education. It was founded by a profit-conscious mission laboratories such as Argonne, Oak industrialist, but it was chartered on a not-for- Ridge, Brookhaven, Los Alamos, Livermore, and profit basis. Its purpose was altruistic, but it at Berkeley. was not a charity. Universities perform R&D within the frame­ In the words of Gordon Battelle, the founder, work of their academic programs and as oper­ the Institute was to be established for “the en­ ators of Federal Contract Research Centers such couragement of creative research . . . and the as the Lincoln Laboratory associated with M.I.T. making of discoveries and inventions.” These Many universities are upping their emphasis on simple words are straightforward and to the R&D by hiring business and market-oriented point, and yet almost naive in their implied specialists to manage the funding and perform­ faith in the idea that creative research and the ance; the money available from various sources making of discoveries and inventions was a has created a new breed of science businessmen. good thing for humanity. But the fact remains All of these areas and much of the statistics that he could hardly have conceived of a more of R&D financing and performance are well- useful and timely concept than an institute for known. But one interesting area deserves atten­ research in science and its application. tion. The remaining 3 to 4 percent of the total During the early 1930s, the young Institute national R&D that is not performed by industry, pioneered the concept of contract research. Bat­ government, or the universities is done by a telle assembled expert scientists and technolo- J variety of nonprofit or not-for-profit organiza­ gists, laboratory facilities and equipment and tions. The 3 largest of these are the Battelle then contracted with industry to p erform re-

Montana Business Quarterly The Science Business 39 search. This research was applied toward the the Atomic Energy Commission’s large labora­ development of new products and processes and tory at Richland, Washington. This laboratory the solution of manufacturing problems. How­ had been developed by the General Electric ever, even though the research was often highly Company, as a contractor to the AEC, to a staff applied, its conduct was based on having staff of 1,900 largely engaged in research on peaceful members expert in the fundamentals of the applications of atomic energy. The transfer re­ relevant sciences. The industrial sponsors re­ sulted from a GE-AEC agreement to segment ceived research of a quality they could not af­ and diversify the large Hanford plant to lessen ford to provide for themselves through building the economic impact on the community due to and staffing laboratories. Battelle, in turn, was substantial reductions in the weapons materials better able to further the purposes of the Will production parts of the plant. through the multiplier effect of financing by Battelle-Northwest, as the new laboratory is sponsors. The sponsors paid the costs of re­ named, assumed a 5-year contract to operate search performed for them and a fee. But since the AEC’s Pacific Northwest laboratory for an the Institute was established on a not-for-profit annually-negotiated fee. But in addition to the basis, all earnings through fees had to be rein­ Operating Contract, Battelle also obtained a vested to carry out the purposes of the Will. pioneering Use Permit Contract. This allows Thus, they extended the capacity for growth in Battelle to use the AEC equipment and facilities staff, equipment, and buildings. The contract and the staff to do research for others as long research system became established and began as it does not interfere with conduct of the AEC to be adopted by others. research programs. The AEC is reimbursed for Then came World War II and the onset of the the costs of these uses. Battelle, for its part, has ultimate dominant role of the government in made and is making substantial investments of R&D. The talents of BMI were quickly called its private funds in new facilities and in the upon for research on materials problems for development of new capabilities for research. atomic energy and other military programs. Together, this business partnership has resulted The laboratory at Columbus grew rapidly dur­ in the growth of Battelle-Northwest from 1,900 ing these years and developed an attitude of to over 2,900 staff members in 4 years. The partnership with the government for solving level of nonAEC R&D, for industry and other national problems. Since the war, the Colum­ government agencies, has already reached about bus laboratory has continued to grow to its $5 million per year. present size of nearly 3,000 staff members. It This experience, in my opinion, is the best also has continued to be a major performer of example in the country of how to spin off tech­ R&D for the government. About 60 percent of nology developed in one field to useful appli­ the present research support derives from fed­ cations in other fields. Here, the scientist and eral agencies, the balance coming from industry engineer who have expert knowledge in atomic and internal funds. Sixty percent is just a little energy can personally apply his know-how to less than the federal share of support for the problems in new fields—in the food processing, total national R&D effort. or aerospace, or forest products industry, for In the early 1950s, the vision of the Battelle example. This is technology transfer at its high­ Will was extended to Europe; and laboratories est efficiency unhampered by intermediaries. were established at Frankfurt, Germany and In less than 40 years the handful of origi­ Geneva, Switzerland. Both have prospered and nal Battelle researchers has grown to over 7,000 both are completely staffed by Europeans. Bat- staff scientists and engineers in 4 large lab­ telle-Frankfurt has about 800 staff members and oratories. And the growth is continuing. Each does R&D, mostly applied in nature, for indus­ laboratory is largely autonomous under the try and the West German government. Battelle- management of a director. The organizations Geneva has about 500 staff members and does are designed to meet the local needs and are research strongly scientific in character, ex­ continually evolving as the research oppor­ clusively for industry. tunities and the available talents change. At Four years ago Battelle took another large the lower levels in the organization are the step in growth by assuming responsibility for truly technical managers; at the higher levels

Winter 1970 40 Ronald S. Paul

are managers of technical activities. This is a proved fungicides, protein enhancement of food, J distinction with a real difference. The former photochemical processes, textile machinery, flu- 1 personally provide technical inputs and leader­ idized bed cooking, and metallic fibers. ship for the R&D. The latter are primarily con­ BDC currently licenses developments involv- J cerned with establishing and building the re­ ing metal finishing, fluidized bed cooking, a tur- 1 sources and environment needed for productive bine speed pump, stabilized acid dairy products, j high-quality research. The technical staff re­ rhenium alloys, leather water-proofing com- I ceives essential support from nontechnical staff pounds, roll-bonding of metals, and a typewrit- j and managers for the business, personnel, and ing teaching aid, to mention a few. Some thirty- 1 legal functions. Good business practices are as five inventions were under license in 1967. necessary as they are in any other large enter­ In contrast with BDC’s early years, when I prise. The difference is that the product is the most of the inventions it evaluated came from 1 brainpower of the staff. within the Battelle staff, the Corporation now j The true social value of scientific research is considers inventions from diverse sources. In often determined by industry’s ability to apply 1967, BDC evaluated more than 1,000 inventions it in the creation of new products and processes. from the Battelle staff, from independent in­ Battelle has a vital interest in the use of science ventors, and from those with academic, govern­ to enhance industrial productivity and economic mental, or industrial affiliations. growth. To further the development of inventions This interest manifests itself in the activities from the academic community, the Corporation of 2 Institute subsidiary organizations that has invention-development agreements with a were purposely established to nurture promis­ number of universities and university affiliates, ing research and advance it to a stage where it here and abroad. becomes a reasonable venture for private indus­ Now in its sixth year of operation, Scientific try. The subsidiaries, with combined research Advances, Inc. provides a means for demon- I expenditures of $2,000,000 in 1967 are The Bat­ strating the manufacture and marketing, on a telle Development Corporation and Scientific profit basis, of products stemming from bona Advances, Inc. fide scientific innovation. The first product it Chartered as a not-for-profit organization in manufactured—and still one of its most impor­ 1935, The Battelle Development Corporation tant ones—was a subminiature absolute-pres­ plays an important role in the identification of sure transducer. Developed originally as a spe­ inventions, and in their development to a useful cialized research device, it has been applied in state through scientific research. Once carried a variety of engineering and medical areas. to this state, the Corporation seeks a contrac­ More recently, SAI has devoted considerable tual relationship with industry that permits the effort to the development of other products most effective public use of new technology. As suitable for manufacture by the company or by a matter of policy, BDC grants nonexclusive li­ other organizations in which it has an interest. censes to all qualified licensees. Further re­ These include a strain-sensing material, port­ search is supported by royalty fees derived from able audio-visual training device, corrosion re­ such licenses. sistant paint, drop weight tear testing machine, One notable example of the beneficial results high pressure couplings for aerospace use, eddy of BDC’s imaginative approach to industrial current testing device, test grading machines, I development is xerography—the electrostatic lead frames for integrated circuits, and leather dry-copying process. Stemming from the pio­ water-proofing compounds. SAI has manufac­ neering work of an independent inventor, this turing facilities in Columbus, Ohio; Richland, process was nurtured and developed through Washington; Archamps, France; and Lindau, research by BDC to a point where its technical Germany. feasibility was established. Xerography has Fundamental research and education are the since had a revolutionary effect on copying surest guarantees of a continuing source of equipment available to the public. scientific knowledge to serve the needs of so- 1 During 1968, the Corporation’s research pro­ ciety, and, traditionally, these have received gram included studies directed toward im­ Battelle’s support. Consistent with its broad-

Montana Business Quarterly The Science Business 41 ened goals, the Institute has placed new em­ ies totaling $1,400,000 in 1967. During the year, phasis on these areas in recent years. they also sponsored or cosponsored some 20 An Institute-wide program strengthens Bat- seminars, symposia, and conferences of an edu­ telle’s role in fundamental research and in edu­ cational nature. These meetings were on a cation. This program is complemented by the broad range of subjects—covering, for example, in-house efforts of each of the Battelle labora­ polymere characterization, mechanical behavior tories. The Institute program accounted for 1967 of solids, and diagnosis and treatment of de­ expenditures in excess of $1,900,000. This was posited radionuclides. used in support of studies carried out by scien­ In less than four decades, Battelle Memorial tists in specially designated centers for funda­ Institute has grown from an idea in the minds mental research at Columbus, Geneva, and Se­ of a few dedicated men to a large, international attle, as well as by scientists assigned to the organization that has assumed a leadership role various laboratories engaged in contract re­ in scientific research, education, and industrial search. Much of this effort focused on high development. Its interests are much broader mathematics and chemical physics. than they were when the Institute was first A year and a half ago an advanced studies, established—much broader probably than the seminar and conference center was established founder or the early builders of Battelle could at Seattle, on a small attractive campus near have envisioned. Yet they are consistent with the University of Washington. In the main re­ the intent of those men and with the living phi­ search building there are thirty offices for a losophy of the organization—to serve the needs small permanent research staff and for visiting of mankind through science. Over the years, researchers in many fields and from many the world has changed, and the Institute has places. There are also seminar and conference grown and diversified in response to change, rooms, a lecture hall, and a library. Small meet­ but the Battelle ideal remains. The unfinished ings and major colloquia are initiated and held story of the Institute is the chronicle of an idea here by Battelle. in evolution. The program also supports professorships and It’s also an encapsulation of the Science Busi­ fellowships at universities in close proximity to ness. Within it we find the spectrum of indi­ Battelle research centers. These have contrib­ viduals runs from the scientist obsessed with uted to the development of the local scientific the desire to comprehend some phenomenon of communities with which the Institute interacts. nature to the technologist seeking to improve The Institute maintains the Battelle Distin­ the profit margin of some industry. We find guished Professorship in Mathematics and the both the servant of the government and the Battelle Distinguished Professorship in Physics, shaper of government policies—the recruiter of both at the University of Washington, and the the new college graduate and the influencer of Battelle Chair of Metallurgy at The Ohio State the education system itself. We see the prob­ University. lems of marketing, finance, contracting, and Each of the Battelle laboratories engaged in delivery. And all of this is embedded in the contract research is also encouraged to exercise adventure of tapping man’s mind—with the leadership in fundamental research and in the conviction that modern man’s material welfare field of education. Collectively, the 4 labora­ can, and should be improved by science and tories funded and carried out fundamental stud­ technology.

Winter 1970 Index of Quarterly

Vol. 1, No. 1, Fall 1962 (Out of Print) Vol. 2, No. 2, Spring 1964 Planning Your Marketing Program ___ Glenn R. Barth Wanted: More Students______... Donald J. Emblen The Montana Economy Montana and Its State in Perspective______P aul B. Blomgren Parks— _____------Lawrence C. Merriam, Jr. Our Business Indicators______Maxine C. Johnson A Look at Competitive Bidding___Norman E. Taylor Some Reflections A Political Scientist Looks on Personal Income...... Maxine C. Johnson at Communism ...... Harvey G. Kebschull The Dilemma of the American Economic Conservative...... Richard E. Shannon Vol. 2, No. 3, Summer 1964 The Impact of Federal Govern­ Vol. 1, No. 2, Winter 1963 ment Expenditure Programs on The Business Outlook______..Maxine C. Johnson Montana’s Economy______Maxine C. Johnson Trees and Communication___ _ Norman E. Taylor Legal Considerations for Corpora­ Keep Your Checkbook Under tions Operating Outside Lock and Key at All Times. Fred A. Henningsen Their Home State______George L. Mitchell Problems of Economic Growth The Business Outlook______.. Maxine C. Johnson in M ontana______. Maxine C. Johnson A Sociologist Looks at Communism______Gordon Browder Vol. 1, No. 3, Spring 1963 Ramblings Through Brazil...... Jack J. Kempner Vol. 2, No. 4, Fall 1964 Three Management Attitudes...... Glenn R. Barth Education: Investment in Agricultural Depopulation in Eight Human Capital______Roy E. Huffman Montana Counties...... Gordon Browder The Civil Rights Act of 1964______Thomas Payne Montana’s Commercial and The Cash Flow M yth______Donald J. Emblen Residential Construction Communism: A Broad View______Melvin C. Wren Industries------Robert C. Haring Don’t Let ’em Get Away...... Melvin C. Wren

Vol. 1, No. 4, Summer 1963 Vol. 3, No. 1, Winter 1965 Educational Opportunities in the The Business Outlook______Maxine C. Johnson Forty-First State...... Frank C. Abbott Bank Notes and the Federal Reserve___ Gene L. Erion Bankruptcy Causes and Bankground and Priorities for Remedies—-Part I— ...... Norman E. Taylor Legislative Reapportionment Bankruptcy Causes and in Montana Remedies—Part II ------George L. Mitchell What Everybody Wants to Know I. Introduction and About Deficit Spending...... Robert F. Wallace Summary...... Ellis L. Waldron II. How the Montana Vol. 1, No. 5, Fall 1963 Legislative Assembly Became Malapportioned. Ellis L. Waldron A Historian Looks at Communism ..... Vernon F. Snow III. Statistical Measures Real Estate Financing of Apportionment—...... Ellis L. Waldron in Montana...... Robert C. Haring Speaking of Figures.—...... Maxine C. Johnson IV. Effects of Malappor­ Legislative Apportionment tionment in the in M ontana------Douglas C. Chaffey Montana Legislative Assembly------Douglas C. Chaffey V. The Political Effects Vol. 2, No. 1, Winter 1964 of an Equitable The Essence of a University...... Paul B. Blomgren Apportionment...... Howard E. Reinhardt Labor’s Stake in Economic VI. The Constitutional G row th...... —--- Richard E. Shannon Obligation to The Business Outlook------Maxine C. Johnson Reapportion------Ellis L. Waldron This Business of Agriculture...... Paul B. Blomgren VII. What Kind of An Economist Views Legislature?------Ellis L. Waldron Communism------Jam es R. Leonard VIII. Getting the Job Done...... Ellis L. Waldron

Montana Business Quarterly Index of Quarterly 43

Vol. 3, No. 2, S p rin g 1965 Vol. 4, No. 3, Summer 1966 Living With Change...... - Norman E. Taylor History and Development of the Some Considerations in Planning Forest Products Industry for Outdoor Recreation in Montana______Arnold W. Bolle in Montana______L. C. Merriam, Jr. A Comparison of Taxes: Montana, and M. B. Price the National Averages and the The Nature of Retail Sales Taxation._John H. Wicks Regional Averages...... —...... John H. Wicks Poverty in Montana...... Maxine C. Johnson Impact of Recent Births and Birth Outlook for Coal: Montana’s Rates on Future Elementary and Unexploited Resource______Arnold Silverman Secondary School Enrollment------William D. Diehl The Business Outlook______-Maxine C. Johnson The University of Montana Busi­ Vol. 3, No. 3, Summer 1965 ness Student—His Employment The Uniform Commercial Code Acceptance Pattern and Attitudes Updates Montana’s Sales Law___ George L. Mitchell Toward Employment What Price Progress?______Norman E. Taylor Opportunities______Lawrence J. Hunt The Business Outlook______Maxine C.Johnson and Thomas G. Armour Myths and Misconceptions About Montana’s State Vol. 4, No. 4, Fall 1966 and Local Taxes...... John H. Wicks Reapportionment and Political What’s Happening in Partisanship in the 1966 Retail Trade?______Maxine C. Johnson Montana Legislative Elections_____ Ellis L. Waldron Who Pays the Taxes in Montana?...... John H. Wicks Vol. 3, No. 4, Fall 1965 Meeting Future Revenue Needs in Montana...... Maurice C. Taylor Business Simulation—A Technique The Case for the Montana Tax for Updating Management______Lawrence J. Hunt Study Recommendations______John H. Wicks and Walter L. Brown, Jr. Montana’s Recreation Challenge ...... Elizabeth Hannum Evolution of Generally Accepted Some Economic Aspects of Accounting Principles______Jack J. Kempner Controlled Burning...... Norman E. Taylor Taxpayer Compliance Costs from The Montana Personal Income Tax______John H. Wicks Vol. 5, No. 1, Winter 1967 Of Truck Drivers and The Arts and Business...... —.....Charles W. Bolen Vice Presidents------Maxine C. Johnson The Business Outlook______Maxine C. Johnson It’s a New Sales World...... Lawrence G. Hunt City People and Farm Cooperatives...... Glenn R. Barth Vol. 4, No. 1, Winter 1966 (Out of Print) The Burden Distribution of The Long-Run Economic Outlook Certain Montana and for Montana------James L. AtheamFederal Taxes...... ~...... John H. Wicks The Outlook for 1966------...Maxine C. Johnson and Brian G. Johnson Why Land-Use Planning? Part I...... Wilson F. Clark Why Land-Use Planning? Part II__ Norman E. Taylor Vol. 5, No. 2, Spring 1967 Business Ethics: A Problem for Society— ------Lawrence J. Hunt Risk Management______James L. Atheam Outdoor Recreation and the Does the Small Businessman Private Sector in Montana...... L. C. Merriam, Jr. Need More Accounting and A Primer on State and Local Financial Information?...... Hubert R. Breuninger and Dwight M. Edmonds Taxation ------John H. Wicks Inequity in Income Taxation: Unequal Treatment of Equals------..John H. Wicks Vol. 4, No. 2, S pring 1966 The Montana Economy— Retrospect and Prospect...... Maurice C. Taylor Montana’s 1966 Legislative Apportionment Amendment...... Ellis L. Waldron A Comparison of Expenditures: Vol. 5, No. 3, Summer 1967 Montana, the National State Using Montana Water for Averages and the Regional Averages....John H. Wicks Economic Growth: Prob­ The Income Statement— lems and Prospects...... Chennat Gopalakrishnan How Useful?------Donald J. Emblen The Business Outlook______William D. Diehl A Basis for Productive Advertising Profit Planning for the Small and Sales Promotion...... Lawrence J. Hunt Businessman______Dwight M. Edmonds Are Montanans Bankruptcy and Hubert R. Breuninger Prone?...... — ...... Robert A. Watne How Good Are Our Schools?-...... Maxine C. Johnson

Winter 1970 44 Index of Quarterly

Vol. 5, No. 4, Fall 1967 Revenue Potential of the State Montana in Transition______Maurice C. Taylor Income Tax and a What’s Happening in Montana’s State Sales Tax______Samuel B. Chase, Jr., 1 Population and Labor Force_____ William D. Diehl William D. Diehl, and § How Effectively Are We Using Peter Formuzis, Jr. ? Our Technology?------Patricia P. Bragg Management as a Profession______Hugh Com Vol. 7, Nos. 1 & 2, Winter/Spring 1969 Fifty Years of Progress------Donald J. Emblen I Vol. 6, No. 1, Winter 1968 and George J. Brabb 1 Perspectives on Planning The Challenge of Today’s in M ontana------David K. Hartley Stock Market------.Patricia P. Douglas j The Tourist Industry: Some Automotive Liability—A Review______Laurel E. Pease j Second Thoughts------Maxine C. Johnson and Patricia P. Douglas I United States Leadership and The Mythology of Community J World Trade------Glenn R. Barth Development------..... Hugh D. Galusha, Jr. I Technological Change: Its Utilization of Montana’s Junked Impact on Montana.-______Patricia P. Bragg Automobiles: An Economic Analysis------Glenn R. Barth 1 and H. J. Schnell 1 Vol. 6, No. 2, Spring 1968 Inventory Controls------.. Patricia P. Bragg Vol. 7, No. 3, Summer 1969 An Economic View of the Draft___Maurice C. Taylor Growth of An Export Market: From the Director’s Desk------William D. Diehl The Inverse Rate Structure Montana and the PLOWSHARE and Hard Spring Wheat------Maxine C. Johnson Program—Benefits vs. Risks...... Meyer Chessin A Review of a New Boom in M arketing------.Rauf A. Khan Vol. 6, No. 3, Summer 1968 and Patricia P. Douglas Air Pollution—Montana Style.... -C larence C. Gordon Party Structure and the Inside the Computer.-...... Jack J. Kempner Nominating Process------Thomas Payne The Insurance Investor— Research and Development: The Forgotten Party-----Patricia P. (Bragg) Douglas Social Utility and Public Policy... Raymond G. Hunt Population Estimates for Montana Counties

Vol. 6, No. 4, Fall 1968 Vol. 7, No. 4, Autumn 1969 The Status of Library Development in Montana...... Earle C. Thompson From the Director’s Desk------Hugh D. Galusha, Jr. Trust Services of Commercial Banks Edward K. Gill The Truth About Truth-In-Lending___ Rauf A. Khan A Case for Raising Montana’s and Patricia P. Douglas Accounting Standards------Jack J. Kempner Changing the Guard------Thomas Payne Montana’s Commercial Fish______Glenn R. Barth _ and Gary F. Demaree Technology, Change, and the Computers in Montana...... George J. Brabb Learning Process------Robert D. Shriner

Montana Business Quarterly

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