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FEDERAL RESERVE BANK OF CHICAGO *»**»* p i ' • * * t t u n itevlH Jp | ^ 4 %* * * %':^iM i l 1 - M 1 ♦ « Ki * 1 To the M em ber Banks of the Seventh Federal Reserve District: I am pleased to present to you the Annual Report of the Federal Reserve Bank of Chicago for the year 1964. The past year has been characterized by further improvement in economic activ ity and continued growth of banking. Some of the more significant developments are described briefly at the beginning of this report. Following the review of 1964, we present a discussion of the steel industry, which produces the key material upon which much of Midwest industrial activity is based. Official appointments, elections and resignations during the year are reported on page 36. The volume of transactions in a number of the Bank’s departments has continued to rise as business activity in the District has risen further (pages 32 and 33). On behalf of the directors, officers and staff, I extend to you appreciation for your cooperation and counsel. Such guidance and assistance have helped us to discharge more effectively our responsibilities to the financial community, business and the general public. Sincerely, uudOO*,a \xk aa ■ January 14, 1965 Economic Developments iN ^ineteen hundred and sixty-four was in most re spects a “good year”— fourth in a row. The ex the pansion that began in early 1961 continued during the year without interruption. Most major sectors of the economy experienced vigorous demand for their products or services. Employment rose and prices con tinued quite stable except for some metals which rose sharply as demand increased, and supplies were re stricted by labor and political unrest in producing areas abroad. The dem and for durable goods was especially strong. Business firms boosted their spending for new plant and equipment about 14 per cent and consumers upped their purchases of autos and household dur ables about 11 per cent during the year. These devel opments were favorable for the Seventh Federal Re serve District where production of durable goods ranks high among all activities. Because of the strong demand for producer and household durable goods, industrial production in the Seventh District rose more than the 6 per cent increase in the nation. The largest gain in output was in iron and steel, up 16 per cent compared with 1963 and well above output in the previous peak year, 1955. Prices fo r some basic m aterials rose sharply late in the y e a r per cent, 1957-59=100 2 Annual Report, 1964 Production of machinery and business equipment in creased about 8 to 9 per cent. The high level of demand for steel toward year-end reflected, in addition to the increase in industrial ac tivity, efforts by many firms to stockpile steel. Inven tories were being increased in anticipation of a pos sible steel workers’ strike by mid-1965 and as a hedge against possible steel price increases. Prior to the strikes at General Motors and Ford in October and November, production of autos had been 8 per cent above the year-earlier volume. Employment and income in the District were adversely affected since almost two-thirds of the United States auto em ployment is concentrated in this region. In December, however, auto production was at a record high to ac commodate customers’ orders and rebuild dealers’ in ventories. Sales of domestic cars in calendar 1964, even in the face of the strike, were estimated to pass 7.5 million and set a new record. This volume would exceed 1963 sales by about 3 per cent and sales in the previous peak year, 1955, by about 2 per cent. Major producers of machinery and equipment in the District continued to report that plant capacity was adequate to handle additional orders. Skilled la bor, however, was in short supply in many areas at year-end and backlogs of unfilled orders continued to rise. Midwestern producers of nondurable goods, such as paper, manufactured foods and chemicals, expe rienced strong demand throughout 1964 and were generally able to fill orders promptly. The rising level of economic activity led to moderate increases in employment and a further reduction in unemployment in most areas. Throughout 1964 the level of unemployment in all Seventh District states was substantially below the national average. At yearend only 1 of the 23 major labor market areas in the District, South Bend, reported a “substantial labor surplus,” with unemployment in excess of 6 per cent. Nearly one-fifth of the 150 centers nationally were classified as having substantial labor surplus. Unemployment continues to be a serious problem among the unskilled workers, particularly those with Housing permit a c tiv ity was strong in D etroit and M ilw aukee areas in 1964 per cent change -30 -2 0 _______ -10________ 0________ +10 1 T I I l------- 1 --------1 ------- 1 ------- 1 I *2 0 I ^ +30 I D e tro it Chicago M ilw a u k e e In d ia n a p o lis Seventh D is tric t United S ta te s * 9 months a minimum amount of education and young people with little or no previous employment experience. These encounter difficulty in qualifying for job open ings. Residential construction in the District drifted downward during most of the year along with a similar trend in the nation. Until early 1964, nonfarm residential construction activity across the country had outpaced the growth rate of the overall economy in the current expansion. Expenditures on homebuilding in the nation, aided by favorable weather, had been at a record rate in the first quarter of the year and by the fourth quarter were down about 5 per cent. However, the decline in residential construction was not ex pected to gain momentum since it was occurring within a framework of stable vacancy rates, rising rents and ready availability of mortgage credit at stable or de clining interest rates. of production, particularly of livestock, depressed prices somewhat. Farmers’ receipts from marketings, therefore, declined from the record year-earlier level. Substantially larger Government payments were re ceived by District farmers under the feed grain and wheat programs but rising production costs resulted in lower net farm income than in the preceding year. Livestock farmers bore much of the brunt of lower prices. Cattle prices were severely depressed during the first half of 1964, averaging $2 to $4 below the relatively low year-earlier levels. As a consequence, many farmers incurred substantial losses from their feeding operations. Hog prices, too, were lower dur ing much of the year and producers’ net returns were below 1963 levels. Corn and soybean prices averaged slightly higher during most of 1964, reflecting the continued strong domestic and foreign demand for these commodities. Wheat prices, however, dropped sharply at midyear but the effects were offset, in part, by the marketing certificates issued under the new wheat program which boosted Government payments substantially. Unfavorable weather conditions during the critical growing stages reduced the production of field crops in 1964 from the previous year’s record total. Corn production in the District states dropped about 10 per cent below the exceptionally high level in 1963 but was still above the average of the past five years. Produc tion of soybeans was about 5 per cent below 1963. Farmers’ income from nonfarm earnings rose some what as the demand for labor in manufacturing, con struction and other nonfarm activities rose further and increased the availability of both part-time and full time jobs to farmers and members of their families. Livestock prices averaged low er during much o f 1964 dollars per hundred pounds at Chicago A g ricu ltu ral prices decline The farm sector did not share fully in the economic expansion during 1964. Although demand for agricul tural commodities was at a high level, the large volume Federal Reserve Bank of Chicago 3 The number of small and inefficient farm units capa ble of providing only low levels of farm income has continued to decline. Farmland prices in the District advanced further during 1964 and at the end of the third quarter were about 4 per cent above the previous year. The demand for farmland has remained strong as individual farmers have continued to seek additional land to add to their present units and improve their efficiency. Agricultural loans outstanding at District member banks rose again. At midyear, loans secured by farm real estate were up 13 per cent from 1963, matching the increase in the preceding 12 months. Non-real es tate loans showed somewhat smaller gains, up 5 per cent from a year earlier. Also, the increase was smaller than in the 1962-63 period. A larger volume of non-real estate loans were re newed as they matured in the first half of 1964, pri marily reflecting the small profits or actual losses from cattle marketed during that period. This situation had improved greatly by year-end with renewals and ex tensions of maturing agricultural loans again near normal levels. Farm mortgage debt, although rising substantially during the past few years, appeared not to be cumber some to borrowers. Mortgage loan delinquencies and foreclosures remained at low levels with repayments on mortgage loans continuing above the scheduled amounts during 1964. Deposits at country banks continued to show steady gains. During the latter part of the year, smaller credit demand to finance purchases of feeder cattle eased the upward pressure on loan-deposit ratios in some areas. B an k credit and deposits As business activity advanced, member bank loans continued to expand rapidly although at somewhat less than the record pace in 1963. At the end of No vember total loans and discounts of Seventh District member banks were 12 per cent above the year-earlier level compared with a 15 per cent gain in the previous year. Under a continued stimulative monetary policy, total reserves of the banking system rose faster than in 1963, and deposit growth at District banks was suf ficient to enable the banks to meet loan demand with out reducing investments. Holdings of U. S. Govern ment securities showed little change, while portfolios of municipal and Government agency issues were ex panded substantially for the third consecutive year. Total bank credit— loans plus investments— was up 9 per cent, slightly more than in the previous year. The demand for loans was strong throughout the District (except in the major cattle feeding areas in the 4 Annual Report, 1964 fall). Relative to the 1963 experience, weekly report ing banks showed a slightly slower growth in commer cial and industrial loans, while loans with real estate as collateral rose at about the same rate and credit to individuals climbed 15 per cent— twice as fast as in the previous year. The slower overall loan growth re flected smaller increases in credits to securities dealers and finance companies, mainly at the large Chicago banks. Preliminary data indicate that banks outside the major cities had larger gains in their lending to both businesses and individuals in 1964 than in 1963. Fewer banks reduced their holdings of U. S. Gov ernment securities compared with 1963. The largest reductions were in areas where banks substantially in creased their holdings of tax-exempt issues. The aver age m aturity of U. S. G overnm ent portfolios was shortened markedly during the year. Holdings of in termediate and long-term issues by the weekly report ing banks declined nearly 15 per cent, reflecting sales, the passage of time and the greater proportion of short term issues offered in Treasury financings. These de clines were offset by the rise in holdings of shortmaturity Governments. Member banks in Indianapolis reported the largest gains in both loans and securities. Total deposits of these banks rose almost 15 per cent after the Indiana state banking authorities lifted the time deposit inter est rate ceilings in line with those made applicable to other states when Regulation Q was amended two years earlier. Time deposits rose 40 per cent in In- Crop output in District fe ll below record ye a r-e a rlie r level dianapolis and 16 per cent at other Indiana member banks. In other areas deposit growth was again mainly in the time accounts although the rate of growth was somewhat slower than in the preceding two years. A number of large District banks continued to acquire funds through the issue of negotiable time certificates of deposit. Outstanding certificates of weekly report ing banks rose more than one-third and accounted for nearly 40 per cent of the growth in total time and sav ings deposits at these banks. Demand deposits were up only 5 per cent, but this was the largest gain since 1958. Some commercial banks have sought out new sources of funds in order to serve more adequately the financial needs of their customers. In addition to the more widespread issuance of negotiable time certif icates of deposit— now outstanding in an amount ex ceeding 13 billion dollars at the nation’s larger banks— a number of banks raised funds by the issue of unse cured promissory notes. These, typically, have matur ities roughly comparable to CDs and have been issued at roughly comparable rates. These obligations, how ever, are not subject to reserve requirements or deposit insurance assessments, as are CDs, but they are sub ject to the applicable borrowing limits. Some further use was made of another innovation begun in 1963 after a permissive ruling by the Comptroller of the Currency— that of raising capital funds through the sale of long-term debentures. The total amount of funds raised through the sale of notes and debentures during the past two years is estimated at roughly 1 billion dollars. Individual banks, moreover, apparently have in creased their efforts to acquire funds for short-term liquid loans and investments by regular day-to-day borrowings from other banks. By paying rates for Federal funds competitive with other short-term yields, even though at times above the discount rate, some banks were able to use the Federal funds market fairly continuously. These have been important avenues of commercial bank growth, but their use has not been completely free of difficulties. Smaller banks, because of the pre mium they must pay on their obligations, have been hard pressed to retain corporate time deposits on occa sions when rates paid by the nation’s large money mar ket banks have approached the maximum specified in Regulation Q. Also, the high interest cost of time and savings deposits and of subordinated obligations has been a strong inducement for banks to channel funds into assets with relatively high yields and, presum ably, greater risk. In general, the funds thus acquired Loan demand accom m odated w ithout liq u id a tio n o f securities at District member banks billion dollars were invested in sound assets with investment yields sufficient to cover their costs (largely tax-exempt se curities and mortgages). A growing cause of concern on the part of super visory authorities, however, was the deterioration in the quality of assets which led to the closing of a few banks in the course of the year. The banks forced to liquidate were widely scattered geographically over the nation. The most common cause of failure was losses incurred on high-risk, high-interest loans either in connection with, or as a result of, policies adopted by changed ownership and management of the banks. In a number of instances these were banks that had achieved rapid growth of deposits through the sale of negotiable certificates of deposit, sometimes at costs involving not only high contract rates but brokerage fees as well. Most smaller banks continued to gain deposits by attracting savings. Not all banks have boosted interest rates paid on savings deposits to the same degree. Rela tively low rates are common in the rural areas of Dis trict states. At the beginning of the fourth quarter, the average rate paid on savings was less than 3 per cent in both Iowa and Wisconsin outside the major metro- Federal Reserve Bank of Chicago 5 politan areas in these states. Except in Indiana, this average changed very little during the past year. Most of the rural banks, however, offer higher rates on time certificates and this type of deposit has been rising in relative importance. Additional flexibility as to rates paid on time and savings deposits was provided in November when Reg ulation Q was further amended to raise maximum rates payable as follows: from 4 to 4.5 per cent on time deposits maturing in 90 days or more, from 1 to 4 per cent on those maturing in 30 to 90 days, and from 3.5 to 4 per cent on savings deposits of less than one year. Before the end of the year a number of the large Chi- Changes in m ajor assets a t D istrict mem ber banks per cent change 0 +20 -2 0 0 +20 -2 0 0 -t-20 Chicago other Illinois Indianapolis other Indiona Des Moines other Iowa Detroit other Michigan Milwaukee other Wisconsin loans 6 U.S. Government securities Annual Report, 1964 other securities +40 +60 cago banks announced they would pay 4 per cent on all savings deposits, effective January 1. The action raising Regulation Q ceilings was taken concurrent with an increase in the discount rate on member bank borrowings in the Seventh District and four other Federal Reserve districts (followed shortly by similar boosts in other districts). The change in the discount rate from 3.5 to 4 per cent, like the pre vious half percentage point boost in July 1963, was mainly to protect the United States balance of pay ments position by reducing the differential between short-term interest rates here and those abroad. It was precipitated by the boost from 5 per cent to 7 per cent in the British bank rate. The volume of member bank borrowings at the discount window, both in the Dis trict and for the United States as a whole, averaged somewhat higher in 1964 than in 1963. Reflecting the policy of the monetary authorities to accommodate the credit demands associated with an expanding economy, yields on securities and other in terest rates remained quite stable throughout most of the year. The three-month Treasury bill rate (weekly average) fluctuated by not more than 10 basis points above or below the discount rate until late November. Yield averages on long-term U. S. Government secur ities and state and municipal issues were both at their lows for the year in mid-November. Yields on sea soned high-grade corporation bonds traced a slowly rising trend but rose less than in 1963. Rates on resi dential mortgages showed no net overall change dur ing the year. All sectors of the money and capital markets re acted sharply to the announced increases in the British and American central bank rates in late November. Short-term money rates moved up in response to this and year-end seasonal demands. But yields on long term securities, after a relatively brief spurt due to un certainties about the impact of these changes, settled back, on balance, to levels close to those prevailing earlier. A very troublesome operating problem for the bank ing system during 1964 was the increasingly severe coin shortage. Despite a rapid rise in the amount of coin in circulation (the total dollar value of coin out side the Treasury and the Federal Reserve Banks has increased 20 per cent in the past two years), banks found it difficult to meet the demands of their custom ers for coin. The “shortage” is traceable in part to in creased use of vending machines, toll roads, parking meters and other coin-operated devices but probably also reflects diversion into private collections and into hoards for speculative purposes. The Federal Reserve Banks, which normally fill Shipments from the m int now the m ajor source of Reserve Bank supplies o f coin coin received at Chicago o ffic e from: other Federal Reserve Banks commercial banks in Seventh District R million dollars 10 U.S. mint panying chart, based on receipts at the Main office of the Federal Reserve Bank of Chicago, illustrates how this return flow of coin in all denominations has shrunk in the past two years. Although new production has been increased sharply, receipts of new coin from the mint have not been sufficient to offset the failure of existing coin to flow back into the Federal Reserve Banks. At y e a r end . . . member bank orders for coin as a routine matter, were forced to ration coins because of the sharp drop-off in coin receipts from commercial banks. The accom The expansion of economic activity in 1964 was well balanced with in creases in nearly all categories and little evidence of the kinds of excesses that normally precede economic adjustments in the form of temporary curtailment in overall activity. At year-end, however, evidences of some imbalances were emerging. Inventories of steel were be ing increased at a substantial pace. Some upward price pressures were visible, particularly in the case of nonferrous metals and other raw materials. Wage settlements had been and were being negotiated which was feared would have an inflationary impact if the margins of unemployed m anpower and unused plant facilities narrowed further. At the beginning of 1965 the econ omy appears poised for continued growth. Such imbalances as had devel oped had not reached critical propor tions. Appropriate policies of business, individuals and government should per mit continuation of the longest uninter rupted postwar uptrend in economic ac tivity yet experienced. There are, of course, unsolved problems. Relatively high unemployment among some seg ments of the labor force and the near chronic balance of payments deficit are probably the most important of these and will continue to com mand attention in the months, possibly years, ahead. Federal Reserve Bank of Chicago 7 Steel Begins Its Second Century S e p tem b e r 1964 marked the hundredth anniversary of the first commercial production of Bessemer steel in the United States. The place was Wyandotte, Mich igan. For some years after 1864 the nation’s total out put of steel was measured in thousands rather than millions of tons, but production expanded rapidly, ex cept in periods of business recession. As the supply of this strong, versatile and relatively inexpensive metal increased, the United States was transformed in a quarter century from a primarily rural nation to one of the world’s foremost producers of manufactured goods. The Age of Steel had begun. More than 800,000 workers in the United States are now employed producing iron and steel, including those in foundries, almost 5 per cent of the total em ployment in all types of manufacturing. Nearly 30 per cent of employment and an approximately equal pro portion of the steel industry’s production is in the five ,states of the Seventh Federal Reserve District, mainly in the Chicago-Gary and Detroit areas. About 55 per cent of total manufactured products are classified as durable goods and many of these are Blast fu rn a ce, coke ovens a nd b y -p ro d u c t fa c ilitie s — marks o f an in te g ra te d steel p la n t made largely of steel. Among the heaviest users of steel in manufacturing are the motor vehicle, railroad equipment and industrial, farm and construction ma chinery industries— of them important in this re all gion. Probably over 35 per cent of the nation’s steel is fabricated into finished products in the District states— Illinois, Indiana, Iowa, Michigan and Wiscon sin. Steel output reached a record 127 million tons in 1964. Growth in this industry has both reflected and contributed to the prosperity of the Midwest. It is reassuring, therefore, that on the hundredth anniver sary of commercial production of steel, the Midwest is in a favored position to participate fully in the pros pective expansion of the industry in the years ahead. Capital expenditures by steel firms, currently, are at a record level, and the industry is in the beginning stages of a technological revolution that will involve substantial changes in manufacturing methods. The share of the nation’s steel produced in the Chicago and Detroit areas has been rising in recent years and is expected to continue upward. The development of this most basic of all industries, in relation to overall economic growth and with emphasis upon the Seventh Federal Reserve District, is traced in the following pages. Steel: the basic m a te ria l Anthropology divides prehistory into a Stone Age, a Bronze Age and an Iron Age, each marking an ad vance in man’s control over his environment. The orig inal advantage of tools and weapons made of iron or steel over bronze (usually an alloy of copper and tin) was strength, hardness and durability rather than cheapness. Unlike copper and various other metals, iron although very abundant is not found in the earth’s crust in a metallic form. Moreover, smelting of iron ores requires higher temperatures and more exacting techniques than those used in extracting other com mon metals that are found combined with other ele ments. Steel is iron after removal of the impurities, such 8 Annual Report, 1964 Locations o f steel m aking facilities and p rin cip a l sources o f raw m aterials ★ ★m a jo r limestone deposits A A major coking coal deposits 9 major iron ore deposits steel production centers brown figures-m illion tons of ingots total U S .-1 0 9 3 * le s s than 100,000 tons as phosphorus, sulphur and silicon and with a con trolled carbon content— usually 1 per cent or less. Un refined iron is very brittle and has a low tensile strength. It cannot be rolled or shaped or drawn into wire and usually is cast in molds to form objects that must be hard and strong but need not absorb shocks or other dynamic stresses. The principle of the blast furnace in which iron is separated from its ores with the aid of a charcoal or coal fire and a “blast” of air has been known since ancient times. Until the middle of the last century, however, only small amounts of steel were made, either by happy accident or through painstaking hand methods in crucibles. Output of steel was exceeded substantially by that of wrought iron. The latter was produced manually by stirring or “puddling” a molten bath of iron until the carbon content was reduced to negligible amounts and the slag was evenly distributed through the mix. Wrought iron has excellent properties— toughness, workability and rust resistance— and continues to be used for some purposes. But wrought iron could be produced only in limited quantities and, therefore, like steel, was expensive. Until a cheap method of producing steel was achieved, the use of both steel and wrought iron was confined to weapons, tools, cooking utensils and machinery. Mass production in factories was limited largely to textiles, the main fruit of the first 100 years of the “industrial revolution.” From B essem er to o x yg e n co nverter One of the great breakthroughs in the history of in dustrial progress was the development of the Bessemer process for converting iron to steel, patented in Eng land by Henry Bessemer in 1856 and by William Kelly in the United States and further developed in subse quent years. The Bessemer converter, still used in limited numbers, is a pear-shaped vessel lined with firebrick that can be rotated for charging and empty ing. Molten iron is poured into the converter and sub jected to a blast of compressed air from below for about 20 minutes. Oxygen in the air burns out the impurities in the iron without the use of fuel. The Bessemer process was fast and cheap. More than half of all United States steel was produced in these converters until 1908. Federal Reserve Bank of Chicago 9 The largest share of Bessemer steel produced in the Seventies and Eighties was rolled into rails for the rapidly expanding railroads. Substantial quantities were also used for railroad locomotives and cars, ships, bridges and other types of construction. The Eads bridge which crosses the Mississippi at St. Louis was completed in 1876 and is counted as the first to use appreciable quantities of steel. Steel girders were first used in the 12-story Home Insurance Build ing constructed on La Salle Street in Chicago in 1885 and later called “the first skyscraper.” Steel framing played a m ajor role in the work of the “ Chicago School” of architecture in which walls were merely “curtains,” and large window areas for better light and ventilation became feasible. In the 1860s the Bessemer process was supple mented by the open hearth process, also developed in England. The open hearth is a reverberatory furnace in which flames are deflected— “reverberated”— from the ceiling and played over molten iron in a shallow bath, the whole area enclosed by firebrick with open ings for charging and tapping. The open hearth has several advantages over the Bessemer process: it per mits the use of iron containing phosphorus which is common in the United States; up to 60 per cent of the charge can be scrap, and control is more exact so that alloy steels can be produced. Production of steel in the United States exceeded 1 million tons for the first time in 1880. By 1889 out put reached 3.4 million tons and this nation surpassed the United Kingdom as the principal producer. The United States has retained the lead ever since. The electric steel furnace was developed in Ger many in the 1890s. Electric furnaces, usually charged 100 per cent with scrap, are used to produce relatively small quantities of high grade alloy steels and carbon steel where molten pig iron is not available. During World War I electric furnaces became a significant factor and have tended to grow in relative importance ever since. A fourth method of making steel, the basic oxygen process, also was developed in Europe. The most widely used Linz-Donawitz method is credited to Aus tria. This process should not be confused with the technique of speeding up the output of open hearth furnaces by the injection of oxygen. The oxygen con verter resembles the Bessemer in that the steel is made in a large receptacle that can be rotated. Oxygen— rather than air— injected from a lance above the is molten iron. Advantages over the Bessemer include the ability of the oxygen process to use iron made from a greater variety of ores, the use of scrap (about 25 per cent) as part of the charge and the ability of operators to closely control the steel making process. Advantages over the open hearth include lower initial investmentonly half as great per ton of capacity— and lower op erating costs. No fuel is used, and firebrick can be re placed much more easily than in an open hearth. An oxygen furnace turns out a batch of steel in 45 min utes to an hour in comparison with eight hours for an open hearth even when oxygen injection is used. One oxygen converter can replace five or more open hearths, while requiring much less space, less auxiliary equipment and fewer operators. The first heats of steel were made in the United Steel production in the United States by ty p e o f furnace Total A m ount Bessemer Per cent A m ount O pen hearth Per cent A m o un t Per cent Basic oxygen Electric A m ount P e rc e n t A m ount Per cent (am ounts in m illions o f tons) 1900 10.2 100 6 .7 66 3 .4 34 — 1910 2 9 .2 100 10.5 36 18.5 64 0 .1 — — — * — — 1920 4 7 .2 100 9 .9 21 3 6 .6 78 0 .6 1 — — 1930 4 5 .6 100 5 .6 12 3 9 .3 86 0 .7 2 — — 1940 6 7 .0 100 3 .7 5 6 1 .6 92 1.7 3 — — 1950 9 6 .8 100 4 .5 5 8 6 .3 89 6 .0 6 — — 1955 11 7.0 100 3.3 3 10 5.4 90 8 .0 7 0 .3 1960 109.3 100 1.2 1964 12 7.0 100 0 .9 *Less than t p er cent. SOURCE: A m erican iro n a nd Steel Institute. 10 Annual Report, 1964 1 * * 8 6 .4 87 8 .4 9 3.3 3 9 8 .4 78 12.4 10 15.3 12 C h a rg in g an open hearth fu rn a ce w ith m olten p ig iron mams T apping m olten steel fro m an e lectric arc furnace Pig iro n bein g poured in to 300 ton oxygen converter Federal Reserve Bank of Chicago 11 states by the basic oxygen process in 1955. By 1964, the new process accounted for 12 per cent of total out put and exceeded the 10 per cent share of the electric furnaces. The Bessemer and open hearth processes ac counted for 1 and 78 per cent, respectively. All the new furnaces ordered by domestic steel firms since the capital spending boom of the midFifties have been either electric or basic oxygen types. Doubtless the time will come when these furnaces will account for the bulk of production. This development compares with the displacement of the Bessemer by the open hearth, but the transition is being accom plished in a much shorter time. Raw m aterials in storage re a d y fo r the b la st fu rn a ce A bundance of ra w m a te ria ls Production of 1 ton of pig iron requires roughly 1.5 tons of ore, two-thirds ton of coke and one-quarter ton of limestone. These materials are all plentiful in eastern and midwestern United States. Limestone serves as a “flux” in the iron making process, reducing melting points and combining with waste materials to form slag. The quarrying, crush ing and sizing of limestone for blast furnace use are relatively simple processes. Limestone is found in many parts of the nation, but the largest quarries sup plying blast furnaces are located in northern Mich igan in the vicinity of the straits of Mackinac. Coke is made from metallurgical grades of soft coal, principally from deposits of the Appalachian region. Good coke must have resistance to crushing in order to support heavy charges of ore and limestone in the blast furnace and be low in sulphur, ash, and silica. It provides carbon monoxide that serves as the reducing agent that separates metallic iron from its ore, usually an oxide, and heat to melt the reduced iron and slag. A portion of the coking coal produced in the United States is sent abroad to nations not hav ing adequate deposits. Most important of the raw materials, of course, is iron ore. The rapid rise of steel production in the United States during the second half of the nineteenth century was aided by the development of the rich Lake Superior ores of northern Minnesota, Michigan, Wisconsin and Ontario, which could be transported to ports on the Great Lakes through the Soo Locks connecting Lake Superior and Lake Huron. Principal of these ore sources was the Mesabi range in Minne sota where ore could be scooped directly from the earth by huge shovels in open pit mines. During the postwar period the dependence of do mestic steel production on foreign ores has increased sharply. Imports of iron ore in the early postwar years were about 4 per cent of domestic consumption Retired ra ilro a d e qu ipm e n t furnishes much "h e a v y m e ltin g " scrap "F a c to ry b u n d le s " o f scrap a w a itin g jo u rn ey to steel furnaces in and were about balanced by exports. Gradual exhaus tion of some of the richest ore bodies of Minnesota and the discovery and development of sources in Lab rador and Venezuela have changed this picture. Last year one-third of the iron ore used in American plants came from foreign deposits. Dependence on foreign ores is unlikely to increase substantially in the United States in the near future. Hundreds of millions of dollars are being invested in new “beneficiating” plants that convert low grade taconite and jasper ores of Minnesota and Michigan to small pellets containing 60-65 per cent iron. Nat ural ores average about 52 per cent iron before con centration (pure iron ore is about 72 per cent iron and 28 per cent oxygen). The use of pellets from exist ing plants in blast furnaces has proved to be highly efficient. The reduction process is speeded and lesser quantities of coke and limestone are required. Vast quantities of scrap are used in steel m akingin 1964 more than 60 million tons. Scrap pomes from three sources— “home” scrap generated in the process of making steel, principally croppings of slabs and blooms and rejected or damaged material; returns of clippings and waste from fabricators, and old scrap assembled and processed by brokers (mainly junked automobiles and retired railroad equipment and ma chinery). Assembly and processing of scrap is said to be a 2 billion dollar industry. Some of the iron in a given finished steel product may have been incarnated several times in earlier forms. Scrap prices fluctuate sharply in response to changes in demand. Late in 1964 heavy melting scrap sold Dips in steel output have reflected strikes, recessions and inventory liquidations per cent, 1957-59=100 seasonally adjusted for $40 a ton compared with $25 a year earlier. The scrap collection industry has been undergoing considerable change in recent years. Large firms with heavy investments in handling equipment and giant shears and presses are increasingly dominating the field. Further changes apparently are in store because oxygen furnaces require less (and more carefully proc essed) scrap than do open hearths. M aking fin ish ed steel 1947 '49 '51 '5 3 ’5 5 ’57 ’59 ’61 ’63 Steel firms are classified as fully integrated, semiintegrated and non-integrated. A fully integrated Federal Reserve Bank of Chicago 13 Large in te g ra te d m ill w ith access to w a te r, ra il and tru ck tra n s p o rta tio n firm owns or controls sources of raw materials; trans portation facilities, usually including large lake ore boats; blast furnaces; steel furnaces; facilities to pro duce coke, oxygen and electric power, roughing and finishing mills, research laboratories; a marketing and distributing network and numerous other supporting facilities. Most large steel plants in the Midwest are served by harbors on the Great Lakes that can accom modate the boats and barges that bring together the necessary iron ore, coal and limestone. The most prominent feature of an integrated steel plant is the blast furnace—100 or more feet high and up to 30 feet in diameter. Close to the furnaces are the stoves that provide heat for the blast of air and the coke ovens. Steel firms have their own ovens in which soft coal is heated to drive off gases and impurities leaving coke, which is virtually pure carbon. Various hydrocarbons and other chemicals are produced as by-products in the coke-making process. Ore, coke and limestone are dumped into the blast furnace from the top from “skips” or buckets. Blast furnaces, like most other steel making facilities, are operated 24 hours a day seven days a week in a con tinuous process, unless closed down for repairs or lack of orders, or banked because of temporary work stoppages. Blast furnaces are tapped every three or four hours. In the past, iron was run out into sand molds to cool in “pigs,” hence the name “pig iron.” Today virtually all pig iron is transferred in insulated ladle cars to steel furnaces in molten form. This journey usually is no more than a few hundred yards but some molten pig iron is transported 10 miles or more to the point of use. Part of the pig iron is sold in solid form to foun dries for the manufacture of cast iron products or to 14 Annual Report, 1964 steel firms that do not have blast furnaces. For many years the principal improvement in blast furnaces was in size and the provision of more efficient auxiliary units. Output of blast furnaces in recent years has been increased by the use of top pressure, injection of oxygen and improvements in the quality and sizing of raw materials. This has resulted in a year-to-year rise in output per furnace. Between 1953 and 1963 the average output per blast furnace per day increased from 920 tons to 1,430 tons. Iron ore requirements per ton of pig iron during the same period were reduced 10 per cent be cause of improved concentration processes. Coke and limestone needs were lowered 26 and 32 per cent, re spectively. The largest blast furnaces produce over 2,500 tons of pig iron per day. Molten pig iron is charged into the open hearth or oxygen converter along with scrap, limestone or lime to remove impurities, iron ore to promote a boiling action (in the open hearth) and, where required, al loying metals such as vanadium, tungsten, molyb denum and m anganese. When the mix has been “cooked” sufficiently, the furnace is tapped and steel is poured into ingot molds to solidify. Formed ingots are transferred to “soaking pits” where they are reheated to a uniform temperature and then passed back and forth through the heavy rolls of a roughing mill to produce blooms (square) or slabs (rectangular). Blooms are rolled again into bars, struc tural shapes and other products. Slabs are further processed to become plates, sheets or strip— called “flat rolled products.” D iversity of products There are thousands of different steels and “fin ished” steel products. These finished products are the raw materials of metal fabricating firms, construction contractors and the mining and petroleum industries. Shipments of steel products are about 70 per cent as great as ingot production, the remainder going back into the steel furnaces as home scrap. About 90 per cent of the steel produced in the United States is carbon steel. The rest is composed of alloy steels of various types. Stainless steels, contain ing a high proportion of chromium and nickel, ac count for only 1 per cent of the total. These stainless steels are very expensive— to 50 cents a pound com 40 pared with 6 to 8 cents for carbon steel— and usually are classified separately from other alloy steels. Sheets and strip, intermediate in thickness between plates and tin mill products, are the most important single category of carbon steel products. Strip is dif ferentiated from sheets by width, tolerances required and other characteristics. Sheet steel and strip are often used for similar purposes and are commonly called “sheet.” Sheets accounted for about 40 per cent of steel mill shipments in the first 10 months of 1964. This proportion has been growing steadily for many years. More than half of the hot rolled sheets are sub jected to a further process called “cold rolling” that imparts a hard bright finish, finer tolerances and bet ter forming characteristics. Cold rolled sheets are used in such applications as auto bodies and shells of ap pliances and metal furniture. The supply of cold rolled sheets has been inade quate in the postwar years in periods of strong de mand. New cold rolling capacity, particularly in the Midwest, continues to be added at a rapid pace. Sup plies of galvanized sheets also are occasionally inade quate to satisfy demands. Part of the problem is that quality requirements for these products have been raised continuously to improve performance on fabri cators’ high speed equipment, so certain orders can not be supplied from older mills. For many years the American Iron and Steel Insti tute (A.I.S.I.) estimated industry capacity in terms of ingot tons and weekly and monthly production oper ating rates were published as a per cent of capacity. The last official estimate of capacity at the start of 1960 was 149 million tons. Unofficial estimates place ingot capacity currently at 165 million tons or higher, but about 20 per cent of this is in open hearth furnaces that were not in use in the fourth quarter of 1964 de spite rising order backlogs. The reason was that fin ishing capacity to produce the types of steel in strong demand was being fully utilized and there was no use for the additional ingots that might have been pro duced in older, less efficient steel furnaces. H ot s trip m ill converts steel stabs in to coils in 1 Voi ' : W a te r cooling o f rolls re q u ire d in hot ro llin g processes ut can i Yovo tir i I B ur t « r i n 1 .4 Jr ® |J r L ' Some open hearths scheduled for eventual demo lition were started up again late in 1964 as production of steel rose to an annual rate of 138 million tons. Presumably, these will be taken out of production as soon as demand subsides. Like the older steel furnaces, many blast furnaces stood idle during 1964. At the start of the year only 142 of 236 blast furnaces— per cent— 60 were in use despite the fact that the steel industry was then oper ating at an annual rate of about 105 million tons. In Pennsylvania and Ohio, 56 per cent of the blast fur naces were in use. For Illinois the proportion was less dian 50 per cent while 21 of the 23 blast furnaces were in use in Indiana and all of the 9 in Michigan. During periods of peak output in the years 1941 through 1957 all blast furnaces and steel furnaces not down for repairs were in use. Under these circum stances the steel industry’s operating rate as a per cent of capacity was a useful indicator of demand pressures, because facilities to produce finished steel products could have absorbed additional ingots. This was not the case in late 1964. Bottlenecks existed in some kinds of finishing capacity that could turn out the types and quality of steel required. Estimates of overall capacity are not meaningful under these con ditions. W ho uses steel? The automobile industry is often said to be the largest user of steel, taking about 20 per cent of the total shipped by the mills, with construction in second place. A ctually, both industries use additional amounts of steel obtained through steel warehouses (now officially called steel service centers). The con struction industry, including “contractors’ products” such as heating and plumbing apparatus, is the largest user of steel, accounting for about 27 per cent of total production. Motor vehicles use about 24 per cent and Service centers ca rry thousands o f types o f steel fo r im m ediate d e liv e ry 16 Annual Report, 1964 Growth o f steel output in D etroit and C hicago areas has been faster than in the nation per cent, 1957-59=100 180 r 1947 1949 1951 1953 1955 1957 1959 1961 1963 SOURCE: A m erican Iro n a nd Steel Institute. all the machinery and equipment industries combined require a roughly similar amount. About 10 per cent of all steel is fabricated into con tainers and 6 per cent is used by the various extractive industries, principally for oil well drilling and pipe lines. Smaller but important tonnages are taken by railroads, shipbuilders, producers of fasteners (screws, nuts and bolts), forgers and others. Military ordnance in recent years has used only a fraction of 1 per cent of all steel. Steel users whose needs for particular types are of sufficient size order directly from the mills. Shipments usually are made by rail or truck but to a limited ex tent by water. Smaller orders are placed with ware houses, which carry an inventory of many types, shapes and sizes of steel (and usually nonferrous metals as well). Warehouses handle about 18 per cent of all steel consumed and account for much larger pro portions of stainless steel and tubing. They are equipped to cut, shape and ship on short notice (al most always by truck). Most types of steel purchased through warehouses bear a higher price than steel ob tained directly from the mills because of the smaller quantities involved and special processing. Small manufacturers typically buy all their steel from ware houses, but even the largest users obtain a portion of their needs from this source. The g e o g ra p h y of steel Location of steel facilities is determined principally by striking a balance between access to raw materials and access to markets. Consideration is given also to labor supply, sources of fresh water for cooling and other factors. Once a plant is developed, there is a tendency to expand on the site because the various facilities must be coordinated and the creation of an all new integrated plant in another place requires an investment of hundreds of millions of dollars. Since the latter part of the nineteenth century, Pitts burgh has been synonomous with steel. Defined broadly to include such centers as Youngstown, Ohio, Johnstown, Pennsylvania, and Weirton and Wheeling, West Virginia, the Pittsburgh area is still the nation’s major steel producing center. The main advantage of this area is its close proximity to coking coal. On a metropolitan area basis the Chicago-Gary complex since 1953 has been the nation’s largest steel producer. Plants in the area are closely concentrated in a strip along Lake Michigan from southern Cook County, Illinois, through Lake and Porter Counties, Indiana. The Chicago area’s advantage consists of its access to water transportation for raw materials and finished products on Lake Michigan (much of the con struction of harbors and plants has been on land re claimed from the lake) and the inland waterways to the Mississippi and gulf ports, and its proximity to four of the largest steel consuming centers— Chicago itself, Detroit, Milwaukee and Indianapolis. Other imSteel being processed to customer o rd e r a t service center iP iii Most ra w m aterials reach M idw est steel plants by b oa t portant steel producing centers include Detroit, Balti more, Buffalo, Cleveland, Philadelphia, Los Angeles and Birmingham (see map on page 9). Among the principal producers in the Chicago area are United States Steel Corporation (with works at Gary and southeast Chicago), Inland Steel Company, Youngstown Sheet and Tube Company, International Harvester Company (Wisconsin Steel Division), Re public Steel Corporation and Acme Steel Company. Midwest Steel Corporation (a division of National Steel Corporation) and Bethlehem Steel Corporation roll sheet and plates from coils and slabs shipped from the East. In addition, there are numerous companies that produce special finished steel products or rela tively small tonnages of steel in electric furnaces. The Chicago area is particularly important in the produc tion of cold finished bars drawn to close tolerances. In Detroit the principal steel producers are McLouth Steel Corporation (developed largely in the postwar period), Great Lakes Steel Corporation (a division of National Steel Corporation) and the Ford Motor Com pany. The second and third largest steel plants in the United States are located in Lake County, Indiana— the Gary Works of U.S. Steel and the Indiana Harbor Works of Inland Steel. (Inland, the only firm head quartered in Chicago, produces only at this location.) The largest facility at one site is Bethlehem’s Sparrows Point Works near Baltimore. Bethlehem’s Bums Har bor Plant, situated on a 3,300 acre site in the Indiana sand dunes east of Gary, could develop into a com parable size operation. At the turn of the century, the Indiana shore of Federal Reserve Bank of Chicago 17 O xygen converters w ere installed in D e tro it in 1955 Lake Michigan and the Lake Calumet area of Illinois were sparsely inhabited. Previous industrial growth in the Chicago region had been largely to the north. But the likelihood of future expansion in the region at the foot of Lake Michigan had long been recognized. The land was flat and easily graded, ample supplies of fresh water were at hand, water and rail transportation were available and the industries of the Midwest, within a radius of 300-400 miles, were growing far more rap idly than those of the nation. Now the area contains a vast complex of metal fabricating plants, oil refineries and chemical plants as well as steel mills. The motor vehicle plants in or near Detroit long have been heavy users of steel. Ford Motor Company built its first facilities in the Twenties. Steel firms, however, were slow to locate plants in the area and Michigan did not become a major steel state until the Thirties. Postwar progress has been rapid, but Mich igan continues to “import” large quantities of steel from other states. Pennsylvania, Ohio, Indiana, Illinois and Michigan, in that order, are the largest steel producing states. For the past 50 years, these five states together have pro duced more than 70 per cent of the nation’s steel. However, a fairly steady westward movement of the industry has occurred. Although important facilities have been added in Pennsylvania and Ohio, the por tion of total production contributed by these two states dropped from 52 per cent in 1944, the peak year of World War II, to 40 per cent in 1963. During the same period, Illinois remained at about 8.5 per cent of total output while Indiana increased from 12.6 to 14.2 per cent and Michigan rose from 3.3 to 7.7 per cent. These trends were reversed slightly in 1964 as some older plants in the East were activated in re sponse to the heavy demand. 18 Annual Report, 1964 Michigan is followed in rank as a steel producing state by Maryland, New York, Alabama, California and West Virginia. These states account for about 20 per cent of United States steel production. Other states with significant tonnages are Texas, Utah, Kentucky, Colorado and Minnesota, but none of these account for as much as 2 per cent of the national total. Four teen other states produce small am ounts of steel, mainly in electric furnaces. Production in California, Texas and Utah was in creased substantially in World War II, when the plants — financed mainly by the Federal Government and pri vately operated— were built. In the past few decades, steel producing facilities in various states have been retired; among these was Wisconsin. Facilities, includ ing blast furnaces, were in operation in Milwaukee un til 1929. Through the years, the location of the industry has tended to follow shifts in markets and to move toward water transportation. The move toward markets has been encouraged by needs for scrap generated in large quantities in manufacturing centers. More recently the reduction in requirements for coke has reduced the advantages of sites near coal. The move toward water transportation was evident early in the century when the Lackawanna Steel Com pany, established in Scranton, was relocated near Buf falo on Lake Erie, and U. S. Steel decided to build at W eekly earnings o f steel and auto w orkers w ell above a ll-in d u stry average dollars per week 160 r 1947 1949 1951 1953 1955 1957 1959 1961 N ote: A n n u a l averages, nine-m onth a vera g e fo r 1964. 1963 Major H. p o s t w a r s t e e l, s t r ik e s S ta rt End — 1956 1959 February November July August November fflltisiSSf (days) 00 1949 1952 January October June July July CN 1946 D uration 42 59 36 116 : Gary. In the postwar period the only completely new integrated mill has been U. S. Steel’s Fairless Works, located at tidewater near Philadelphia, in part to re ceive foreign ores direct from vessels. Recent and prospective technological developments may encourage the construction of new integrated mills. The combination of oxygen steel furnaces and continuous casting, for example, will reduce capital requirements sharply. This may tend to aid the forces that cause steel furnaces to be located with an eye more to markets than raw materials and existing sup porting facilities. Oxygen furnaces will be used only in large plants as compared with electric furnaces. A single oxygen furnace can produce 1 million tons of steel per year, and they are usually installed in pairs. Ample facilities must be at hand to supply molten pig iron and to process the molten steel. Em ploym ent and w ag e s Prior to the Thirties organized labor had not been an important force in the steel industry. Craft unions had existed since the middle of the nineteenth century, but these represented only a very small proportion of all steel workers. Attempts were made to organize a larger segment of the work force from time to time, but these were not successful even though supported by fiercely contested strikes. Today, most workers in the steel industry and many in related activities are members of the United Steel Workers Union (USW). The present status of organ ized labor dates back to March 1937 when the Steel Workers Organizing Committee of the CIO was rec ognized as the workers’ bargaining agent by the U. S. Steel Corporation. (General Motors had recognized the United Automobile Workers only two weeks ear lier.) Several other major producers accepted the USW as bargaining agent in 1942. When a nationwide strike is called by the USW, about 85 per cent of the steel making capacity of the nation is shut down. Work stoppages lasting a month or more have occurred five times since World War II - in 1946, 1949, 1952, 1956 and 1959. The last of these was by far the longest—116 days. This strike re sulted in secondary layoffs by steel fabricators who had used their stock of metal as well as by transporta tion firms. The influence of these disputes is registered prominently on charts of general economic activity. In the first quarters of 1962 and 1963, and again in late 1964, users of steel began to stockpile inventories while labor-management negotiations were in prog ress. Although negotiations were concluded in 1962 and 1963 without stopping production, steel output slumped sharply following conclusion of negotiations as users worked off excess inventories. A similar de cline in output is expected some time in 1965 whether or not a strike occurs. Wage rates in the industry have been relatively high for many years. In 1936 average hourly wages at 67 cents per hour were 22 per cent above the average for all manufacturing. Many jobs in the plants require skill, strength and alertness. One steel firm has stated that only 10 per cent of the jobs in its plants are clas sified as “unskilled.” In the first nine months of 1964, hourly earnings in steel averaged $3.35, 33 per cent higher than the aver age for all manufacturing. Additional “fringe benefits” raise wage earner employment costs, according to in dustry sources, to over $4.25 per hour. In recent years average hourly pay for steel workers has exceeded the average for auto workers, but because of longer hours in the auto industry, weekly earnings have been about the same. Emphasis upon safety by both management and Output o f steel per w orker has increased sharply since 1960 tons thousands Federal Reserve Bank of Chicago 19 unions during the past 50 years has drastically reduced accident rates. Once an industry with a high rate of serious injuries, in recent years steel has had an acci dent rate only half as great as the average for all indus try. Because of increased output in 1964, steel firms in the Chicago-Gary area were unable to hire sufficient workers locally. As a result, recruiting teams were sent to Pittsburgh, northern Minnesota, Michigan and Wis consin in an attempt to persuade workers to move. In the 1960-63 period, however, most steel centers re ported substantial unemployment. Steel is a highly cyclical industry and also an indus try of rapid technological change. Union leaders, therefore, have placed heavy emphasis upon job secu rity and seniority when layoffs occur or when jobs are eliminated by mechanization. In 1963, the number of production workers in steel was 23 per cent less than 10 years earlier. Output was only 6 per cent less. Dur ing the same period, the number of workers in admin istrative, supervisory, research, engineering and other jobs not directly associated with production rose slightly. Electronic devices fo rm p a rt o f com puter co n tro lle d ro llin g mill N ew steel p la n t und e r construction in P orter C ounty, In d ia n a Estimates of the U.S. Department of Labor indi cate that increases in output per man-hour, counting both production and nonproduction workers, have been sufficiently great that, since 1958, employment costs per unit of output in the steel industry have re mained relatively constant despite substantial in creases in worker compensation. From 1947 to 1958, employment costs per unit of output had risen more than 80 per cent. This type of estimate should be used with caution, of course, because of variations between firms, changes in product mix, the importance of changes in the volume of operations and the disruptive effects of work stoppages. Consideration must be given, moreover, to increases in non-labor expenses such as depreciation, which has increased sharply in the postwar period as the result of heavy investments in capital goods. C oncentration and com petition Looping b a r m ill co n tro lle d fro m overhead booth 20 Annual Report, 1964 At present the largest steel firm accounts for about 25 per cent of steel output and the eight largest pro ducers account for about 75 per cent of the total. Con centration to this degree prevails to a greater or lesser extent in other durable goods industries, for example, aluminum, copper, motor vehicles and cement. When an industry is dominated by a relatively small number of firms, “oligopoly” is said to exist: market decisions of one or a few large producers strongly influence policies of the others. The steel industry was not always concentrated. Until 1898, according to economic historians, there were many individual producers and vigorous price competition. Some termed this “destructive” or “cut throat” competition. Starting in 1898 a series of merg ers occurred that culminated in the creation of the U. S. Steel Corporation— first billion dollar enter the prise. Capitalized at 1.4 billion dollars, U. S. Steel has been known in the industry ever since simply as “The Corporation.” The U. S. Steel Corporation combined the inte grated properties of the Carnegie holdings headquar tered in Pittsburgh and the Federal Steel Corporation k Large pipes ca rry dust from oxygen converters to p recip ita to rs based in Chicago and other facilities. These enter prises had been engaging in expansion programs that would have resulted, it was feared, in bitterly fought “price wars.” For some years after the formation of the Corpora tion, prices were quite stable. Because of its wide spread operations, price cutting in local markets usually could be matched by the Corporation without disrupting markets elsewhere. Most smaller firms were said to follow the “price leadership” of U. S. Steel or another large producer. The Department of Justice instituted an antitrust proceeding against the Corporation in 1911 in an at tempt to break it up into smaller units as had been done with the Standard Oil Company and the Amer ican Tobacco Company. Delayed by World War I the U. S. Steel case was not decided by the Supreme Court until 1920. By a 4-3 decision, the Corporation was al lowed to remain intact. A majority of the Supreme Court decided that its market power had not been used “unreasonably” to harm competitors. Moreover, the share of the steel market accounted for by the Corporation, once over 50 per cent, had declined. During the Twenties and Thirties, firms other than U. S. Steel strengthened their market positions. Beth lehem Steel Corporation increased greatly in size as it acquired the large Lackawanna Steel Corporation with major works near Buffalo, and built its vast Spar rows Point Works. At the end of the Twenties the last major combinations in the industry resulted in the creation of Republic Steel Corporation and National Steel Corporation. For many years Bethlehem sought to merge with Youngstown Sheet and Tube to gain entrance to the Midwest steel markets. When it was finally deter mined by a court decision in 1957 that this merger would not be permitted, Bethlehem decided to enter the Chicago area as a producer through construction of new facilities in northern Indiana. One practice that helped maintain stable prices in the steel industry for decades was the “basing point” pricing system. This system was abandoned after 1948 when the Supreme Court held that the method was illegal in the cement industry. Until 1924 the basing point system was known as “Pittsburgh plus.” Prices throughout the nation were quoted as the price estab lished at Pittsburgh plus the freight from Pittsburgh, regardless of the location of the mill from which the products were shipped. On some shipments freight was “absorbed;” on others “phantom freight” was charged. After a Federal Trade Commission “cease and de sist” order in 1924 the industry gradually shifted to a multiple basing point system, using several centers rather than Pittsburgh alone. The basing point system is believed to have helped to stabilize steel prices and with slowing the movement of the industry away from the Pittsburgh area. Steel prices dropped sharply in 1920, along with the severe decline in commodity prices generally, and drifted downward between 1923 and 1928. During the early Thirties and again in the 1938 recession, the price structure was described as “chaotic.” National Recovery Administration (NRA) codes established by the directors of the American Iron and Steel Insti tute under Government auspices were credited with raising and maintaining prices in the 1934-38 period. Without implicit or explicit cooperation among all producers, or at least those accounting for the bulk of production, there are strong pressures to cut prices in an industry such as steel when excess capacity ex ists. Investment in plant and other fixed costs is heavy. Fixed assets account for 50 per cent of the steel firm’s Capacity to produce steel ingots has exceeded requirem ents since 1955 million tons 60 - 1___I___ I___ I___ I___ I___ l___ I___ l___ l___ l___ I___ l___ I___ I___ I___ l___ l___ I 1947 1949 1951 1953 1955 1957 1959 1961 1963 SOURCE: A m erican Iron and Steel Institute Federal Reserve Bank of Chicago 21 assets compared with 38 per cent for all manufactur ing. As a result, any price that more than covers cur rent costs, principally labor and materials, appears worthwhile if some overhead costs can be recovered. When other producers meet these cuts, however, the advantage disappears and markets become “de moralized.” Demand for steel is said to be “inelastic,” that is, appreciable changes in prices do not lead to appreci able changes in the amount used. One reason is that there are no close substitutes for a large range of the uses for steel, giving consideration to relative costs. In addition, although steel is a vital ingredient in many commodities, its cost rarely exceeds 20 per cent of the cost of the finished product and often amounts to only 1 or 2 per cent. Automobiles are made largely of steel, but the cost of the steel is unlikely to exceed 10 percent of the retail price of automobiles. A 10 per cent change in the price of steel, therefore, would amount to only 1 per cent of the retail price of a car. For any given producer, however, demand for steel is highly elastic to the extent that markets can be bid away from competitors. This is also true for foreign markets. Steel prices on a p latea u In no other industry have postwar price trends been watched more closely and commented upon at such length as in steel. Steel prices in 1946 were not much higher than the prewar level, as a result of price con trols during the war when the industry operated under forced draft. Demand continued strong in the post war years as civilian requirements were very large. Production of durable goods for purposes not con nected with the war had been negligible from 1942 through 1945, with the result that a large backlog of “pent-up” demand accumulated during the period. Steel capacity, for 12 years after World War II, was one of the important bottlenecks limiting total in dustrial output in periods of high level economic ac tivity. Customers of steel firms were placed on “alloca tion” schedules, that is, they were allowed portions of available supplies based upon their previous pur chases. Some steel firms held prices below the level users of steel were willing to pay. This gave rise to “gray markets” in which steel was traded above list prices. (A form of allocation was in effect late in 1964.) Why, in the absence of Government price regula tion, did these firms hold down prices in years when demand was strong? Leading firms in the industry maintained that they were satisfied with a “fair price” that yielded an “adequate” profit, a situation often 22 Annual Report, 1964 Steel prices have stabilized since 1958, along w ith the average o f all nonfarm wholesale prices per cent, 1957-59=100 * W o rld W a r II price controls rem oved. referred to as an “administered price” system. Prob ably they also believed price increases would have had undesirable consequences. The general inflationary wage-price spiral might have been stimulated further. Higher profits might have encouraged unions to de mand larger wage hikes and stockholders to press for more generous dividends. Also, there was the possi bility that the Federal Government might re-institute price and materials controls. This was done when the Korean War began in 1950. From 1946 through 1958 prices of finished steel products were increased virtually every year. Average steel prices rose 136 per cent during the interval while the average of all nonfarm wholesale prices increased 37 per cent. The last general steel price increase came when the economy was in the initial stages of recovery from the 1957-58 recession and the steel industry was operating at less than 60 per cent of capacity. Never theless, average prices were raised about 3 per cent in the summer of 1958 after wage increases agreed to in earlier negotiations became effective. Prices of steel have fluctuated moderately up and down since 1958 with no appreciable overall change. A similar trend has been evident in the average of non farm prices. Federal Reserve Bank of Chicago 23 As the economy advanced from the 1960-61 reces sion, there were widespread reports in trade circles that steel prices would be increased on October 1, 1961, when wages were to be raised under the union contract. But prices were not increased at that time. Inventories were increased by steel users in the first quarter of 1962 while labor negotiations were in prog ress. In April and May, orders were being cancelled and users began to reduce excess stocks. Moreover, competition from imports and other materials were helping to soften the price structure in steel. As a re sult, average steel prices declined somewhat in the late spring and summer of 1962, after an abortive attempt of some producers to increase prices in April. Selective steel price increases were announced as demand strengthened in April and again in October 1963. Since then adjustments up and down have oc curred, but average prices in the fourth quarter of 1964 were at virtually the same level as after the in creases of 1958. C han ge in com p etitive pressures Imports o f steel products have exceeded exports since 1958 on a tonnag e basis . . . million tons 8 " 7 - 1947 1949 1951 1953 1955 1957 . . . w h ile ,d o lla r value o f exports has a b o u t m atched im ports N o te : D ata not a v a ila b le p rio r to 1956. 24 Annual Report, 1964 1959 1961 1963 A number of developments have tended to restrain price increases since 1958 and to raise a question whether the industry continues to offer a clear ex ample of an “administered price” system. On the cost side it appears that labor expense per unit of output for the industry as a whole has remained relatively stable, with increased output per man-hour about off setting increases in worker compensation. On the sup ply side the waves of capital expenditures in the post war period, culminating in outlays of 1.7 billion dol lars in 1957, broke the bottlenecks in ingot capacity and in capacity to produce most finished products ex cept in periods of extremely high demand. There also appears to have been a lessening of concentration as medium-sized and specialized steel producers in creased their shares of the market. Finally, a series of antitrust suits involving steel firms and producers of other commodities have aimed at maintaining or in creasing price competition. Since 1958 imports have played a larger role in domestic steel markets, and exports have declined as foreign firms expanded capacity and output. Steel ex ports substantially exceeded imports until 1959. In that year a long steel strike encouraged domestic users to order from producers abroad, especially in West ern Europe and Japan. Once established, these trade relationships have been expanded and broadened. In dustry executives complain that some of the foreign steel sold in this nation is “dumped,” a term describ ing the practice of maintaining prices in home mar kets while charging less for “excess” output shipped abroad. Imports of steel reached 5.6 million tons in 1963 and were 7.5 per cent as great as shipments from United States mills, in contrast to exports that year of only 2.5 million tons. A large share of imported steel consists of lower priced types, such as reinforcing bars and wire products. Nevertheless, the dollar value of imports exceeded the dollar volume of exports in 1963 and probably in 1964 as well. Even before 1958 steel producers began to note increased competition from other materials. Rein forced and prestressed concrete in the mid-Fifties began to take a greater share of the construction mar ket from structural steel, partly because of architec tural and engineering developments but also because of the availability of cement while steel was in short supply. Aluminum has made inroads into the use of steel in containers, construction, motor vehicles, pipe and a variety of fabricated metal products. Plastics also have replaced steel in some applications. Competition among regions for markets also has been increased in recent years. Large eastern pro ducers have been attempting to increase sales in the Midwest, as a prelude to the establishment or expan sion of facilities in this area. Appreciable strengthening or weakening of mar kets has caused steel price adjustments that were not reflected in published price indexes. “Extras” are charged for steel products depending upon special characteristics, for example, dimensions or finish. When competition is strong, charges for extras are re duced or eliminated. Quantity discounts are raised or lowered and shipments are “undergraded” or “over graded” as market conditions permit. Freight can be absorbed in whole or in part. Rebates for defective shipments can be adjusted. Altogether these devices provide a fairly wide area for price competition withSteel industry ca p ita l expenditures continue in fo u rth postw ar expansion b illio n d o lla r s P ouring o f test hea t in the la b o ra to ry out changes in the list prices used to calculate indexes. In addition to price adjustments made to meet com petition of other materials and imports, steels have been developed that do jobs more effectively and at lower cost. Various structural alloy steels have been created with several times the strength of equivalent shapes made of carbon steel. Also, steels have been designed to “weather” and acquire an attractive pro tective coating that does not require painting or other maintenance. New rolling facilities are being constructed to pro duce “thin” tin plate in an attempt to win back part of the container market gained by aluminum. Other developments are progressing in the fields of coatings — metallic, plastic and organic— that will strengthen the market for steel in uses where corrosion resistance and appearance are important. Steel firms have urged more vigorous enforcement of antidumping laws to limit imports. But they also are emphasizing the benefits of the superior quality of American-made steels in many applications and are exploiting their natural advantage of being able to service nearby accounts more effectively than for eign producers located thousands of miles away. The p o stw ar ex p a n sio n SOURCE: D epartm ent o f Commerce and Am erican Iron and Steel Institute. During the period since World War II, the steel industry has participated in five waves of outlays on new plant and equipment corresponding to the five general business expansions: capital outlays hit suc cessive peaks in 1948, 1952, 1957 and 1960. Ex penditures were rising as 1964 drew to a close and the prospect was for a further increase in 1965. The Federal Government financed the construction of important new facilities during World War II. These plants, after hostilities were concluded, were sold at public auction to private firms, usually those that had operated them. Retirement of older plants caused a Federal Reserve Bank of Chicago 25 temporary reduction in the industry’s rated capacity in 1946 and 1947. Capacity at the start of 1950, how ever, was at a new high of 100 million tons (com pared with 82 million tons in 1939) and output that year reached 97 million tons. After the Korean War began, strong pressure was placed upon the industry by the Government to ex pand capacity further. Encouragement was offered through the provision of five-year write-offs for tax purposes. With heavy excess profit taxes, this was a strong inducement. Capacity at the start of 1955 reached 126 million tons. For the entire year 1955, the industry operated its steel furnaces at 93 per cent of estimated capacity. Without direct Government urging, profit prospects stimulated a new capital expenditure surge that boosted capacity to 149 million tons at the start of 1960. In 10 years the industry had increased its abil ity to produce steel ingots by 49 per cent! Such an increase in capacity would not have been outstanding in a new industry, but for an industry nearing com pletion of its first century it was noteworthy. In the early postwar years there had been appre hension that a sharp slump for steel and durable goods generally lay ahead once demand backlogs were satis fied. Memories were still clear of the 1929-32 decline in steel output— from 62 million to 15 million tons. (The 1929 output had not been exceeded until mili tary needs boosted demand in 1940.) Later opinion shifted to the view that the long-term uptrend of the Forties and Fifties would continue indefinitely. The pendulum had swung too far toward optimism. Out M odern tin m ill ca p a b le o f producing "th in t in " pla te 26 Annual Report, 1964 C up o la fo r hea tin g pig iro n and scrap und e r construction put in 1955 set a record that was not exceeded until 1964. There are a number of reasons for the sluggish de mand for steel after 1955. Probably important in gen eral was the strong rise of steel prices through 1958. This contributed to the increased use of imported steel, to the decline of exports and the larger use of competitive materials. More important, and probably not unrelated, were the short recessions in 1957-58 and 1960-61. These periods marked a slowing in the rate of economic growth, in which expansion of spend ing on consum er and business durable goods was dampened more than proportionally. Meanwhile, mil itary needs for steel were drastically reduced as re quirements shifted from conventional arms to air craft and missiles. Finally, there were improvements in the design of goods and structures and the introduc tion of better steels, both of which permitted equiva lent jobs to be done with a lesser weight of metal. Whatever the reasons for reduced output relative to capacity, the fact remains that a substantial part of the steel industry’s multi-billion dollar investment in structures and equipment has stood idle for long pe riods since 1957. Most of the newly constructed facil ities have been in use almost continually because of lower operating costs and higher quality products. Nevertheless, the profits of some steel firms probably would have been higher in recent years had their capi tal expenditure programs been paced more evenly in the Fifties. Older facilities represent “sunk” costs, but they yield nothing if not employed. Also, it is apparent that if a portion of the ingot expansion programs of the Fifties had been delayed a few years, they would have taken the form of oxygen converters rather than open hearths. New finishing capacity also would have taken a somewhat different form. Finally, prices of many types of capital goods declined after 1957 once order backlogs of producers of these items were worked down. After-tax earnings of steel firms have been below to ta l m anufacturing per cent o f net worth Profits and stock prices Steel industry profits after taxes amounted to 7.2 per cent of net worth in 1963, according to compila tions of the First National City Bank, compared with SOURCE: First N a tio n a l C ity Bank. 1964 estim ate by Federal Re serve Bank o f C hicago. D ry box used in steel research 11.5 per cent for all manufacturing industries. Profits in steel during the past five years have averaged 7.0 per cent of net worth as compared with 10.9 per cent for all manufacturing. For both steel and manufactur ing, these ratios are well below the averages of the earlier postwar period, but they are almost identical with the average for the years 1925-29. One factor holding down the increase in steel in dustry profits after 1961 has been the application of the Treasury’s new depreciation guidelines under which facilities are written off in an average period of 18 years in comparison to 25 years prior to 1962. Even without this factor, however, steel industry prof its relative to invested capital have been lower in re cent years than in the earlier postwar period and the reduction has been greater than for manufacturing as a whole. Investors have not favored steel common stocks in recent years. Standard and Poor’s index of steel stocks was 15 per cent below its 1957-59 average in Decem ber 1964 while that of 425 industrial stocks was 65 per cent higher. When reported, steel industry profits in 1964 are expected to be about 25 per cent above profits in the preceding year. Maintenance or improve ment of this level of earnings in 1965 doubtless would tend to raise the standing of steel shares. Rising profits are related to capital expenditures in two ways. First, profitability suggests that a favor able yield may be realized on new investments. Sec ond, after-tax earnings in excess of dividends provide Federal Reserve Bank of Chicago 27 a portion of the funds needed to finance outlays on plant and equipment. Dividends paid to stockholders were reduced by some major steel firms in 1962 and 1963, in part, to help pay for planned increases in capital expenditures. Heavy fixed capital investments encourage the use of debt in some industries. Executives of the largest steel firms, however, have been reluctant to go into debt to pay for expansion programs. This is partially because of the cyclical history of the industry. Out standing debt was considered to have been burden some in the Thirties when production was reduced. Steel firms have invested more than 20 billion dol lars in new plant and equipment since 1945. Out standing long-term debt and bank loans, nevertheless, totaled only 3.1 billion dollars in mid-1964. This debt amounted to 15 per cent of total assets, almost exactly the same as for all manufacturing. From 1945 through 1964 over 11 billion dollars had been provided through depreciation and 6 billion through retained earnings. Prices o f steel common stocks have not risen as strongly as the averages in recent years Vacuum degassing cham ber fo r p rod u cin g flaw less a llo y steel For the steel industry as a whole, internally gener ated funds (depreciation plus retained earnings) ex ceeded capital expenditures in 1962 and 1963 and possibly in 1964 as well. Heavy reliance upon inter nally generated funds has placed the industry in a strong position to finance the large capital expenditure programs that are likely to be needed in the years ahead. Steel's future With a new record of output in 1964, the steel in dustry rounds out its first century with order books full and hopes high for another good year in 1965. In the months ahead the nation will look forward to an early successful settlement in the pending labor-man agement negotiations. Continuous operation of this in dustry is a requisite to a healthy economy, and strikehedge inventory building is disruptive. Steel in recent years has provided an excellent ex ample of how a great industry, dominated by a rela tively small number of firms, can perform successfully in a competitive enterprise system. Nevertheless, there is a realization that this industry, perhaps to a greater extent than any other in manufacturing, is “clothed with the public interest.” Since the turn of the century, the Government has felt called upon to take a direct interest in steel because this industry’s problems have such widespread effects. Despite inroads on steel’s domain by other mate rials, this metal remains unchallenged in its ability to perform more varied tasks at lower cost than any other material. The surge of rapid technological change in 28 Annual Report, 1964 today’s steel industry probably is more vigorous than ever before. A growing portion of the industry’s re sources is being devoted to research and engineer ing in an attempt to improve products and their applications. As the oxygen converter takes a rapidly expanding place in steel production, interest is growing in a new process to prepare steel for hot rolling. Continuous casting, employed successfully in Europe for several years, permits bypassing the soaking pits and rough ing mills as a continuous flow of steel poured from steel furnaces is cooled and cut to lengths for further processing. Experiments are under way on processes that permit the reduction of iron directly from ores without the use of blast furnaces. Substantial outlays continue to be made on facilities to enrich ores for blast furnace use. Strides are being made in the com puter control of rolling mills and in new techniques, such as vacuum degassing and pressure pouring for stronger castings and forgings. In short, a large part of steel’s existing facilities may be replaced in the next decade or two as newly developed processes are intro duced that do jobs better, faster and at lower cost. Europe has led the way in some important new steel making processes, but usually United States producers have found ways to use these techniques in larger and more efficient applications. The fact that a high pro portion of Europe’s steel facilities have been con structed in the postwar period has placed some for eign firms at an advantage. Steel’s new wave of capital outlays may permit the domestic industry to leap ahead once again. In the decades to come steel will continue to play its major role in our lives. We will live and work in structures made partly of steel, ride in steel vehicles and consume food and commodities processed or fab- E xperim ental continuous casting unit — p a rt o f steel's fu tu re ricated by steel machinery. The major customers of steel firms have been, and will continue to be, the manufacturers of transportation equipment and farm, construction and industrial machinery— symbols all of American prosperity. The product mix will change in the future, as it has in the past, but the next hun dred years probably will continue to be characterized as the Age of Steel. Acknowledgm ents The photographs used in this section of the Annual Re port were provided by: Acme Steel Company: p. 1 3 top, p. 15— top, p. 26— top right (United Press Interna tional photo); Amsted Industries, Incorporated: p. 11 — middle, p. 23— middle right; Bethlehem Steel Company: p. 20— top; Great Lakes Steel Corporation, Division of National Steel Corporation: p. 11— bottom, p. 20— mid dle; Ford Motor Company: p. 17— top right; Don Heaton Associates: p. 23— middle left, p. 28; Hyman-Michaels Company: p. 12— middle, p. 12— bottom; Inland Steel Company: p. 11— top, p. 14, p. 15— middle, p. 25, p. 27; International Harvester Company: p. 21; McLouth Steel Corporation: p. 18; Midwest Steel Company Division; National Steel Corporation: p. 26— bottom left; Republic Steel Corporation: p. 8, p. 12— top, p. 13— bottom, p. 20— bottom, p. 23— bottom right, p. 23— top left, p. 2 3 middle right; Joseph T. Ryerson and Son, Inc.: p. 1 7 bottom left; United States Steel Corporation: p. 1 5 bottom, p. 16, p. 23— top right, p. 23— bottom left, p. 29. Cover, Inland Steel Company. Federal Reserve Bank of Chicago 29 A sse ts D ecem ber 31, 1964 D ecem ber 31, 1963 G o ld c e rtific a te a c c o u n t ................................................................................................................ $ 2 ,2 0 6 ,9 9 9 ,1 6 5 R e dem ption fund fo r F e d e ra l Reserve n o t e s ........................................................................... 2 8 6 ,9 6 7 ,6 9 5 2 5 6 ,1 6 2 ,8 7 5 $ 2 ,4 9 3 ,9 6 6 ,8 6 0 $ 2 ,6 8 2 ,7 1 1 ,1 4 5 T o ta l g o ld c e rtific a te reserves $ 2 ,4 2 6 ,5 4 8 ,2 7 0 F e d e ra l Reserve notes o f o th e r B a n k s .................................................................................. 6 1 ,5 7 6 ,0 0 0 5 0 ,3 7 9 ,0 0 0 O th e r c a s h ....................................................................................................................................... 2 5 ,4 6 7 ,3 0 4 2 5 ,1 6 7 ,3 1 7 Discounts a n d ad va nce s: Secured b y U. S. G o v e rn m e n t securities $ O t h e r ....................................................................................................................................... T o ta l discounts and a d v a n c e s .................................................................................. 2 ,2 5 0 ,0 0 0 $ 4 ,2 3 0 ,0 0 0 $ 6 ,4 8 0 ,0 0 0 3 ,3 00 ,0 0 0 4 ,5 12 ,0 0 0 $ 7 ,8 1 2 ,0 0 0 6 ,3 0 1 ,9 6 8 ,0 0 0 5 ,3 9 5 ,3 9 7 ,0 0 0 $ 6 ,3 0 8 ,4 4 8 ,0 0 0 $ 5 ,4 0 3 ,2 0 9 ,0 0 0 Cash items in process o f c o l l e c t i o n .......................................................................................... 1 ,4 0 1 ,2 8 8 ,5 0 9 1 ,2 7 7 ,4 3 1 ,3 0 7 Bank p re m is e s ....................................................................................................................................... 2 1 ,5 3 1 ,3 2 0 2 2 ,5 3 1 ,3 7 7 O th e r assets 8 5 ,0 0 7 ,1 9 9 6 0 ,9 8 2 ,7 5 3 $ 1 0 ,3 9 7 ,2 8 5 ,1 9 2 $ 9 ,5 2 2 ,4 1 1 ,8 9 9 $ 6 ,3 8 6 ,4 1 6 ,5 3 0 $ 5 ,8 9 1 ,4 8 8 ,2 1 0 M e m b e r b a n k r e s e r v e s ......................................................................................................... $ 2 ,6 3 8 ,2 3 8 ,9 2 9 $ 2 ,4 9 7 ,5 4 3 ,8 7 4 U. S. T re a s u re r— g e n e ra l a c c o u n t .................................................................................. 8 1 ,0 5 5 ,4 2 0 6 5 ,4 2 5 ,7 8 7 F oreign ....................................................................................................................................... 3 1 ,0 2 0 ,0 0 0 2 2 ,5 6 0 ,0 0 0 O t h e r ....................................................................................................................................... 17,65 2 ,7 3 7 3 3 ,27 9 ,5 4 2 T ota l d e p o s it s ........................................................................................................................ $ 2 ,7 6 7 ,9 6 7 ,0 8 6 $ 2 ,6 1 8 ,8 0 9 ,2 0 3 D e fe rre d a v a ila b ility cash i t e m s .................................................................................................. 9 9 9 ,0 0 0 ,8 1 9 7 8 8 ,8 7 7 ,2 5 5 U. S. G o v e rn m e n t securities T ota l loans and s e c u ritie s .......................................................................................... Total assets Liab ilities F e d e ra l Reserve n o t e s ......................................................................................................... Deposits: O th e r l i a b i l i t i e s ........................................................................................................................ 9 4 ,6 9 5 ,0 5 7 13,470,481 Total l i a b i l i t i e s ......................................................................................................... $ 1 0 ,2 4 8 ,0 7 9 ,4 9 2 $ 9 ,3 1 2 ,6 4 5 ,1 4 9 C ap ital accounts 7 4 ,6 0 2 ,8 5 0 6 9 ,9 2 2 ,2 5 0 S u r p l u s .............................................................................................................................................. 7 4 ,6 0 2 ,8 5 0 1 3 9 ,8 4 4 ,5 0 0 Total liab ilities and capital a c c o u n t s .................................................................... $ 1 0 ,3 9 7 ,2 8 5 ,1 9 2 $ 9 ,5 2 2 ,4 1 1 ,8 9 9 27.2% 31.5% C a p ita l p a id i n ........................................................................................................................ R atio o f g o ld c e rtific a te reserves to d e p o s it and F e d e ra l Reserve n o te lia b ilitie s c o m b i n e d ............................................................ C o n tin g e n t lia b ility on a c c e p ta n c e s purchased fo r fo re ig n c o rre s p o n d e n ts ......................................................................................................... 30 Annual Report, 1964 $ 17,31 4 ,8 0 0 $ 12,95 7 ,9 0 0 STATEMENT OF EARNINGS AND EXPENSES 1963 1964 C u rre n t earnings: Discounts a nd a d v a n c e s .................................................................................. $ 2 ,7 74 ,2 8 0 $ 1,679,049 U. S. G o v e rn m e n t s e c u r it ie s .......................................................................... 2 2 3 ,5 0 2 ,2 4 8 1 9 0 ,404,300 F oreign c u r r e n c i e s ......................................................................................... 9 0 1,823 2 8 8,100 A ll o t h e r ................................................................................................................ 48,541 4 2,590 T o ta l c u rre n t e a r n in g s .................................................................................. $ 2 2 7 ,2 2 6 ,8 9 2 $ 1 9 2 ,4 1 4 ,0 3 9 O p e ra tin g e x p e n s e s ......................................................................................... $ 2 8 ,3 7 2 ,0 3 3 $ 2 7 ,7 6 6 ,8 6 4 F e d e ra l Reserve c u r r e n c y .......................................................................... 3,117,641 1,712,708 C u rre n t expenses: Assessment fo r expenses o f B oa rd o f G o v e r n o r s .............................. 1,224,500 1,069,700 T o t a l ............................................................................................................... $ 3 2 ,71 4 ,1 7 4 $ 3 0 ,54 9 ,2 7 2 3 ,6 91 ,6 0 6 3 ,6 97 ,7 6 5 C u rre n t net e x p e n s e s .................................................................................. $ 2 9 ,0 2 2 ,5 6 8 $ 2 6 ,8 5 1 ,5 0 7 C u rre n t n e t e a r n i n g s .................................................................................. $ 1 9 8 ,2 0 4 ,3 2 4 $ 1 6 5,562,532 $ 103,881 $ 51,785 $ 197,946 $ 105,944 Less reim bursem ent fo r c e rta in fisca l a g e n c y a n d o th e r e x p e n s e s .......................................................................... A d d itio n s to curre n t net earnings: P ro fit on sales o f U. S. G o v e rn m e n t securities (net) . . . . T o ta l a d d itio n s ................................................................................................. 54,159 9 4,065 A ll o t h e r ............................................................................................................... 113,302 3 5 ,7 6 6 D eductions fro m curre n t net e a r n in g s ................................................................... -7 ,3 5 8 $ N e t e a rn in g s b e fo re p a ym e n ts to U. S. T r e a s u r y .............................. $ 1 9 8,3 6 6 ,5 0 4 $ 1 6 5,5 5 5 ,1 7 4 D ividends p a i d ........................................................................................................ 4 ,3 7 3 ,2 1 9 4 ,0 6 9 ,4 5 0 Payments to U. S. Treasury (interest on Federal Reserve notes) . T ra n s fe rre d to s u rp lu s ................................................................................................. 162,180 $ N e t d eductions fro m (— ) o r a d d itio n s to curre n t net e a rn in g s . 1 5 3 ,713,724 2 5 9 ,2 3 4 ,9 3 5 * $ - 6 5 ,2 4 1 ,6 5 0 $ 7 ,7 72 ,0 0 0 Surplus account Surplus, J a n u a ry 1 ........................................................................................................ T ra n s fe rre d to surplus— as a b o v e Surplus, D ecem ber 31 ......................................................................................... $ 1 3 9 ,8 4 4 ,5 0 0 $ 1 3 2,0 7 2 ,5 0 0 - 6 5 ,2 4 1 ,6 5 0 7 ,7 7 2 ,0 0 0 $ 7 4 ,60 2 ,8 5 0 $13 9,8 4 4 ,5 0 0 *See note on page 33. Federal Reserve Bank of Chicago 31 1964 Clearing and collection Currency and coin Safekeeping of securitiest Discount and credit Investment Transfer of funds Dollar amount (in millions) Commercial bank checks.................................. Government checks*......................................... Other items........................................................ Number of pieces (in thousands) Commercial bank checks.................................. Government checks*........................................ Other items........................................................ Dollar amount (in millions) Currency received and counted...................... Coin received and counted............................. Coin wrapped................................................... Unfit currency withdrawn from circulation. .. . Number of pieces (in millions) Currency received and counted...................... Coin received and counted............................. Coin w rapped................................................... Unfit currency withdrawn from circulation. . .. Dollar amount (in millions) Securities received........................................... Securities released............................................ Coupons detached............................................ In safekeeping on December 3 1 ........................ Number of pieces (in thousands) Securities received........................................... Securities released............................................ Coupons detached............................................ In safekeeping on December 3 1 ....................... Dollar amount (in millions) Total loans made during ye ar......................... Daily average outstanding............................... Number of banks accommodated during year....... Purchases and sales of securities for member banks Dollar amount (in millions)............................... Number of transactions.................................... Dollar amount of funds transferred (in millions) . . . Number of transfers (in thousands)......................... ’ Includes postal money orders. 32 Annual Report, 1964 fln c lu d in g c o lla te ra l custodies. 1963 237,462 220,840 16,693 16,777 519 440 687,893 628,341 93,759 95,219 1,716 1,649 5,559 67 864 5,115 130 141 867 893 864 47 348 1,103 703 222 1,281 235 16,792 15,969 16,410 262 8,637 16,374 259 8,255 426 369 384 304 2,913 1,493 2,747 1,384 6,716 49 192 77 179 1,436 1,799 1,878 17,150 16,199 570,905 485,705 615 548 Marketable securities Dollar amount (in millions) Issued........................................................................ Servicing: 15,619 Securities re ce ive d ....................................... 15,806 14,627 Securities delivered...................................... 20,961 18,848 Redeemed................................................................ Number of pieces (in thousands) 20,050 19,955 Issued........................................................................ Servicing: 348 316 Securities re ce ive d....................................... Securities delivered...................................... 209 513 206 450 Redeemed................................................................ 724 619 Issued........................................................................ 1,576 1,509 Servicing: Bonds received fo r reissue........................ 160 144 Bonds delivered on reissue........................ Services to the U.S. Treasury 15,200 160 144 Savings bonds Dollar amount (in millions) Bonds delivered on replacement............... 5 5 Redeemed................................................................ 1,028 991 22,880 22,112 Bonds received fo r reissue........................ Bonds delivered on reissue........................ Bonds delivered on replacement............... 699 779 60 666 750 53 Number of pieces (in thousands) Issued........................................................................ Servicing: Redeemed................................................................ 15,313 14,859 Federal tax receipts processed Dollar amount (in millions)............................................. 7,793 8,030 Number of pieces (in thousands)................................. 1,912 1,858* *Footnote to Statement of Earnings and Expense The am ount o f paym ents to the U. S. Treasury as interest on Federal Reserve notes fo r the y e a r 1 9 6 4 to ta le d $ 2 5 9 ,2 3 4 ,9 3 5 , com pared d ividends plus amounts necessary to reduce surplus to the level o f p a id -in c a p ita l, instead o f subscribed c a p ita l, as h e re tofore . w ith $ 1 5 3 ,7 1 3 ,7 2 4 in 1 9 6 3 , as shown in the statem ent o f earnings _Since 1 9 5 9 , the Fe d e ra l Reserve System has been p a y in g into and the U. S. Treasury as interest on Federal Reserve notes a ll net expenses. In th a t connection the Board o f G overnors o f the Federal Reserve System issued the fo llo w in g statem ent on Ja nu a ry earnings o f the Federal Reserve Banks a fte r p aym e n t o f statutory 5, 1965: divid e n ds and amounts set aside to m aintain the surplus accounts P relim inary figu re s received in d ica te th a t during the y e a r from the Federal Reserve Banks 1 9 6 4 th e ir earnings am ounted to $ 1 ,3 4 4 m illion, an increase o f $ 1 9 3 million com pared w ith 1 9 6 3 . o f the 12 Reserve Banks a t a level equ a l to the am ount o f c a p ita l subscribed b y th e ir m em ber banks. M e m be r banks a re re q u ire d to subscribe to Federal Reserve m illion on U. S. G overnm ent securities w ere Bank c a p ita l stock in an am ount e qu a l to 6 p e r cent o f th e ir own $ 1 8 6 m illion more than in 1 9 6 3 , re fle ctin g an increase in a v e ra g e c a p ita l and surplus, and to p a y in o n e -h a lf o f the subscribed amount. holdings and a higher a v e ra g e yie ld . Earnings from discounts and Because o f the g row th o f the c a p ita l structure o f the 6 ,2 0 0 m em ber Earnings o f $ 1 ,3 2 4 advances w ere $ 1 0 m illion, co m pa re d w ith $ 9 million in 1 9 6 3 ; and banks, in re fle ctio n o f the g row th o f the econom y, the subscribed earnings on fo re ig n currencies am ounted to $6 m illion, com pared c a p ita l o f the Reserve Banks a t the end o f w ith $2 m illion in 196 3 . $ 1 ,0 4 8 m illion, an increase o f n e a rly $ 3 0 0 m illion since 1 95 9 . 1 96 4 had reached Expenses in 1 9 6 4 am ounted to $ 1 9 7 million, $ 1 0 m illion more A c c o rd in g ly , the B oard has concluded that the g row th in the c a p ita l than in 1 9 6 3 , le a vin g net earnings o f $ 1 ,1 4 7 m illion b e fo re d iv i and accum ulated surplus o f the several Reserve Banks, as w ell as dends and paym ents to the U. S. Treasury, com pared w ith $ 9 6 4 in th e ir net earnings (which rose from $ 8 4 0 m illion in 1 9 5 9 to m illion in 1 9 6 3 . $ 1 ,1 4 7 Payments o f sta tu to ry divid e n ds to m em ber banks am ounted to m illion in 1 9 6 4 ), w a rra n ts reducing the surplus o f the Reserve Banks to the level o f p a id -in c a p ita l instead o f subscribed $31 m illion, up $ 2 m illion from 1 9 6 3 . Payments to the U. S. Treasury c a p ita l as has h e re to fo re been the case. This decision w ill a d d $ 5 2 4 as interest on Federal Reserve notes fo r the y e a r 1 9 6 4 w ill to ta l million to the am ount p a id into the Treasury in 1 9 6 5 . $ 1 ,5 8 2 m illion. These paym ents consist o f a ll net earnings a fte r Federal Reserve Bank of Chicago 33 JA M ES H. HILTON, President Iow a S tate U niversity o f Science and T ech n o lo g y Am es, Iow a D e p u ty C h a irm a n JO HN H. CR O CK ER, C h a irm a n o f the Board W ILLIAM E. RUTZ, D ire cto r The Citizens N a tio n a l Bank o f D e ca tu r a nd M e m b e r o f the Executive C om m ittee D ecatur, Illinois G id d in g s & Lewis M ach in e Tool C o m pa n y Fond du Lac, W isconsin W ILLIAM A . HAN LEY, D ire cto r HARRY W. SCHALLER, President Eli Lilly & C om pany The C itizens First N a tio n a l In d ia n a p o lis , In d ia n a Bank o f Storm Lake Storm Lake, Iow a GERALD F. LA N G EN O H L, T reasurer a n d Assistant S ecre tary JO H N W. SHELDON, President Allis-C halm ers M a n u fa c tu rin g C o m pa n y Chas. A . Stevens & Co. M ilw a u k e e , W isconsin C h ica g o, Illinois KENNETH V. ZW IENER, C h a irm a n o f the Board H arris Trust a n d Savings Bank C h ica g o, Illinois DETROIT BRANCH JA M ES W. MILLER, President W estern M ich ig a n U niversity K a la m a zo o , M ich ig a n C h a irm a n JO HN H. FRENCH, JR ., President FRANKLIN H. M O O RE, C h a irm a n o f the Board C ity N a tio n a l Bank o f D e tro it a n d President D e tro it, M ichigan The C om m ercial and Savings Bank o f St. C la ir C o u n ty St. C la ir, M ich ig a n M A X P. H EAVEN RICH, JR ., President H eavenrich Bros. & C o m pa n y G U Y S. PEPPIATT, C h a irm a n o f the B oard S a g in a w , M ic hig a n F ed e ra l-M o gu l-B o w e r Bearings, Inc. D e tro it, M ich ig a n C. LIN COLN LINDERHOLM, President DON ALD F. V A LLEY, D ire c to r C e n tra l Bank N a tio n a l Bank o f D e tro it G ra n d Rapids, M ic hig a n D e tro it, M ichig a n MEMBER OF FEDERAL ADVISORY COUNCIL EDW ARD BYRON SMITH, C h a irm a n o f the B oard The N o rth e rn Trust C o m p a n y C h ica g o , Illinois December 31, 1964 34 Annual Report, 1964 CHARLES J. SC A N LO N , President HUGH J. HELMER, First Vice President CLAREN CE T. LAIBLY, Vice President ERNEST T. BAUG H M A N , Vice President RICHARD A. M OFFATT, Vice President JO H N J. ENDRES, G e n era l A u d ito r HAROLD J. N EW M AN , Vice President ARTHUR M. G U STA V SO N , Vice President LELAND M. ROSS, Vice President PAUL C. H O D GE, Vice President, HARRY S. SCHULTZ, Vice President G e n era l Counsel a nd S ecretary LAURENCE H. JO N ES, Vice President a nd C ashier RUSSEL A. SW A N EY, Vice President CARL E. BIERBAUER, Assistant Vice President KARL A. SCHELD, Assistant Vice President G EO R G E W. CLO O S, S enior Economist BRUCE L. SMYTH, Assistant Vice President FRED A. DONS, Assistant G e n era l A u d ito r ROBERT E. SO RG, Assistant Vice President DANIEL M. DOYLE, Assistant Vice President JOSEPH J. SRP, Assistant Vice President ELBERT O. FULTS, Assistant Vice President EDWARD A. HEATH, Assistant Vice President LYNN A. STILES, Senior Economist and Assistant S ecretary JAM ES R. M ORRISON, C hief Exam iner CHARLES G. W RIGHT, Assistant Vice President ARNOLD J. AN SCHUTZ, Assistant Cashier VICTO R A. HANSEN, Assistant C ashier HARRIS C. BUELL, Assistant C h ie f Exam iner WILLIAM O. HUME, Assistant C ashier JO HN J. CA P O U C H , Assistant C ashier ERICH K. KROLL, Assistant C ashier LE ROY A. DAVIS, Assistant Cashier WARD J. LARSON, Assistant Counsel and Assistant S ecretary LE ROY W. DAW SON , Assistant C ashier RAYM ON D M. SCHEIDER, Assistant C ashier FRANCIS C. EDLER, Assistant C ashier CARL W. W EISKOPF, Assistant C h ie f E xam iner LESTER A. G O H R, Assistant Cashier DETROIT BRANCH RUSSEL A. SW A N EY, Vice President PAUL F. CA REY, Assistant C ashier RICHARD W. BLOOM FIELD, Assistant Vice President LOUIS J. PUROL, Assistant C ashier G O RD O N W. LAM PHERE, Assistant G e n e ra l Counsel W. G EO R G E RICKEL, Assistant C ashier December 31, 1964 Federal Reserve Bank of Chicago 35 Appointments, Elections, Resignations and Retirements I n u r i n g the year the following appointments and elections were announced: John H. Crocker, Chairman of the Board, The Citizens National Bank of Decatur, Decatur, Illinois, was reelected Director for a three-year term ending December 31, 1967. James H. Hilton, President, Iowa State University of Science and Technology, Ames, Iowa, a Director since 1960 and Deputy Chairman since 1961, was redesignated Deputy Chairman for 1965. Franklin J. Lunding, Chairman of the Board, Jewel Tea Company, was appointed Director of the Bank for a three-year term ending December 31, 1967, and was designated Chairman of the Board and Fed eral Reserve Agent for 1965 to succeed Robert P. Briggs, Executive Vice President, Consumers Power Company, Jackson, Michigan. Mr. Lunding formerly served as Deputy Chairman of the Bank for one year (1949) and Chairman for three years (1950-52). James W. Miller, President, Western Michigan University, Kalamazoo, Michigan, was reappointed Director of the Detroit Branch Board for a three-year term ending December 31, 1967. Mr. Miller was re elected Chairman of the Detroit Board for 1965. Raymond T. Perring, Chairman, Detroit Bank and Trust Company, Detroit, Michigan, was appointed Director of the Detroit Branch Board for a three-year term ending December 31, 1967, to succeed Donald F. Valley, former Chairman, National Bank of De troit, Michigan. William E. Rutz, Director and Member of the Ex ecutive Committee, Giddings & Lewis Machine Tool Company, Fond du Lac, Wisconsin was reelected Di rector for a three-year term ending December 31, 1967. Edward Byron Smith, Chairman of the Board, The Northern Trust Company, Chicago, Illinois, was re appointed member of the Federal Advisory Council of the Federal Reserve System for 1965. 36 Annual Report, 1964 Bruce L. Smyth, Assistant Vice President, was pro moted to Vice President, effective January 1, 1965. LeRoy A. Davis, LeRoy W. Dawson and Victor A. Hansen, Assistant Cashiers, were promoted to As sistant Vice Presidents, effective January 1, 1965. Robert P. Briggs resigned as Chairman and Fed eral Reserve Agent of the Bank effective September 21, 1964. He had been a Director since 1956, Dep uty Chairman in 1960 and Chairman and Federal Reserve Agent since 1961. Donald F. Valley, former Chairman, National Bank of Detroit retired as Director of the Detroit Branch Board on December 31, 1964. Mr. Valley had been a Director since 1959. The employes listed below, all with service records of more than 25 years, retired in the course of the year from the Bank: John Egeland John L. Hopcia Helen Gloss James Isherwood Zenon Jerus John A. Reiter William Thau The following employes had been associated with the Bank for more than 40 years before retiring in 1964: Gerald L. Beyerlein Roy C. Helsten Gertrude Hoefer Aloysius L. Kauth Eugene Liday Margaret C. Toomey Robert Wilson These 14 retired employes of the Bank represent more than 495 years of service to this institution. H G 2613 ANNUAL REPORT, I96A Date Due Federal Reserve Bank o f Chicago F29a CA " 196a L ib ra ry Bureau C at. N o. 1137 Requests for additional copies of this report sh o u ld be a d d re sse d to: Research D e p a rtm e n t F ederal Reserve B ank o f C h ica g o Box 834 C h icago, Illin o is 6 0 6 9 0