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FEDERAL

RESERVE

BANK

OF

CHICAGO

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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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102