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FEDERAL RESERVE BANK OF CHICAGO

annual report 1966

M ACHINERY AND EQUIPM ENT

key industries in the Midwest

To the M em ber Banks o f the
Seventh Federal Reserve D istrict:

It is our pleasure to submit to you the Annual Report of the Federal Reserve
Bank of Chicago for the year 1966.
Last year combined public and private demands for goods and services pressed
closely upon the nation’s economic resources and credit growth was restrained to
dampen price inflation. The impact of these developments upon the Seventh Federal
Reserve District is described briefly at the beginning of this report.
A discussion of the machinery and equipment industries and their role in the
economy of the Midwest and the nation is presented on pages 10-33.
The financial statements are presented on pages 34 and 35. The volume of
transactions in many departments of the Bank has continued to rise as business
activity in the Seventh District has expanded further (pages 36 and 37).
Official appointments and elections during the year are reported on pages 38-40.
On behalf of the directors, officers and staff, 1 extend to you appreciation for
your cooperation and counsel which has enabled us to provide continued high-quality
financial services to the public.
Sincerely,

January 20, 1967

Economic
Developments

R fsnuiTf's of men and facilities were utilized more
fully during 1966 than at any time since the Korean
War, in both the nation and in the Seventh Federal
Reserve District. As record demands of consumers,
businesses and governments—aided substantially by
credit expansion—pressed upon productive capacity,
price increases were widespread and persistent.
To prevent snowballing price inflation, monetary
policy during 1966 was directed toward reducing the
rate of credit growth, while the Government took
steps to increase tax receipts and restrain the rise of
expenditures. During the latter part of the year, in­
come and total output of goods and services were
increasing at a more moderate pace than in earlier
months and prices of some goods declined. Neverthe-

Rise in m achinery output
leads other in d u strie s in 1966
percent, 1957-59 =100

2

less, the economy retained substantial momentum,
and prospects for a further increase in activity in
1967 remained favorable.
D e fe n se an d b u sin ess in ve stm e n t

Consumer outlays continued to rise, increasing
about 8 percent from the 1965 level. The main im­
petus to overall business expansion, however, came
from military outlays and business investments in new
plant and equipment and inventories.
As a result of the Vietnam conflict, national de­
fense outlays rose to a rate of 61.3 billion dollars in
the third quarter, up 21 percent from a year earlier.
Military orders, although important, did not play a
dominant role in the Midwest economy where the
prime movers in the expansion were the machinery
and equipment industries. The five-state area of the
Seventh District produces about one-third of all pro­
ducers’ durable equipment (see article, page 10).
Output of machinery and equipment continued to
rise throughout 1966 and was up about 15 percent for
the year as a whole. Meanwhile total output of con­
sumer goods increased slowly early in the year and
then leveled off. Virtually all producers of machinery
and equipment operated at practical capacity limited
by availability of facilities, floor space and, most com­
mon and most critical, manpower. Supplies of materi­
als and components tended to ease in the fourth
quarter, but shortages of skilled workers, especially
in the metalworking trades, remained severe.
Orders for construction machinery were at a very
high level until the fourth quarter when reductions in
housing and commercial construction (and related
industries such as logging) were reflected in a sharp
decline. Farm equipment output remained strong
throughout the year and, for the first time since the
Korean War, total output was limited by productive
capacity.

Consum er prices continued to rise but
the w holesale index declined in late 19 66 ,
m a inly reflecting low er fa rm
percent,

prices

195 7 -5 9 =100

continued strong throughout the year, but makers
were prompted to adjust production schedules in
favor of lower-priced models to tap a vast market
potential.
Steel output reached a record 134 million tons in
1966, compared with 131 million tons the year before,
but shipments of finished steel were down slightly as
mill inventories rose. Imports of steel totaled 10
million tons, about the same as in 1965 when these
were stimulated by a strike threat. Steel output
reached a peak rate in the spring as new facilities
came into production and some older ones were re­
activated. The ingot rate declined gradually in the
fourth quarter, more because steel users were liqui­
dating inventories than because of reduced consump­
tion.
C onstruction slid es

I9 6 0

SO U RC E:

1961

1962

1963

1964

1965

1966

U. S. Bureau o f Labor Statistics.

New orders for total machinery and equipment
reached a peak in the second quarter and then de­
clined somewhat. Nevertheless, these orders remained
above rising shipments through October and unfilled
orders continued to rise. Order lead times lengthened
and prices of some types of capital goods increased
sharply.
A utos, a p p lia n c e s an d ste e l

Auto sales were at an extremely rapid pace in the
early months of 1966, allowing for normal seasonal
patterns. When the rate of sales slackened in the
spring, output schedules for the remainder of the
model year were reduced. Planned production of
1967 model passenger cars was curtailed in the fourth
quarter as sales proved somewhat disappointing after
a fairly strong start.
Passenger car output totaled 8.6 million in 1966,
down from 9.3 million in 1965, but far larger than
in any earlier year. Truck production was only
slightly below 1965’s record level, and unfilled orders
for heavy trucks remained large throughout the year.
Large gains in sales and output were reported for
most major household appliances and for furniture
in 1966. Demand slackened in the fourth quarter,
however, and layoffs were announced late in the year
as some of the major appliance manufacturers moved
to reduce inventories. Sales of color television sets

Total construction activity declined steadily after
a peak attained in March. Most of the drop was
accounted for by residential building, but the nonresidential and government sectors also slowed
moderately.
Housing starts for the nation were off about 20
percent from 1965, mainly because of reduced avail­
ability of mortgage funds. For the Midwest the de­
cline was much smaller, reflecting the underlying

Re sid e n tia l b uilding declined sha rp ly
in 1 9 66 w h ile other construction leveled
billion

dollars

vigor of housing demand and the low vacancy rates
reported for certain leading centers.
Total construction contracts for the first 11 months
of 1966, as reported by F. W. Dodge, were up 5
percent in the Midwest from the same period a year
earlier—slightly more than for the nation. For the
January-May period, however, construction contracts
had exceeded 1965 by 18 percent in the Midwest and
9 percent in the nation. Year-to-year declines in later
months, first in the residential and later in the com­
mercial sectors, sharply reduced the margin of gain.

Prices of fa rm commodities
average w e ll above
other recent years
percent,

1957-59 = 100

Lab o r m a rk e ts tig ht

Throughout the Midwest, demands for workers—
skilled and unskilled, experienced and inexperienced
—remained very strong in 1966. In late November
rates of insured unemployment were 1 percent or less
in Illinois, Indiana and Iowa, and 1.2 percent in
Michigan, compared with 1.9 percent in the United
States. These rates were the lowest on record in all
states, except for a slightly lower rate in Michigan a
year earlier. Increased draft calls aggravated labor
shortages resulting from high level activity.
Even building trades workers remained in short
supply. Apparently, increases in some types of nonresidential construction and repair and modernization
activity, together with opportunities in other industries
and attrition through retirements prevented an appre-

As em ploym ent rose, unem ploym ent
w a s reduced to the low est level
since the Korean W a r
percent

ciable increase in unemployment among construction
workers, at least in the Midwest.
Businesses increased recruiting efforts by extensive
advertising, lowering of hiring standards, bounties and
other measures. Training programs were activated or
expanded. Nevertheless, lists of job vacancies con­
tinued to lengthen at many firms, and higher labor
turnover, increased absenteeism and the use of less
qualified workers tended to reduce efficiency.
Farm incom e rise s

The farm sector of the economy reported substan­
tial income gains during 1966. Net income from farm­
ing operations advanced further from the high level of
1965 and was the largest since the period immedi­
ately following World War II. The continued advance
in agricultural prosperity can be attributed primarily
to higher prices of farm commodities, virtually across
the board.
Prices received for farm products were substan­
tially above year-earlier levels during early 1966,
reflecting both relatively small supplies of slaughter
livestock, especially hogs, and the expectation that
1966 feed grains and soybean crops would be sub­
stantially short of expected consumption. Prices of
dairy products and fruits and vegetables also rose
sharply in response to reduced supplies and strong
consumer demand. As a result of expanded meat pro­
duction and a larger than expected crop harvest,
average farm prices declined in the fourth quarter
but continued well above year-earlier levels.
Deposits at most “agricultural” banks rose, reflect­
ing, in part, higher farm income. Demand deposits at
these banks increased at about twice the rate of most
recent years and in October were about 5 percent

above the same month of 1965. Time deposits in
October were 10 percent or more above the yearearlier level in each of the District states.
The marked improvement in farm income, coupled
with an optimistic outlook of farmers, led to increased
spending for production and capital goods. Expendi­
tures for production items rose about 8 percent.
Higher prices were partly responsible, but the physical
volume of purchases of most production items such
as fertilizers, insecticides, weed inhibitors, seeds and
feed also rose.
Outlays for most types of equipment increased
substantially. For example, purchases of tractors by
District farmers—their major equipment expenditure
—increased 18 percent from the year-earlier level
during the first 10 months of 1966. Meanwhile, de­
mand for farmland remained very strong as additional
land was purchased to expand existing farms. Farm­
land prices in the District were about 9 percent above
the previous year at the end of the third quarter.
These developments were accompanied by in­
creased borrowing. At midyear, non-real estate farm
loans outstanding at District member banks were up
nearly 14 percent from 1965, more than double the
increase in the preceding 12 months. Loans secured
by farm real estate were about 12 percent higher,
nearly equal to the large rise during the 1964-65
period. While demand for new credit continued
strong, bankers in many areas reported that repay­
ments of outstanding loans had accelerated and that
renewals and extensions had declined.

Fa rm e rs1 cash receipts
from

m arketings rose sha rply,

largely because o f higher prices
percent increase

Illin o is

from

1965

Indiana

Iowa

Michigan

W isconsin

United States

Deposits at agric ultura l banks
rise sha rp ly as fa rm and other
income rose in ru ra l areas
percent, 1957-59=100

B ank g ro w th m o d e rate d

Rising levels of expenditure continued to generate
strong demands for credit, especially by the business
sector. In the face of upward price pressures and
near-capacity utilization of resources, monetary pol­
icy was designed to slow the rate of credit growth
and at the same time to moderate the unduly heavy
impact of monetary restraint on certain sectors of the
economy. As credit demands exceeded limited sup­
plies, interest rates rose to the highest levels in 40
years. With yields in the money and capital markets
well above the rates that banks and other intermedi­
aries were able to pay for funds, a smaller portion
of the total volume of credit was accounted for by
the commercial banks, reversing the trend that had
prevailed during the preceding five years.
Total loans and investments of all Seventh Dis­
trict member banks were 6 percent above the yearearlier level in early December, compared with a
record 10 percent gain in the previous 12 months.
Bank credit trends in the District roughly paralleled
developments for the nation. In the first half of 1966,
credit growth slowed slightly from the rapid 1965
pace, but in late summer both bank credit and money
supply, seasonally adjusted, turned down and con­
tinued to decline through the fall months. The expan­
sion in aggregate loans and investments of District
banks from August through November was only about
40 percent of the increase during the same period of
1965, mainly because of greater net pay-downs of
loans at large banks in the major cities.
Despite persistently strong credit demands, over-

5

all loan expansion in the District was relatively
smaller in 1966 than in the previous year for both
city and country banks. At the beginning of Decem­
ber, loans and discounts of all member banks were
10 percent above the year-earlier levels—well below
the 17 percent gain recorded for 1965. While some
easing of loan demand appeared in the fall, the slower
pace of lending was attributable in large part to re­
strictive bank policies necessitated by the slower
growth in bank reserves.
The unusual strength in loan demand stemmed
mainly from commercial and industrial firms seeking
to finance an unprecedented expansion in working
capital and facilities. At the large District banks for
which information is available on the composition of
loan portfolios, business loans increased very rapidly
through July but leveled off thereafter. For the year
as a whole, these loans rose about 15 percent, much
less than the 23 percent gain in 1965 but significantly
more than in any other recent year. Other types of
borrowers also felt the impact of the squeeze on bank
funds. Real estate and consumer loans continued to
rise, but at a slower pace, while loans to finance com-

G ro w th in past year less rapid
than in 1 9 6 5 at both city
and country banks in Seventh D istrict
weekly reporting member banks
percent change

‘ Excludes large country banks which reported weekly in both
years.

panies and securities dealers failed to show their
normal expansion late in the year.
Most banks accommodated loan customers, when­
ever possible, by further reducing their investments.
Holdings of U. S. Government securities declined 7
percent at all District member banks, matching a
similar liquidation in the previous year. The reduc­
tion at city banks was relatively smaller than in 1965
while at country banks it was greater. This difference
reflects the relatively low liquidity positions of the
large banks. City banks had only small amounts of
Governments remaining in their portfolios that were
not pledged against public deposits or required by
“dealer” banks for trading purposes. Investments in
securities other than Governments rose 8 percent dur­
ing the year. Acquisitions of these securities—mainly
municipals—were concentrated in the early months
of the year and were partly offset by later sales.
The late 1966 halt in credit growth at member
banks was the counterpart of a downturn in deposits,
especially time deposits. For the year as a whole, time
and savings deposits of all District member banks rose
less than 7 percent compared with annual gains in the
previous five years ranging from 12 to 20 percent.
Banks continued to bid aggressively for funds in
1966, within the rate limits set by regulatory action.
The maximum interest rate payable on time deposits
other than savings had been raised to 5.5 percent in
December 1965 (from 4.5 percent on maturities of
90 days or more and 4 percent on shorter maturi­
ties), but by midsummer yields on alternative invest­
ments, such as Treasury bills and commercial paper,
had risen so sharply that even the new ceiling ham­
pered banks in competition for interest-sensitive
funds. From mid-August to the end of November,
CDs of $100,000 or more outstanding at the District’s
large money market banks declined 450 million dol­
lars, or about 20 percent. Toward year-end, however,
CD run-offs slowed as yields on alternative invest­
ments declined.
Meanwhile, many banks attempted to attract funds
by offering small denomination time certificates to
individuals and others at rates well above the 4 per­
cent maximum rate permitted on passbook savings.
These instruments accounted for a rising proportion
of time deposit money. A large portion of the gains
in these “other time” deposits represented shifts from
passbook savings, often within the same institution.
While such shifts were most significant at the Dis­
trict’s largest banks, smaller banks also reported net
withdrawals of savings balances, especially during the
second half of the year. Aggregate demand deposits at

District banks in December were less than 2 percent
above year-earlier levels—a smaller net gain than in
1965. The total dollar volume of time and savings
balances combined exceeded demand deposits in
February for the first time on record and remained
higher through year-end despite the run-off of CDs
at large banks in the fall months.
The ratio of loans to deposits is a general indicator
of bank liquidity; changes in this ratio strongly influ­
ence bank lending policies. Total loans of all District
member banks exceeded 62 percent of gross deposits
at year-end. Ratios of individual banks varied sub­
stantially, ranging up to 80 percent at a few large
banks.

C red it expansion slowed
w ith decline in tim e deposits
billion

dollars

M o n e ta ry po licy action

Deposit trends, of course, reflected actions of the
monetary authorities. The need to restrain aggregate
demand in order to contain inflationary forces became
persuasive in the late fall of 1965 and was marked
by the discount rate increase in December of that
year. In the early part of 1966, the Federal Reserve
System maintained a restrictive posture by supplying
reserves to the banking system less freely than would
have been necessary to meet the burgeoning demands
for credit as the pace of business accelerated. Under
these conditions, although bank credit continued to
expand, interest rates continued the rise which had
begun in mid-1965. Moreover, the availability of
credit was sharply curtailed in certain sectors—nota­
bly residential building—while business loans con­
tinued to rise.
Concern over the uneven impact of reduced credit
availability influenced the nature of monetary policy
actions. High rates did not sufficiently deter business
borrowing. In view of the objective of slowing the
growth in bank credit, especially loans to business,
with minimal impact on interest rates, the maximum
rates payable on time deposits were not raised and
the discount rate remained at the level established in
December 1965. With yields on other investments
continuing to advance, loan policies became more
restrictive. In addition, a number of positive steps
were taken that also reduced the banks’ ability and
incentive to expand their loans.
Percentage reserve requirements against time de­
posits other than passbook savings in excess of 5 mil­
lion dollars at any one bank were raised twice—first
in July from 4 to 5 percent, and again in September
to 6 percent. These changes absorbed reserves and
increased the effective cost of time funds to the large
banks. In July, the Board also amended Regulations

D and Q (effective September 1) to include short­
term promissory notes under the definition of depos­
its, thereby making them subject to reserve require­
ments and regulations relating to the payment of
interest on deposits. As a result, banks were pre­
vented from avoiding the restrictive effects of policy
through the issue of promissory notes. Some banks
had issued higher-yield notes in 1965 when the 4.5
percent ceiling on time deposit rates had become an
impediment to their deposit growth. All such notes
have now been retired.
Another amendment to Regulation Q (effective
July 20) reduced the maximum rates payable on
“multiple-maturity time deposits” (deposits payable
at the depositor’s option on more than one date) to
5 percent on such deposits maturing in 90 days or
more and to 4 percent on those payable in less than
90 days. In still another amendment to Regulation Q,
the maximum rate payable on single-maturity time
deposits other than savings in denominations of less
than $100,000 was reduced to 5 percent. This action
immediately followed legislation approved September
21 which specifically authorized the Board to pre­
scribe different rate limitations for different classes of

7

deposits according to size, maturity, nature or loca­
tion of depositors or other “reasonable bases.” Con­
currently, the new ceilings were made applicable to
insured nonmember banks by the FDIC and, under
newly enacted legislation, the Federal Home Loan
Bank Board established upper limits on dividend rates
paid by savings and loan associations.
These restrictive actions were designed especially
to reduce the impact of overall monetary policy on the
residential mortgage market. But it was recognized
that with deposits leveling off or declining as invest­
ors sought more attractive returns elsewhere, the
attempt by banks to adjust reserve positions through
sales of securities also could have damaging effects on
other financial institutions. Evidence of such a devel­
opment appeared in August when market prices of
some long-term municipal obligations dropped pre­
cipitously. In these circumstances, the Federal Re­
serve on September 1 called upon all member banks
to reduce lending to businesses in preference to fur­
ther liquidation of securities. The request reminded
banks that discount facilities were available to assist
them in case of a shrinkage of deposits and that the
System was prepared to extend such accommodation
over longer periods of time to the extent that adjust­
ments were made through loan curtailment.

Tim e dep osit gains at D istrict banks
shifte d to consumer-type certificates
w e ek ly
-600

-4 0 0

million dollars
-2 0 0
0
+200

— i----- 1
------ 1
—

i-------1
—

i—

repo rtin g banks
million dollars
- 4 0 0 -2 0 0
0
+200 +400

+ 4 0 0 +600

i------1
--------1
------ 1
------ 1

(-------1
----- 1
—

f i r s t h a lf

sa vin g s

i-------1
—

i-------1
------ 1
—

+600

i----- 1
--------1
------ 1

second h a lf (4 m onths)

i i i M

i i i L

' 9

6

5

-

------- 9 6 6 — |

n e g o tia b le CDs

L

ilp m

■

other time deposits

g

M

a

_

Role of in te re s t ra te s
i

+ 1091

o th e r

b a n k s*

*Banks in 51 Seventh D istric t urban areas tha t report IPC (individuals, partnerships and
corporations) savings and time deposits m onthly.

8

The Federal Reserve discount rate was held con­
stant at 4.5 percent throughout 1966. In view of the
already high level of interest rates and the problems
encountered by some financial institutions, any fur­
ther upward pressure on rates which might flow from
announcement of a further increase in the discount
rate was not considered desirable. Despite the unusu­
ally wide spread between the discount rate and the
cost of funds obtained through the money market (the
Federal funds rate moved in the 5 to 6 percent range
during the second half of the year) the volume of
member bank borrowing rose only moderately
through the summer and declined thereafter. Aggre­
gate borrowing of all member banks in the nation
from the Federal Reserve reached a peak of 760 mil­
lion dollars on average for the month of July com­
pared with a 1965 peak of 560 million in August of
that year. More than one-fourth of the Seventh Dis­
trict banks borrowed at the discount window during
the past year, the largest proportion since 1960.
The limited amount of reserves borrowed from the
Federal Reserve despite the relatively low discount
rate reflected, of course, discount administration
closely aligned with the principles specified in Regu­
lation A. Except in emergencies, Federal Reserve
discounts or advances are available only to cover very
temporary needs—usually to adjust to short-run de­
posit drains.
The net amount of total reserves supplied to the
banking system by the Federal Reserve was in line
with the slower growth of deposits. After rising at an
annual rate of 4.6 percent during the first half of
1966, reserves declined (after adjustment for sea­
sonal factors and changes in reserve requirements)
during most of the remainder of the year. For the year
as a whole, reserve growth amounted to less than 2
percent compared with an expansion of more than 5
percent in 1965.

Returns available on new issues of corporate and
municipal securities and, to a lesser extent, U. S.
Government obligations attracted both large and small
investors. As usual in a period of rising interest rates,
short-term rates moved up faster than long-term and
with greater short-run variation. Fluctuations in rates
were larger in all areas of the financial market than in
previous years, partly reflecting uncertainties sur­
rounding the course of monetary and fiscal develop­
ments as pressures on the economy intensified and
then abated somewhat toward year-end.
Paradoxically, the reduction in availability of bank

credit was itself a major factor influencing the pattern
of rates. Finance companies—unable to get bank
loans—increased sales of short-term notes. In the
course of the year, commercial paper outstanding rose
more than 20 percent. Corporate treasurers also
turned to the capital markets for interim financing
previously provided through bank term loans. The
rates paid on prime commercial paper reached 5%
percent, attracting funds not only from banks but
from other financial intermediaries as well. The diffi­
culties banks encountered in rolling over their ma­
turing CDs last fall were evidenced by secondary
market yields on three- and six-month prime bank
CDs of 5.85 percent and 6.20 percent, respectively.
As the availability of funds shrank and costs rose,
rates charged borrowers were adjusted upward. The
bank charge to prime business customers, which had
been boosted from 4.5 to 5 percent in December
1965, was raised to 6 percent in three further steps in
March, June and August. Rates to other borrowers
were scaled accordingly, and non-rate terms were
made generally more restrictive. Mortgage rates
moved up sharply, and by autumn a 7 percent rate

S tro n g credit demands and m onetary
re stra in t raised interest rates

percent

SO U RC E: Federal Reserve Bulletin, Federal Housing Adm inistration,
Salomon Brothers and H utzler, F irst National City Bank of New York.

in conventional contracts on new homes was not
uncommon in some areas.
In a competitive market, interest rate movements
and differentials should reflect relative costs and re­
turns on alternative uses of funds and assist in direct­
ing real resources into their most productive uses.
However, rigidities that limit the effective competition
for funds by some borrowers, the long-run importance
of certain industries and institutions and anti-cyclical
objectives at times argue for modification of the harsh
impact of market forces. Much of the regulatory
action of 1966 had its roots in these considerations.
As the year drew to a close, pressures in credit
markets eased somewhat although rates remained at
relatively high levels and a large volume of issues was
scheduled in the capital markets. An important factor
in this improvement was the widespread change in
expectations on the part of both borrowers and in­
vestors. With evidence that credit demands had al­
ready been effectively tempered by restraint and that
fiscal policy would be called upon if further anti­
inflation measures proved to be necessary, there was
lessened incentive for credit users to try to acquire
funds in advance or for suppliers to defer commit­
ments.
Lo o king to w a rd 1 9 6 7

Late in 1966, for the first time in four years, the
view that the economy was at or near a cyclical peak
became increasingly prevalent. A progressive slowing
in the rate of rise of plant and equipment outlays,
heavy and partly involuntary inventory accumula­
tions, declines in the construction, auto, appliance and
steel industries were coupled with a reduction in bank
credit, high interest rates and a weak stock market.
All these appeared as “classic” signs heralding a gen­
eral business decline.
Economic developments in 1967 are not likely to
follow a classic pattern. Most important, a war effort
involving the expenditure of many billions of dollars
is taking a growing share of the nation’s resources of
men and materials. Changes in prospective military
requirements, up or down, could quickly overwhelm
other recent developments. Moreover, most of the
tendencies of recent months are the result, directly
or indirectly, of actions to restrain credit growth, re­
duce non-military Government outlays and raise addi­
tional revenues, steps which would not have been
taken but for the continued threat of further general
price inflation. The emergence of substantial margins
of unused resources of men and facilities would signal
a reversal of these efforts.

Machinery and equipment
ke y in d u strie s in the M id w e st

l d uring 1966 purchases of
producers’ durable equipment by
United States businesses reached a
record total of more than 51 bil­
lion dollars—up 15 percent from
the level of the previous year. To­
gether with rising defense spend­
ing, these outlays constituted the
main driving force behind the de­
velopment of an extremely tight
labor market and upward pressure
on prices.
The rise in equipment expendi­
tures has been of particular impor­
tance to the five states of the
Seventh Federal Reserve District—
Illinois, Indiana, Iowa, Michigan
and Wisconsin. With 16 percent of
the nation’s population, this area
accounts for about one-third of
total output of capital equipment.
For some categories the proportion
is much higher. These states pro­

duce two-thirds of the nation’s farm
and construction equipment, more
than half of the motor vehicles and
two-fifths of the metalworking ma­
chinery. High-level activity in these
industries was largely responsible
for extremely low unemployment
rates in the Midwest in 1965 and
1966, well below the national aver­
age.
Virtually all machinery and
equipment producers were working
at practical capacity during 1966.
Output would have increased even
more but for limitations of re­
sources—especially, engineers and
virtually all types of skilled man­
power. Orders for machinery and
equipment reached a peak in the
second quarter of the year and
then declined slightly, but back­
logs continued to grow through
October despite rising shipments.
Demand pressures on capital
goods industries in 1965 and 1966
resu lted in higher prices and
lengthened lead times on new or­
ders. After an appeal for restraint
on new investm ent spending,

President Johnson, in September,
asked Congress to suspend the 7
percent investment tax credit on
equipment purchases. This measure
had been enacted in 1962 to stimu­
late demand for capital goods at a
time when orders were relatively
sluggish.
Prosperity and heavy demand
for machinery and equipment go
hand-in-hand. Rapid increases in
output narrows margins of unused
productive capacity. Rising profits
provide both the incentive and the
financial capacity for new invest­
ments. Business expansions, there­
fore, typically are accompanied by
a more than proportionate growth
in purchases of machinery and
equipment. During recessions, con­
versely, capital spending usually
declines more rapidly than the total
economy.
Purchases of producers’ dura­
bles were 80 percent higher in
1966 than in 1961 while total

spending was up only half as much.
From 1960 to 1961, when total
spending increased only slightly,
purchases of producers’ durable
goods declined 6 percent. Clearly,
the concentration of capital goods
production in the Midwest gives
this region a special stake in the
maintenance of a vigorous national
econom y and achievem ent of
greater stability of demand for
these goods.
When capital expenditures are
rising sharply, businesses bid vig­
orously for resources and contrib­
ute to inflationary pressures. As
productive capacity is increased,
however, shortages are eased and
prospects for stable noninflationary
growth are improved. In the final
months of 1966, increased avail­
ability of goods and services—re­
flecting, in part, the large capital
investments of recent years—ap­
peared to be gaining on the de­
mands of consumers, businesses
and Government.

M achines an d p ro g re ss

A great Centennial Exposition
was held in Philadelphia in 1876
to celebrate the 100th anniversary
of the Declaration of Indepen­
dence. Although the largest share
of the nation’s wealth still was pro­
duced in agriculture, the theme of
the exposition was industrial prog­
ress. The principal exhibits were
newly developed steam engines,
dynamos, farm and railroad equip­
ment and the first workable tele­
phone. Motor vehicles and movies
were still 20 years in the future, but
the stage already was set for the
steady advance in technology and
industrial capacity that would re­
lieve men and women (and chil­
dren ) of unrelenting toil while pro­
viding them with an increasing
abundance of necessities and lux­
uries.
Half of all gainfully employed
workers in 1870 were in agricul­
ture. Fifty years earlier the pro­
portion had been more than 70
percent. Already John Deere’s steel

Rise in purchases o f producers7 durable
equipm ent since 1961

has d w a rfed

ea rlier p ostw a r expansions

N ew o rd e rs fo r machinery and equipm ent
rose fa ste r than shipm ents
until last q ua rter o f 1 966
billion

SO U RC E:

U. S. Department o f Commerce.

dollars

plow and C yrus M cC orm ick’s
reaper, supplemented by other ma­
chines for seeding and cultivating,
were releasing farm workers for
jobs in industry. Mainly as a result
of the steady substitution of ma­
chines for human and animal
power, this process has continued.
Today, record production of crops
and meat requires only about 5
percent of the civilian labor force.
The nation’s total output—farm
and nonfarm—was valued at about
10 billion dollars in the 1870s. Al­
lowing for higher prices, output
since then has increased 30-fold.
On a per capita basis, output has
risen about seven times. Mechani­
zation in all sectors of the economy
has been largely responsible for
this gain.
During most of the early history
of the United States, too few work­
ers were available to fully exploit
the nation’s abundant land and
other resources. (Until the 1920s,
immigration from Europe was not
restricted.) A limited labor supply
encouraged the mechanical inge­
nuity of farmers and craftsmen.
Unencumbered by the restrictive
customs and traditions of the old
world, these innovators devised a
large share of the labor-saving de­
vices introduced in the nineteenth
century.
Important new industries devel­
oped as a result of the dedicated
work of individual men. The fore­
runner of these was Whitney with
his cotton gin, and, later, the prin­
ciple of interchangeable parts em­
ployed first in the manufacture of
firearms. He was followed by Ful­
ton and the steamboat, Morse and
the telegraph, Howe and the sew­
ing machine, Goodyear and the
vulcanization of rubber, Bell and
the telephone, Eastman and the
modern camera, and Westinghouse

12

and Edison — who developed a
multitude of basic electrical and
mechanical devices.
Europeans took the lead in sci­
entific research, but the United
States outdistanced other nations
in the development and use of ma­
chinery and equipment.
Combinations of machines and
scientific management led to the
great mass production industries of
the twentieth century—the Ameri­
can system of manufacture. The
individual inventor, working with
few assistants and scanty resources,
gave way to the great research lab­
oratories of industry, government
and the universities, continually
developing new products and tech­
niques, while utilizing advanced
scientific information.
P ro d u ctivity an d au tom ation

At the turn of the century, the
average workday in manufacturing
and most other industries was 10
hours, and the average workweek
was 60 hours. Paid vacations,
moreover, were rare. As late as the
mid-1920s, the 50-hour week was

the norm in manufacturing.
Gradually, the eight-hour day
replaced the working day of 10
hours or more. With the growth of
unionization and the minimum
wage-maximum hour legislation of
the 1930s, the five-day, 40-hour
week with time-and-one-half for
overtime spread throughout most
industries.
In only a few industries have
standard workweeks been reduced
below 40 hours. In fact, heavy de­
mands for workers have stretched
the average workweek in recent
years. Additional leisure has been
provided, however, through longer
vacations, commonly in excess of
two weeks, additional paid holi­
days and earlier retirement. Never­
theless, the real earning power of
most workers has increased virtu­
ally every year. This has been pos­
sible only because of increases in
productivity — output per m an­
hour.
The long-term increase in aver­
age output per man-hour of all
United States workers has been
estimated at slightly more than 2

Modern address-label p rin te r tu rn s out 135,000 labels per hour

G ains in outp ut per man-hour

La b o r costs per u n it o f output

have been especially large in agriculture

in m anufacturing rose in 1966
fo r the fir s t tim e since 1 9 60
percent, 1957-59=100

SO U RC E:

percent, 1 9 5 7 - 5 9 = 100

U. S. Bureau o f Labor Statistics.

percent annually. In the period
since World War II, this rate of
gain has accelerated.
From 1947 through 1960, pro­
ductivity in the private economy
increased at an average rate of 3.3
percent a year—6.5 percent in the
farm sector and 2.7 percent in the
nonfarm sector. For the 1960-65
period, the average rise was 3.6
percent—6.2 percent in agricul­
ture and 3.2 percent in other in­
dustries. Since 1964, with short­
ages of labor and most industries
operating close to capacity, the
rate of increase apparently has
slowed to less than 3 percent.
Productivity changes are the re­
sult of the interaction of several
factors: better worker education,
improved management techniques,
absence of work stoppages, high
rates of utilization of men and
facilities and favorable climatic
conditions. Of crucial importance,
however, are increases in the quan­
tity and quality of capital equip­

ment developed and used by pri­
vate industry. Increases in produc­
tivity often are thought of as
applying exclusively to manufac­
turing, utilities and agriculture.
Some of the most impressive gains
of the past 20 years, however, have
been the mechanization, or com­
puterized automation, of whitecollar jobs in trade, finance and
other service industries.
Growth in productivity provides
the only means whereby manage­
ments can pay higher wages while
avoiding price increases and main­
taining profit margins. From 1958
until quite recently, labor costs per
unit of output for all manufactur­
ing remained remarkably stable,
even declining slightly in some
years. In 1966 an acceleration in
the rise of wage rates together with
increased absenteeism and high
labor turnover as well as the use

of marginal facilities and less quali­
fied labor caused labor costs to rise
to the highest level since early
1961.
Payroll expense comprises only
one, although often the most im­
portant, of the costs incurred by
business firms. Costs of capital,
taxes and prices of services and raw
materials also must be considered.
Nevertheless, stabilization of labor
costs probably is a prerequisite to
general price stability. More and
better capital goods provide the
major means of reducing or damp­
ening increases in labor costs.
Capital invested in various in­
dustries sometimes is divided by the
average employment to obtain fig­
ures that are represented as the
“cost of creating a job.” Many
capital expenditures, however, are
undertaken to reduce labor require­
ments. Managements often are

faced with competing equipment
purchase plans, with the most ex­
pensive of the alternatives requiring
the fewest operatives.
A lm ost any p ro d u ctio n job
could be mechanized further today
by utilizing modern technology. In
many cases, however, costs of such
installations are prohibitive. If de­
mand declines, idle capital invest­
ments continue to be reflected in
fixed costs. Moreover, highly auto­
matic facilities are not always
readily adaptable to new products
and therefore often have a high
rate of obsolescence.
In periods of recession or slow
economic growth, excessive unem­
ployment commonly is attributed
to increased use of labor-saving
machines and equipment. Most re­
cently this view was emphasized in
the early 1960s. Nevertheless, as
the expansion accelerated in 1965
and 1966, widespread labor short­
ages, even of inexperienced and un­
skilled workers, developed.
Unlike the situation in some
industrialized nations, organized
labor in the United States has not,
as a general rule, attempted to
hamper or prevent the introduction
of m ore efficien t equipm ent.
Unions, however, have insisted
upon steps to ameliorate the im­
pact on workers during periods of
transition.
Mechanization, and its ultimate
refinement automation, has per­
mitted the gradual elimination of
many onerous, dangerous, dirty
and tedious jobs that tended to de­
grade men and women physically
and mentally. Moreover, in the long
run, all workers benefit from in­
creased productivity through higher
real wages and reduced prices of
consumer goods that would have
remained luxuries but for the in­
troduction of better machines.

14

P riv a te purchases o f producers7 durable equipm ent
Distribution
Industry

1960

1965

(billion dollars)

T o ta l p riv a te purchases

I9 6 0

1965

(percent)

3 0 .2 8

4 4 .8 2

En g in e s and tu rb in e s

0 .6 0

0 .4 5

2 .0

1.0

T ra c t o rs

0 .6 8

1.41

2 .2

3.1

A g ric u ltu ra l m a c hine ry (excep t tra c to rs)

1.11

1.64

3.7

3 .7

C o n stru c tio n m a c hine ry

0 .9 4

1.65

3.1

3 .7

M in in g and o ilfie ld m a c hine ry

0 .5 0

0 .8 0

1.7

1.8

M e ta lw o rk in g m a c hine ry

1.67

2 .9 3

5 .5

6 .5

S p e c ia l in d u s try m a c hine ry

2 .1 3

2 .6 7

7.0

6.0

5.9

1 0 0 .0

1 0 0 .0

N onelectrical machinery

G e n e ra l in d u stria l (including m a te ria ls
1.91

2 .6 6

6.3

O ffic e , com puting and a ccounting m a c hine ry

ha ndling equipment)

1.66

2 .8 6

5 .5

6.4

S e rv ic e in d u stry m a c hine ry

1.48

2 .0 7

4 .9

4 .6

12.68

19.14

41.9

4 2 .7

To ta l

Electrical m achinery
E le c tric a l tra n sm issio n , d istrib u tio n and
in d u stria l a p p a ra tu s

2 .1 6

2.81

7.1

6.3

C om m unica tio n equipm ent

1.97

2 .4 9

6 .5

5 .6

O th e r e le c tric a l equipm ent

0 .2 9

0 .6 2

1.0

1.4

4 .4 2

5 .9 2

14.6

13.2

To ta l

Tra n sp o rta tio n equipm ent
T ru c k s, buses and truc k t r a ile rs

3 .6 4

5 .3 7

12.0

12.0

P a sse n g e r c a rs

3 .0 9

4 .4 7

10.2

10.0

A irc ra ft

0 .8 3

1.39

2 .7

3.1

S h ip s and b o a ts

0 .4 5

0 .5 9

1.5

1.3

R a ilro a d equipm ent

0 .7 5

1.16

2 .5

2 .6

8 .7 6

12.98

2 8 .9

2 9 .0

2 .8

To ta l

O th e r
Fa b ric a te d metal p ro d uc ts

0 .9 8

1.25

3 .2

F u rn itu re and fix t u re s

1.55

2 .3 5

5.1

5.2

In stru m e n ts

1.07

1.94

3 .5

4 .3

M isc e lla n e o u s equipm ent

0 .8 9

1.34

2 .9

3.0

4 .4 9

6.8 8

14.8

15.4

To ta l
SO U RC E: U .S. Department o f Commerce.

The cap ital goods p ro d u cers

Producers’ durable equipment,
as the term is used by the Depart­
ment of Commerce, includes ma­
chines and equipment for agricul­
ture, construction, manufacturing,
mining and oil well drilling, com­
munications, public utilities, trans­
portation, commerce and the serv­
ice industries. Most of these goods
are relatively long-lived and repre­
sent fixed assets that are depreciaated over some anticipated life
span.
Because of the large outlays in­
volved and because of the special
requirements of individual pur­
chasers, more than half of all capi­
tal goods, by value, are produced
to order rather than for stock.
Order backlogs of the manufactur­
ers of these goods, therefore, usu­
ally are large relative to shipments.
On the average, orders for custombuilt machinery and equipment

must be placed about nine months
in advance of delivery. If demand
is strong and a given piece of equip­
ment is large and complicated, as
for rolling mills or electrical gen­
erating facilities, two or three years
may elapse from order to delivery
—a portion of this time is required
for the design stage.
Most capital goods are produced
by manufacturers classified in the
electrical machinery (less house­
hold appliances and radio-TV),
the nonelectrical machinery and
the transportation equipment in­
dustries (less military aircraft and
missiles and the 85 percent share
of total passenger auto output pur­
chased by consumers). A large
share of the production of steel and
nonferrous metals is incorporated
in producers’ durable equipment,
often after fabrication by foundries
or forging mills. Output of items
classified as producers’ durable
equipment is substantially in ex­

O u tp u t o f business equipm ent
has increased much fa ste r
than outp ut o f consumer goods since 1961

SO U R C E:

Board of G o vernors of the Federal Reserve System.

cess of the total purchases by pri­
vate business firms, as a sizable
share is sold to governments or
exported.
Capital goods producers vary
greatly in size and diversification,
from small enterprises to such
giant corporations as International
Harvester, General Electric and
General Motors. Some capital
goods producers, such as Cummins
(diesel engines), concentrate on a
single product line. Others, such as
Allis-Chalmers, make a wide vari­
ety of products, including in this
case farm machinery, construction
equipment, electrical generating
equipm ent and cem ent kilns.
Another example is A. O. Smith,
producing motor vehicle frames,
water heaters, line pipe, oil well
casing and glass lined tanks for a
variety of purposes. Still another is
Link-Belt which produces excavat­
ing machinery but also engineers
and manufactures processing and
materials handling systems for vir­
tually all major extractive and
manufacturing industries.
The Midwest contains many
relatively small firms that produce
vital capital goods components—
for example, fluid drives, speed re­
ducers, clutches, gears, bearings,
pumps, valves and castings—that
are sold to producers of finished
goods. Some large corporations
have divisions producing a portion
or all of their requirements of
similar components. Many of these
were independent companies before
acquisition.
Some of the large capital goods
producers also manufacture con­
sumer goods and have one or more
divisions serving the defense and
space establishments. The varied
nature of these firms closely limits
the usefulness of aggregative finan­
cial data, for analytical purposes,

or composite stock price indexes.
M idw est le a d s in output

Capital goods producers employ
directly about 3 million United
States manufacturing workers and
account for about 15 percent of the

has advanced rapidly as a center of
production, especially aircraft and
electronic apparatus associated
with the aerospace industries.
At present the top 10 states pro­
ducing electrical and nonelectrical
machinery, with the exception of

value added by all manufacturing.
A century ago the forerunners of
these firms were concentrated in
the northern states of the eastern
seaboard. Even then, however, the
center of gravity was shifting to the
Midwest. In recent years California

Em ploym ent and value added in m achinery and equipm ent ind ustrie s
Average employment in 1 9 6 3
SIC
code

Industry

United
States

Illinois

Indiana Iowa

Value added by manufacture in 1 9 6 3

Mich.

W is.

Five
States

(thousands)

T o ta l m anufacturing

1 6 ,3 5 2

1,151

600

ill.

Ind.

Iowa

Mich.

W is.

(percent o f United States)

178

879

448

13

17

2 2 .7

7 .7

4.1

1.2

6 .9

2 .8

M achinery (except electrical)

35

D

*

24

5

22

5

12

2 12

53

4

6

12

16

50

10

85

9

352

Farm m a c hine ry and equipm ent

119

353

C o n stru c tio n and lik e equipm ent

351

E ng ine s and tu rb in e s

D

9 .0

6 3 .6

2 1 .1

4 7 .0

2 7 .6

D
t

17.0

18.6

3.6

2 1.0

7.6

10.3

2.1

3 .2

6.4

7 .7
3 .5

354

M e ta lw o rk in g m achinery

258

30

8

2

4 0 .9

12.0

2.9

0.6

2 1.9

355

S p e c ia l in d u stry m a chinery

171

14

3

2

7

9

2 2 .4

9.1

1.8

0 .7

5.2

5.6

356

G e n e ra l in d u stria l m achinery

232

20

9.9

7 .4

0 .8

7.6

5 .3

141

8

1

11
*

3 1 .0

O ffic e m a c hine ry

2
*

16

357

17
*

7.7

7 .5

t

t

0 .2

t

358

S e rv ic e in d u stry m achinery

112

10

1

8

5

2 7 .2

8.4

3 .8

2 .3

8 .0

4 .7

3 59

M isc e lla n e o u s m a c hine ry

133

11

5
*

1

D

D

D

8.7

0 .5

D

D

t

1,463

179

55

35

10.6

5.9

140

15

4

To ta l

36

134

85

3 6 .7

13.4

4 .0

2 .8

Electrical m achinery
E le c tric a l d istrib u tio n p ro d u c ts

361
362

E le c tric a l in d u stria l a p p a ra tu s

*

161

10

12

*

3

4

17.8

10.0

3.1

t

1.8

2.9

8

21

31.4

6.0

6.7

t

4 .0

14.7

6
*

3 4 .5

14.0

7 .2

4.1

5.4

3 .8

17.2

11.0

5 .4

t

0 .8

t

5 4 .0

2 9 .7

2 2 .7

0 .8

t

11.3

2.7

0 .4

2 .3

363

H o u se h o ld a p p lia n ce s

145

24

9

4

8

364

Lig hting and w irin g d e vice s

142

16

7

*

2

365

Ra d io and T V re c e iv in g equipm ent

96

29

17

1

1

366

C om m unica tion equipm ent

414

44

13

367

E le c tro n ic com ponents

283

24

11

369

O th e r e le c tric a l com ponents

91

6

19

1,472

168

To ta l

D

*

D

0 .8
D

2

9

3
*

3

3

13.9

6.6

3 .8

1.3

1.2

1.0

7

5

4 2 .6

6 .5

2 2 .9

t

8.1

5.1

91

20

32

50

2 5 .4

11.1

6.9

1.5

2 .3

3 .6

1
*

263

38
*

5 3.3

2.9

6.1

0.1

3 8 .7

5 .5

5.1

0 .8

3.0

t

1.3

2
*

2

4 .3

0 .4

1.1

t

1.2

3 5 .8

2 8 .0

7.8

t

t

2 6 .6

0.3

14.1

1.8

9.9

0 .5

3 3 .2

2 .6

4.9

0.1

2 2 .4

3 .2

Tra n sp o rta tio n equipm ent

37
371

M o t o r v e h ic le s and equipm ent

697

22

60

372

A irc ra ft and p a rts

691

6

21

373

S h ip and b oa t b u ild ing

141

1

2

374

R a ilro a d equipm ent

45

10
*

4
5

1

4

*

41

91

3

282

43

3 7 5 , 3 7 9 O th e r tra n sp o rta tio n equipm ent

1,618

To ta l
H e s s than 500 w o rke rs.

44

*
*

10

*

fLe s s than $500,000 value added.

DW ithhe ld to avoid disclosing fig ure s fo r individual companies; amounts are included in tw o -d ig it in d u stry totals.
SO U R C E: 1 9 6 3 Census o f Manufacturers.

t

t

1.6

California, form a solid block from
Illinois and Wisconsin on the West
to Massachusetts and New Jersey
on the East. The top ranking state
in the production of machinery,
and also total capital equipment, is
Illinois—followed by New York,
Michigan and Ohio.
Illinois, with 5.5 percent of the
nation’s population, produces
about 13 percent of all capital
equipment. It accounts for 21 per­
cent of all farm machinery, 48 per­
cent of construction machinery
and 28 percent of railroad equip­
ment. The state’s development as
a great industrial area was based,
in part, upon its advantageous loca­
tion with access to raw materials
and markets. Water transportation
was available on both the Great
Lakes and the Mississippi. Chi­
cago’s position at the foot of Lake
Michigan made inevitable its de­
velopment as a great railroad cen­
ter and as a producer of railroad
equipment.
Farm machinery production in
Illinois began with the establish­
ment in the 1840s of McCormick’s
first major factory in Chicago and
John Deere’s plow works in Mo­
line. Gradually, Chicago became a
center for the production of a wide
variety of goods for use in agricul­
ture, construction, transportation
and communications.
The Chicago area now includes
important plants of Western Elec­
tric (communication equipment),
International Harvester (farm and
construction machinery), Motorola
(com m unication eq u ip m en t),
Miehle-Goss-Dexter (printing
presses) and many other capital
goods producers. In the railroad
equipment field, the Chicago area
has G eneral M o to rs’ E lectro Motive Division (diesel locomo­
tives), Pullman-Standard, Union

Tw o -third s o f all fa rm and construction equipment
and a large proportion o f m aterials handling equipment
is produced in the Seventh D istrict

Tank Car, GATX and Thrall (all
producers of freight cars) as well
as manufacturers of signals, track
components and other railroad
supplies.
Moline, along with Rock Island,
East Moline and Davenport (the
Quad Cities), became a center for
farm equipment production with
International Harvester, Deere and
J. I. Case now represented. Peoria
developed as a center for the manu­
facture of construction machinery,
mainly because it happened to be
the home of the small firm, Cater­
pillar Tractor, that developed the
first crawler tractor and grew to be­
come the world’s largest producer
of construction machinery, espe­
cially earthmoving equipment.
Caterpillar also has important fac­
tories in Joliet, Decatur, Aurora
and Mossville—all in Illinois.
Wabco’s construction machinery
division (formerly Le TourneauWestinghouse) also is in Peoria.
Rockford became an important
producer of machine tools and
other equipment. Springfield has
Sangamo Electric and an AllisChaimers plant.
Michigan did not become a high­
ly industrialized state until the

motor vehicle industry began to ex­
pand sharply after the turn of the
century. With 4.2 percent of the
nation’s population, Michigan now
accounts for almost 40 percent of
all motor vehicle output. This state
also produces large numbers of
engines for nonautomotive uses.
Partly because of the requirements
of the auto industry, Michigan also
produces about 10 percent of the
nation’s nonelectrical machinery
and 21 percent of the metalwork­
ing machinery. In addition, Detroit
has an important firm that makes
office equipment and computers
(Burroughs).
M uskegon has C o n tin en tal
Motors, Brunswick (automatic pinsetters) and some large foundries.
Clark Equipment (construction
equipment) has plants in Buchanan
and other Michigan cities.
Wisconsin, with only 2.1 per­
cent of the nation’s population,
ranks sixth among the states as a
producer of nonelectrical machin­
ery with almost 6 percent of the
total. Like Michigan, Wisconsin
does not possess the locational ad­
vantages and rich soil of Illinois.
Wisconsin’s prosperity, like Michi­
gan’s, has been based on the initia­

17

tive and ingenuity of firms that
chanced to begin operations there.
Once established, these plants at­
tracted satellite industries, skilled
workmen and engineers—to a large
extent from Europe.
Among the larger industrial cen­
ters, none is so dependent upon
producers’ durable equipment as
Milwaukee. This city’s name often
is associated with its breweries.
Actually, the bulk of Milwaukee’s
income long has been generated by
plants that produce agricultural
equipment, construction machin­
ery, machine tools and electrical
apparatus. Milwaukee has the prin­
cipal plants of Allis-Chalmers, A.
O. Smith, Falk, Harnischfeger, Rex
Chainbelt, Nordberg, Koehring,
Bucyrus-Erie, Louis Allis, Kearney
and Trecker, Allen-Bradley, Cut­
ler-Hammer and many others with
famous names. Other Wisconsin
cities—Racine (J. I. Case and
Massey-Ferguson), Fond du Lac,
Madison and Beloit— produce
capital goods, but the great center
is Milwaukee.
Indiana, with 2.5 percent of the
nation’s population, produces more
than 5 percent of all electrical and
nonelectrical machinery combined.
This state is relatively more im­
portant in electrical goods, with
large establishments of Western
Electric and General Electric lo­
cated in Indianapolis, where LinkBelt and General Motors’ Allison
Division also have plants. Fort
Wayne has a General Electric
plant, a Fruehauf plant (trailers)
and the heavy truck assembly
facilities of International Harves­
ter. Bendix, with a wide variety of
products for industry and aerospace
industries, has its principal oper­
ations in the South Bend area.
Cummins, the foremost producer
of truck diesel engines, has its main

plant in Columbus.
Iowa, one of the richest farm
states, is less heavily industrialized
than other Midwest states. It is,
however, a major producer of farm
machinery, with 21 percent of the
nation’s total. Major plants are
located in Davenport, Waterloo
and Des Moines. Cedar Rapids has
the largest plant of Collins Radio,
a leader in the production of ad­
vanced communication equipment
for use in aviation, aerospace and
industry.
The concentration of producers’
durable equipment production in
the Midwest has been largely re­
sponsible for the high-level pros­
perity of these states in recent
years. With the unemployment rate

nationally averaging about 4 per­
cent in 1966, most Midwest centers
reported rates well below 3 per­
cent. Labor shortages, particularly
of engineers and skilled workers in
the metalworking and electrical
trades, hampered output. To alle­
viate these strains, many firms in­
creased recruiting efforts (even in
Europe) and activated or expanded
training programs for less skilled
employes.
C a p ita l o u tla y m otives

A basic force motivating busi­
ness capital investments is the de­
sire to maximize profits. The value
of any machine or equipment to a
purchaser is his estimate of the
stream of earnings, net of all ex-

O u tp u t o f all m ajor groups
o f machinery and equipm ent
have increased sh a rp ly in recent years
percent. 1957-59=100

S O U R C E:

Board of G o vern ors of the Federal Reserve System .

Mechanized coal processing fac ility
sharply reduces manpower requirements
Sta tio n a ry rock crushing, screening and
washing plant is made in Cedar Rapids

penses, that will be generated
through the facility’s useful life,
discounted to present worth. This
present value, of course, must equal
or exceed the purchase price. In
short, purchasers assess capital
goods in much the same manner as
buyers of bonds, common stock or
real estate value these assets, but
there are important differences.
Evaluations of the desirability of
prospective purchases of capital
goods often involve personal judg­
ments of a type not involved in the
selection of fixed income securities.
The future dollar payments on a
high-grade bond are known beyond
a serious doubt. The profits to be
derived from new capital goods, on
the other hand, are frequently
known only imperfectly. In fact,
some purchases involve financial
loss. Judgments of expected re­
turns on capital goods may prove
to be far wide of the mark, because
of faulty evaluations of the course
of general economic activity, mar­
ket potentials, the actions of com­
petitors or the performance capa­
bilities of the facility.
Some business firms use a rule
of thumb that any new project
should “pay out” in after-tax prof­
its and depreciation within five
years. Fulfillment of this goal re­
quires net profits of 10 to 15 per­

cent a year, depending on the rate
of depreciation taken for tax pur­
poses.
The expected return on new in­
vestments sometimes is termed the
“marginal efficiency of capital.”
Investments are presumed to take
place when the marginal efficiency
of capital exceeds the interest rate
paid on borrowed funds, or the rate
that could be earned on high-grade
investments. The great bulk of in­
vestments in machinery and equip­
ment, however, does not involve a
close relationship between expected
earnings and interest rates. For one
thing, interest is tax deductible and
must be halved for most corpora­
tions to be compared with after-tax
earnings. More important, contract
interest is a precisely known quan­
tity, quite unlike the uncertain
prospective earnings on capital
goods.
Higher interest rates, of course,
will tend to discourage investments
—“other things equal.” This rela­
tionship, however, often is ob­
scured by other factors. Typically,
capital investment and interest rates
move in the same direction, up in
prosperity, when profit prospects
improve, and down in recession.
During each postwar business
cycle, capital expenditures have
changed in the same direction as

rates on new corporate bonds.
Although interest as a cost can
be placed in a subordinate role for
most purchasers of capital goods,
decisions of such firms are influ­
enced by the quantity of funds
available to them. The great bulk
of funds utilized by United States
business are generated “internally”
through retained earnings and de­
preciation. In prosperity, earnings
tend to rise faster than dividends,
thus increasing in tern al funds
available for investment. But, as
prosperity continues, capital ex­
penditures usually rise faster than
internally generated funds, with the
result that businesses turn increas­
ingly to the money and capital
markets to supplement their finan­
cial resources.
When credit demands are very
large, new credit necessarily must
be rationed by lenders. Profitable
business firms are able to compete
successfully for available funds in
comparison to certain other activi­
ties, notably homebuilding and
commercial construction. Never­
theless, businesses with unused
credit potential may tend to re­
strict capital outlays under condi­
tions of “tight money,” either be­
cause of a reluctance to borrow for
long terms at high rates or because
of the increased uncertainty con­
cerning future prospects for the
(continued on page 22)

19

Plastic milk containers are fille d ,
capped and cased automatically

"M o ving sid e w a lk" carries men and tractors
through assembly process in Racine, W isconsin

Ta los guided missiles are assembled
by prime contractor in M ishaw aka, Indiana

Hydraulic clutches
fo r heavy-duty construction
equipment are manufactured
in Rockford, Illin o is

21

economy that may accompany a
period of rising interest rates.
Capital expenditure projects
often are classified as representing
expansion or modernization and
replacement. About two-thirds of
estimated total plant and equip­
ment expenditures are for expan­
sion at the present time. In many
cases this distinction is arbitrary. A
new plant may represent expansion
at the time it is conceived, planned
and completed, but at a later time
of slack demand, the existence of
the new facility may permit retire­
ment of older installations.
Expansion may mean either
larger production of existing prod­
ucts or the initial production of
new products. Modernization and
replacement may be motivated by
the possibility of reducing costs,
increasing speed of operation or
improving product quality. Each of
these motives arises from the de­
sire to increase sales and profits
over what these might have been in
the absence of such investments.
It is not enough that a new capi­
tal good represent an improve­
ment over an existing facility to
warrant its acquisition. A prospec­
tive replacement for existing equip­
ment must be sufficiently superior
in terms of lower operating costs,
improved product quality, better
customer service or reliability to
indicate the desirability of scrap­
ping or selling older facilities. Sums
realized from disposal of equip­
ment may be minimal compared to
original cost or depreciated book
value. Purchases of new equip­
ment, therefore, usually are desira­
ble only if total costs, including
depreciation, compare favorably
with out-of-pocket operating costs
of existing units.
A recent McGraw-Hill survey
showed that 36 percent of all manu­

22

P la n t and equipm ent expenditure plans
often are revised su b sta n tia lly
percent

change

from

previous

year

+25r

1955
SO U RC E:

1956

1957

1958

1959

I960

1961

1962

1963

1964

1965

1966

1967

U. S. Departm ent o f Commerce, Securities and Exchanae Commission and McGraw-

H ill.

facturing capacity was less than
five years old, compared with 33
percent in 1961. Even some of
these relatively new facilities may
be obsolescent at the present time,
however. Only 24 percent of cur­
rent capacity was installed before
1950, compared with 40 percent
five years ago. Some relatively
ancient capital goods continue to
perform adequately in various ap­
plications. For example, some ma­
chine tools and vessels 50 years or
more old and long since fully de­
preciated, remain in service.
History provides examples of
modernization programs involving
large investments that took place
in times of depressed demand when
the industries concerned were op­
erating well below capacity. In the
1930s, for example, steel mills
converted to continuous rolling mill
equipment, the railroads began

quantity purchases of diesel loco­
motives, and motor vehicle firms
introduced coordinated batteries of
tools to perform a series of machin­
ing operations on engine blocks. In
recent years basic oxygen furnaces
have offered steel producers cost
advantages sufficient to cause some
firms to dismantle open hearth
furnaces that had been modernized
only a few years previously.
A cyclical in d u stry

During the postwar period, the
Department of Commerce and the
Securities and Exchange Commis­
sion (SEC) have surveyed nonfarm
business firms quarterly concerning
their past and prospective expendi­
tures on new plant and equipment.
Because of the importance of these
outlays and their impact on total
business activity, the results of each
new survey are analyzed with care

by those seeking clues to future
trends in economic activity.
In some activities, notably oil
well drilling, petroleum refining,
chemicals and utilities, the line be­
tween construction and equipment
is not clear. Many business firms
do not attempt to separate these
aggregates and report a total of
plant and equipment in their finan­
cial statements. The CommerceSEC survey does not divide ex­
penditures between plant and
equipment.
Total plant and equipment ex­
penditures are estimated to have
totaled almost 61 billion dollars in
1966, a rise of 17 percent from
1965. This followed increases of
15 and 16 percent in the two pre­
vious years. Preliminary soundings
suggest that any gain in 1967 will
be much smaller.
Some firms have passed the crest
of plans adopted one, two or more
years ago. Suspension of the invest­
ment tax credit and accelerated de­
preciation on commercial buildings
are tending to dampen certain new
outlays. Some plans, particularly
for commercial buildings, are be­
ing curtailed because of credit strin­
gencies. Certainly, the capital
spending boom entered a new
phase in late 1966, with the possi­
bility that a “turn” was in the
making.
Capital expenditures have been
rising since the second quarter of
1961, following the mild 1960-61
recession. On an annual basis these
outlays have risen five years in suc­
cession. The longest previous post­
war upswing was from 1949 to
1953, a period encompassing the
Korean War.
During 1966 capital expendi­
tures as defined in the CommerceSEC survey amounted to 8.2 per­
cent of total spending on goods and

services—the gross national prod­
uct (GNP). The proportion of
plant and equipment expenditures
to total spending for 1966 is not a
record, having been exceeded in
1947, 1948, 1956 and 1957. For
equipment alone the 1966 propor­
tion was a record.
From 1961 through 1963 the

proportion of capital outlays to
total spending remained at a post­
war low of 6.6 percent, instead of
rising as in earlier expansions. This
occurred despite the enactment of
the investment tax credit and the
issuance of new guidelines for fas­
ter writeoffs by the Treasury in
1962.

Exp e n d itu re s fo r new plant and equipm ent
by United States businesses
Change
Industry

1961

1965

1966

(billion dollars)

1 9 6 1 -6 6 1 9 6 5 -6 6
(percent)

T o ta l a ll industries

3 4 .3 7

5 1 .9 6

6 0 .5 6

76

17

M anufacturing

1 3 .6 8

2 2 .4 5

2 7 .0 1

97

20

D ura b le goods
P rim a ry iro n and ste e l

1.13

1.93

2 .1 6

91

12

P rim a ry n o n fe rro u s metal

0 .2 6

0 .6 8

0 .8 2

215

21
39

E le c tric a l m a c hine ry and equipm ent

0 .6 9

0 .8 5

1.18

71

M a c h in e ry (excep t e le c tric a l)

1.10

2.21

2 .8 9

163

M o t o r v e h ic le s and p a rts

0 .7 5

1.98

1.96

161

31
-1

T ra n s p o rta tio n equipm ent (except
0 .3 8

0 .5 8

1.10

190

S to n e , c la y and g la ss

0.51

0 .7 8

0 .8 9

75

14

O th e r d u ra b le g o o d s

1.45

2.41

3 .0 3

109

26

6.2 7

11.40

14.04

124

123

m o to r ve hic le s)

To ta l

90

N o nd ura b le goods
Fo od and b e ve ra g e

0 .9 8

1.24

1.39

42

12

T e x tile

0 .5 0

0 .9 8

1.18

136

20
34

Pap er

0 .6 8

1.12

1.50

121

C hem ical

1.62

2 .5 9

2 .9 5

82

14

P e tro le u m

2 .7 6

3 .8 2

4 .4 2

60

16

Rubber

0 .2 2

0 .3 4

0.41

86

21

O th e r no n d u ra b le g o o d s

0 .6 5

0 .9 6

1.12

72

17

7 .4 0

11.05

12.97

75

17

To ta l

M ining

0 .9 8

1 .3 0

1 .4 7

50

13

R a ilro a d

0 .6 7

1 .7 3

1 .9 4

190

12

Tra n sp o rta tio n (except ra il)

1 .8 5

2.81

3 .4 8

88

24

Public u tilitie s

5 .5 2

6 .9 4

8 .31

51

20

Communication

3 .2 2

4 .9 4 ]

Commercial and o ther

8 .4 6

1 1 .7 9 J

> 1 8 .3 6

57

10

SO U RC E:

U. S. Department o f Commerce and Securities and Exchange Commission.

23

Examination of the postwar rec­
ord does not reveal a clear rela­
tionship between changes in plant
and equipment expenditures and
changes in GNP. Cyclical peaks in
total spending and capital spending
were reached in the same quarter
in both 1957 and 1960 but not in
1948 or 1953. At the low points,
troughs in total spending and capi­
tal spending were coincident in
1949, but capital spending lagged
by one to three quarters in the
other cycles.
Cyclical fluctuations in these
outlays, however, consistently
have been much greater than sim­
ilar changes in total spending. For
example, in the sharp 1957-58 re­
cession, capital outlays dropped
21 percent while total spending
declined less than 3 percent. Since
early 1961, capital outlays have
risen almost 90 percent while GNP
increased 50 percent.
Many capital expenditure pro­
grams, once initiated, are pushed
through to completion despite any
subsequent deterioration in eco­
nomic conditions because of losses

that would be incurred in the event
of cancellation. Often the rate of
progress on such projects can be
adjusted, however, through elimi­
nation of extra crews, overtime and
other costly measures associated
with speed. Other programs, as for
example those involving the pur­
chase of trucks or office equip­
ment, can be changed very rapidly.
A comparison of final results
with first estimates of capital spend­
ing plans, made by the Department
of C om m erce and the SEC in
March and by McGraw-Hill in
November of the previous year,
reveal a fairly consistent “procyclical” pattern. Business firms
tend to enlarge and accelerate their
capital expenditure plans during
expansions and reduce these plans
in recessions. As a result, large
order backlogs for capital goods
and a heavy volume of advance
planning do not necessarily assure
continued growth in plant and
equipment spending.
Much has been written about
the direction of the cause and
effect relationship between capital

P la n t and equipm ent expenditures
sh o w much greater fluc tua tio ns
than total spending on goods and services
percent change

from

previous

yeor

SO U RC E: U. S. Departm ent o f Commerce, Securities and Exchange
Commission.

24

spending and total activity. An ex­
planation of the linkage between
business capital outlays and total
spending is the principle of the
“investment multiplier,” under
which new investment has a more
than proportional impact on total
income. But the course of income
clearly has an impact upon spend­
ing for equipment. This effect is
described by the “acceleration prin­
ciple” under which given increases
in spending on final products may
induce much larger proportionate
gains in output of machinery and
equipment used in producing them.
On the downside these tendencies,
of course, are reversed. Obviously,
the multiplier and accelerator in­
teract along with other factors to
determine the course of general
activity.
C a p ita l o u tla ys b y in d u stry

During the postwar period, the
proportion of total plant and equip­
ment spending accounted for by
manufacturing firms has been as
high as 46 percent and as low as
36 percent. This ratio has tended
to rise during economic expansions
and to decline during recessions.
Capital spending of durable
goods manufacturers, at 14 billion
dollars, in 1966 was somewhat
higher than similar outlays of non­
durable goods manufacturers. In
most recent years, total outlays for
these industry groups have been
approximately equal. During the
1962-66 period, for example, capi­
tal spending of durable goods
firms exceeded nondurables by
only 2 percent. Employment in
durable goods manufacturing, how­
ever, averages about 30 percent
more than in nondurable goods.
Nondurable goods manufacturers
as a group, therefore, have higher
fixed c a p ital investm ents per

Advanced numerically controlled machining center automatically changes tools fo r m ultiple boring, d rillin g , m illing and tapping w o rk

worker than the durable goods
group. The reason is that certain
important nondurable goods facili­
ties—for example, in the petro­
leum, chemical and food process­
ing industries—consist of batteries
of automatic machines manned by
small numbers of operators and
maintenance personnel. Many dur­
able goods industries, particularly
machinery, have relatively high
labor inputs.
Outside of manufacturing, com­
mercial and service industries ac­
counted for about 23 percent of
total plant and equipment expen­
ditures in 1966 with a large share
of this, probably well over half,
represented by buildings. Public
utilities accounted for 13 percent
of the total, and mining, railroads
and non-rail transportation com­
bined for about 11 percent.
All industry categories and all
groups of manufacturers, except
motor vehicles, reported record
capital expenditures in 1966. This
experience contrasts with the 1957
peak when outlays of such major
industries as motor vehicles, foods,
textiles and the railroads fell far
short of levels reached earlier in
the postwar period.
The largest proportional in­

creases in the current capital goods
expansion have been accounted for
by the nonferrous metals, nonelec­
trical machinery, motor vehicles,
aircraft, textile, paper and chemical
industries. Outlays of most of these
industries had lagged in prior years.
In short, this capital expenditure
boom has been better balanced
than its predecessor of the mid1950s, which helps account for its
longevity.
From the end of World War II
until the recovery from the second
relatively mild postwar recession
in 1955, it was widely believed in
business circles that prosperity was
a transient phase certain to be
followed by a severe postwar ad­
justment similar to the setback
after World War I. Many firms,
therefore, hesitated to embark on
costly expansion projects. As a re­
sult, successive supply bottlenecks
were reached in such basic materi­
als as steel, nonferrous metals and
cement. Shortages of these key
products placed a damper on each
business expansion that occurred
during this period.
The capital outlays of the 195457 expansion effectively removed
the bottlenecks until the current
upswing gathered momentum in

the mid-1960s. Federal Reserve
System estimates of the relation of
total manufacturing to capacity in­
dicate that output reached 91 per­
cent of capacity in the second half
of 1955, a rate not realized again
until 1966.
M achin es to m ak e m achin es

Machine tools comprise a small
but vital part of total producers’
durable goods. Although purchases
of these tools account for only
about 2 percent of the dollar value
of all equipment purchases by
United States firms, these “ma­
chines that make machines” are a
prerequisite to the operation of
modern industry.
The basic types of machine tools
include lathes and drilling, boring,
milling, planing and grinding ma­
chines that remove metal in chips
and shavings to produce parts to
meet exacting dimensional toler­
ances. Machine tools may be used
to produce parts on a custom basis
or may be incorporated in mass
production processes.
Few industries, even in the capi­
tal goods fields, experience as large
fluctuations in orders and ship­
ments as does the machine tool
industry. During World War II

25

machine tool shipments reached a
peak of 1.3 billion dollars in 1942
and then declined to a low of 250
million dollars in 1949. A Korean
War peak of 1.2 billion dollars in
shipments was reached in 1953.
Two years later shipments were
only about half this amount. From
1957 to 1958 shipments declined
by somewhat more than half.
The abortive recovery of 195860 witnessed only a moderate rise
in machine tool shipments. Only
when the expansion of the Sixties
was well under way did machine
tool shipments and orders begin to
approach earlier peaks. Shipments
in the first 10 months of 1966
were up 20 percent from the ad­
vanced level of the previous year
and new orders were up 40 per­
cent. For 1966 as a whole, ship­
ments probably totaled more than
1.1 billion dollars, the largest vol­
ume since 1953. New orders proba­
bly exceeded 1.6 billion dollars, the
highest level since 1942. The surge
in machine tool orders and ship­
ments partly has reflected the gen­
eral prosperity, but also the tech­
nological progress, that has tended
to outmode existing equipment.
Among the major machine tool
producers of the Seventh Federal
Reserve District are Giddings and
Lewis (Fond du Lac), Gisholt
(Madison), recently merged with
Giddings and Lewis, Sundstrand
and Ingersoll (Rockford), Kearney
and Trecker (M ilwaukee) and
Ex-Cell-O (Detroit). Other im­
portant firms are located in Ohio
and New England. Midwestern
machine tool producers have been
leaders in the development of
numerically controlled units that
operate from taped instructions and
permit relatively unskilled oper­
ators to produce metal parts of a
high degree of uniformity and pre­

26

cise dimensions at high speed.
M a c h in e ry in fo re ig n tra d e

Exports of machinery and equip­
ment have been a major factor
enabling the United States to main­
tain a favorable balance in mer­
chandise transactions with other
nations. In recent years shipments
of these goods to foreign customers
have accounted for about 40 per­
cent of all nonagricultural exports.
This proportion rose to 47 percent
during 1965.
The strong competitive position
of United States capital equipment
in world markets is of special inter­
est because wage rates here are by
far the highest in the world and
capital equipment contains a higher
labor component (about 38 per­
cent) than total manufacturing
(about 26 percent). The explana­
tion lies in the advanced technology
employed by United States firms.
In many sectors—particularly
construction machinery, commer­
cial aircraft, computers and ad­

vanced types of machine tools—
United States products have been
markedly superior in efficiency,
durability and quality of product
to counterparts produced abroad.
Were it not for limitations deter­
mined by availability of funds and
import restrictions imposed by
foreign governments, exports
would be much larger.
Exports of capital equipment
totaled almost 10 billion dollars in
1965. During the first nine months
of 1966, these exports rose 12
percent from the comparable yearago period. Imports of capital
equipment also have risen in recent
years but have been only about 15
percent as large as exports.
Rapid acceleration of domestic
demand in 1965 and 1966 together
with sharply increased military re­
quirements have moderated one of
the competitive advantages, rela­
tively short delivery times, offered
by United States capital goods pro­
ducers to foreign buyers in the late
1950s and early 1960s. Large un-

Mach ine tool orders in 1 9 66
exceeded the Korean W a r peak
billion

d o lla rs

SO U R C E:

N ational Association o f Machine Tool Builders.

U nite d Sta te s exports
o f capital equipm ent
Dolla r
Change,
value
Jan.-June
1965 1965 to 1966
(billions)

Total

(percent)

9 .8 7

13

1.04

18

A irc raft and parts
(civilian)
Auto parts and accessories

0 .9 9

Agricultrual machinery

0 .8 7

Engines (except aircraft)

0 .5 9

36

Instruments

0 .4 8

19

17
-1

Power machinery and
switchgear

0 .4 7

1

O ffice machines

0 .4 7

19

0 .3 3

10

M aterials handling
equipment
Metalworking machinery

0 .3 3

Construction machinery

0 .3 2

1

Broadcasting equipment

0 .3 0

7

Trucks (civilian)

0 .2 8

13

-2

Te xtile machinery

0.21

26

Pumping equipment

0 .1 4

31

Miscellaneous

3 .0 5

13

SO U RC E: U .S. Department o f Commerce.

used capacity had caused these
firms to push exports vigorously.
The reversal of this trend has been
particularly marked in the case of
machine tools during the past two
years.
The importance of exports to
capital equipment producers was
highlighted in the 1960-61 reces­
sion when output and shipments of
these goods declined only slightly
because a rise in exports partially
offset a decline in domestic de­
mand. As a proportion of all ship­
ments of United States machinery
and equipment producers, domestic
and foreign, exports rose from
about 15 percent in the late 1950s
to more than 20 percent in 1965.
Apparently this proportion de­
clined somewhat in 1966.
An important aspect of the in­
ternational picture in capital goods
concerns the large investments of

United States firms in other nations
in recent years, most prominently
in Canada and Europe. According
to the Department of Commerce,
new foreign investments of busi­
ness firms totaled a record 9 billion
dollars in 1966. In some cases,
capital expenditures abroad by
American firms or their affiliates
involve shipments of capital goods
manufactured in this country.
A large proportion of United
States machinery and equipment
producers have become interna­
tional firms in the past decade, both
through construction of new facili­
ties and acquisitions of existing
foreign firms. Lower costs of labor
and transportation have been par­
tially responsible, but, commonly,
these foreign markets could be
served more efficiently from domes­
tic plants. In the latter instances the
principal motivation has been the

desire to produce behind trade bar­
riers imposed by foreign govern­
ments either individually, or in
combination, through the Common
Market.
Sales of foreign affiliates of ma­
chinery firms totaled more than 9
billion dollars in 1965. Only about
2 percent of these shipments were
exported to the United States,
compared with more than 4 per­
cent for all classes of manufactures.
In addition to some return flow of
goods, foreign investments also
have resulted in a reciprocal ex­
change of technology and process­
ing techniques.
Pricing cap ital goods

Average prices of producers’
durable equipment were remarka­
bly stable during the 1959-63
period. As demand for these prod­
ucts accelerated, prices began to

rise. The average for 1966 was up
about 4 percent from 1963, an in­
crease that about matched the rise
for all wholesale prices other than
farm products and processed foods.
During the 1954-57 expansion,
prices of producers’ durables rose
16 percent while nonfarm whole­
sale prices increased 10 percent.
Doubtless, some buyers were
priced out of the market in the
later stages of that expansion.
Price trends have varied among
the major types of machinery and
equipment since 1963. While aver­
age electrical machinery and equip­
ment prices have remained virtually
stable, farm equipment increased 7
percent, construction machinery 8
percent and metalworking machin­
ery about 12 percent.
Price comparisons can be only
rough guides in time periods when
new products are introduced and
existing lines are improved and
modified. Few classes of goods
change in quality, or performance
characteristics as much as pro­
ducers’ durables. If earthmoving
equipment were priced on the basis
of capacity to move a given vol­
ume of material, electrical generat­
ing equipment on kilowatts of
capacity and locomotives on horse­
power or tractive effort, some con­
temporary models would be found
to be cheaper than their counter­
parts of 30 or 40 years ago.
Quality changes in many cases
cannot be measured in units of
capacity. What is to be done with
factors such as ease of loading and
unloading, safety, durability or
higher quality of goods produced
by new equipment? Even more per­
plexing, how should such new de­
velopments as solid state electrical
circuits and vacuum-degassed steel
affect measures of price change?
The Bureau of Labor Statistics

Prices o f m achinery and equipm ent
have increased less in the current upsw ing
than in the 1 9 5 4 -5 7 period
percent, 1957 -5 9 *1 0 0

attempts to make adjustments for
quality change, but apparently
these must be somewhat arbitrary.
Probably existing price indexes
overstate prices of capital goods,
currently, in comparison with the
past.
Producers’ durable equipment
purchases amounted to 7.0 percent
of GNP in 1966, up from 5.5 per­
cent in 1961— a p ro p o rtio n
equaled in only one year, 1948,
since the series began in 1929.
After adjustment for price changes
in both series, producers’ durables
outlays amounted to 7.5 percent of
GNP in 1966, indicating an even
sharper rise relative to total spend­
ing in recent years although not in
comparison with the early postwar
period.
Financing cap ital o u tla ys

A favorable evaluation of the
profit prospects for a proposed
capital investment is not followed
automatically by negotiation of a

contract to purchase. No less im­
portant is the expectation that suf­
ficient funds will be available from
sales, liquidation of other assets,
anticipated cash flow or borrowings
that the firm is able and willing to
undertake.
Some firms make it a practice to
restrict capital expenditures to the
sums made available from internal
sources, undistributed profits and
depreciation, thus avoiding outside
borrowings. More commonly, firms
are willing to use long-term debt,
within some limit, to undertake de­
sired capital outlays. As a result,
long-term corporate borrowing
typically rises when capital ex­
penditures increase.
About two-thirds of all funds
used by nonfinancial corporations
throughout the postwar period
have come from internal sources.
During recent years depreciation
has exceeded undistributed profits
by about two to one and has con­
stituted by far the most important

Th e p ro p o rtio n o f gross national product
accounted fo r by producers7 durable
equipm ent neared early p ostw a r peak in 1 966
percent

SO U RC E:

U. S. Department o f Commerce.

C orporate p ro fits and purchases
o f producers7 durables have follow ed
sim ila r patterns in the p ostw a r period

SO U RC E:

U. S. Department o f Commerce.

single means of financing United
States business.
Undistributed profits and depre­
ciation of nonfinancial corporations
were approximately equal to plant
and equipment expenditures of
these firms in the first three quar­
ters of 1966. These sources of
funds were 8 percent larger than
capital outlays in 1965 and 15 per­
cent larger in the previous year,
the highest ratio since 1950. That
cash flow remained large relative to
needs until 1965 reflects the main­
tenance of profit margins—in con­
trast to earlier expansions—and
more rapid depreciation permitted
for tax purposes after 1962. From
1955 to 1957 the ratio of cash flow
to capital expenditures had dropped
from 120 to 96 percent. Individual
firms, of course, greatly vary their
willingness and ability to rely upon
internal funds for expansion needs.
When capital expenditures rise
in prosperity, working capital re­
quirements usually are increasing
as well. Under these circumstances
it is not feasible to relate particular
sources of funds to particular uses.
Businesses may list proposed capi­
tal expenditures as the reason for
a new bond issue, for example,
when the reason might as well be
given as “higher financial require­
ments, beyond the scope of our
internal sources of funds.” Plant
and equipm ent ex p en d itures
amounted to about 58 percent of
total corporate uses for funds in
1965 and 1966, slightly less than
the proportion of the early 1960s
and much less than in several pre­
vious postwar years.
The rate at which internal
funds were acquired in the first
nine months of 1966 declined
sharply to 58 percent of total
sources of funds, compared with
63 percent in 1965 and 72 percent

the previous year. Security issues,
net of repayments, and outstanding
borrowings of corporations in­
creased 13.6 billion dollars in 1964
and 18.6 billion in 1965, with more
rapid expansion of commercial
bank loans accounting for virtually
all of the difference between the
two years. Total net borrowing in­
creased to an annual rate of 25.6
billion dollars in the first three
quarters of 1966, with a rise in
bond issues mainly responsible for
the change from 1965.
Some types of equipment financ­
ing arrangements are directly re­
lated to particular expenditures.
When equipment trust certificates
are offered by railroads, trustees
retain title to rolling stock and re­
payments are scheduled to reduce

the outstanding debt more rapidly
than the decline in the depreciated
value of the asset. Instalment sales
contracts used in purchases of cars,
trucks, trailers and farm and con­
struction equipment are similar.
Often “unsecured” term loans,
or revolving credits, from banks
are used to purchase fleets of
trucks, aircraft or construction
equipment. These loan agreements
contain various restrictive cove­
nants, including negative pledge
clauses, that substitute for direct
liens.
Increasingly, businesses—espe­
cially smaller firms—have leased
new equipment of a wide variety of
types to conserve working capital
and borrowing potential. Some
lease agreements, most notably in

N e t sources and uses o f fu n d s
o f corporate nonfinancial business

1961

1962

1963

1964

1965

1966 *

(billion dollars)

Sources
D e p re c ia tio n

25.4

2 9 .2

3 0 .8

3 2 .8

35.1

3 7 .2

U n d istrib u te d p ro fit s

10.1

12.6

13.1

18.1

2 0 .2

2 1 .0

S e c u rity issu e s

7.1

5 .2

3.6

5.4

5.4

12.5

Loans

2.2

6.1

6.9

8 .2

13.2

13.1

P a ya b le s

6.6

4 .5

6.0

3 .4

7.9

9.8

O th e r lia b ilit ie s

3.1

5 .8

5 .5

2.7

6.2

6.1

5 4 .5

6 3 .4

6 5 .9

70.6

8 8 .0

9 9.7

3 3 .2

3 7 .0

3 8 .6

44.1

51.3

5 8 .4

1.5

4 .7

4 .3

4 .4

6 .8

9.8

R e c e iva b le s

10.1

9.1

9 .2

10.1

14.9

16.8

Liq u id a sse ts

3.5

4 .2

4 .3

0 .8

0.6

3.4

O th e r a sse ts

6.6

6.7

9.4

7.9

13.9

10.9

5 4 .9

6 1 .7

6 5 .8

6 7.3

8 7 .5

9 9 .3

-0 .4

1.7

0.1

3 .3

0 .5

0.4

To ta l

Uses
Pla nt and equipm ent
In v e n to rie s

To ta l

Discrepancy
S o u rc e s le ss u se s

*Based on rate fo r firs t three quarters.
SO U R C E: Board o f Governors o f the Federal Reserve System.

connection with commercial air­
craft, have enabled lessees to take
advantage of the investment credit
otherwise unavailable to them be­
cause of inadequate profits.
Whatever the methods used,
some purchases of machinery and
equipment were deferred in 1966
because of credit stringencies. Pre­
sumably, many of these plans could
be reactivated should funds be­
come more readily available.
D ep re cia tio n ch an g es

Until the enactment of the Fed­
eral income tax in 1913, business
accounting records often were kept
on a haphazard basis with little
uniformity, even among firms en­
gaged in similar activities. Many
firms made no provision for de­
preciation on fixed investments,
taking the view that assets properly
maintained do not depreciate.
The need to recognize deprecia­
tion as a part of the cost of doing
business—to reflect wear and tear
and obsolescence—now has been
firmly established. At times it has
been argued that depreciation
should be determined on some
basis other than original cost, sub­
stituting some measure of replace­
ment or reproduction cost. This
view was pressed with vigor in the
early postwar years after the sub­
stantial upthrust of the general
price level associated with World
War II. But replacement cost de­
preciation gained little political
support.
Another plan for depreciation
reform was incorporated by Con­
gress in the Revenue Act of 1954.
Previously, only straight-line de­
preciation for the expected useful
life of the asset was permitted.
Starting in 1954, most businesses
have been able to elect to take de­
preciation on the basis of the de-

Portable diesel power units and mobile
high frequency communications equipment aid
the nation's e ffo rt in Vietnam

dining balance and sum-of-theyears-digits methods. Accelerated
depreciation calculated on these
formulas permits much faster write­
offs for tax purposes in the early,
and most profitable, years of an
asset’s life, thereby reducing uncer­
tainty by providing a more prompt
recovery of the cost of capital goods
in depreciation and after-tax prof­
its.
A further step to accelerate de­
preciation was taken in 1962 when
the Treasury published new guide­
lines of suggested useful lives for
broad classes of producers’ dur­
able equipment. In many cases
these were much shorter than the
lifespans in common use for tax
purposes.
The in vestm en t cred it

Another 1962 step intended to
stimulate capital outlays was the
enactment of the Investment Tax
Credit. Seven percent of the cost of
fully eligible producers’ durable
goods, with eight years or more of
expected useful life, could be de­
ducted from the purchaser’s tax

liability. Credits were limited to 25
percent of a firm’s tax liability, but
liberal carry-forward and carry­
back provisions were provided.
Originally, only 93 percent of the
cost of an asset covered by the tax
credit could be depreciated on the
ground that the credit was equiva­
lent to a 7 percent Government sub­
sidy and reduced the initial cost of
the investment by an equivalent
am ount. In 1964 firm s were
permitted to depreciate the full
purchase price of covered assets,
making the tax credit the equivalent
of a price cut of more than 7
percent.
During the 1962-64 period, busi­
nesses reduced their taxes by 4
billion dollars— 1.6 billion dollars
in 1964 alone—as a result of the
tax credit. Almost half of these
credits were claimed by manufac­
turers and 80 percent by corpora­
tions.
In September 1966 the Admin­
istration asked Congress to help
relieve inflationary pressures by
suspending the tax credit on equip­
ment and accelerated depreciation

on new buildings that were ordered
or delivered between that time and
the end of 1967. As subsequently
enacted by Congress, the effective
date of the suspension became
October 10, 1966, and purchases
valued up to 20,000 dollars were
exempted, thereby reducing the
effect of the change on small firms
which are important purchasers of
farm machinery and trucks. In
suspending the tax credit, Congress
also provided that after 1967 the
limit will rise to 50 percent of a
firm’s tax liability, and the carry­
forward provision will be extended
from five to seven years.
Estimates of the effect of the
suspension of the tax credit on
capital spending are highly tenta­
tive, and the amount of any cut­
backs probably never will be known
with precision. Too many other
factors are involved in capital ex­
penditure decisions.
Equipm ent n e e d s still la rg e

An important feature of the
postwar period has been the grow­
ing emphasis on Research and

31

Development (R and D) by United
States businesses. R and D expen­
ditures of private industry grew
rapidly after W orld War II,
amounting to 3.6 billion dollars in
1953, according to the National
Science Foundation. A decade
later the total was estimated at 12.7
billion dollars and was still grow­
ing rapidly. A survey by McGrawHill indicates that private R and D
outlays exceeded 15 billion dollars
in 1966 and may rise a further 3
billion by 1969.
Research work can be classified
as basic, applied and product de­
velopment. Eastman-Kodak, Gen­
eral Electric, the Bell System Lab­
oratories and du Pont were among
the pioneers in basic research not
necessarily directed to the solving
of immediate technical problems.
During recent years virtually all
businesses of substantial size have
instituted similar programs. Efforts
of business firms have benefited by
research in the universities, gov­
ernment and private laboratories.
The result has been a steady pro­
liferation of new and better prod­
ucts that often require large outlays
on new equipment.
The largest R and D spenders
have been in the aircraft and mis­

sile, electrical equipment, commu­
nication, chemical, pharmaceutical,
motor vehicle and nonelectrical
machinery industries. A recent
tabulation lists more than 60 im­
portant firms, in a wide variety of
industries whose R and D expen­
ditures total 2 percent or more of
annual sales volume.
R and D affects three types of
capital spending: first, facilities
used directly in research; second,
facilities necessitated by decisions
to place new items in production,
and, third, sufficiently superior new
equipment to replace existing
models.
The day has long since passed
when capital goods producers could
“sit tight” with accepted products,
expecting that customers would
not be lured away by competitors.
When new product lines are intro­
duced, one or more later genera­
tions already are in the develop­
ment stage to be introduced when
matured and fully tested.
The day is also past when im­
portant new scientific or technical
discoveries are allowed to lie fallow
for years awaiting exploitation.
Recent dramatic examples of the
swift adaptations of new technology
are found in the use of computers,

M issile components in an environm entally controlled w h ite room
and an astro na ut's space su it illu stra te advanced technology o f M idw e st defense contractors

micro-circuitry and lasers in indus­
trial applications.
A number of reasons can be of­
fered for the more rapid pace of
technological development of the
postwar period. The cooperation of
industry and government in main­
tain in g the n a tio n ’s m ilitary
strength in the cold war has speeded
the development of many types of
research that have civilian applica­
tions. This process has been aided
by the ever-growing number of
scientists, engineers and technicians
that have received advanced train­
ing in universities, industry and
government.
Technological progress also has
been spurred by the highly compe­
titive nature of the United States
business structure. Unlike some
nations, where private cartels and
government-sponsored firms are
dominant, each major United States
industry includes a number of in­
dependent firms, each striving to
increase its share of the various
markets. Anti-monopoly policies
have been supplemented by court
decisions that have gradually nar­
rowed the role of patents in restrict­
ing competition. Domestic compe­
tition also has been stimulated in
the past decade by the growing im-

Acknow ledgm ents
Cover—Sangamo Electric Company, Barber

the requirements of the war in
Southeast Asia. Private capital out­
lays probably will be rising but at
a slower rate than in 1966. Never­
theless, barring an unforeseen jolt
to business confidence, the capital
spending upsurge that began in
1961 retains substantial momen­
tum. During 1966 many planned
private equipment purchases were
delayed or postponed because of
labor and material shortages, ex­
cessive costs or military priorities.
The longer-run needs for pro­
ducers’ durable goods are immense.
Huge outlays are contemplated in
connection with projects of gov­
ernment and industry to reduce air
and water pollution, to improve
water supplies and for airports,
highways and urban transport. Im­
plementation of these programs will
coincide with an impending surge
in family formation resulting from
the maturing of those born in the
early postwar years. Demands of
these families together with pro­
grams to raise the economic status
of disadvantaged groups will re­
quire continued growth in output of
consumer goods and of the ma­
chinery and equipment used in pro­
ducing them. The future prosperity
of the Seventh Federal Reserve
District centers that concentrate on
output of producers’ durable equip­
ment will be determined in large
part by the degree of success
achieved in meeting these goals.

to improve product quality

M anufacturing

portance of imports of a wide
variety of products.
Capital outlays have been en­
couraged in the postwar period by
favorable profit trends and the
ready availability of credit. Under
the circumstances, facilities to pro­
duce new products were not de­
layed because of an inadequate
supply of funds. Large firms with
surplus cash and borrowing power
have acquired smaller firms of
demonstrated profitability with
noncompeting product lines. As
semi-independent divisions of
parent corporations, these merged
firms have been supplied with am­
ple funds to help achieve their full
growth potential.
But technology and competition
will not maintain capital outlays in
the future in the face of declines in
general activity. Major investment
decisions involve extended commit­
ments that require confidence in the
long-run economic growth of the
nation. Any recession, even a
moderate setback, could have a
pronounced effect on sales of pro­
ducers’ durable goods. An ex­
tended period of recession or slug­
gish growth, as in the 1957-63
period, would be accompanied by
a marked slowing of investment
outlays resulting in a barrier to
achievement of full growth poten­
tial when prosperity returned.
In early 1967 the economic out­
look will continue to be clouded by

Tool Company; Page 27 —Cummins

Company,

Link-Belt

Com­

Instrum ents to test m aterials and posture
studies to reduce w o rke r fatig u e —
part o f the continuing e ffo rt

Engine

pany; Page 20 —Cummins Engine Company,

Company, Incorporated, Electro-Motive D iv i­
sion, General M otors C orporation, Amsted

Greene Company, Th ra ll Car M anufacturing

Incorporated (Ezra Sto lle r Associates), Abex

Company, Federal-Mogul C orporation; Page

C orporation; Page 21— Hoover Ball & Bear­

Industries, Incorporated; Page 31—The Ben­

12—A. B. Dick Company, Page 17— Interna ­

ing

Case

d ix

tional

Company,

Borg-

Page 32 —The Bendix C orporation, Federal-

25—Ex-Cell-O

M o g u l C o rp o ra tio n ; Page 3 3 — B ru n s w ic k

Harvester

Company,

Le Tourneau-

Company
The

W e s tin g h o u s e C o m p a ny, A llis - C h a lm e rs

W a rn e r

M anufacturing

Corporation,

Company;

Page

19—Iowa

(Levers' Studio), J.
Bendix

C orporation;
G iddings

I.

C orporation,
Page
&

Lew is

Machine

C orporation,

C ollins

Radio

Company;

C orporation, J. I. Case Company.

33

Assets

December 3 1 , 1 9 6 6

G old c e rtific a te a c c o u n t ...........................................

December 3 1 , 1 9 6 5

Red em p tion fu n d f o r Fe d e ra l Reserve notes

1 ,8 2 6 ,7 3 1 ,5 8 3

$ 2 ,2 0 9 ,4 9 5 ,0 4 7

3 3 1 ,4 3 3 ,9 2 7

$

3 1 8 ,0 6 5 ,6 5 0

To ta l go ld c e rtific a te re se rv e s

.

$ 2 , 1 5 8 ,1 6 5 ,5 1 0

$ 2 ,5 2 7 ,5 6 .0 ,6 9 7

Fe d e ra l R e se rv e notes o f o th e r B a n k s

.

8 6 ,0 3 5 ,0 0 0

8 4 ,8 8 5 ,0 0 0

4 5 ,9 9 4 ,2 1 0

2 1 ,6 8 1 ,9 0 5

O th e r c a s h .............................................................................
D isc o u n ts and advances:
Secured by U. S. G o v e rnm e nt se c u ritie s
O th e r

$

1 9 ,6 6 0 ,0 0 0

$

To ta l d isc o u n ts and advances

.

1 5 ,1 5 0 ,0 0 0
5 ,8 2 2 ,0 0 0

....................................................................
$

1 9 ,6 6 0 ,0 0 0

$

2 0 ,9 7 2 ,0 0 0

7 , 3 2 2 ,1 4 4 ,0 0 0

6 ,7 4 1 ,8 3 5 ,0 0 0

.

$ 7 , 3 4 1 ,8 0 4 ,0 0 0

$ 6 ,7 6 2 ,8 0 7 ,0 0 0

Cash ite m s in p rocess o f collection .

1 ,7 4 2 ,1 6 9 ,9 6 2

1 ,5 0 8 ,1 7 2 ,0 5 0

U. S. G o v e rn m e n t s e c u r i t i e s ..................................
To ta l lo a n s and se c u ritie s

B a n k p r e m is e s ....................................................................

1 9 ,5 8 4 ,6 5 1

2 0 ,4 9 0 ,5 1 7

O th e r a s s e t s ....................................................................

1 7 9 ,5 4 9 ,4 8 4

1 3 9 ,7 7 5 ,4 2 5

............................................

$1 1 ,5 7 3 ,3 0 2 ,8 1 7

$1 1 ,0 6 5 ,3 7 2 ,5 9 4

Fe d e ra l R e se rv e n o t e s ...................................................

$ 7 ,2 9 3 ,0 7 2 ,2 9 2

$ 6 ,8 9 0 ,6 4 2 ,1 4 5

$ 2 ,7 5 3 ,9 0 9 ,0 9 1

$ 2 , 8 1 4 ,2 8 2 ,4 5 3

5 2 1 ,2 6 3

4 9 ,2 6 4 ,8 9 2

Total assets
Liabilities

D e p o sits:
M e m b e r b ank r e s e r v e s ..................................
U. S. T re a s u re r—g e n e ra l account .
F o r e i g n ....................................................................

2 2 ,8 8 0 ,0 0 0

2 1 ,3 0 0 ,0 0 0

O th e r

....................................................................

2 8 ,6 5 9 ,7 6 6

2 1 ,5 4 9 ,2 1 8

To ta l d e p o s i t s ...................................................

$ 2 , 8 0 5 ,9 7 0 ,1 2 0

$ 2 ,9 0 6 ,3 9 6 ,5 6 3

1 ,2 7 0 ,1 3 5 ,9 6 9

1 ,0 8 0 ,0 7 6 ,2 4 3

D e fe rre d a v a ila b ilit y cash ite m s

.

O th e r l i a b i l i t i e s ...........................................................

3 8 ,8 9 0 ,2 3 6

3 0 ,9 3 0 ,8 4 3

Total l i a b i l i t i e s ....................................

$1 1 ,4 0 8 ,0 6 8 ,6 1 7

$ 1 0 ,9 0 8 ,0 4 5 ,7 9 4

...........................................................

8 2 .6 1 7 .1 0 0

7 8 .6 6 3 .4 0 0

............................................................................

8 2 .6 1 7 .1 0 0

7 8 .6 6 3 .4 0 0

$1 1 ,5 7 3 ,3 0 2 ,8 1 7

$1 1 ,0 6 5 ,3 7 2 ,5 9 4

$

$

Capital accounts
C a p ita l paid i n
S u rp lu s

Total liabilities and capital accounts
C o n tin g e n t lia b ilit y on acceptances purchased
f o r fo re ig n c o rre s p o n d e n t s ..................................

2 7 ,4 2 7 ,4 0 0

2 0 ,3 9 1 ,2 0 0

R a tio o f go ld c e rtific a te re se rv e s
to Fe d e ra l R e se rve note lia b ilit ie s

2 9 .6 %

3 6 .7 %

1965

1966

C u rre n t e a rn in g s:
D isc o u n ts and a d v a n c e s .....................................................................................

$

6 ,0 5 0 ,3 3 5

$

3 ,9 3 3 ,3 9 6

U. S. G o v e rnm e nt s e c u r i t i e s ............................................................................

3 0 9 ,9 9 8 ,0 7 6

2 5 3 ,9 5 8 ,4 6 6

F o re ig n c u r r e n c i e s .............................................................................................

3 ,1 4 3 ,5 1 9

1 ,9 7 9 ,9 4 4

A ll o t h e r .......................................................................................................................

1 0 8 ,5 3 8

6 8 ,9 9 7

To ta l c u rre n t e a r n in g s .....................................................................................

$ 3 1 9 ,3 0 0 ,4 6 8

$ 2 5 9 ,9 4 0 ,8 0 3

O p e ra tin g e x p e n s e s .............................................................................................

$ 2 9 ,0 7 0 ,3 0 2

$ 2 7 ,9 0 9 ,4 6 2

Fe d era l Re se rve c u rre n c y .....................................................................................

4 ,0 7 8 ,1 13

4 ,0 0 3 ,9 4 6

A sse ssm e n t f o r e xp e n se s o f Board o f G o v e r n o r s ..................................

1 ,2 9 2 ,3 0 0

1 ,2 2 3 ,9 0 0

$ 3 4 ,4 4 0 ,7 1 5

$ 3 3 ,1 3 7 ,3 0 8

C u rre n t e xp e n se s:

To ta l

.......................................................................................................................

Le ss re im b u rse m e n t f o r certain fisc a l agency
3 ,8 0 5 ,1 3 1

3 ,7 2 4 ,8 2 3

C u rre n t net e x p e n s e s .....................................................................................

$ 3 0 ,6 3 5 ,5 8 4

$ 2 9 ,4 1 2 ,4 8 5

C u rre n t net e a r n i n g s .....................................................................................

$ 2 8 8 ,6 6 4 ,8 8 4

$ 2 3 0 ,5 2 8 ,3 1 8

$

$

and o th e r e x p e n s e s .....................................................................................

A d d itio n s to c u rre n t net e a r n i n g s ............................................................................

2 6 7 ,2 2 9

1 9 5 ,2 3 0

Deductions fro m c u rre n t net e a rn in g s:
Loss on sa le s o f U. S. G o v e rnm e nt se c u ritie s ( n e t ) ..................................

4 1 4 ,1 0 8

1,301

A ll o t h e r .......................................................................................................................

1 ,2 2 9

4 0 ,3 5 9

N e t ded uctions fro m (—) o r a d d itio n s to c u rre n t net e a rn in g s .
N e t e a rn in g s before p a ym e nts to U. S. T re a s u ry

.

.

.

.

$

4 1 5 ,3 3 7

$

4 1 ,6 6 0

$

To ta l d e d u c t i o n s .............................................................................................

_ 1 4 8 ,1 0 8

$

1 5 3 ,5 7 0

$ 2 8 8 ,5 1 6 ,7 7 6

4 ,8 5 5 ,8 3 8

Pa ym e nts to U. S. T re a s u ry (in te re st on Fe d e ra l R e se rve notes) .
$

4 ,6 2 6 ,2 8 4

2 7 9 ,7 0 7 ,2 3 8

D iv id e n d s p a i d ..............................................................................................................

T ra n s fe rre d to s u r p l u s ......................................................................................................

$ 2 3 0 ,6 8 1 ,8 8 8

2 2 1 ,9 9 5 ,0 5 4

3 ,9 5 3 ,7 0 0

$

4 ,0 6 0 ,5 5 0

Surplus account
S u rp lu s , J a n u a ry 1

......................................................................................................

$ 7 8 ,6 6 3 ,4 0 0

$ 7 4 ,6 0 2 ,8 5 0

T ra n s fe rre d to s u r p lu s —a s a b o v e ............................................................................

3 ,9 5 3 ,7 0 0

4 ,0 6 0 ,5 5 0

S u rp lu s , December 3 1 ......................................................................................................

$ 8 2 ,6 1 7 ,1 0 0

$ 7 8 ,6 6 3 ,4 0 0

35

1966

1965

D o lla r am ount (in m illio n s)
C o m m e rc ia l bank c h e c k s............................................................

2 6 2 ,8 6 7

19,407

17,186

O th e r ite m s .........................................................................................

682

1,127

C o m m e rc ia l bank c h e c k s............................................................

810,381

745,431

G o v e rn m e n t c h e c k s * ....................................................................

9 4 ,1 8 4

9 4 ,6 9 2

O th e r ite m s .........................................................................................

1,800

1,7 9 4

C u rre n c y re c e ive d and c o u n te d ...........................................

4 ,8 6 2

5 ,5 7 8

C o in re c e ive d and c o u n te d .....................................................

98

38

C o in w ra p p e d ...................................................................................

30

83

U n fit c u rre n c y w ith d ra w n fro m c irc u la t io n .....................

1,219

1,099

C u rre n c y re c e ive d and c o u n te d ...........................................

759

866

C o in re c e ive d and c o u n te d .....................................................

913

536

C o in w ra p p e d ...................................................................................

256

969

U n fit c u rre n c y w ith d ra w n fro m c irc u la t io n .....................

276

195

S e c u ritie s re c e iv e d ........................................................................

14,739

15,957

S e c u ritie s re le a s e d ................................................................ '. . .

1 5,096

16,118

C o u p o n s d e ta c h e d .........................................................................

271

260

In sa fe ke e p in g on D ecem b er 3 1 ............................................

8 ,1 2 0

8 ,4 7 6

S e c u ritie s re c e iv e d ........................................................................

364

383

S e c u ritie s re le a s e d .........................................................................

365

350

C o u p o n s d e ta c h e d .........................................................................

3 ,0 7 2

3 ,0 0 8

In sa fe ke e p in g on D ecem b er 3 1 ............................................

1,5 2 5

1,526

T o t a l lo a n s made d u rin g y e a r ................................................

15,908

11,033

D a ily a ve ra g e o u tsta n d in g ........................................................

132

95

N u m b e r o f banks accom modated d u rin g y e a r ........................

268

171

D o lla r am ount (in m illio n s ) ........................................................

1,680

1,812

N u m b e r o f tra n s a c tio n s ..............................................................

Clearing and
collection

3 0 8 ,9 9 0

G o v e rn m e n t c h e c k s * ....................................................................

1 7,669

1 8,0 75

D o lla r am ount o f funds tra n sfe rre d (in m illio n s ) ....................

8 8 9 ,8 4 7

6 8 6 ,2 5 6

N u m b e r o f tra n s fe rs (in th o u sa n d s)................................................

751

672

N u m b e r o f pie ce s (in thousa nds)

D o lla r am ount (in m illio n s)

Currency and
coin

N u m b e r o f p ieces (in m illio n s)

D o lla r am ount (in m illio n s)

Safekeeping of
securitiesf

N u m b e r o f p ie ce s (in thousa nd s)

D o lla r am ount (in m illio n s)

Discount and
credit

Purc ha se s and sa le s o f se c u ritie s f o r mem ber banks

Investment
Transfer of
funds

'Includes postal money orders.

flncluding collateral custodies.

1966

1965

13,929

15,513

M a rk e ta b le se c u ritie s
D o lla r amount (in m illio n s)
Issu e d .............................................................................................
S e rv ic in g :
S e c u ritie s re c e iv e d ....................................................

17,297

18,021

S e c u ritie s d e liv e re d ...................................................

2 2 ,2 6 3

2 1 ,4 3 9

R e d e e m e d ...................................................................................

18,952

19,280

433

344

S e c u ritie s re c e iv e d ....................................................

242

212

S e c u ritie s d e liv e re d ...................................................

754

551

R e d e e m e d ...................................................................................

805

664

1,628

1,528

B o n d s re c e ive d f o r r e is s u e ...................................

150

154

Bo nd s d e liv e re d on re is s u e ..................................

150

154

Bo nd s d e liv e re d on re p la c e m e n t......................

6

5

R e d e e m e d ...................................................................................

1,182

1,068

25,551

2 4 ,1 2 7

N u m b e r o f pieces (in thousa nds)
Issu e d .............................................................................................
S e rv ic in g :

S a v in g s bonds

Services to the
U.S. Treasury

D o lla r am ount (in m illio n s)
Is su e d .............................................................................................
S e rv ic in g :

N u m b e r o f pieces (in thousands)
Issu e d .............................................................................................
S e rv ic in g :
B o n d s re c e ive d fo r r e is s u e ...................................

702

699

Bo nd s d e liv e re d on re is s u e ..................................

790

784

Bo nd s d e liv e re d on re p la c e m e n t......................

68

70

R e d e e m e d ...................................................................................

17,319

16,393

10,891

8,201

2 ,1 3 2

1,937

Fe d e ra l ta x re c e ip ts p roc e sse d
D o lla r am ount (inm illio n s ) .............................................................
N u m b e r o f pieces

(in th o u sa n d s)............................................

R e q u e s ts f o r a d d itio n a l c o p ie s o f this A nnual Re po rt should be addressed to:
Federal Reserve Bank o f Chicago
Box 8 3 4
Chicago, Illin o is 6 0 6 9 0

FRANKLIN J. LUNDING
C h a irm a n o f the Finance C om m ittee
Je w e l C o m p a n ie s, Inc.
Chicago, Illin o is

Chairm an and F e d e ra l Reserve A g en t

JOHN W. SHELDON, P re sid e n t
C has. A . Ste v e n s & Co.
Chicago, Illin o is

D eputy Chairman

JOHN H. CROCKER, C h a irm a n o f the Boa rd

HARRY W . SCHALLER, P re sid e n t

Th e C itiz e n s N a tio n a l B a n k o f Decatur

Th e C itize n s F ir s t N a tio n a l

Decatur, Illin o is

B a n k o f S to rm Lake
S to rm La ke , Iow a

GERALD F. LANGENOHL, T re a s u re r
ELVIS J. STAHR, P re sid e n t

and A s s is ta n t Se c re ta ry (Retired)
A llis -C h a lm e rs M a n u fa c tu rin g C om pany

In d ia n a U n iv e rs it y

M ilw a u k e e , W isc o n sin

B lo o m in g to n , In d ia n a

W ILLIAM E. RUTZ, D ire c to r

JOSEPH O. WAYMIRE

and M e m b e r o f the Exe cu tive C om m ittee

Vice P re sid e n t and T re a s u re r

G id d in g s & L e w is M achine To o l C om pany

E li L illy and C om pany

Fond du Lac, W isc o n sin

In d ia n a p o lis, In d ia n a

KENNETH V. ZW IEN ER, C h a irm a n o f the Boa rd
H a r r is T r u s t and S a v in g s B a n k
Chicago, Illin o is

DETROIT

BRANCH

GUY S. PEPPIA TT, C h a irm a n o f the Boa rd
Fe d e ra l-M o g u l C o rp o ra tio n
D e tro it, M ic h ig a n

Chairm an

JOHN H. FRENCH, JR., P re sid e n t

FRANKLIN H. MOORE

C ity N a tio n a l B a n k o f D e tro it

C h a irm a n o f the Bo a rd and P re sid e n t

D e tro it, M ic hig a n

Th e C om m ercia l and S a v in g s B a n k o f S t. C la ir C ounty
S t. C la ir, M ic h ig a n

MAX P. HEAVENRICH, JR., P re sid e n t

RAYMOND T. PERRING, C h a irm a n o f the Boa rd

H e a ve nric h B ro s. & C om pany

Th e D e tro it B a n k and T r u s t C om pany

S a g in a w , M ic hig a n

D e tro it, M ic h ig a n

JAMES W. MILLER, P re sid e n t

B. P. SHERWOOD, JR., P re sid e n t

W e ste rn M ic h ig a n U n iv e rs ity

S e c u rity F ir s t B a n k & T r u s t Co.

K a la m a zo o , M ic hig a n

G ra n d H a ve n, M ic h ig a n

MEMBER

OF

FEDERAL

ADVISORY

COUNCIL

HENRY T. BODMAN, C h a irm a n o f the Boa rd
N a tio n a l B a n k o f D e tro it
D e tro it, M ic h ig a n
Decem ber 31, 1966

CHARLES J. SCANLON, P re sid e n t
HUGH J. HELMER, F ir s t Vice P re sid e n t

OFFICERS

ERNEST T. BAUGHMAN, Vice P re sid e n t

HAROLD J. NEWMAN, Vice P re sid e n t

JOHN J. ENDRES, G e ne ra l A u d ito r

LELAND M. ROSS, Vice P re sid e n t

ARTHUR M. GUSTAVSON, Vice P re sid e n t

HARRY S. SCHULTZ, Vice P re sid e n t

PAUL C. HODGE, Vice P re sid e n t,

BRUCE L. SMYTH, Vice P re sid e n t

G e ne ra l C ounsel and Se c re ta ry

LAURENCE H. JONES, Vice P re sid e n t

RUSSEL A. SW ANEY, Vice P re sid e n t

RICHARD A. M OFFATT, Vice P re sid e n t

JACK P. THOMPSON, Vice P re sid e n t
CARL E.

!, Ca s h ie r

GEORGE W. CLOOS, S e n io r Econom ist

W ILLIAM O. HUME, A s s is ta n t Vice P re sid e n t

LE ROY A. DAVIS, A s s is ta n t Vice P re sid e n t

WARD J. LARSON, A s s is ta n t G e n e ra l C ounsel
and A s s is ta n t Se c re ta ry

LE ROY W. DAWSON, A s s is ta n t Vice P re sid e n t
JAMES R. MORRISON, C h ie f E x a m in e r
FRED A. DONS, A s s is ta n t G e ne ra l A u d ito r
KARL A. SCHELD, A s s is ta n t Vice P re sid e n t
DANIEL M. DOYLE, A s s is ta n t Vice P re sid e n t
ROBERT E. SORG, A s s is ta n t Vice P re sid e n t
ELBERT O. FULTS, A s s is ta n t Vice P re sid e n t
JOSEPH J. SRP, A s s is ta n t Vice P re sid e n t
VICTOR A. HANSEN, A s s is ta n t Vice P re sid e n t
LYNN A. STILES, S e n io r Econom ist
EDWARD A. HEATH, A s s is ta n t Vice P re sid e n t
CHARLES G. W RIG HT, A s s is ta n t Vice P re sid e n t

and A s s is ta n t Se c re ta ry

ERICH K. KROLL, A s s is ta n t C a sh ie r

ARNOLD J. ANSCHUTZ, A s s is ta n t C a sh ie r
HARRIS C. BUELL, JR., A s s is ta n t C h ie f E x a m in e r

RAYMOND M. SCHEIDER, A s s is ta n t C a sh ie r

JOHN J. CAPOUCH, A s s is ta n t C a sh ie r
ADOLPH J. STO JETZ, A s s is ta n t C a sh ie r

RUDOLPH W. DYBECK, A s s is ta n t C a sh ie r

CARL W. WEISKOPF, A s s is ta n t C h ie f E x a m in e r

FRANCIS C. EDLER, A s s is ta n t C a sh ie r

DETROIT
RUSSEL A. SW ANEY, Vice P re sid e n t
GORDON W . LAMPHERE, A s s is ta n t Vice P re sid e n t

BRANCH
LOUIS J. PUROL, A s s is ta n t C a sh ie r
W. GEORGE RICKEL, A s s is ta n t C a sh ie r

and A s s is ta n t G e ne ra l C ounsel

PAUL F. CAREY, A s s is ta n t C a sh ie r
Decem ber 31, 1966

RONALD L. ZILE, A s s is ta n t C a sh ie r

Appointments,
Elections and Retirements

i d uring 1966 the following appointments and
elections were announced:
Henry T. Bodman, Chairman of the Board, Na­
tional Bank of Detroit, Detroit, Michigan, was
reappointed Member of the Federal Advisory Coun­
cil from the Seventh Federal Reserve District for
1967.
William H. Davidson, President, Harley-Davidson
Motor Co., Milwaukee, Wisconsin, was elected Direc­
tor for a three-year term beginning January 1, 1967,
to succeed Gerald F. Langenohl, Treasurer and
Assistant Secretary (Retired), Allis-Chalmers Manu­
facturing Company, Milwaukee, Wisconsin.
John H. French, Jr., President, City National Bank
of Detroit, Detroit, Michigan, was reappointed Direc­
tor of the Detroit Branch for a three-year term
beginning January 1, 1967.
Max P. Heavenrich, Jr., President, Heavenrich
Bros. & Company, Saginaw, Michigan, was reap­
pointed Director of the Detroit Branch for a threeyear term beginning January 1, 1967.
Emerson G. Higdon, President, Maytag Company,
Newton, Iowa, was appointed Director for a threeyear term beginning January 1, 1967, to succeed John
W. Sheldon, President, Chas. A. Stevens & Co., Chi­
cago, Illinois.
Franklin J. Lunding, Chairman of the Finance
Committee, Jewel Companies, Inc., Chicago, Illinois,
was redesignated Chairman of the Board and Federal
Reserve Agent for 1967.
Guy S. Peppiatt, Chairman of the Board, FederalMogul Corporation, Detroit, Michigan, was redesig­
nated Chairman of the Branch Board for 1967.
Elvis J. Stahr, President, Indiana University,
Bloomington, Indiana, was designated Deputy Chair­
man of the Board for 1967.
George L. Whyel, President, Genesee Merchants
Bank & Trust Co., Flint, Michigan, was appointed
Director for a three-year term beginning January 1,
1967, to succeed Franklin H. Moore, Chairman of the
Board and President, The Commercial and Savings
Bank of St. Clair County, St. Clair, Michigan.
Kenneth V. Zwiener, Chairman of the Board,
Harris Trust and Savings Bank, Chicago, Illinois, was
reelected Director for a three-year term beginning
January 1, 1967.

Gordon W. Lamphere, Assistant General Counsel,
was promoted to Assistant Vice President and Assist­
ant General Counsel at the Detroit Branch on Sep­
tember 1.
Adolph J. Stojetz was appointed Assistant Cashier
on August 1.
Jack P. Thompson was appointed Vice President
on October 1.
Ronald L. Zile was appointed Assistant Cashier at
the Detroit Branch on September 1.

Gerald F. Langenohl, Franklin H. Moore and John
W. Sheldon retired as directors on December 31,
1966. Mr. Langenohl was Director of the Bank since
1958. Mr. Moore was Director of the Detroit Branch
since 1961. Mr. Sheldon was Director since 1961 and
Deputy Chairman since 1966.
Lester A. Gohr, Assistant Cashier, retired on Aug­
ust 1 after 47 years of service at the Bank.
Clarence T. Laibly, Vice President, retired October
1 after 48 years of service at the Bank.
Richard W. Bloomfield, Assistant Vice President,
retired on September 1 after 37 years of service at the
Detroit Branch.
The employees listed below, all with service rec­
ords of more than 25 years, retired within the course
of the year from the Head Office or Detroit Branch:
Matt L. Donovan
Hertha M. Moehlig
Joseph H. McHale
James I. Molloy
Esther H. Martin
John L. Reynolds
Gregory J. Smith
The following employees retired after more than
40 years association with the Head Office or Detroit
Branch:
Raymond Carroll
Louise Harris
Margaret E. Clapp
Walter C. Schaack
Marion L. Daus
Zella E. Towne
The 16 retired officers and employees of the Bank
represent more than 618 years of service to this
institution.

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