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f 1948 FEDERAL RESERVE BANK OF MINNEAPOLIS ■ THE YEAR 1948 included a date of more than passing interest in the bank's history, for it was April 9, 1923, that the cornerstone of the bank building was laid. Fittingly, therefore, the front facade of the building is portrayed (in bas relief) on the cover of this annual report. Historymaking was its construction as blocks of Minnesota granite quarried for the base course and portico columns were publicized as the largest ever finished in the state. A special lathe was built to turn the eight massive pillars. ■ In his message delivered at the cornerstone ceremonies, Roy Young, governor of the bank, said in part: "While the future may make it necessary to change the methods of operation of this institution, let us hope, to avoid future disaster, that unsophisticated financiers, theorists, econ omists or what not, possessed of visionary and untried ideas, will never be permitted to undermine or change in any particular the foundation of sound fundamental credit principles upon which this Federal Reserve bank and the Federal Reserve System have been established." 1 H E STATEM EN TS of condition and of earnings and expenses of the Federal Reserve Bank of Minneapolis for 1948—with certain comparative data for 1947—are here presented. In a letter to the stockholders, President John N. Peyton has reviewed the year’s operations of the bank in the light of contemporaneous developments in the commercial banking, agriculture, and business of the district. Continuing the policy introduced the previous year, this year’s report contains a feature article revealing another facet of the bank’s operations not clearly re flected in the balance sheet or operating figures. This treatise, which has the Interdistrict Settlement Fund as its subject, is designed to present a simplified version of one of the important yet not generally under stood services performed by the Federal Reserve System for the nation’s banks and the general public. -•? / Chairman, Board of Directors BOOKKEEPER FOR T HE NATION - PAGE THE P R E S I D E N T ’S LETTER TO THE S T O C K H O L D E R S .A. YEAR AGO, when you, the Ninth district bankers, looked back over the previous year, you probably said, ‘Things can’t be that good again this year.” Well, things in 1948 were that good and a little better! The people of the United States produced more, bought and sold more, and consumed more goods and services than in any other peacetime year. In this accomplishment die people of the Ninth Federal Reserve district contributed handsomely. The production of our farms, mines, and factories reached record proportions. Reflecting the high level of business activity, Ninth district bankers last year handled more money payments—made by coins, currency, and checks—than in the previous year. Although total bank deposits were down slightly from 1947, they changed hands more rapidly, and hence did more money work. Services rendered your customers through loans were substantial, since bank loans hit an all-time peak volume. Business Indicators Reflect Leveling Off Nevertheless, the year 1948 must be described as a year in which readjustments and leveling off, rather than sharp advances, took place. Per centage-wise, advances over 1947 in most cases were less than those in 1947 over 1946. The accompanying chart (next page) shows that in several business indicators the percentage increases over the extremely high levels of 1947 were comparatively modest Only in construction contracts awarded was there a marked percentage increase—attributable largely to greater expendi tures for educational purposes and public works. The increase in department store stocks reflected a “filling of the pipelines.” Reports indicate that today very few items are unavailable to willing and able buyers. Loan Expansion Reached Record Level At the close of 1948, total loans of all Ninth district member banks reached the record level of $876 million, surpassing the previous all-time high of $811 million in June, 1920. Nevertheless, the rate of loan expansion in 1948 was the lowest so far in the postwar period—16 per cent—which compared with increases of 27 per cent in 1947 over 1946 and 31 per cent in 1946 over 1945. The major sources of loan expansion, indicated by reports from a selected group of the larger banks in this district, were real estate and con sumer loans. In these reporting banks real estate loans increased from $55 million to $63 million during the year. That real estate loans did not increase more, in the face of a brisk demand for mortgage credit, indicates a reluctance on the part of bankers to lend freely in an inflated real estate market. Other loans of these banks—mostly consumer loans—increased from $91 million to $118 million during the year. Here again there is evidence of cautious restraint on the part of commercial bankers, who were faced with continued strong demand. While real estate and consumer loans were increasing, commercial, industrial, and ag ricultural loans were declining slightly in 1948 in this group of banks. The volume of loans of the latter three categories declined from $252 million to $246 million. In the four full states of our district in all in sured commercial banks, however, agricultural P sp Tbrtt PERCENTAGE EXPANSION IN NINTH DISTRICT BUSINESS INDICATORS, 1947-48 HIGH LEVEL OF NINTH DISTRICT BUSINESS ACTIVITY IN 1947 FOR SOURCES AND DESCRIPTION OF DATA FOR CHARTS SEE INSIDE BACK COVER loans increased steadily, the increase being 32 per cent from June 30, 1947, to June 30, 1948. This development reflected pressure on country banks by farmers, whose credit needs increased owing to greater costs of operations and more ready availability of such items as farm machinery, building materials, and motor vehicles. of this year. The accompanying table shows some of the price readjustments of 1948. WHOLESALE PRICES OF SELECTED GROUPS OF COMMODITIES December 1947 and December 1948 (Index numbers of the Bureau of Labor Statistics, 1926 = 100) Decem Decem Percent ber ber age 1947 1948 (est.) Change Price Readjustments Noticeable in 1948 The past year was characterized by readjustment in prices as well as leveling off in several business indicators. In general, the prices of industrial prod ucts rose steadily, while prices of farm products behaved erratically. Prices of farm products took a sharp break in February, recovered during the summer and autumn, then broke again in Novem ber and December, reflecting the bountiful crops All commodities............ Farm products .............. Foods ............................ Hides and leather products Textile products ............ Metals and metal products Building materials ......... House furnishings ......... 163.2 196.7 178.4 203.4 148.0 151.5 191.0 139.4 163.5 176.1 173.5 184.4 145.8 173.8 202.1 147.5 + 0.2 - 10.5 — 2.8 — 9.4 — 1.5 + 14.7 + 5.8 + 5.8 Farm machinery increased in price from 127.0 in November 1947 to 146.2 in November 1948, an increase of 15.1 per cent. In the same period, brick and tile increased in price from 148.1 to 160.5, UP 8.4 per cent, while cement prices ad vanced from 120.6 to 133.7, a r^se I0-9 Per centThat farmers are now being caught in a squeeze between rising costs and falling farm prices can hardly be questioned. This development portends a struggle on the part of the agricultural interests to maintain the favorable position they have en joyed in recent years. Tug-of-War in Economy At year’s end, most observers looking backward saw the development of a trend toward a more even balance between the strength of still-present inflationary factors and the strength of growing “soft spots” making an appearance in the economy. Looking forward, they are puzzled over this tug-of-war between the forces of inflation and deflation, and are watching carefully for signs that indicate which side may get the firmer foot hold in the changing economic scene. Discount Rates Raised in 1948 Although 1948, as a leveling-ofl year, saw less drastic alterations in our bank operations than did the war and immediate postwar period, there were several noteworthy developments. In January our discount rate on advances to member banks secured by government securities or eligible paper was increased from 1 per cent to 1 J4 per cent, and in August, with inflationary factors still strong in our economy, it was raised to 1 1/2 per cent. Our rates on other types of bor rowing moved up correspondingly. Pursuant to measures passed by Congress, Sep Page Five tember saw the reimposition of consumer credit controls and an increase in reserve requirements for member banks of 2 per cent on demand de posits and 154 per cent on time deposits. Changes Facilitate Transfers and Clearings Of more permanent significance to the banks' of the Ninth district was the arrangement by the Treasury department and Reserve banks to make telegraphic transfer of long-term govern ment coupon bonds after March 1, 1948. Previously only short-term securities could be transferred by wire. This service will save banks in the district an estimated $45,000 annually in registration and insurance costs. New microfilming equipment enabled us to notify our member banks May 1 that all checks drawn on banks outside the Twin Cities would be photographed before leaving our bank, elimi nating our requirement that member banks de scribe or maintain descriptive records of items sent to us for collection. There were two other important developments in our check collection operations in 1948. Our operating letters were amended to provide that only cash and noncash items of more than $500, instead of those for more than $100, should be protested, and Regulation J was changed to per mit conditional payment of checks on the day of receipt, allowing return of unpaid items on the following business day. Our Activity Reflects Business Activity Past experience has shown that the volume of work handled by the various departments of our bank is a fair indicator of the level of business and agricultural activity in this district Our volume figures for 1948 seem to bear out the observation that this was a year of record prosperity and, at the same time, of leveling off. The volume of transactions in some departments was up from the record figures of 1947, while in others it turned down. Our check collection departments at the head office and the Helena branch handled 58.5 million checks with a value of $21.3 billion, well ahead of 1947 and a new record. Grain drafts collected numbered 912/mo, up slightly from last year’s total. Their dollar volume of $1,057 million was slightly less than in the previous year, however, indicating that die average grain draft was slightly smaller than in record 1947. Our fiscal agency department showed a sub stantial decline in die number of pieces handled, although dollar figures were above last year’s. Savings bonds sold in the district (not including post office sales) numbered 1,380,000, down from 1947’s 1 ,426,000, but increasing in dollar value from $317 million to $340 million. The number of savings bonds redeemed dropped from 3,200,000 in 1947 to 2,708,000 last year, but their dollar volume of $210 million was almost 5 per cent above the previous year. Currency and coin counted and sorted at the head office and branch reached a record total of $442 million in 1948, up 11 per cent from 1947. Number of pieces of money handled, however, showed a year-to-year decline of approximately 5 per cent. More than 46 million coins were wrapped in the first full year of our wrapped coin service, 23 per cent above the figure for 1947, when the service was inaugurated. The note circulation of our bank, which makes up most of the currency used in the district, totaled $631 million at year’s end, up only $4 mil lion from the figure for December 31, 1947, and the smallest increase since before the war. There was a decline in the dollar value of securities held in custody for Ninth district banks, the total for December 31, 1948, being $1,297 m^' lion compared with $1,407 million a year previously. We made 181 advances to member banks for a total of $256 million, both figures being lower than those for 1947. Number of Our Employees Leveled Off Perhaps nowhere in the bank does the over-all flattening out of work during the year show up so clearly as in the size of our bank staff. After the sharp rise in the number of employees during the war and a rather rapid reduction immediately following the war, in 1948 the number remained almost constant. There were 644 employees at the head office and Helena branch on December 31, 1948, compared with 651 at the dose of 1947. Burges Elected Director; Two Changes in Official Staff Our bank began 1949 with a new class A director, Charles W. Burges, vice president and cashier of the Security National Bank, Edgeley, North Dakota. Mr. Burges was elected in November to replace F. D. McCartney, who was not a can didate for reelection. The Helena branch also had one change in its directorate as James A. McCain, president of the University of Montana, at Missoula, was appointed by the Board of Governors to the vacancy created by the retirement of R. B. Richardson. The composition of the two boards otherwise remained unchanged. Ray C. Lange was reelected and Paul E. Miller reappointed to the district board, and Theodore Jacobs and E. D. MacHaffie were reappointed to the Branch board. R. B. Shepard continues as chairman and W. D. Cochran as deputy chairman of the district board in 1949, and Malcolm E. Holtz was named chairman of the Branch board. Henry E. Atwood was renamed to the Federal Advisory Council for 1949. There were two changes in the bank’s official staff during the year. Paul W. McCracken, who had been director of research, resigned to join the faculty of the University of Michigan. He was succeeded by J. Marvin Peterson, formerly head of the economics department at Miami University, Oxford, Ohio. The second change was at die Helena branch when C. J. Larson, assistant cashier, resigned to become vice president of the Conrad National Bank, Kalispell, Montana. C. W. Groth of our examination department was named assistant vice president and assigned to the Helena branch to succeed Mr. Larson. Number of Banks Unchanged There were 1,285 banks in the district as 1948 ended, the same number as at the dose of 1947. Of these, 476 were member banks. The four following banks joined the Federal Reserve Sys tem during the year: S e c u r it y S t a t b B a n k , L ake Bank C o u n ty B a n k , of R S u p e r io r N po lso n , h a m b, r h a m e, n o rth a t io n a l B Mo n tan a s t . ig n a t iu s , M o n tan a Da k o t a a n k , su p e r io r , W is c o n s in . Conferences Well Attended Nearly 1,100 bankers attended our annual Ninth district conference on April 24; the third Federal Reserve Forum on October 11 and 12 brought more than 400 potential executives of member banks to Minneapolis; and approximately 140 representatives of state and federal supervisory agencies met on November 27 for our annual Examiners* conference. In March we launched something new in bank ing education—a Short Course in Central Bank ing. The course brought member bankers into the Federal Reserve bank in groups of 12 for five days of detailed study of our operations and the theory of central banking. The course was pre sented 12 times with a total attendance of 144. Students, educators, businessmen, and others have evinced their interest in our bank during the year, as indicated by the frequency of con ducted bank tours, and requests for our publica tions. The number of persons who have seen our bank movie passed the half-million mark during the year. Calls on country banks by members of our staff and visits by country bankers to the Federal Reserve bank have continued to keep us in dose touch with the men who know best the business, agricultural, and financial conditions of all parts of the district. Pagi Stftn BOOKKEEPER FOR THE NATION A LO O K AT THE INTERDISTRICT SETTLEMENT f U N D H OW would you ship $461,000^ 00,000? It sounded like quite a job to us—something for Paul Bunyan, maybe. “How much money is that?” we asked our statistician. The wheels in his head began to turn and out came the answer. ‘In dollar bills, laid end to. end, enough to extend almost 44 million miles,” he replied. “Al most half the distance from the earth to the sun,” he added. “No, not in dollar bills,” we interposed hastily. “In gold.” The wheels turned again. “Four hundred fifty-two thousand tons of 24carat gold,” he said. “Nineteen times as much gold as there is in Fort Knox and the other depositories of the U. S. Treasury. Enough to cover a football field with a solid block fifteen feet high. Enough to make wedding rings for . . . ” “We get the idea,” we interrupted. It looked like too big a job even for Bunyan’s Blue Ox. What baffled us was that apparendy the job had already been done. We had just seen some figures which indicated that money payments back and forth between different sections of our nation last year were measured in hundreds of billions of dollars. The figures were those representing the dollar amount of transfers made through the Interdistrict Settle ment Fund of the Federal Reserve System. In 1948, these transfers totaled approximately $461 billion—a figure sufficiently gigantic to fit the pine tree pen of Bunyan’s Johnny Inkslinger. This seemed to call for an investigation. What is this Interdistrict Setdement Fund? How does it work? We began to ask a few questions. The Fund Actually Is Gold Certificates In outward appearance the Interdistrict Settle ment Fund is a small, quiet office in the Federal Reserve Building, Washington, D. C. The three men who work there are neither transportation experts nor magicians. Their only magic is that of the telegraph: and double-entry bookkeeping. Technically—if you want to be technical—the fund consists of several billion dollars in gold certificates, which are due to the nation’s 12 Federal Reserve banks from the U. S. Treasury. A gold certificate, as its name implies, is a receipt for gold bullion held by the United States Treasury. We found that these gold certificates do double duty in that they not only serve as a clearing fund but also form a part of the reserves which Federal Reserve banks are required to maintain against the deposits of member banks, the United States Treasury, and others in the Federal Re serve banks. The balance which the Federal Reserve Bank of Minneapolis held in this fund on December 31, 1948, is included among our assets in the item, “Gold certificates on hand and due from U. S. Treasury,” which appears on our Statement of Condition (page 17 of this report). But, as wc said, that’s the technical part of it. What we really wanted to find out is how this Fund works—how it moves money from one part of our country to another. Perhaps we can best tell you with an illustration. Check Payments Speeded Up Through the Fund Remember last Christmas you wondered what you should give Aunt Mary in Peoria? You finally decided to send her a check for $10, drawn on your own First National bank. You put the check in the mail and forgot about it—at least until you received your statement from the First National. That was the beginning of a money transfer between two Federal Reserve districts, for, if you remember your high school civics, you know that your bank is in the Ninth Federal Reserve district, served by the Federal Reserve Bank of Minneap olis, while Peoria is in the Seventh district, served by the Federal Reserve Bank of Chicago. When Aunt Mary received the check she cashed it at her bank in Peoria. How she spent the money is her business. Let’s follow the check. The Peoria FUNDS ARE FLASHED FROM MINNEAPOLIS TO ANY BANKING CENTER Telegraphic Network Implements Transfers Through Interdistrict Settlement Fund bank bundled it up with several hundred others and sent it to the Federal Reserve Bank of Chi cago. The Chicago Reserve bank whisked the check on to our own Federal Reserve bank here in Minneapolis and then paid the Peoria bank by adding the amount of the check to its account with the “Fed” of Chicago. Our bank sent it to your own First National, who paid us for it and, as you well know, reimbursed themselves from your bank account. dollar total of checks and other items collected by us for the account of other Reserve banks and branches. If these collections totaled a million dollars our wire might be as follows: Everyone who handled the check, from Aunt Mary to your own bank, seems to have been paid —that is, everyone except the Federal Reserve Bank of Chicago. Our bank owes them $10. Each of the other Reserve banks and branches would send similar wires to the Interdistrict Set tlement Fund for amounts collected in its district payable to other Federal Reserve banks. When all of the wires have been received by the manager of the Fund, he gets out his books and posts the entries to each bank’s account. Then he wires each bank or branch the total amount of its credits and from whom received. How did we pay the Chicago Reserve bank? By sending them a $10 bill? No, for with millions of checks being written and sent to all parts of the country daily, shipment of currency in payment would be too expensive, too risky, and too slow. Here’s where the Interdistrict Settlement Fund comes in. Remember that both the Federal Re serve Bank of Minneapolis and the one at Chicago own parts of that Fund. Their ownership is re flected in figures on the Fund’s books. A simple bookkeeping entry reduces our own bank’s share of the Fund by $10 and increases the Chicago bank’s share by the same amount. The payment has been made. “ Charge our account in the Interdistrict Settlement Fund one million dollars and credit the Federal Reserve ban\s and branches listed below in the amounts indicated: Buffalo, $100,000; New Yor\, $300,000; Chicago, $400,000; San Francisco, $200,000." It’s as simple as that. A transfer between any of the 12 Federal Reserve banks and their 24 Of course, that may be oversimplifying it a bit because your check to Aunt Mary was only one of thousands which the Chicago Reserve bank sent to us on that particular day. At the same time, our bank was sending the Chicago “Fed” other thousands of checks drawn on banks in the Chicago district and cashed or deposited in banks in our area. The Feds Settle Up Daily In settling up at the end of the day our bank telegraphs the Interdistrict Settlement Fund the branches can be made just by bookkeeping entry. No one so much as rustles the gold certificates which the figures on the Fund’s books represent. All the banks and branches are connected by telegraph to facilitate such transfers. Mosf Money Is Bank Deposits The transfer of money by bookkeeping entry instead of by actual transportation of cash can be appreciated only if we realize that most of our money in the United States is not in the form of coin or currency, but in the form of demand deposits in banks. Those familiar little slips of paper—checks—are the vehicles by which bank deposit money is shifted from one section of our economy to another as purchases and sales of goods and services are made. provide a ready channel for the movement of deposit money about the country. The millions of checks which travel from one Federal Reserve district to another are, however, not the only instruments for which payment is made by bookkeeping entry in the Fund. Payment Deposit banking and the use of checks on the scale we know it now are comparatively recent developments. Your great grandfather seldom wrote a check. Only since Civil War days have checks become more important than bank notes as a medium of exchange. Today an estimated 90 per cent of the money payments in this country are made through the medium of the check. When checks circulate locally only—that is, when you give Jake, the grocer, a check and he deposits it in the local bank with which you both do business—payment is made by a simple ad justment of the figures for your account and his on the bank’s books. If the check goes out of town but stays within the boundaries of one particular Federal Reserve district, payment may involve bookkeeping entries on the books of at least two or more commercial banks and probably the Fed eral Reserve bank of that district. Whenever a check goes outside the district of origin, however, in a large percentage of cases payment between the two districts will be made through the Interdistrict Settlement Fund. By a well-developed means of telegraphic communica tion and daily settlement of accounts in the Fund, the various Federal Reserve banks and branches for notes, drafts, coupons, warrants, and other pieces of paper—which your banker calls “ noncash items”—are similarly made. Banks Can Transfer Customers' Funds Quickly A substantial part of the $461 billion handled by the Fund represents wire transfers of funds between commercial banks which are members of the Federal Reserve System. Many such transfers are made by banks to accommodate their cus tomers. In such cases the sending of a check or other payment order by mail is not necessary. Again, let’s take an example. J. Mactavish Doe, a hypothetical businessman, lives in the very real city of Fargo, North Dakota. This morning he received a bill from Smith and Company, San Francisco, which to the sorrow of J. Mactavish’s thrifty soul, must be paid today if he is to take advantage of the discount. A thousand dollars must be in San Francisco today, but he knows that a check sent by mail cannot possibly reach Smith and Company in time. His bank in Fargo has a simple solution to his problem, however. They will be happy to take his check for $1,000. Out goes a wire from the Fargo bank to the Federal Reserve Bank of Minneapolis. As in structed, our bank charges their account with us for $1,000 and simultaneously wires instructions to the Federal Reserve Bank of San Francisco. The San Francisco Reserve bank credits Smith and Company’s bank with $1,000, and the latter bank passes the credit along to Smith and Company. Long before the sun has set over the Golden Gate, Smith and Company has its money, J. Mactavish has his discount, and everyone has done a neat piece of business all along the line—in cidentally, at no profit to either Reserve bank. Everyone has been paid, too—that is, everyone except the Federal Reserve Bank of San Francisco. They aren’t worrying, however. They own a share of that Interdistrict Settlement Fund, too. They know that at the end of the day, when our bank wires the manager of the Fund, the San Francisco share of the Fund will be increased by $1,000 and our own Reserve bank’s share will be reduced by the same amount as a result of this particular transaction. What Happens When You Buy a Bank Draft Banks often transfer money from one place to another for their own accounts, too. Let’s see how such a transaction might arise. Did you ever buy a bank draft? Perhaps you’ve wondered how your local banker always seems to have funds in Minneapolis, St. Paul, Duluth, Chicago, New York, or some other banking center against which he can draw so that you can pay a bill in or near one of those cities. It’s all a part of an efficient “correspondent bank” relationship which commercial banks have developed. Your own bank keeps money on de posit with larger commercial banks in several bank ing centers. He calls them his correspondent banks. When he sells you a draft on one of these banks, his balance with the particular correspondent on which the draft is drawn is, of course, reduced. How does he rebuild it so that he can again sell you a draft the next time you come in ? He has two principal methods. First, he may bundle up part of the out-of-town checks he has taken in during the day and send them directly to his correspondent bank. When the correspondent bank has collected for the checks, it places the money on deposit in your local bank’s account. The second and more rapid method is to use our old friend, the Interdistrict Settlement Fund. Suppose your banker has more money than he needs in his New York correspondent bank, but not enough with his correspondent at Omaha. He merely asks his New York bank to transfer money by wire to Omaha. Presuming both banks to be members of the Federal Reserve System, such transfers are made by the Federal Reserve banks free of charge. Settlement is made, of course, through the Interdistrict Settlement Fund. Uncle Sam Also Makes Use of the Fund Some of the largest transfers which flow through the Fund each day are those made in connection with United States Treasury accounts. The Treas ury department is well acquainted with big figures and Treasury deposits in Federal Reserve banks have been unusually large in the last few years. Through the Interdistrict Settlement Fund such deposits can be transferred from one Reserve bank to another easily and quickly. The withholding tax which your employer de ducted from your last salary check and turned over to the local bank is now, or soon will be, resting in the Treasury’s account at the Federal Reserve Bank of Minneapolis. It’s been a good year here in the Northwest and tax money is piling up in our bank. Down in Boston, however, Uncle Sam may have bills to meet in payment for that sleek, new battleship the Navy is building. Now the Inter district Settlement Fund has another money mov ing job. A quick change of the figures on its books and the money which was formerly in the Federal Reserve Bank of Minneapolis has been shifted Hello, Minneapolis, How About m y tax < m o ney? f “N Homing FR Notes Are Redeemed Through the Fund Many other adjustments between Reserve banks are made through the Fund. In your wallet right now you may have a $20 bill. Inspection reveals that its correct name is a “Federal Reserve Note.” On which Federal Reserve bank is it drawn? What difference does it make so long as it’s worth $20? You’re right. None at all to you, but when that “twenty” comes in to our bank in a currency shipment from your local banker it makes quite a difference to us. We can receive from but not pay out to member banks in our district the Fed eral Reserve notes of the 11 other Reserve banks. One of our big jobs is the sorting out of incom ing Federal Reserve notes as to the bank of issue. The notes of other Reserve banks are returned to them, or, if they are beginning to look a little travel weary, to the Treasury department for re demption. The other Federal Reserve banks have the same job. How is payment made for the notes thus ex changed and redeemed? Daily, through the Inter district Settlement Fund. From time to time the Open Market committee of the Federal Reserve System buys or sells gov ernment securities for the accounts of the 12 Re serve banks. Such operations may be undertaken as a credit control measure or to stabilize the government bond market. Allocation to the various Reserve banks of the funds spent for or realized from such transactions are made, as you should guess by this time, through the Interdistrict Set tlement Fund. at the Treasury’s request to the Federal Reserve Bank of Boston where Uncle Sam needs it. Seasonal shortages of money in one district can be eased by such Treasury transfers or by borrow ing between Reserve banks through bookkeeping entries in the Fund. Transfers Total Nearly Half-Trillion Annually These are a few of the transactions that make up that annual total of almost a half-trillion dollars in transfers. In a sense, the Interdistrict Settlement Fund is the bookkeeper for the nation’s economy. The term aptly describes the enumeration of trans actions between the different sections of the coun try. The volume of business activity, as reflected in interdistrict trade and money payments, shows up, at least in part, in the transfers of funds from one Federal Reserve bank or branch to another. For instance, when the automobile industry is booming in Detroit, sales of motor cars in other districts of the country mean a flow of money to that city. Drafts and checks on banks in other sec tions go to the auto makers’ banks in Detroit. Pay ment for such checks and drafts results in transfers on the books of the Fund from other Federal Reserve banks and branches to the Detroit branch of the Federal Reserve Bank of Chicago, which passes the money along to the commercial banks in Detroit as it pays for the checks. During the crop-moving and livestock-selling seasons a particularly large number of checks are sent to the predominantly agricultural districts. During summer tourist seasons, vacationists to Minnesota’s and Wisconsin’s lakes, to South Dako ta’s Black Hills, and to Montana’s national parks write checks on banks in other sections of the country. Payment for these checks means a shift ing of bank deposits in other Reserve districts to the banks of the Ninth district. Settlement through the Fund means a greater share of it for the Fed eral Reserve Bank of Minneapolis. Trade Pattern of District Revealed by Transfers Recently here in the Federal Reserve Bank of Minneapolis we made a study of the flow of funds into and out of this district as revealed by transfers to and from our account in the Interdistrict Set tlement Fund last year. Some rather interesting facts were disclosed. The study shows that the Chicago district is apparently the largest importer of Ninth district products. Our transactions with the Federal Re serve of Chicago are not only larger than those with any other Reserve bank but they show what economists call a “favorable balance of payments” during every month of the year. In other words, more funds flowed into the Ninth district from the Seventh district than flowed the other way. Evidently Chicago is our best market for the grain, livestock, dairy products, and other commodities of this area. Our transactions with Detroit, on the other hand, reveal an unfavorable balance. We consistently transferred more money to the Detroit branch than we received from them, a fact attributable perhaps to the heavy purchases by persons in this district of the automobiles, trucks, and auto parts manu factured in that city and area. Our transactions with New York rank second in dollar volume according to the debits and credits to our account in the Fund. In 1948, we had a favorable balance with New York from January to August and unfavorable from Septem ber to December. With Buffalo, however, our balance was favorable in all months of the year by a wide margin. Buffalo is a good market for Ninth district grain. Our Trade Is in Balance with Some Areas Our debits and credits with the Federal Reserve Bank of Kansas City rank third. Our trade with that city and area is in near balance during all months of the year. Similarly, exports and imports, as revealed by money transfers, seem to be about equal between Minneapolis and the cities of Bos ton, Philadelphia, Cleveland, Baltimore, Birming ham, Omaha, El Paso, and Los Angeles. The Minneapolis area has a sizable unfavorable balance of payments with the Cincinnati region because of our large imports of machine tools, office supplies, soap, and other goods produced there. Pittsburgh also sells more to us than they buy from us, due to our heavy purchases of coal and steel. Our purchases of such products as tobacco, pea nuts, and liquor probably account for a surplus of imports over exports with such cities as Rich mond, Charlotte, Louisville, Nashville, and Mem phis. Purchases of cotton, cottonseed oil, and petroleum products may account for an unfavor able balance of trade with other southern cities. During the winter months Florida and Cali fornia gain at the expense of the Midwest from tourist expenditures, as shown by our settlements with the Jacksonville and Los Angeles branches. banks. Such payments may entail only a transfer of money between or within large eastern banks. A similar situation prevails in the lumber and wood products industry of our North Woods country, the copper mining of Montana, the gold mining of the Black Hills, and several other lines of industry in the district. Of course, money does flow into the Ninth district to meet payrolls, taxes, and for other purposes. The Interdistrict Settlement Fund, however, does the lion’s share of the job of moving money from one part of our nation to another. Since its establishment in 1915, the Fund has increased tremendously in both size and impor tance. Then, known as the “Gold Settlement Fund,” it amounted to only $20 million. The name was changed in 1934. Today it totals some $8 bil lion. The increase in its size, however, is much less significant than the increase in the volume of transactions flowing through it. Simplest Transaction Places Mechanism in Motion In the summertime, northern sections of Michigan, Minnesota, and Wisconsin benefit from the tourist traffic. Transfers through the Fund, however, by no means represent all of the trade between various sections of the country. Curiously enough, pay ments for northern Minnesota’s vast shipments of iron ore may involve no transfer of money into the Ninth Federal Reserve district, because the companies owning the mines do not carry their principal bank accounts in Ninth district By the time you get around to mailing in your next subscription check to the Saturday Evening Post, you will probably have forgotten that such a Fund exists. Nevertheless, from the time a teller in a Philadelphia bank takes your check in through his window until the bookkeeper in your local bank posts it to your account, the efficient and complex mechanism of modern banking serves you. And the cog in that mechanism through which payment for your check and some $461 billion in other transactions takes place each year is that great bookkeeper for the nation, the Interdistrict Settlement Fund, which shovels mountains of money from one part of the country to another with such ease as would make Paul Bunyan, Johnny Inkslinger, and even the Blue Ox turn green with envy. EN D EARNINGS AND EXPENSES 1948 1947 Earnings from: Discounted Bills .......................................... ..... S 88,859 S 96,443 United States Government Securities...................... 9,148,680 4,506^70 ___ Industrial Advances ___ 0 0 All Other .............. ............................................ 8,889 9,994 Total Current Earnings ............................. $ 9,246,428 $ 4,613,107 Expenses: Net Operating Expenses ...................................... S 2,119,004 $ 1,888,829 80,229 Assessment for Expenses of Board of Governors............. 65,186 Federal Reserve Currency: Original Cost ...................................................... 88,202 90,473 18,665 Cost of Redemption ............................................. 18,610 $ 2,063,098 Total Current Expenses .............................. $ 2306,100 Current Earnings ...................................................... I 6,940,328 $ 2,550,009 Additions to Current Net Earnings: 179,381 Profit on Sales of U. S. Government Securities........ 74,733 All Other ........................................................... 828 782 $ 180,209 Total ................. ...................................... S 75,515 Deductions from Current Net Earnings: 11,289 11,754 Reserve for Registered Mail Losses........................ All Other ........................................................... 343 593 9 11,882 $ 12,097 Total ........................................................ Net Additions to Current Net Earnings........................ $ 168,112 $ 63,633 Net Earnings ............................................................. $ 7,108,440 $ 2,613,642 Dividends Paid ......................................................... % 262,776 $ 253,251 Paid to U. S. Treasury (Interest on outstanding 5,081,916 2,124,282 Federal Reserve Notes) ................... .............. 0 500 Paid to U. S. Treasury (Section 13b)............................. Transferred to Reserves for Contingencies ................... 1,199,000 0 0 0 Transferred to Surplus (Section 13b) .......................... 235,609 564,748 Transferred to Surplus (Section 7) .............................. Surplus Account (Section 7) Balance at Close of Previous Year................................ $11,232,567 564,748 Transferred from Profits of Year.................................. Balance at Close of Year............................. $11,797,315 *10,996^58 235,609 $11,232,567 Surplus Account (Section 13b) Balance at Close of Previous Year................................ $ 1,072,621 0 Transferred to Surplus (Section 13b)............................ Balance at Close of Year........... ............... $ 1,072,621 PapSixsiB $ 1,032,621 0 $ 1,072,621 STATEMENT OF CONDITION ASSETS Gold Certificate* on Hand and Due from U. S, Treasury .................. .................. Redemption Fund—F. R. Notes........... . Total Gold Certificate Reserve........... Other Cash ...................................................... Bills Discounted................................................ Industrial Advances ...... .............................. U. S. Government Securities: Bonds ........................................................ Notes ......................... Certificates of Indebtedness...... Bills ............... ..................... ........... Total U. S. Government Securities.... Total Bills and Securities................... Due from Foreign Banks ...... ...................... F.R.Notesof Other F.R. Banks...... ......... Uncollected Items ............................................. Bank Premises .............................. ................... Other Assets ................................................... Total Assets ..................................... Dec. 31,1948 ----------- Dec. 31,1947 -------- ---- $ 470,419,210 23,135,518 $ 493,554,728 12,127,891 4,928,125 0 $ 431,974,895 22,880,274 $ 454,855,169 6,792,806 1,265,000* 0 336,001,000 24,198,000 186,029,000 167,963,000 $ 714,191,000 f 719,119,125 93,936*000 48,618,000 223,788,000 298,577,000 $ 664,919,000 $ 666,184,000 2,379 8,158,050 67,641,451 1,208,439 3,656,181 $1,208,498,475 1,221 9y273,550 73,484,442 1,177,033 4,464,921 $1,313,202,911 LIABILITIES Federal Reserve Notes in Actual Circulation— . $ 631,348,825 Deposits: Member Bank—Reserve Account ................ 506,653,068 74,129,726 U. S. Treasurer—General Account ...... ........ Foreign Bank ..................................... . 15,892,500 Other Deposits ...... ........................... 2,843,121 Total Deposits .................................. $ 599,518,415 Deferred Availability Items .............................. 61,749,681 Other Liabilities ........................................... 381,005 Total Liabilities . . . ............................ $1,292,997,926 $ 626^68,780 450,542,397 43,974,904 8,225,000 2,645,456 $ 505,387,757 57,023,537 867,040 $1,190,247,114 CAPITAL ACCOUNTS Capital Paid in ................................................ $ 4,471,800 Surplus (Section 7) .......................................... 11,797,315 Surplus (Section 13b) ....................................... 1,072,621 Other Capital Accounts....... ........................... 2,863,249 Total Liabilities and Capital Accounts.. $1,313,202,911 $ 4,293,650 11,232,567 1,072,621 1,652,523 $1,208,498,475 • C o n sists so le ly o f fo re ig n lo an s on cold . Pagg S*n*$nn FEDERAL RESERVE BANK OF MINNEAPOLIS-1949 DIRECTORS R o g e r B . S h e p a rd St. Paul, Minnesota Chairman of the Board and Federal Reserve Agent W. D. C o c h ra n GJM.C. Truck Distributor Iron Mountain, Michigan Deputy Chairman C h a r le s W. B u rg e s R a y C. L a n g e Vice Pres. & Cashier, Security Nad. Bank President, Chippewa Canning Company Edgeley, North Dakota Chippewa Falls, Wisconsin H o m e r P. C la r k J. R. M c K n ig h t Chairman, West Publishing Co. Chairman, Pierre National Bank St. Paul, Minnesota Pierre, South Dakota C la r e n c e E. H i l l W a lt e r H . M cL e o d Chairman, Northwestern National Bank President, Missoula Mercantile Co. Missoula, Montana Minneapolis, Minnesota P a u l E. M ill e r Director of Agricultural Extension University of Minnesota St. Paul, Minnesota OFFICERS N. P e y to n , President O liv e r S. P o w e ll, First Vice President Jo h n BANKING DEPARTMENT BANK EXAMINATION DEPARTMENT Personnel Officer H a r o ld G. M c C o n n e ll, Vice President C. W . G r o t h , Assistant Vice President FISCAL AGENCY DEPARTMENTS Assigned to Helena Branch E a r l B . L a r s o n , Assistant Vice President A r t h u r R. L a r s o n , Assistant Cashier Government Securities Check Collection W illia m E . P e te r s o n , Assistant Cashier M ilfo r d E. L y se n , Operating Research Officer Custodian for Governmental Agencies Withheld Taxes A lb e r t W . M ills , Vice President and Cashier General Bank Operations RESEARCH DEPARTMENT O tis R. P r e s to n , Vice President D r . J . M a rv in P e te rs o n , Director of Research Banks and Banking F. L . P a rso n s, Associate Director of Research R. E. T o w le , Vice President Assigned to Helena Branch AUDIT DEPARTMENT W a lt e r H . T u r n e r , Assistant Cashier O rth e n W . O h n sta d , Auditor Collection Department Currency and Coin LEGAL COUNSEL Securities Safekeeping S ig u rd U e la n d , Vice President and Counsel H a r r y L Z ie m e r, Vice President and Secretary M . H . S tr o th m a n J r ., Assistant Counsel Loans and Discounts H a r o ld C . C o re , HELENA BRANCH DIRECTORS E* H o lt z , Chairman Agriculturist Great Falls, Montana M a lc o lm B. M. H a r r is President, The Yellowstone Bank Columbus, Montana E. D. M a c H a ffie President, State Publishing Company Helena, Montana T h e o d o re Ja c o b s D r . Jam es A . M c C a in President, First National Bank Missoula, Montana President, Montana University Missoula, Montana OFFICERS R. E. T o w le , Vice President MEMBER C. W. G r o t h , Assistant Vice President OF FEDERAL ADVISORY COUNCIL H e n r y E. A tw o o d President, First National Bank Minneapolis, Minnesota IN D U S T R IA L ADVISORY COMMITTEE S h e ld o n V. W ood , Chairman President, Minneapolis Electric Steel Castings Co. L. M ill e r , La Crosse, Wisconsin President, Miller Broom Company A lb e r t Jo h n M. B u sh , Negaunee, Michigan The Clcveland-Cliffs Iron Company P sp Ntntfetn CALENDAR OF 1948 12>19 . . . Rediscount rates increased from 1 per cent to 1% per cent. Ja n u a r y 23 . . . Reserve requirements increased from 20 per cent to 22 per cent against net demand deposits of central reserve city banks effective on February 27. Ja n u a r y 26 . . . Thomas B. McCabe nominated chairman of Board of Governors. Confirmed by Senate, April 12. (Term as chairman expires April 15, 1952; as member of Board, February 1, 1956.) M a rc h 18 . . . Upper limit on annual purchases of Series E United States Savings bonds raised from $5,000 to $10,000. M a rc h 25 . . . United States monetary gold stocks hit $23,000,000,000, new all-time high. M a rc h 31 . . . United States money supply (demand* deposits adjusted and currency outside of banks) dipped to $107,100,000,000—down almost $6,500,000,000 from the beginning of 1948. A p r il 2 . . . Foreign Assistance Act of 1948 passed ($5,050,000,000 for 12-15 months). A p r il 2 . . . Revenue Act of 1948 reduced personal income tax rates beginning May 1. M a y 13 . .. Retention of V/% per cent certificate rate for June 1 and June 15 refunding announced by Treasury. Ju n e 2 . . . Reserve requirements increased from 22 per cent to 24 per cent against net demand de posits of central reserve city banks (effec. June 11). Ju n e 10 . . . Upper limit on annual purchases of Series F and G United States Savings bonds tem porarily (July 1-15) lifted from $100,000 to $1,000,000. Ju n e 19 . . . Agricultural Act of 1948 passed—signed July 3, 1948. Generally provided for continuation of farm price supports at existing levels of 90% of parity for 1949; and provided for long-range program of revision of parity and flexible price supports at 60-90% of parity, effective January 1, 1950. Ju n e 30 . .. Total loans of all Ninth district member banks reached $813 million—$2 million above the previous all-time peak of June 1920. A u g u s t 7 . . . Anti-Inflation Act of 1948 passed— signed August 16. Conveyed authority to Board of Governors to reinstitute some consumer instal ment credit restrictions and to increase reserve requirements another 4 per cent and V/i per cent, Ja n u a r y Pagefor Twenty Digitized FRASER FINANCIAL EVENTS respectively, against demand and time deposits, in addition to existing statutory limits. Expires June 30, 1949. A u g u s t 9 . . . Certificate rate permitted to rise from 1% per cent to 1% per cent with September 15 and October 1 refunding. A u g u s t 13-23 . . . Rediscount rates increased to 1J4 per cent (see January 1948). A u g u s t 16 . . . Yield on new Treasury bills rose above 1 per cent. A u g u s t 18 .. . Series D Tax Saving Notes to be put on tap beginning September 1 (yield to maturity 1.40 per cent) in place of Series C Notes. A u g u s t 19 . . . Consumer instalment credit controls announced, to be effective September 20. S e p te m b e r 8 . . . Third 1948 increase in reserve re quirements announced: a. llA per cent on time deposits at all member banks beginning September 16. b. 2 per cent on demand deposits at all country member banks beginning September 16. c. 2 per cent on demand deposits at reserve city and central reserve city member banks begin ning September 24. N o v e m b e r 3 . . . United States monetary gold stocks hit $24,000,000,000. N o v e m b e r 10 . . . Federal Reserve System open market purchases (net) of Treasury bonds have totaled $10,500,000,000 during past 12 months, but holdings of bills, certificates, and notes are nearly $9,500,000,000 below year ago. Ninth Federal Re serve bank portfolio of Treasury bonds increased over $320,000,000 during past year; holdings of bills, certificates, and notes are more than $220,000,000 below a year ago. N o v e m b e r 16 . . . Retention of 1% per cent certifi cate rate for December 15 and January 1 refund ings announced by Treasury. N o v e m b e r 30 . . . November annual rate of turn over of demand deposits adjusted in reporting centers other than New York City reached the highest point so far in the postwar period. D e c e m b e r 29 . . . United States money supply at $111,460,000,000, recovering approximately twothirds of the loss sustained in the first quarter of die year. D e c e m b e r 29 . . . Total loans of all United States banks established all-time high, roughly 12 per cent above a year earlier. THE RIBBON running head fheming the spe cial article on the Interdistrict Settlement Fund contains some of the code words used in the wire transfer of money and securities. Although real code words, no actual mes sage could be deciphered from them, as they appear in disordered sequence. CHART I SOURCE: Cash Farm Income, USDA; Income Payments, Department of Commerce; Construction Contracts Awarded* F. W. Dodge Corp.; Cost of Living, Department of Labor. NOTE: Change* In Cash Farm Income and Income Payments are based on partially estimated data. Department store stocks are measured from yeaivend 1947 to year*end 1918. "Cost of Living*' is a percentage change in an annnal average of the quarterly data. All other Items are based on annnal volume. CHART II NOTE: * Beginning June 89, 1948, individual loan items are reported gross, le., before deduction of valuation reserves. In* stead of net as previously reported.
@FedFRASER