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MONTHLY

Annual Report Issue
FEDERAL RESERVE BANK OF MINNEAPOLIS




JAN U ARY 1965




Dist l t tdevelopments in 1964
A he Ninth district’s economic performance in
1964 was, on the whole, a rather subdued replica
of major national patterns of growth. Many dis­
trict production measures continued to expand,
though none spectacularly, and most at less than
national rates.
The important agricultural sector fell short of
its previous year’s performance as a generator of
district income — by some 5 per cent. (Agricul­
ture normally accounts for about one-tenth of
the district’s total personal income.) A major fac­
tor contributing to the drop was lower farm prices,
although declines in crop production also figure
in the showings. Dollar receipts from marketings
of livestock during 1964 remained at about the
level achieved the previous year in spite of lower
prices, while reduced receipts from crops served
to pull total cash from marketings below the threeand-a-third billion dollar level. The fact that gov­
ernment payments to district farmers — at nearly
one-third billion dollars — were up 24 per cent
over the preceding year helped soften the impact
of the estimated decline in receipts from market­
ings.
In the nonfarm sector, 1964 witnessed modest
improvements in most industrial activity — em­
ployment totals, unemployment rates, production
and shipments of raw materials and products, and
construction. Again these improvements tended
to be at lesser rates than those which held for the
nation as a whole.
The over-all balance of effects appears to have
resulted in an increase in district personal income




flows of the order of 4 per cent during the year.
Some of the increased earnings has presumably
shown up in expanded buying by consumers, al­
though the fragmentary sales data available sug­
gest that the over-all rise in consumption purchases
was rather small. District automobile buying
shared some of the surge that output and sales
boosts caused nationwide in 1964 — and this pre­
sumably also helped shape the expansion in instal­
ment credit that took place at some district banks.
Consumers apparently also chose to add some
of their increased incomes directly to their savings
balances: they continued the rather substantial
build-up of savings at the district’s commercial
banks that has persisted since 1961. In fact the
expansion in savings deposits of more than a
quarter-billion dollars absorbed much of the
indicated half-billion dollar increase in personal
income. Undoubtedly consumers chose to place
some of their increased income in commercial
banks, although just how much of the increased
bank savings was simply diverted from other sav­
ings institutions, or was made at the expense of
“ normal” demand deposit growth, is unknown.
In any event, the great bulk of 1964’s deposit
increase at district member banks was accounted
for by the boost in interest-paying time deposits,
but little by the rise in demand deposits. The con­
comitant increase in member bank earning assets
during 1964 followed a relatively similar pattern
to that of the preceding year, with funds going
mostly into loans.
The foregoing comments highlight the district’s

JANUARY 1965

3

Chart 1—Per cent change in crop production,

economic performance in 1964. Particulars follow
under three major headings: agriculture, banking
and business.

1964, compared with 1963 and 1958-62
average, district states*

Agriculture

percent
-4 0

The Ninth district farm economy dipped slightly
in 1964 as generally unfavorable price levels and
a mixture of good and bad crop outputs led to
lower cash incomes. Prices for many major com­
modities ran below those of a year earlier with
the most notable differentials existing in wheat
and feeder cattle prices. Livestock prices were
down for the most part relative to 1963, although
price strength in some beef classes, in hogs, and in
sheep in the fall months brightened the income
picture to some extent. About the only price cate­
gory to run consistently above 1963 was “ all
milk.” The sharply lower wheat prices in 1964
reflected the new wheat program, a change that
brought the average market price down about 50
cents per bushel at the farm level. Corn prices,
which started the year at higher levels than those
of a year earlier, fell during the fall months to
levels just under those of 1963.
Crop production in the district varied from ex­
cellent in the wheat areas to poor in many parts
of the corn belt. The district’s total wheat output
amounted to more than 300 million bushels, up
13 per cent from 1963, on the strength of a 6 per
cent increase in harvested acres and a continuation
of the remarkable yields per acre that have been
achieved during the past three years. Among the

all wheat

-3 0

-2 0

-10

0

+10

+20

+30

I

corn
oats
barley
flax
soybeans
i
|

1964 as a percent of 1958-1962 average
1964 as a percent of 1963

district states, the largest relative increase in wheat
production occurred in South Dakota where the
1964 output exceeded that of 1963 by 28 per cent.
The increase in 1964 wheat output amounted to
20 per cent in North Dakota, while in Montana
it was up only 1 per cent. Wheat output was down
2 per cent in Minnesota.

TABLE 1-B U S H E L Y IELD S PER A C R E IN FO U R D ISTRICT STATES, 1963 A N D 1964
Minnesota

Montana

North Dakota

South Dakota

1963

1964

1963

1964

1963

1964

1963

24.7

23.0

23.5

24.4

22.3

24.2

14.6

17.6

Corn

69.0

59.0

55.0

65.0

41.0

30.0

48.0

31.0

Barley

36.0

32.5

29.5

33.0

32.0

34.0

25.0

25.0

10.0

8.5

24.0

16.0

All wheat

Flax

12.0

10.0

10.0

8.0

9.1

8.0

Soybeans

24.5

20.0

n.a.

n.a.

19.0

14.0

n.a.— not available.


4
MONTHLY REVIEW


1964

Feed grain output in the district was typically
under that of the previous year with the exception
of oat production in North Dakota and barley in
Montana. Harvested acres of feed grains were
down in all states. The mid-summer drought se­
verely reduced yields of corn, the major feed
grain: district output totaled nearly 360 million
bushels, down 31 per cent from 1963. The 1964
corn crop in Minnesota, the district’s major corn
producer, was 23 per cent under that of 1963 while
the South Dakota crop equaled only 53 per cent
of the year-earlier output.

TABLE 2—ESTIMATED 1964 CASH RECEIPTS FROM
FARM MARKETINGS
(millions of dollars)
1963

1964

440
1,033

415
1,050

Minnesota
Crops
Livestock

------------

Total
Montana
Crops
Livestock

------------

1,473

1,465

219
186

185
J70

----

----

405

355

Crops
Livestock

455
209

335
205

Total

664

540

169
489

160
475

Total
North Dakota

Cash receipts down
The 1964 production and price levels resulted
in an estimated 5 per cent reduction in cash re­
ceipts from farm marketings as compared with
1963. As may be observed from Table 2, the de­
cline was attributable to lower crop receipts. Most
of the reduction occurred in the wheat states,
where, in spite of the size of 1964’s wheat output,
the lower price level for wheat brought down crop
receipts an estimated 26 per cent in North Dakota
and 15 per cent in Montana. Lesser relative de­
clines occurred in the crop receipts of Minnesota
and South Dakota, down 7 per cent and 5 per cent,
respectively. In all, district crop receipts in 1964
were estimated at $1.1 billion, down 14 per cent
from 1963.
Livestock receipts in the district remained vir­
tually unchanged from 1963 as larger marketings
and higher prices for milk, sheep, and lambs, and
for some classes of slaughter cattle, offset lower
prices for feeder stock and declining hog prices.
At the end of 1964 cash receipts from livestock
marketings in Minnesota are estimated to be 2
per cent above a year earlier, while declines of
2 and 3 per cent are estimated for North and
South Dakota, respectively. Lower feeder cattle
prices are primarily responsible for the estimated
9 per cent decline in Montana livestock receipts.
The district’s total marketing receipts amounted
to an estimated $3.3 billion in 1964 as compared
with $3.5 billion in 1963. All states shared in the




South Dakota
Crops
Livestock

——

Total

•

— ——

658

635

Crops
Livestock

1,312
2,149

1,125
2,160

•..........-

----

Total

3,461

3,285

D is t r ic t

* Includes western Wisconsin and Upper Michigan.

decline with the largest relative drop, 19 per cent,
occurring in North Dakota followed by a 12 per
cent drop in Montana. The estimated declines in
South Dakota and Minnesota amounted to 4 per
cent and 1 per cent, respectively.

Government payments up
Some of the impact of lower market receipts on
farm income was absorbed by a marked rise in the
amount of direct payments to farmers for partici­
pation in various farm programs. In 1964 pre­
liminary data indicate that such governmental pay­
ments to the four full district states amounted to
over $330 million, a figure which reflects a 24
per cent increase over the 1963 total. Thus direct
payments to farmers by the government amounted
to 10 per cent of total district market receipts in

JANUARY 1965

5

1964 as compared with 8 per cent in 1963 and 3
per cent in 1960.
Most of the increase in program payments is the
result of the 1964 wheat program which brought
into the district an estimated $112 million in com­
bined certificate and land diversion payments, a
figure which compares to $60 million paid to dis­
trict wheat farmers under the 1963 program. The
largest share of these 1964 payments went to
North Dakota and Montana where wheat produc­
ers received $57 million and $28 million, respec­
tively. Payments under the 1964 feed grain pro­
gram amounted to an estimated $141 million in
the district, up $33 million from a year ago. Pay­
ments under the other major program, the soil
bank, continued to decline as acres were with­
drawn from the conservation reserve. This latter
program provided an estimated $44 million in
farm income in 1964, down $25 million from the
1963 total.
The increment to cash farm income provided by

the expanded government programs not only par­
tially closed the gap between the 1964 total and
that of 1963, but it has also acted as a stabilizing
factor for farm income over the past few years
(see Chart 2 ).

Banking
District member bank growth during 1964 as
measured by deposit and credit activity proceeded
at much the same pace as in 1963, but both years
fell substantially below 1962.
Total deposits at district member banks moved
6 per cent higher in 1964 to match the relative
gain recorded in 1963 (see Table 1 ). Not only
were the gains in total deposits the same in both
years, but the gains in the components were sim­
ilar. In 1964 demand deposits edged 2 per cent
higher, while time and savings deposits rose by
13 per cent to provide most of the gain in the
deposit total. The same pattern prevailed in 1963.

Chart 2—Cash farm receipts,* Ninth district

I960

1961

1962

1963

1964

1,000

2,000

3,000

4,000
millions of dollars

CROP
C A SH RECEIPTS

LIVESTO CK .
CA SH RECEIPTS

^Minnesota, Montana, North Dakota, and South Dakota


6
MONTHLY REVIEW


r/A v r^ v V .

GO VERNM ENT
PAYM ENTS * *

*

1964 figures are estimated
**governm e nt payment figures are for four full states only

TABLE 1-PERCENTAGE CHANGES IN DEPOSITS AT
NINTH DISTRICT MEMBER BANKS
(mid-December to mid-December)
1964
A ll Member Banks
Total Deposits
Gross Demand
Time and Savings
City Banks
Total Deposits
Gross Demand
Time and Savings
Country Banks
Total Deposits
Gross Demand
Time and Savings

6%
2
13
3
**

1963
6%
2
13
♦

1962
9%
1
24

8

— 4
9

12
— 1
64

8
3
14

10
6
14

8
2
16

*Down less than I per cent.
**U p less than I per cent.

Further, time and savings deposits at city and at
country banks also showed substantially the same
rate of growth in 1964 and 1963. The similarity
pattern is upset, however, when a comparison is
made of demand deposit behavior. During 1964
demand deposits at city banks showed no signifi­
cant change, whereas in 1963 a 4 per cent con­
traction was recorded. This 1964 relative im­
provement at city banks, nevertheless, was offset
at country banks where demand deposits grew at
only one-half the 1963 rate.
District deposit growth in 1964 and 1963, how­
ever, did not match the strong deposit expansion
which took place in 1962. The principal reason for
the 1962 upsurge stemmed from changes in Regu­
lation Q made at the beginning of that year which
permitted member banks to raise their allowed
rate of interest payable on both time and savings
deposits. District city banks, faced with growing
competition for savings deposits from other sav­
ings institutions and from the short-term money
market, immediately increased their rates— in the
case of time deposits by the full additional amount
allowed. As a result, the time and savings deposit
growth rate showed a substantial increase in 1962.
Having virtually exhausted the rate increases al­




lowable by Regulation Q the previous year, how­
ever, city banks in 1963 and 1964 were able to
increase interest rates only slightly, and time and
savings deposits advances proceeded at a much
lower rate during the last two years. At district
country banks, on the other hand, competition for
savings deposits was less keen. Interest rates rose
only moderately in 1962 providing considerable
leeway for increases in the interest rates in the
succeeding two years. The effect of this develop­
ment may be observed in the relative steadiness of
time and savings deposit expansion at country
banks over the last three years.

Loans up
Loans at district member banks, excluding loans
to other commercial banks, rose 10 per cent during
1964—matching loan expansion in 1963, but fall­
ing somewhat short of the 13 per cent loan incre­
ment in 1962 (see Table 2 ). Country bank loans
in 1964 were down slightly from those of the pre­
vious year, but the decline was offset entirely by
TABLE 2-PERCENTAGE CHANGES IN LOANS AND
INVESTMENTS AT NINTH DISTRICT MEMBER BANKS
(mid-December to mid-December)
1964

1963

1962

A ll Member Banks
Total Loans and Investments, adj. *
Loans, adjusted*
Investments
U.S. Government securities
O ther securities

8%
10
6
1
17

7%
10
2
— 3
17

M%
13
8
6
14

City Banks
Total Loans and Investments, adj.
Loans, adjusted
Investments
U.S. Government securities
Other securities

8
9
7
1
19

3
7
— 4
— II
15

13
15
8
4
21

Country Banks
Total Loans and Investments
Loans
Investments
U.S. Government securities
O ther securities

8
II
6
2
16

9
12
5
1
17

9
II
7
6
II

* Ad justed loans equal loans (net of valuation reserves)
minus loans to other commercial banks.

JANUARY 1965

7

TABLE 3—PERCENTAGE CHANGES IN LOANS AND
INVESTMENTS AT NINTH DISTRICT CITY BANKS
(mid-December to mid-December)
1964
Loans, adjusted
9%
Commercial and industrial
7
Nonbank financial institutions 24
12
Real estate
All other loans
4
7
Investments
U. S. Government securities
1
Under 5 year maturities — 5
15
O ver 5 year maturities
19
Other securities

1963

1962

7%
6
9
14
2

15%
15
35
9
6

— 4
— 11
— 17
9
15

8
3
— 15
221
24

trends at city banks: 1964 loans advanced relative
to those of 1963.
An expansion of consumer loans appears to
have been the principal factor behind the stronger
loan advance at city banks during 1964 relative to
1963 (see Table 3). Both loans to nonbank finan­
cial institutions, which represent indirect loans to
consumers, and “ all other loans,” which includes
direct consumer loans, reflected strong advances
in 1964 relative to the previous year. Auto instal­
ment credit comprises a substantial element of
both categories, and since there appears to be a
strong correlation between auto sales and volume
of auto instalment credit extended, it is not too
surprising that the increased volume of auto sales
in the district during 1964 should be reflected in
a higher rate of increase in these loan categories.
Commercial and industrial loans at district city
banks continued to lag in 1964 after their rate of
expansion had been greatly reduced in 1963 from
that of the previous year. This lag exerted a drag
on the rate of loan expansion at city banks because
commercial and industrial loans comprise such a
large share of total loans. The comparatively slow­
er rate of growth of loans at city banks thus ex­
erted a depressing impact on district bank credit
in 1964 and 1963 compared to that in 1962. Since
a close association exists between business loans
and inventory accumulation, the slowdown in
business loan expansion perhaps indicates that


8
MONTHLY REVIEW


district city bank credit has not been used to build
inventory stockpiles.
In adding to their investment portfolios during
1964, district banks continued to depend heavily
on “ other securities,” comprised substantially of
municipal and federal agency obligations (see
Tables 2 and 3). Such investment in higher yield­
ing (in the case of municipals, on an after-tax
basis) albeit riskier securities was in answer to the
need by banks to offset the higher interest cost
arising from both the increased volume of time
and savings deposits and the higher rates of in­
terest paid on those deposits. Long-term U. S.
government bonds on the basis of city bank be­
havior, likewise, were a favored investment be­
cause of their recent history of relatively high and
stable yields. But the need for relatively high
yields in investment portfolios also induced dis­
trict city banks to reduce holdings of shorter-term
U. S. government securities. The rate of disinvest­
ment of these securities, however, was lower in
1964 than in the previous two years. In 1963 de­
posit losses at city banks forced a higher than usual
selloff of short-term U. S. governments, while in
1962 the rapid rise of time deposits relative to
demand deposits likely induced an unusually large
rate of transfer to the longer-term investment
category.

Rate and regulation changes
In late November the Federal Reserve System
both increased its discount rate on loans to mem­
ber banks and liberalized certain provisions of
Regulation Q. The objective of the discount rate
increase (from 3% to 4 per cent) was to dis­
courage an increase in the outflow of capital
abroad in response to an upward movement of
short-term interest rates in Britain which followed
an increase in discount rate (from 5 to 7 per cent)
by the Bank of England. Such outflows would
otherwise tend to widen the United States balance
of payments deficit.
Regulation Q was changed to permit member
banks to increase (from 3
to 4 per cent) the

maximum interest rate payable on savings depos­
its held less than one year. (Banks were already
permitted to pay 4 per cent on savings deposits
held one year and longer). Member banks were
also permitted to increase interest rates on time
deposits (including negotiable certificates of de­
posit [CD’s ] ) to 4 per cent on those maturing in
less than 90 days, and to 4% per cent on those
having longer maturities. The previous limits were
1 per cent on less-than-90-day-maturities and 4
per cent on longer maturities. The purpose of the
changes in Regulation Q was to encourage the flow
of savings to member banks in order to maintain
an ample supply of credit for domestic investment.
It is still too early to ascertain the effect of the
most recent change in Regulation Q on district
bank deposits. The state of Minnesota, for exam­
ple, presently prohibits interest payments of more
than 4 per cent. Should this prohibition remain
effective while interest rates paid by New York and
other large city banks go up, the larger banks in
Minnesota, since they could not compete, might
experience an outflow of CD’s. Such a development
would pose a real problem to Minnesota banks and
force them to consider other means of obtaining
resources.

Business
District business activity during 1964 was stim­
ulated by the $11.5 billion federal tax cut which
became effective March 5. This measure boosted
both personal consumption expenditures and sav­
ings, especially in the larger district cities. Rising
aggregate consumer demand expanded markets for
manufactured products and minerals which, in
turn, served to initiate the building and installa­
tion of new manufacturing facilities. District re­
sorts also benefited from the sharp rise in dispos­
able consumer income. In the construction field,
activity, which was dominated by federal projects
in some areas, apparently was less noticeably
affected by the tax cut.




A weak spot was the contraction in home build­
ing stemming largely from conditions peculiar to
the Ninth district. The demand for new housing
is, in part, determined by the rate of regional
economic growth; and all district states still suffer
a net out-migration of population with its con­
sequent depressing effect upon residential building.

Nature of the expansion
In 1964 payroll and proprietors’ income from
district manufacturing rose approximately 3 per
cent, thus revealing a significant expansion in the
output of industrial products. Despite large cut­
backs in government contracts for hard goods, the
expansion was concentrated in durable products.
Marked increases were recorded in the categories
of electrical and nonelectrical machinery, trans­
portation equipment, and furniture and fixtures.
While the output of nondurables also expanded,
it was at a much slower rate. A marked increase
did occur in the output of textile products and
apparel.
The expansion in industrial production was
accompanied by an acceleration in capital invest­
ment. From May through September, the dollar
valuation of building permits authorizing indus­
trial building was nearly two and one-half times
the amount a year earlier. Further evidence of
industrial and commercial expansion was noted in
the steady rise in business loans at large com­
mercial banks in the district.
In Minnesota, where much of the district’s
manufacturing is located, detailed information
concerning new industrial facilities is available.
According to compilations made by the Minnesota
Department of Business Development, 149 new
plants (including major warehouse facilities) were
erected on new sites and began operations during
1964. These plants, and their equipment, repre­
sented a capital investment of $87,270,000 and
called for the employment of 11,700 workers. This
latter number, however, did not represent a net
increase in manufacturing employment since some
workers were transferred from old plants.

JANUARY 1965

9

In addition to the entirely new plant operations,
171 expansions (defined as an addition to an
operating facility or new plant built on an adjoin­
ing site) were completed in Minnesota during
1964. The investment involved aggregated $100,300,000; employment, 3,600 workers.
With the exception of home building, construc­
tion put-in-place was at a high level during 1964.
Commercial redevelopment in urban centers as
well as highway and bridge construction moved
ahead at a rapid pace. The new missile base com­
plex under construction in North Dakota added
significantly to the total regional activity.

peninsula by mid-1967. Ore from these mines will
boost their copper output from the present yearly
rate of 17,500 tons to an annual total ranging
from 22,500 to 25,000 tons.
Silver extraction, a by-product of other mineral
production, was up 29 per cent from the 1963
total; gold extraction, 9 per cent. Zinc and lead
outputs, which are of minor importance, were
down about 7 per cent and 21 per cent, respec­
tively.
Although logging operations in the district’s
forest regions were curtailed by severe spring

Mineral production

TABLE 1-PRESENT AND PLANNED NINTH DISTRICT
IRON ORE PELLET CAPACITY

The 1964 shipments of iron ore from U. S.
mines in the Lake Superior region aggregated 62.0
million gross tons, up 11 per cent from the 1963
total. Shipments of 13.7 million tons from Upper
Michigan mines was up nearly 21 per cent, and
the 48.3 million tons from Minnesota mines was
up by 8 per cent from the preceding year. With
the assurance of a stable tax climate in Minnesota
following the enactment of a “ taconite amend­
ment” to the state constitution, the output of highgrade iron ore pellets will expand rapidly. Con­
struction of several new taconite plants already
has been announced (see Table 1).
Copper output in both Upper Michigan and
Montana was at a high level in 1964. The output
of 144,000 tons through October exceeded, by
15 per cent, the corresponding 1963 total. The
increase in output resulted from the application
of new techinques and from the exploitation of
new deposits.
Anaconda Copper Company now operates a
large scale ore concentration plant at Butte, Mon­
tana using the autogenous method of ore grinding
(ore ground against ore instead of ore against
steel balls). When it comes into full operation,
the new plant will process 42,000 tons of ore daily.
Calumet and Hecla, Incorporated is preparing to
open two new copper mines located a few miles
north of Calumet, Michigan on the Keweenaw


10
MONTHLY REVIEW


(gross tons)
Site
Present Capacity
Eagle Mills, Mich.
Cleveland-Cliffs Iron C o .
Empire, Mich.
Humbolt, Mich.
Republic, Mich.
Groveland, Mich.
Hanna Mining C o .
Erie Mining C o .
Hoyt Lakes, Minn.
Reserve Mining C o .
Silver Bay, Minn.
Company

Total
Planned Expansion
Cleveland-Cliffs Iron C o .1 Negaunee, Mich.
Eagle Mills, Mich.
Eveleth Taconite C o .
Virginia, Minn.
United States Steel C orp. Mountain Iron, Minn.
Hanna Mining C o .a
Cooley, Minn.
Hanna Mining C o .8
Keewatin, Minn.
Erie Mining C o.
Hoyt Lakes, Minn.
Jones & Laughlin Steel
Biwabik, Minn.
C orp .4
Total
Present and Planned C ap acity

Capacity
800,000
1,400,000
800,000
2,800,000
1,250,000
8,000,000
9,000,000
24,050,000
1,200,000
1,200,000
1,600,000
4,500,000
2,000,000
2,400,000
2,000,000
1,500,000
16,400,000
40,450,000

1 In addition to the pellets, at this site 1.2 million tons of
processed sinter feed and coarse ores will be produced.
2 Inland Steel Company and W heeling Steel Corporation
are associated with Hanna on this project.
8 National Steel Corporation is assoiated with Hanna on
this project.
4 Construction could begin within two or three years.
Sources: Skillings' Mining Review, August 15, 1964, p. I and
December 26, 1964, pp. I, 6, and 7, and Upper Peninsula
Power Com pany Annual Report for 1963, pp. 5-8.

Per cent change of selected indicators,

PERCENT

United States and Ninth district, November

0

+5

1963 to November 1964

weather conditions, production reached peak lev­
els when operations were resumed. At the height
of the season labor shortages of skilled woodsmen
and heavy equipment operators were reported.
Among the service industries, the record of the
resort business merits brief mention. During 1964
resort operators enjoyed an excellent season. The
rise in disposable personal income (due, in part,
to the reduction in federal income taxes), com­
bined with exceptionally high summer tempera­
tures in July and August, led to a large influx of
vacationers into resort areas. Also, the develop­
ment of new ski resorts during the past several
years has boosted the number of winter sports
enthusiasts. For instance, over the past four winter
seasons, the number of lift or tow tickets sold has
increased at a compounded annual rate of 24
per cent.
The expansion in consumer expenditures in
the district was reflected in the rise of retail sales.
In the first four months of 1964, the volume was
down considerably from the total of the com­
parable period of 1963. A plausible reason: in
addition to a relatively low farm income in the
district, individuals also saved and paid off past
debts with a large proportion of their additional
income derived from the federal tax cut, effective
March 5, instead of purchasing merchandise. Be­
ginning in May, however, district retail sales rose
above the year-earlier volume, and in all but one
of the months from May through October, sales
have set new record highs. Even so, in the first
ten months of 1964, district sales were up only 1
per cent from the total in the same period of 1963,
while in the United States they were up 6 per cent.
W e a k n e s s in h o m e b u ild in g

Activity in home building declined during 1964,
,
,
,
.
thus accounting tor low employment in the con-




EMPLOYMENT
(NON-FARM)
AV6. W EEKLY
EARNINGS
INSURED
UNEMPLOYMENT
NEW CAR
REGISTRATIONS
CONSTRUCTION
CONTRACTS
CASH FARM
RECEIPTS
PERSONAL
INCOME
BANK
LO ANS*
BANK
INVESTMENTS*
TOTAL
DEPOSITS*
TIME
DEPOSITS*

UNITED STATES
H

H

DISTRICT

^ ucllDtD D
Ay„
MtMBtK BANK

JANUARY 1965

11

struction field. The decline was prompted by a
falling off in the demand for both apartments and
single houses. The number of apartment units
authorized by building permits began to slow
down in March 1964, and by the end of November
the number of units was down 9 per cent from a
year earlier. The number of single houses author­
ized by permit began to fall off in April, and by
the end of November they also were down 9 per

Bank

operations in 1964

The end of the 50th anniversary year of the
Federal Reserve System, is an appropriate time to
look at certain historical aspects of the institution
to better understand what the nature of the Fed­
eral Reserve Bank of Minneapolis is presently and
how the tasks performed relate to it.
Those who participated in the Congressional
debates of 1913 about the Federal Reserve Act,
working in the immediacy of the money panics of
1907 and 1903, and remembering as well those
that marked each decade following the Civil War,
were very aware of the need for a sweeping mone­
tary reform. Capitalism, as the basis on which our
economic system was and is predicated, had suf­
fered greatly from the inadequacies of a monetary
system which made no provision for expansion
and contraction of currency and credit in accord­
ance with the needs of the nation’s economy.
Underlying the Federal Reserve Act as origin­
ally passed, and the Federal Reserve System as it
exists today, was the belief that if the amount of


1
MONTHLY REVIEW


cent. In the United States, housing starts have
declined since October 1963, but at a slower rate
than in the district.
During the latter half of 1964, the supply of
new housing appears to have come into balance
with the prevailing demand. The vacancy rate
leveled off, family formation was rising, and terms
on mortgage loans remained liberal.

credit available to the economy could be kept in
reasonable relation to demands for it, the market­
place would be able to function freely and that
“ freedom of choice,” the essential characteristic of
capitalism, could be preserved. To those respon­
sible for the original Federal Reserve Act, though,
the record of history of other countries and of the
U. S., as well, indicated the wisdom of shielding
the monetary authorities from government’s un­
trammeled use, and so made the Federal Reserve
System, which was to determine the availability of
credit, free from day-to-day political pressures.
Furthermore, the 1913 Congress recognized that
monetary and credit policy should be formulated
and implemented flexibly in response to changing
conditions, and, in addition, that legislative action
on monetary policy normally could not be taken
with necessary speed. Thus, the System was given
a form of “ trust indenture,” a delegation of cer­
tain money powers which Congress constitution­
ally holds. As a result, the Federal Reserve System

was created and is now “ independent within the
government.”

A blend of functions
There were those in the 1913 Congress who felt
that the important powers delegated to the Federal
Reserve System should not be concentrated in a
small number of decision makers, so they incor­
porated into the System an idea based on what is
commonly termed “ federalism,” a blend of cen­
tralized and regional functions and responsibili­
ties. The idea was given concrete expression in
regional Federal Reserve banks responsible to re­
gional boards of directors. The main monetary
power was to be the discounting done by these
banks in almost automatic response to the credit
needs of the districts through the rediscounting of
commercial paper of member banks. Originally it
was felt that the banks would discount commercial
bank loans made to finance the production or mar­
keting of goods.
Experience in the early 1920s showed, however,
that commercial loans were discounted in large
volume precisely when credit should have been
restricted, and in small volume when credit should
have been expanded. Also, with the discount rate
being determined by the several Federal Reserve
boards of directors, variations existed in the rates
from district to district. As a result, credit was
sought out by commercial banks in the district
with lower rates.
During the very severe post World War I de­
pression, the earnings of the Federal Reserve
banks, dependent as they were on the discounts and
advances made, dropped sharply as reduced credit
pressures on the commercial banks lowered the
demands for credit from the “ Feds.” The individual
Federal Reserve banks had been given the power
in the original Act to go into the open market to
buy and sell government securities, much as com­
mercial banks could, to bolster their earnings and
thus be able to meet expenses and pay the statu­
tory dividends on member bank stock. As indi­
vidual Federal Reserve banks did this, they found




out that their uncoordinated purchases disrupted
the securities markets, and in some cases found
themselves trying to outbid each other and the
Treasury for securities. As an operational matter,
these purchases, prompted by a decline in dis­
counting and Bank earnings, were found to add
to the reserves of member banks through whom
the purchases of government securities took place.
These added reserves further reduced the need of
commercial banks to borrow— thus adding to fur­
ther reduction in discount earnings.
But more important was the discovery that such
“ open market operations” were a powerful force
for easing or tightening general credit conditions,
a force that could be deliberately introduced into
central money markets, and with the developing
fluidity of these markets, spread quickly through­
out the country. By 1923 a committee, the “ Open
Market Investment Committee for the Federal
Reserve System” (OMIC) was established under
the supervision of the Federal Reserve Board to
recommend plans for the purchase, sale, and dis­
tribution of securities for the System.
Since that time, credit administration has been a
“ matter of judgment concerning each specific
credit situation at the particular moment of time
when it has arisen or is developing.” * With this
development, and with the knowledge gained about
the nature of the discount function as a monetary
tool, the role of the regional Federal Reserve bank
has changed in emphasis— but in some respects the
System regionalism is more important now than
when originally conceived.
The “ automatic” extension of credit through the
determination of the discount rate by the boards
of directors of the several Federal Reserve banks
is gone. Now, with judgment important in credit
administration, the Federal Open Market Com­
mittee (as the OMIC as named by Congress in
1935) reflects the basic regionalism of the System
in its make-up of members. The seven members of
the Board of Governors sit with the 12 presidents
of the Federal Reserve banks, five of whom have a
*Annual Report of the Federal Reserve Board of 1923.

JANUARY 1965

13

vote in the deliberations; and currently meetings
are held every three weeks to discuss and deter­
mine monetary policy. Thus, the regionalism
found in the 12 Federal Reserve banks is repre­
sented by the 12 presidents in this important task
of credit determination.

Counsel and advice
Each president, serving as he does as the chief
executive officer of the regional Federal Reserve
bank and responsible to its board of directors,
relies on his own staff of capable economic ex­
perts, who via staff briefings prior to the FOMC
meetings, counsel and advise him. Also, each bank
president is in close contact with bankers, business­
men, and labor leaders in his respective district
and is therefore very knowledgeable about re­
gional needs. As an informed participant in the
monetary policy process, each president is thus
able to make significant contributions to policy
deliberations and thereby to the economic welfare
of the country. It is important that bank presidents
be responsive to these boards of directors and
to these other regional influences generally for
monetary policy has to be based on the needs and
conditions in all parts of the country.
The discount function has changed from a pri­
mary source of Reserve bank credit to one which
enables a member bank to exercise a privilege of
obtaining necessary funds when faced with prob­
lems unique to itself or which may be the result
from specific local, regional, or national condi­
tions. While the establishment of the discount rate
is still initiated by the board of directors of each
Federal Reserve bank, it was made subject to the
“ determination and approval” of the Board of
Governors by the Banking Act of 1935, the Act
which recognized that with the establishment of
the FOMC, discount rate determination had to be
coordinated with the other instruments of mone­
tary policy. An example of how this works was
observed this past year. When the government in
Great Britain raised the British bank rate, the
discount rates of all Federal Reserve banks were

14
MONTHLY REVIEW



raised within the period of a few days (Novem­
ber 23 and November 30). The Executive Com­
mittee of the Board of Directors of the Federal
Reserve Bank of Minneapolis had met on Novem­
ber 23, but recognizing that commercial loan ex­
pansion in the Ninth district had been lagging
that in the rest of the country, they deferred
“ establishing” the higher rate here until their next
meeting on November 27 to be effective November
30. Thus, regional differences were recognized to
a certain extent in the timing of establishment of
the discount rate.
The administration of the discount window is a
task performed at the local Federal Reserve bank
and all discounts and advances are approved by
the board of directors or its executive committee.
To determine that such extensions of credit to in­
dividual member banks are for appropriate uses,
the board or its executive committee at frequent
intervals reviews these borrowings with the Fed­
eral Reserve bank staff.

Other operational aspects
Several other aspects of operations deserve con­
sideration in this retrospective review of Federal
Reserve banks. The individual Federal Reserve
bank, being the funnel through which economic
and banking data flows, is able to serve its region
in many positive ways. For instance, the Federal
Reserve Bank of Minneapolis began work this year
on a district production worker man-hours index;
when perfected, it will reveal movements at the
individual industry level within the district and
will allow comparisons with corresponding in­
dustries in the national economy. Also a regional
stock prices index is now being tested. Regional
surveys and reports are made; two, “ The Timber
Economy of the Ninth District West” and “ Ski
Resorts in the Ninth District” were issued this
year. Participation has also continued, through
research and consultation, in the work of the Up­
per Midwest Research and Development Council.
The Federal Reserve Banks aid banks generally
in performing many services for them. Through

the cooperation and assistance of the commercial
banking community, our Check department this
year achieved substantially “ full automation” in
the handling of magnetically encoded checks. Also,
besides the services performed for the member
banks, there are programs handled for the Treas­
ury through the Fiscal Agency department. “ Let­
ters of credit” were first used in connection with
certain Federal programs to allow the Treasury to
make use of allotted funds until they are actually
disbursed.
All of these and other developments put greater
demands and offer greater challenges to members
of the Federal Reserve Bank staff to do a bigger
job more effectively. In part this reflects the de­
veloping pace facing banking generally, and the
fluidity and speed with which financial matters
are being handled. It also requires more coordi­
nation between the Federal Reserve banks, since
the impact of these operations and of monetary
determinations are very quickly felt.
The principal avenue of coordinating adminis­
trative managerial matters of the Federal Reserve
banks is through the quarterly conferences of the
12 Federal Reserve bank presidents and its System
committees and subcommittees. The volume and
importance of the work being done by these groups
is growing, reflecting again the quickening pace
of banking today.
Along with this coordinating work the Research
department performed a number of services and
made surveys at the request of the Board of Gov­
ernors. These included a sampling of reserve sta­
tistics in a national effort to improve the estimates
of weekly figures on bank reserves, a reporting of
quarterly changes in bank lending practices, and
a quarterly maturity survey of certificates of de­
posits.




At the end of the year, the President of the
United States announced the appointment of
Frederick L. Deming to the position of the Under­
secretary of the Treasury for Monetary Affairs to
fill the vacancy left by the resignation of Robert
V. Roosa, which became effective December 31,
1964. During the year, three officers retired from
the staff, Harold G. McConnell, Arthur W. John­
son, and Milford E. Lysen. At year end, the Board
of Directors promoted Earl O. Beeth and William
C. Bronner to Assistant Vice Presidents to become
effective January 1, 1965. In the election of direc­
tors by the Group 1 (large) member banks, John
F. Nash, President of the American National Bank
of St. Paul was elected to succeed Rollin 0. Bishop
as a Class A director; and Joyce A. Swan, Execu­
tive Vice President and Publisher of the Minne­
apolis Star and Tribune, to succeed T. G. Harrison
as a Class B director, for three year terms be­
ginning January 1, 1965.
The Board of Governors of the Federal Reserve
System appointed for a similar term B. W. Reeve,
President of Lake Shore, Inc., Iron Mountain,
Michigan, as a Class C director to succeed John H.
Warden; and reappointed Charles G. McClave as
a director of the Helena Branch for a two year
term. Atherton Bean was redesignated as chairman
and Federal Reserve Agent and Judson Bemis as
deputy chairman for 1965. The Board of Directors
of the Federal Reserve Bank of Minneapolis ap­
pointed Charles H. Brocksmith, President, First
Security Bank of Glasgow, Montana, and Glenn H.
Larson, President, First State Bank of Thompson
Falls, Montana, as directors of the Helena Branch
for two year terms and re-elected John A. Moor­
head as the Federal Advisory Council member
for 1965.

JANUARY 1965

15

Volume of Operations*
Discounts and advances
Currency shipments, outgoing
Coin shipments, outgoing
Checks handled, total
Collection items handled
Issues, redemptions, exchanges of
U. S. Government securities
Securities held in safekeeping
Transfers of funds

Number
1964
1963
519
359
17,620
17,598
18,142
32,118
173,998,830
184,882,000
706,777
875,419
253,356
295,377
100,026

287,676
314,153
114,950

Dollar Amounts
1963
1964
888,677,000
612,234,000
473,004,000
451,523,000
25,006,000
34,861,000
52,443,244,000
49,118,987,000
579,893,000
621,316,000
8,553,228,000
1,683,079,000
47,938,261,000

9,441,769,000
1,743,158,000
55,081,388,000

Earnings and Expenses
1963
$ 169,804
22,713,451
60,886
22,944,141

1964
$ 246,575
26,265,227
161,521
26,673,323

7,000,591
176,300
77,640
7,254,531

6,962,251
201,300
321,642
7,485,193

611,557

609,703

Net Expenses

6,642,974

6,875,490

CURRENT NET EARNINGS

16,301,167

19,797,833

32,201
— 2,450

12,280
18,008

NET EARNINGS BEFORE PAYMENTS TO UNITED STATES TREASURY

16,330,918

19,828,121

PAYMENTS TO U. S. TREASURY (Interest on Federal Reserve Notes)

14,332,546

29,991,401

673,472

711,320

1,324,900

-10,874,600

SURPLUS January 1

21,709,200

12,159,500

SURPLUS December 31

23,034,100

12,159,500

CURRENT EARNINGS
Discounts and advances
United States Government securities
A ll other

Total Current Earnings
CURRENT EXPENSES
Operating Expenses
Assessment for expenses of Board of Governors
Federal Reserve Currency

Total Current Expenses
Less: reimbursement for certain fiscal agency and other expenses

NET ADDITIONS TO CURRENT NET EARNINGS
Profits on sales of U. S. Government securities (net)
A ll other

DIVIDENDS PAID
TRANSFERRED TO SURPLUS

*AII figures are for Minneapolis and Helena combined.


16
MONTHLY REVIEW


Statement of Condition
ASSETS

Dec. 31, 1963

Dec. 31, 1964

$ 282,319,984

$ 281,685,493

29,060,033

28,017,228

311,380,017

309,702,721

40,875,000

26,871,600

6,741,723

4,526,107

Secured by U. S. securities

300,000

500,000

Other

736,000

690,000

649,489,000

776.251.000

650,525,000

777.441.000

3,510,267

6,782,671

211,296,152

250,018,381

Bank premises

3,941,667

3,597,630

Other assets

4,769,627

5,406,794

1,233,039,453

1.384.346.904

$ 592,150,850

$ 631,006,469

403,595,507

465,642,437

45,899,470

54,245,778

Foreign

3,680,000

5,060,000

Other deposits

1,572,322

2,779,050

454,747,299

527,727,265

149,474,469

186,063,355

2,115,685

15,230,815

1,198,488,303

1.360.027.904

Capital paid in

11,517,050

12.159.500

Surplus

23,034,100

12.159.500

1,233,039,453

1.384.346.904

Gold certificate account
Redemption fund for Federal Reserve Notes
Total Gold Certificate Reserves
Federal Reserve Notes of other Federal Reserve Banks
Other cash
Discounts and advances

United States Government securities
Total loans and securities
Foreign currencies
Cash items in process of collection

Total Assets
LIABILITIES
Federal Reserve Notes in actual circulation
Deposits:
Member banks — reserve accounts
United States Treasurer — general account

Total deposits
Deferred availability cash items
Other liabilities
Total Lia b ilitie s
CAPITAL ACCOUNTS

Total Lia b ilitie s and C ap ital Accounts
Ratio of gold certificate reserves to deposit
and Federal Reserve Note liabilities combined




29.7%

26.7%

JANUARY 1965

17

Officers of the Federal Reserve Bank of Minneapolis
Frederick L. Deming

President

Maurice H. Strothman, Jr.

First Vice President

Kyle K. Fossum

Vice President

John J . Gillette

Vice President

Roger K. Grobel

Vice President

Clarence W . Groth

Vice President and Cashier

Melvin B. Holmgren

Vice President

Franklin L. Parsons

Vice President

Ralph J . Dreitzler

General Auditor

Christopher E. Bjork

Assistant General Auditor

Frederick J . Cramer

Assistant Vice President

Lester G . Gable

Chief Examiner

Roland D. Graham

Assistant Counsel and Assistant Secretary

Howard L. Knous

Assistant Vice President

Oscar F. Litterer

Assistant Vice President

John A . MacDonald

Assistant Vice President

John P. Olin

Assistant Vice President and Secretary

Earl O . Beeth

Assistant Cashier

Carl E. Bergquist

Assistant Cashier

W illiam C . Bronner

Assistant Cashier

W illiam A . O'Brien

Assistant Cashier

Marcus O . Sather

Assistant Cashier

Officers at the Helena Branch
Clement A . Van Nice

Vice President

John L. Heath

Assistant Cashier

Robert W . Worcester

Assistant Cashier

As of December 31, 1964


1
MONTHLY REVIEW


Directors of the Federal Reserve Bank of Minneapolis
Term expires
December 31

Class A:
Rollin O . Bishop
Curtis B. Mateer
Harold C. Refling

Consultant, The American National Bank of Saint Paul,
Saint Paul, Minnesota
Executive Vice President, The Pierre National Bank,
Pierre, South Dakota
Executive Vice President, First National Bank in Bottineau,
Bottineau, North Dakota

1964
1965
1966

Class B:
T. G . Harrison
Hugh D. Galusha, Jr.
Ray C. Lange

Chairman of the Board, Super Valu Stores, Inc.,
Minneapolis, Minnesota
Lawyer and Certified Public Accountant,
Helena, Montana
President, Chippewa Canning Company, Inc.,
Chippewa Falls, Wisconsin

1964
1965
1966

Class C:
John H. Warden
Atherton Bean
Judson Bemis

Chairman of the Board, Upper Peninsula Power Company,
1964
Houghton, Michigan
CHAIRMAN AND FEDERAL RESERVE AGENT
1965
President, International Milling Company, Inc., Minneapolis, Minnesota
DEPUTY CHAIRMAN
1966
President, Bemis Bro. Bag Co., Minneapolis, Minnesota

Directors of the Helena Branch
Appointed by Federal Reserve Bank:
Roy G . Monroe
Harald E. Olsson
B. Meyer Harris

Chairman of the Board and President,
The First State Bank of M alta, M alta, Montana
President, Ronan State Bank
Ronan, Montana
President, The Yellowstone Bank,
Laurel, Montana

1964
1964
1965

Appointed by Board of Governors:
C. G . McClave

Edwin G . Koch

CHAIRMAN
President and General Manager, Montana Flour Mills Co.,
Great Falls, Montana
VICE CHAIRAAAN
President, Montana School of Mines, Butte, Montana

1964

1965

Member of the Federal Advisory Council
John A. Moorhead

President, Northwestern National Bank of Minneapolis,
Minneapolis, Minnesota

As of December 31/ 1964




JANUARY 1965

19




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Federal Reserve Bank of Minneapolis,
Minneapolis, Minnesota 55440

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