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E B&NJC OF GHlCAGp

•Y ™E EEDERAL

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DECEMBER, 1946
:

Farm Price Outlook
Up or Doivn? How Far?
The course of farm product prices probably is being
watched more closely at the present time than at any other
period in history. Prices received by farmers always have
been of prime importance to farm operators and their fam­
ilies, with annual variations in farm incomes resulting mostly
from changes in prices, although changes in the volume of
sales have at times been of importance. In addition to farmers,
rural business men, and processors of farm products, usually
follow the trend of farm prices closely. At the present time,
however, people with a great diversity of interests are keep­
ing an eye on the course of farm product prices. Much of
the unusual current interest results from the expectation
that farm product prices indicate the course of other prices
and of the general level of business activity in the economy as
a whole; also, that they might indicate whether or not prices
during the coming year may follow a course similar to that
traversed after World War I.
PRICES RISE DURING RECONVERSION

Following the end of hostilities, many wartime controls
were relinquished promptly, one of the more important being
the consumer rationing of some important foods. The major
concern of many people at that time was an anticipated
“reconversion slump” which, it was feared, might be the
first turn of a downward spiral into depression. Instead, the
wartime generated inflationary pressures increased. With
appetites for goods and services which appeared insatiable
at a time when many items were in short supply, successive
bulges developed in the line formed against inflationary
price advances. There was fundamental disagreement as to
the most effective Governmental action. While some in­
sisted that direct controls were the most feasible means of
restricting the upward pressure on prices, others were
equally convinced that greater freedom in the price arena
would solve the domestic problem readily by accomplishing
great increases in supplies of scarce items.
In orthodox domestic relations fashion a compromise was
reached. Greater freedom was allowed in some lines while
others were continued under direct controls. The negotiations
leading to this compromise, however, extended through most
of July and left the growing inflationary pressures very much
on their own during that month. For some important farm
products the “price control holiday” continued through
August. Prices received by farmers increased from mid-June
to mid-August by an average of 14 per cent, most of the
increase occurring in the first part of July following the
expiration of price control at the end of June. Sharpest in­
creases occurred in prices received for meat animals which
by mid-August experienced a 28 per cent rise, followed by
dairy products with a 24 per cent rise, feed grains 18 per
cent, and poultry and eggs 12 per cent.



Following renewal of the price control law, prices of some
agricultural products, particularly livestock and meats were
recontrolled, but ceilings were re-established at higher levels
than prevailed in June. By mid-September, average prices
received by farmers for all crops and livestock were about
3 per cent below the preceding month with most of the
decline occurring in prices of meat animals. On October 14
price controls were removed from livestock, meats, and some
other commodities. Prices received by farmers in midNovember averaged 8 per cent higher than for mid-Septem­
ber but 4 per cent below mid-October when prices were
the highest for any period of record—273 per cent of the
1909-14 period and two and one-half times 1935-39.
The sharp price increases accompanying decontrol were
heralded by those who had predicted disastrous inflation if
controls were removed as ample proof that their predictions
were accurate. With equal vigor, proponents of decontrol
seized upon the tendencies for prices of farm products to
stabilize after their initial spurts, then weaken as distribution
channels filled and consumers economized in the use of
commodities bearing the higher price tags, as proof that the
inflation scares were superficial. It is assumed quite generally
that post World War II peaks in prices of most farm products
have passed, although the average for all such products
continues near an all-time high. Interest in farm prices has
turned largely from their inflationary potentialities to a con­
sideration of how long the present level can be maintained
and how far prices will fall. Some point to recent breaks in
stock and commodities markets and suggest that an ex(Continued on Page 8)

PRICES RECEIVED BY FARMERS,
PREWAR AVERAGES, JUNE AND NOVEMBER 1946
AND PARITY PRICES
(Amounts in dollars)
Commodity and Unit

Wheat, per bu.....................
Corn, per bu........................
Oats, per bu........................
Barley, per bu.....................
Cotton, per lb......................
Soybeans, per bu...............
Flaxseed, per bu................
Potatoes, per bu................
Hogs, per cwt.....................
Beef cattle, per cwt..........
Lambs, per cwt..................
Butterfat, per lb................
Milk, wholesale, per cwt....
Chickens, live, per lb.......
Turkeys, live, per lb.........
Eggs, per doz......................

Aug.
1909July
1914

Jan.
1935Dec.
1939

June 15,
1946

Nov. 15,
1946

Parity
Price
Nov. 15,
1946

0.88
0.64
0.40
0.62
0.124

0.84
0.69
0.34
0.53
0.103
0.95
1.69
0.72
8.38
6.56
7.79
0.291
1.81
0.149
0.160
0.217

1.74
1.42
0.81
1.25
0.26
2.17
3.10
1.47
14.30
14.10
14.30
0.5211
3.391
0.266
0.312
0.335

1.89
1.27
0.78
1.32
0.292
3.09
6.90
1.22
22.80
17.60
18.40
0.8421
5.071
0.276
0.372
0.515

1.87
1.36
0.85
1.31
0.263
2.04
3.58
1.57
15.40
11.50
12.50
0.5932
3.732
0.242
0.305
0.5562

.----------

1.69
0.70
7.27
5.42
5.88
0.263
1.60
0.114
0.114
0.215

^oes not include dairy production pavments of 15 cents per pound of
butterfat in June, 13 cents in July, and about 17 cents in November,
of 50 cents per hundredweight of milk in June and July, and about
65 cents in November.
2Adjusted for seasonal variation.
SOURCE : Agricultural Prices, U. S. Bureau of Agricultural Economics.

War and Postwar Manufacturing Employment Trends
District Industrial Workers 1stumber 40 Per Cent Above Prewar Level

Manufacturing employment in the Seventh Federal
Reserve District states of Illinois, Indiana, Iowa, Michigan,
and Wisconsin will average more than three million persons
in 1946, over 40 per cent above the 1939 level although
about one-fifth under the numbers employed in the peak war
years of 1943 and 1944.1 The downward trend in industrial
employment, which began early in 1944 and reached its
depth as a result of the post V-J Day wave of strikes, was
reversed early in 1946 with subsequent marked increases in
manufacturing employment in both the District and the
nation (see accompanying chart). The 1946 upward trend,
like that of the early war years, was primarily due to the
expansion of employment in the durable goods industries,
particularly metal working.
IMMEDIATE OUTLOOK

Available evidence points to some continued rise in de­
mand for manufacturing workers, particularly in the skilled
classifications, in the months immediately ahead. Labor
shortages, already pressing in the District’s major industrial
areas, may therefore become more acute before they ease.
Since V-J Day, manufacturing has been subject to greater
competition for workers from non-manufacturing industries,
notably construction. In addition, manufacturing and other
industries have been handicapped by a number of factors in
filling job needs: (1) unexpectedly heavy withdrawal of
older workers and women from the labor force since V-J
Day, either directly or via the unemployment insurance
route, (2) heavy enrollment among younger age groups, in­
cluding veterans, in educational institutions, (3) a noticeable
tendency, now decreasing, for many discharged servicemen
1Except where otherwise indicated, the national and state manufacturing
employment estimates referred to throughout this article are those of the
U. S. Bureau of Labor Statistics.

(I939 -IOO)

EZ SEVENTH FEDERAL RESERVE

1939 1943 1944 1945




to take some time off before looking for jobs, (4) lack of
housing facilities for workers otherwise willing to move from
labor surplus to labor deficit areas, and (5) continued ab­
normally high labor turnover.
Manufacturing as well as other industries will, for some
time at least, probably have to depend to a great extent
on persons not now in the labor force, mainly veterans and
women, for additional employees. Some relief will come
from the ranks of the unemployed, although the current
national level of about two million is not out of line with
the estimated “normal” unemployment in most of the post­
war full employment models (see Business Conditions for
October 1946). High-wage industries will obtain some em­
ployees by drawing on labor forces of low-wage industries.
The decreased work week after V-J Day has been esti­
mated as the equivalent of over one-half million employees
in all industries in the Seventh District. Material shortages
and other bottlenecks probably account in large part for the
failure of industry to utilize its existing manpower more
fully through a longer work week. Only in the last few
months has there been a tendency for average hours worked
per week in manufacturing to recover slightly from the
postwar low reached in July of this year. Another source of
manpower relief is the expected continued gradual increase
in output per man-hour.
The major uncertainties in the employment situation
concerns the number and duration of the “second round”
of strikes in the coming winter and spring months and the
possibility of a period of business readjustment. Seventh
District manufacturing employment, as before, would be
seriously curtailed by an extended "second round” of work
stoppages, not only because of the importance in the District
of iron and steel, automobiles, and other heavy manufactures,
but also because of the almost complete dependence of these
and other industries on coal. The extent to which work
stoppages develop will depend on (1) the outcome of nego­
tiations now in progress (coal, meat packing, rubber, petro­
leum, etc.), (2) the willingness of labor and management
in general to accept the wage pattern set by that industry
which first successfully reaches a new agreement2, and (3)
the extent to which matters of “principle,” e.g., company
security, union security, and annual wage, enter the nego­
tiations in each industry.
Many of the existing labor contracts in the strongly union­
ized basic industries expire early in 1947 at a time when the
Republican controlled Congress will be in session. Whether
this will offset or accentuate the economic complexities
of the situation depends not only on the type of labor legis2The Sinclair Refining Company and the Oil Workers International Union
have recently signed a new trade agreement in which wages are geared to
the cost of living. Although similar agreements have existed in the past,
Sinclair is believed to be the first nationwide company adopting it. How­
ever, other companies and unions have not yet indicated their reactions to
the Sinclair-Oil Workers type of wage settlement.

Page 1

lation preferred by Congress but also on the extent of
Table 1
agreement on labor policy between Congress and the
PERCENTAGE CHANGES IN MANUFACTURING
Administration.
EMPLOYMENT, UNITED STATES AND SEVENTH
Recent drops in the commodity and stock markets may be
FEDERAL RESERVE DISTRICT STATES
advance indications of a transition from an inflationary to a
SELECTED PERIODS, 1939-46
deflationary economy. The accumulated demand for most
Seventh Fed­
Period
United States eral Reserve
durable goods, production of which is particularly important
District States
in the Seventh District, remains considerably in excess of
Prewar-war increases
supply. Deflationary pressures, if they occur, will be greatest
1939 to wartime peak1.................
+ 77
+ 78
in the non durable goods industries which have been in
1939 to 1945.....................................
+ 49
+ 48
relatively more abundant supply throughout the war and
Wartime decreases
postwar period. Some of these industries have exhibited signs
Wartime peak to V-E Day1.........
— 9
— 9
V-E Day to V-J Day2...................
—22
—29
of weakness in recent months as consumers again begin to
devote an increasing portion of their expenditures to the
Prewar-postwar increases
V-J Day to postwar low5.............
— 1*
— 5
growing stream of durable goods.
1939 to 1946—1st 8 months....
+ 381
+ 36
Any manufacturing unemployment resulting from the
1November 1943 in the United States and January 1944 in the Seventh
period of business readjustment will probably be minor in
Federal Reserve District states.
2For employment purposes, V-E Day is April 15, 1945, and V-J Day
extent and in all likelihood will be concentrated mainly in
is September 15, 1945.
non-durable goods, particularly textiles and food. This is in
3February 1946 in both the United States and the Seventh Federal
Reserve District states.
contrast with the usual tendency of durable goods to be
Estimated by Federal Reserve Bank of Chicago.
SOURCE: U. S. Bureau of Labor Statistics.
hardest hit by deflation. However, durable goods manufac­
turers may use a business recession as an opportune time to
weed out ’ employees, with the dual aim of increasing out­ in both the District and the nation were the result of the
put per man-hour and of approaching closer to prewar increasing impact of war contract cancellations on the
labor-capital relationship.
economy, physical reconversion problems, and widespread
wage-price-profit controversies.
In the period beginning in September 1945, manufactur­
DISTRICT AND NATION COMPARED
ing employment in both the District and nation moved in
In the first eight months of 1946, manufacturing employ­ an irregular plateau until the drop in February 1946, occa­
ment in the District exceeded its 1939 average by about sioned by the accumulated effects of severe nationwide
38 per cent. In the same period, manufacturing workers strikes in steel, automobiles, and other heavy industries.
throughout the nation averaged in excess of 13.5 million, This was the period of the completion of the physical phase
or about 36 per cent above the 1939 level. Whether the of postwar reconversion and the more time-consuming de­
District can maintain its slight relative advantage as well velopment of a postwar wage-price policy. In spite of a heavy
as its absolute differential over 1939 depends primarily on concentration of work stoppages in Seventh District steel,
the future demand for consumers’ and producers’ durable auto, and agricultural equipment industries early in 1946,
manufacturing employment fell less as a result of strikes
goods, which dominate Seventh District manufacturing.
The increase in manufacturing employment during the than in the nation. This was due in large measure to the
war was somewhat later in the Seventh District than in the greater offsetting effect of increased employment among the
nation (see Business Conditions for December 1944). At its District’s non durable industries.
peak in November 1943, manufacturing employment in the
nation exceeded 17.8 million, about 77 per cent above the
DURABLE AND NON-DURABLE PATTERNS
1939 average of 10 million. Allowing for seasonal variations
in food manufacturing employment, the Seventh District
The District’s durable goods factories experienced much
wartime peak of 3.8 million manufacturing workers oc­ greater employment gains during the war than the non­
curred in January 1944 and was 78 per cent higher than durable goods industries. As a result, seven of every ten
the 1939 average of slightly over two million employees manufacturing workers were employed in the durable goods
(see Table 1).
industries at the peak of war production compared with five
The decline in employment from their respective wartime of every ten in 1939.
peaks to V-J Day was greater in the nation than in the
The average durable goods employment in the peak war
District. This reflects the heavy concentration of Midwest years of 1943 and 1944 exceeded 2.6 million workers, com­
industry on ammunition, artillery, electrical equipment, pared with less than half that number in 1939. In spite of
tanks, and other ordnance items which received continued strike-accentuated post V-J Day declines to 1.7 million
strong emphasis by the armed services in the later stages of workers, employment in the District’s durable goods indus­
the war. It was these industries which were primarily re­ tries climbed back to more than 2.2 millions by August 1946,
sponsible for the District s marked upward wartime increase almost 75 per cent above the 1939 average (see accompany­
in manufacturing employment.
ing chart).
The accelerated downward manufacturing employment
Wartime trends in non-durable goods employment differed
trend after V-E Day and the precipitate drop after V-J Day from those in durable goods in two ways: (1) the peak
Page 2




occurred earlier in non-durables, namely, in 1943 compared
with 1944 for durables; and (2) the expansion was much
less, about 25 per cent above prewar levels compared with
the more-than-doubled wartime employment in durable
goods. The earlier peak in non durable goods was partly
due to their greater ease of conversion to war production
and partly to the emphasis on food in the immediate prewar
(lend-lease) period. The 1944-45 employment trend was
gradually downward and was followed by a virtually coun­
terbalancing rising trend in 1946. These trends were very
little affected by V-J Day or the postwar wave of strikes.
Strikes in petroleum and rubber were short-lived and in
meat packing were halted by temporary Government as­
sumption of meat packing operations.
METAL WORKING INDUSTRIES

Over nine-tenths of the prewar, war, and postwar durable
goods employment in the Seventh District states is concen­
trated in metal working, the remainder being divided among
lumber, furniture, and stone, clay and glass. Of the metal
working industries, machinery and transportation equipment
experienced the greatest wartime gains in employment, over
140 per cent, and nonferrous metals and iron and steel the
least, under 90 per cent. In spite of drastic post V-J Day
declines, machinery employment in August 1946 was still
almost double the prewar level. Since machinery accounts
for more than one-third of all metal working employment,
the future behavior of this industry will have a vital bearing
on Seventh District employment trends. The important
products turned out by this industry include farm machin­
ery, heavy industrial equipment, electrical equipment, and
many consumers’ durable goods such as radios, phonographs,
washing machines, and refrigerators.
The transportation equipment industry, which currently
also accounts for about one-third of metal working employ­
ment, lost more than half of its wartime employment gains
after V-J Day. This was due in large part to the fact that
the wartime shipbuilding and aircraft programs were either
virtually discontinued or drastically reduced in the four
Seventh District states in which they had assumed some

EMPLOYMENT IN ALL MANUFACTURING, DURA8LE,
AND NON-DURABLE GOODS
SEVENTH FEOERAL RESERVE DISTRICT STATES, 1939 AND 1943-46

OB ALL MAN JFACTURlNG
■1 DURABLE GOOOS
UA NON-OURA8LE GOOOS

__

DURABLE GOODS
1

A**'

)
\

all' manufacturing""

-- ------

\

:

§
■

1939

1944

X
\
1945

1943

SOURCE: U S. 8UREAU OF LABOR STATISTICS




1944

1945

1946

wartime importance, namely, Illinois, Indiana, Michigan,
and Wisconsin.
Iron and steel accounts for slightly over one-fifth of the
District’s metal working employment. Although down sub­
stantially from the wartime peak, iron and steel employment
still exceeds the prewar level by over 40 per cent and prom­
ises to show further gains into 1947 as the industry strives
to meet the heavy accumulated demand for its products.
Nonferrous metals, the least important of the District’s metal
working industry groups in terms of numbers of workers,
have employment over two-thirds above the prewar level
and are having probably the greatest difficulty of recruiting
needed manpower in order to fill their heavy backlog of
orders. This recruiting problem arises from the heavy nature
of the work and the intense heat characteristic of many
nonferrous operations. War and postwar trends in the sev­
eral metal working industries are summarized in Table 2.
FOOD AND OTHER NON DURABLE INDUSTRIES

Food manufacturing, particularly canning, meat packing,
and dairy products, is of relatively great importance in all
of the five District states. The heavy wartime requirements
of the armed forces, the high wartime levels of disposable
income among civilians, and the scarcity of food in most of
the other United Nations were reflected in a marked war­
time employment rise. Since V-J Day the continued high
level of disposable income at home and the needs of
UNRRA abroad have resulted in 1946 food employment
of over 320,000 workers, substantially above the 1939
average of 280,000, although somewhat under the wartime
level. Because of canning and meat packing, food employ­
ment has a pronounced seasonal peak in the late summer
and fall months of each year.
The remaining non-durable goods industries fall into two
major groups: CO those which have had sharply increased
wartime employment followed by varying post V-J Day
declines and 1946 rises, and (2) those in which employment
was adversely affected by the war but since V-J Day have
regained their prewar employment levels, in whole or in
part. The first group includes chemicals and rubber and
the second, leather, textiles, apparel, and printing. Paper
manufacturing is unique in having a relatively unbroken
upward war and postwar trend.
INDIVIDUAL STATE PATTERNS

The war and postwar trends in each of the District states
are similar in broad outline to the trends in the District as
a whole, emphasizing the broad homogeneity of District
manufactures. What differences exist among the states are
due in large part to the varying importance of individual
manufacturing industries in each state’s economy. The war­
time manufacturing employment gains of Indiana, Iowa,
Michigan, and Wisconsin ranged from 83 to 96 per cent;
Illinois showed a lesser rise of 65 per cent (see Table 3).
As of July 1946, Indiana, Michigan, and Wisconsin had
maintained their wartime manufacturing employment gains
to a much greater extent than Illinois or Iowa. The staying
power of Michigan and Indiana is based largely on the
Page 3

Table 2
METAL WORKING EMPLOYMENT IN SEVENTH
FEDERAL RESERVE DISTRICT STATES BY
INDUSTRY GROUPS, PREWAR, WAR,
AND POSTWAR

Industry

Transportation (including
automobiles) ...................
Iron and steel........................
Other machinery.................
Electrical machinery .........
Nonferrous metals .............
All metal working...............

Per Cent of Total
Metal Working
Employment
July
1939
1944
19461

Per Cent
Increase
Over 1939
July
1944
19461

35
28
22
9
6
100

147
76
144
162
96
125

38
22
23
11
6

100

34
22
27
10
7
100

59
44
98
105
67
69

Excludes Indiana, for which manufacturing employment estimates are
available only through December 1945.
SOURCE: U. S. Bureau of Labor Statistics.

tremendous pent-up postwar demand for the products of
each state’s major industry, automobiles and iron and steel,
respectively. The automobile industry accounts for almost
one-half and metal working, including automobiles, for
three-fourths of Michigan’s manufacturing employment. In
Indiana, iron and steel accounts for every fourth manufac­
turing worker, and metal working for one-half of the manu­
facturing total.
Illinois and Wisconsin manufacturing employment are
more evenly spread among individual industries than that
of Michigan and Indiana. Wisconsin’s better postwar record
compared with Illinois is due in large part to the strong
demand for paper, furniture, and lumber products which
together employ one in every seven manufacturing workers
and which during the war suffered aggregate employment
declines. Postwar strength in these three industries as well
as sustained demand for heavy machinery, cheese, beer, and
other food products has helped to offset Wisconsin’s losses
in employment occasioned by drastic war contract cancella­
tions in metal working, particularly shipbuilding.
Prior to the war Iowa was primarily a food producing
state. The few key ordnance plants located there during
the war were largely instrumental in stimulating Iowa’s
wartime manufacturing employment. As a result of the
closing of some of these plants since V-J Day, Iowa’s con­
siderable wartime expansion in chemical munitions employ­
ment has been virtually eliminated, and in metal working
largely reduced. Iowa’s ability to maintain or increase its
1946 metal working employment of about 42,000, twice
the 1939 average, therefore is crucial in determining future
manufacturing employment levels.
All the District states are thus heavily dependent upon a
sustained demand for durable (metal) products in keeping
their postwar employment above prewar levels. This is par­
ticularly true for Indiana and Michigan, not only because
of their one-dominant-manufacturing-industry characteristic,
but also because manufacturing employees constitute a much
higher proportion of all non-agricultural workers than in
Illinois and Iowa (see Table 3).
Page 4



OTHER TRENDS

Total non-agricultural employment in the Seventh Federal
Reserve District states has increased over 15 per cent since
the end of the war, about the same rate of increase as for
manufacturing workers. The reversal of the wartime down­
ward trend in non-manufacturing employment represents
the beginning of increased competition of these industries
for workers. Such non-manufacturing industries as con­
struction and transportation have wage levels which in many
cases are as high or higher than those in manufacturing.
Other non-manufacturing industries pay lower wages than
manufacturing but offer non-pecuniary advantages such as
permanence, pleasant working conditions, convenience of
location, etc. As a result, a number of manufacturing com­
panies have instituted recruiting campaigns, aimed pri­
marily at women.
The exodus of women from the labor force began in the
later stages of the war and gained momentum after V-J
Day. Reports from several United States Employment Serv­
ice offices in the Seventh District indicate, however, that
in the last several months more women have entered than
have left the labor force, but not in sufficient numbers to
fill available job openings. Total female employment still
remains considerably under wartime levels. This is particu­
larly true of women in the marriageable and childbearing
age groups between 20 and 35.
Servicemen have in recent months reduced considerably
the average time between discharge and seeking employ­
ment. Consequently, the number of employed veterans has
increased more sharply than employment in general. Of the
nationwide estimated total of two million unemployed,
however, about 750,000 were veterans. The length of time
of average unemployment of both veterans and non-veterans
has shown a tendency to increase compared with a year ago,
indicating that a growing number of the currently unem­
ployed may represent persons who are becoming more
difficult to place.

Table 3
WAR AND POSTWAR MANUFACTURING
EMPLOYMENT TRENDS IN INDIVIDUAL
SEVENTH FEDERAL RESERVE DISTRICT STATES

State

Per Cent of
Seventh District
Manufacturing
Employment

Per Cent of
Per Cent Increase Manufactur­
in Manufacturing ing to Total
Employment
Non-agricul­
from 1989 to:
tural
Employment
Wartime
July
1944
Peak
1946

1939

Illinois ...............
Indiana...............
Iowa ...................
Michigan ...........
Wisconsin .........
Total

July
1946

38
16
4
30
12

35
19
4
30
12

65
96
85
92
83

40
521
43
52
57

43
56
31
59
52

100

100

78

511

49

Estimated by the Federal Reserve Bank of Chicago.
SOURCE: U. S. Bureau of Labor Statistics.

Wisconsin State Finance—III
Substitutes for State Debt: Taxes, Local Credit, Loans from Trust Funds

The economic and legal capacity to use credit on a longor short-term basis may have important advantages for a state
or local government. The relative significance of these ad­
vantages is, however, dependent upon such factors as the
size of the government, the character of the functions it
performs, the nature of its tax system, and the rate of growth
of the community served.
Governments furnishing services which occasionally re­
quire capital outlays that are large, relative to annual operat­
ing expenses, must he able to use credit or to draw on a cash
reserve. Otherwise they will impose excessive taxes during
years of construction and forego the contribution of the
facility created by the capital outlay to defray amortization

Table 1
OUTSTANDING STATE DEBT, INTERFUND
BORROWING AND COUNTY INDEBTEDNESS FOR
STATE TRUNK HIGHWAYS JUNE 30, 1920-45
(In millions of dollars)
Year

Direct
Debt1

Interfund
Borrow­
ing2

1920
1921
1922
1923
1924

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

2.7
2.3
2.2
2.1
2.0

1925
1926
1927
1928
1929

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

1.9
1.8
1.7
1.6
1.5

__
.4
.4
.8
.8

1930
1931
1932
1933
1934

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

1.4
1.3
1.2
1.2
1.2

1935
1936
1937
1938
1939

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

1940
1941
1942
1943
1944

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

1945 ..............................

Deferred
County
Payments
Issues
to Teach­ for State
Trunk
ers’ Retire­
ment Fund Highways

.

—

__
—

—
—

—
—
__

—

—

—

1.4
1.8
1.8
2.0
1.9

__
—
—
—
—
1.6
1.7
1.8
2.2
2.8

__
—
—
—
—
__
35.8
34.4
31.2
28.4

1.2
1.2
1.2
1.2
1.2

1.8
1.7
1.7
1.8
2.9

3.8
4.7
5.0
5.2
5.8

26.1
24.8
23.4
21.8
19.4

1.2
1.2
1.2
1.2

6.2
5.9
3.2

—

4.2
4.3
4.2
4.3
4.2

—

16.3
13.3
10.1
6.8
4.1

—

3.9

—

2.4

—

—
—

Consists of Civil War obligations and notes issued to compensate the
Normal Fund for the State’s diversion of monies designated by statute
for normal school use.
includes loans made from the Teachers’ Insurance and Retirement
Fund and other trust funds by the Wisconsin University Building Corporation and appropriations made from the State Insurance Fund.
SOURCES: Taken from the Biennial Report of the Secretary of State
of the State of Wisconsin, Report of the Business Manager (formerly
the Comptroller), University of Wisconsin, the Wisconsin State Budget,
and the Wisconsin Taxpayer.




charges. New or developing communities are seriously re­
tarded unless they can, through credit devices, keep public
investment apace of private investment and anticipate tax
receipts from a larger and more prosperous population.
The yields from certain types of tax systems fluctuate
widely in prosperity and depression, and a government
largely dependent on flexible tax revenues may find short­
term borrowing preferable to carrying a large enough cash
surplus in normal or prosperous years to suffice for depressed
periods, or to falling hack on the alternative of raising tax
rates at the depths of depression.
BARRIERS TO USE OF STATE CREDIT

The disadvantages of using state or local credit arise from
the fact that it is often possible for a government to borrow
more than is necessary or desirable from the standpoint of
the community. An excess of this character is no different in
kind from inappropriate expenditures from annual taxation,
but it is much more likely to have serious economic and
political consequences because of the amounts involved.
Even the best intentioned judgments on the wisdom of a
given expenditure policy may thus have the effect of un­
wisely committing a substantial amount of state expenditure
not for a year or a biennium but for ten to twenty-five years.
The framers of many state constitutions, and particularly
those adopted about a century ago, were acutely aware of
the hazards of public investment, and incorporated provisions
into the fundamental laws of their states calculated to re­
strict borrowing within very narrow limits. Thus, the pro­
visions of the Wisconsin Constitution have been so restrictive
that the State has not borrowed money in the manner pre­
scribed by its Constitution since Civil War days. A portion
of the Civil War debt was outstanding until 1944 (see
Table 1), although the obligation had been held by State
trust funds after 1886.
The constitutional prohibition against State debt in Wis­
consin (Constitution, Article VIII, section 9) permits bor­
rowing for only two purposes: (1) to defend the State in
time of war (Article VIII, section 7), and (2) to defray
extraordinary expenditures not in excess of 100 thousand
dollars (Article VIII, section 6). Any other evidence of
State debt which can be shown to create a legal obligation
on the State would require an amendment to the Constitu­
tion. Such an amendment has never been adopted. In
addition to this broad prohibition against borrowing, the
State Constitution as originally adopted prohibited the State
Government from contracting any debt for works of internal
improvement or to being a party in carrying out such works
(Article VIII, section 10). This restriction on the scope of
State activities reflects the prevailing sentiment of the era
in which the Constitution was originally adopted (1848).
Page 5

Illinois, Michigan, and other states were at that time suffer­
ing severe financial distress arising from ill-considered and
overly ambitious programs of internal improvement. The
framers of the Wisconsin Constitution were firmly resolved
to prevent their State’s credit and resources from being in­
volved in any such schemes. As they did not wish to dis­
courage all public participation in internal improvements,
they did not inhibit the use of local taxes or credit.
The prohibition against State participation in internal im­
provements proved too restrictive to endure, and the Con­
stitution subsequently was amended to permit the State to
use funds in the public treasury or the proceeds of taxes to
aid in the construction and maintenance of highways (1908),
a State forestry program (1924), and airports (1945). The
section in its present form reads as follows:
Sec. 10.—The state shall never contract any debt for works of
internal improvement, or be a party in carrying on such works; but
whenever grants of land or other property shall have been made to
the state, especially dedicated by the grant to particular works of
internal improvement, the state may carry on such particular works,
and shall devote thereto the avails of such grants, and may pledge
or appropriate the revenues derived from such works in aid of their
completion. Provided, that the state may appropriate money in the
treasury or to be thereafter raised by taxation for the construction or
improvement of public highways or the development, improvement
and construction of airports or other aeronautical projects. Provided,
that the state may appropriate moneys for the purposes of acquiring,
preserving, and developing the forests of the state; but there shall
not be appropriated under the authority of this section in any one
year an amount to exceed two-tenths of one mill of the taxable prop­
erty of the state as determined by the last preceding state assessment.

Though section 10 has been liberalized on three occasions,
none of the amendments authorized the use of the State’s
credit. After almost a century of experience, the State still
prefers pay-as-you-go to loans for internal improvements.
ALTERNATIVES TO BORROWING

Between 1920 and 1940, the 48 state governments bor­
rowed in the neighborhood of 4 billion dollars. Approxi­
mately 45 per cent of the total was for highways, 12 per
cent for soldiers’ bonuses, 16 per cent for unemployment
relief and general operating purposes, and 12 per cent for
public buildings. In Wisconsin these functions were financed
as follows; bonus payments following World War I and the
State’s share of unemployment relief in the 1930’s were
paid for by special taxes; the State’s contribution to highways
was almost entirely from highway-user taxes, supplemented
by extensive borrowing of the counties and local units of
government; State buildings and institutional facilities were
financed out of current revenues and by special credit devices
now typical of many states having strict prohibitions against
state borrowing.
The most pressing demands for the use of state credit
undoubtedly have been associated with the rapid expansion
of highway facilities. In Wisconsin, motor vehicle license
fees and State and local property taxes were early sources
of highway revenue. A motor fuel tax was adopted in 1925.
The over-all highway program integrated state, county, and
local plans and particularly encouraged the use of county
credit to build a state highway network. In 1931 the State
recognized a moral obligation to assist the counties in servic­
Page 6




ing debts incurred for the state system and provided grants
out of highway-user revenues in amounts sufficient to pay
the principal on the bonds issued. The State by earmarking
aids for the repayment of county bonds did not assume any
legal responsibility for meeting future debt service. How­
ever, it would have required a most unusual combination of
circumstances for the State to discontinue a policy thus em­
barked upon even though no legal compulsion was involved.
Despite county borrowing, development of highways in
Wisconsin has been at a somewhat slower rate than in states
which have used credit more extensively. The difference is
most noticeable in the proportion of highway facilities that
are improved with a high type of pavement. The necessary
delay in the pay-as-you-go financing scheme has probably
accounted in part for the failure of the State to extend as
substantial aid to municipalities for city streets as might
otherwise have been practicable. The indirect use of local
government credit for a function otherwise regarded as that
of the state is fairly common in several states where for con­
stitutional reasons it has been difficult, if not impossible, for
the state to borrow.
The financing of the World War I bonus is another ex­
ample of the State’s preference for pay-as-you-go financing.
Both a cash and an educational bonus given to veterans of
World War I were currently financed by property and in­
come tax levies.
In the early 1930’s, when declining State revenues and
the growing burden of providing unemployment relief
brought State finances into serious difficulty, the State met
the emergency by imposing additional taxes on net income
and by diversion of revenues earmarked for trust funds and
special functions. Thus, statutory provision for the Teachers’
Retirement Fund required contributions from the General
Fund when the yield of the surtax levied for retirement pur­
poses was inadequate to meet the actuarial liability. Con­
versely, when the receipts from this levy were in excess of
the requirements, transfers from the Retirement Fund to the
General Fund of the surplus were required. With a sharp
reduction in tax yields in depression years, the General Fund
incurred substantial liabilities to the Retirement Fund which
it did not meet; as indicated by Table 1 the accumulated
liability at one time amounted to some 6 million dollars. In
these same years the State also diverted funds from the high­
way account to general State purposes. There was no hard
and fast legal requirement then that the motor fuel tax and
the motor vehicle licenses should be used exclusively for
road construction, maintenance, and aids. Actually a portion
of the yields from these taxes in the years of financial strain
were a vital factor in maintaining expenditures for general
state government.
As early as 1925, certain quasi-educational facilities at the
State University called for fairly substantial capital outlays.
The Union Building and dormitories were financed by the
organization of the University Building Corporation which
leased property from the University, borrowed money from
State trust funds, constructed the improvements, and leased
the improved property back to the University. The Univer­
sity in operating the facilities charged fees and, from the
earnings accruing from operation of the property, made

rental payments to the building corporation. The building
corporation thus acted as an agency which made it possible
for one State agency to borrow from another. This arrange­
ment was challenged in the Wisconsin courts, but the State
Supreme Court held that while the device was admittedly a
subterfuge, the State had not incurred any legal liability for
such debts and they therefore could not come within the
prohibition of the State Constitution.1
In the late 1920’s, another device of a somewhat similar
nature was adopted. The State needed additional office space
and, being unwilling or unable to finance construction of an
office building from the General Fund, appropriated monies
for this purpose from a trust fund (the State Insurance
Fund) to the State Office Building Commission. The Build­
ing Commission constructed the building and leased it to
various State departments at regular space rentals sufficient
to amortize the loans from the Insurance Fund in twentyfive years with interest at 3 per cent. This situation differs
from that of the University Building Corporation in that the
1“It is of no legal consequence to say that the plan is a subterfuge and de­
vised for the mere purpose of circumventing the constitution. This may be
admitted without answering the question one way or the other. In order to
condemn the transaction it must be found that it creates a state debt within
the meaning of the constitution.” Locmis vs. Callahan (1928) 220 N.W. 816.

Table 2
BALANCES IN STATE OF WISCONSIN TRUST FUNDS
JUNE 30, 1920-45
(In millions of dollars)
Fiscal
Year

Total

School1

1920
1921
1922
1923
1924

9.8
10.2
12.4
14.6
17.2

8.6
8.8
9.1
9.8
10.3

.3
.4
.5
.7
1.1

.7
.8
2.6
3.9
5.6

1925
1926
1927
1928
1929

20.3
23.8
27.1
28.6
31.3

10.8
11.5
12.1
12.7
12.8

1.3
1.6
1.9
2.0
2.3

7.6
9.6
11.8
12.9
15.4

1930
1931
1932
1933
1934

34.0
37.2
40.0
43.0
44.4

13.3
13.6
13.8
13.8
13.9

2.5
2.2
2.5
2.8
2.6

17.3
20.1
22.4
25.0
26.6

1935
1936
1937
1938
1939

47.4
61.1
76.0
90.3
104.9

14.0
14.2
14.4
14.6
14.8

2.8
2.9
3.1
3.4
4.1

28.5
30.7
33.8
37.4
40.8

1940
1941
1942
1943
1944

118.9
131.8
150.1
182.9
228.7

15.1
15.4
15.7
15.9
16.2

4.5
5.3
6.5
7.7
8.5

1945®

281.3

17.9

9.0

Insur­
ance2 * *

Pen­
sion8

Unem­
ployment
Compen­
sation
Trust
_______
_______
______
—

___

_______
_______

—
_______
_______
_______

—

All
Other5
.2
.2
.2
.2
.2
.6
1.1
1.3
1.0
.8
.9
1.3
1.3
1.4
1.3

11.5
23.2
33.3
43.4

2.1
1.8
1.5
1.6
1.8

44.0
48.0
54.8
64.4
70.7

53.4
61.4*
71.1
92.5
131.0

1.9
1.7
2.0
2.4
2.3

78.5

173.3

2.6

_______

’Consists of the School, University, Agricultural College, and Normal
School Trust Funds.
2Consists of the State Insurance Fund, State Deposit Fund (1932-45),
and Life Fund.
3Consists of the Teachers’ Insurance and Retirement Fund and, begin­
ning in 1944 and thereafter, the Wisconsin Municipal Employee and
the State Employees’ Retirement Funds.
^Balances are adjusted in this year for a transfer of $1,964,000 to the
railroad unemployment insurance accounts.
5Consists of the University Trust and Trust Fund Income, Death Bene­
fit, Injuries Indemnity, Benevolent Fund and Fund Income, and the
Mutual, Stock, and Reciprocal Workmen’s Compensation Security Funds.
°Balances for 1945 have been estimated from the Monthly Report of
the State Treasurer.
SOURCES: State of Wisconsin, Report of the State Treasurer; Bien­
nial Report of the Secretary of State of the State of Wisconsin; Unem­
ployment Compensation Trust Fund balances from the Annual Report of
the Social Security Board.




earnings of the improvement are dependent upon State
appropriations and not upon tenants who have no particular
connection with the State Government. From these examples
it appears that the State can indirectly borrow for some types
of public improvement of a limited character. That this
device will be widely and generally used in financing a
large program of public works construction hardly seems
likely, although the existence of substantial trust funds (see
Table 2) for which profitable investment by the State is
sought may suggest the extension of present practices.
THE NATURE OF WISCONSIN TRUST FUNDS

The cash and investment balances in Wisconsin trust
funds are set forth in Table 2. A brief summary of their size,
function and character will roughly indicate the limits of
interfund borrowing.
The school trust funds were founded with the proceeds
from Federal land grants. There have been no accretions to
the Agricultural College Fund (300 thousand dollars) nor
to the University Fund (233 thousand dollars) during the
years 1920-45. The School Fund, which receives for invest­
ment monies reverting to the State from escheats, forfeitures,
and fines in counties, has grown steadily. The annual earn­
ing of all these trust funds goes for school operation.
Among the group of insurance funds, the State Insurance
Fund provides fire insurance for all State property and that
of cities, towns, and villages; the Life Fund provides insur­
ance for residents of Wisconsin; and the Deposit Fund pro­
vides for insurance of public funds in designated depositories.
All of these funds receive some type of “premium” payment—
and must be prepared to meet the financial contingencies for
which they were created.
The teachers’ insurance and retirement system was created
in 1911 and extensively amended in 1921. The State Em­
ployees’ Retirement and Municipal Employee Retirement
were established in 1943. All of these systems are operated
on a reserve basis, being supported by payroll deductions
from participants and by State or local taxes. The Teachers’
Insurance and Retirement Fund holds about 98 per cent of
the total balances in all pension funds.
The investments of the several trust funds are subject to
varying restrictions, the major one being that the Unemploy­
ment Trust Fund is invested by the Secretary of the U. S.
Treasury in the securities of the United States. Otherwise,
the bulk of the trust funds may he invested in such assets
as would be legal for domestic life insurance companies in
Wisconsin: Federal, state, local bonds; Canadian Dominion
and Provincial bonds; U. S. or Canadian public utility bonds;
first mortgages on improved or partially improved real estate
up to 50 per cent of fair cash value. Seventy per cent of the
investments of pension funds by the State Annuity and
Investment Board are to be made in Wisconsin. Within these
restrictions, and by specific legislative authorization, the
State Government can shift cash resources from one of its
agencies or functions to another by interfund borrowing
and provide a plan of repayment that will be both certain
and properly adjusted to the later expenditure needs of the
loaning agency or fund.
Page 7

FARM PRICE OUTLOOK
(Continued from Inside Front Cover)

perience similar to that of 1920-21 awaits us now.
FARM PRICES COLLAPSED IN 1920-21

Prices received by farmers in June 1920 averaged 234
per cent of the 1910-14 average. By December prices had
declined 36 per cent with a further decline to the following
June, making a total decline in one year of 52 per cent. The
farm price of wheat dropped from $2.56 per bushel in
June 1920 to $1.46 in December and declined further to
$1.20 in June 1921. Corn averaged $1.85 per bushel in June
1920, $0.67 in December, and $0.62 the following June.
Hogs reached an average of $20.12 per hundredweight for
mid-July 1919, had declined to $13.23 in June 1920, and to
$8.50 in December. Other agricultural commodities experi­
enced similar price adjustments. Will this experience be
repeated? Most observers say yes, but expect the price de­
clines to be smaller and more gradual than in 1920-1921.
Many similarities exist between the current farm price
situation and conditions prevailing after World War I.
Also there are many differences. Important similarities in­
clude the increased output capacity of farms, the relatively
high level of farm product prices, and the intense worldwide
demand for food at the close of the wars. The important
differences which lead most observers to expect a less drastic
deflation of farm product prices than occurred following
World War I include an anticipated high level of employ­
ment and incomes, Government commitments to support
prices of most farm products, less speculative accumulation
of inventories of farm products (an awareness that prices
can decline as well as rise), and a substantial backlog of
liquid savings held by consumers, some of which may he
spent to maintain a high level of consumption.
Of prime importance currently, as always, in determining
the future course of prices of farm products is the level of
income payments. If a high level of industrial production
and employment is maintained, the outlook for farm prices
is relatively favorable; if not, farm prices are likely to
experience precipitous declines. Even with high levels of
industrial production and employment, prices of farm prod­
ucts are expected to decline relative to prices of other com­
modities and services. This would be, in part, a readjustment
resulting from the relatively greater increase in prices of
farm products than in prices of other important groups of
commodities and services commonly experienced during wars
or other periods of sharply increased demand.
Parity prices have been a goal of some farm leaders for
many years and have been written into laws establishing
them as the official goal of the Government in its activities
affecting prices of farm products. To facilitate increased
production of products required for the successful prosecu­
tion of World War II, price supports were announced by
the Secretary of Agriculture for many farm products. Legis­
lation adopted during the war obligated the Government to
support prices of the commodities for which the Secretary
requested increased production during the war at 90 per
cent of parity1 for at least two years following official declara­
Page 8




tion of the end of the war (not yet declared ended).
Prices received by farmers on November 15, 1946, aver­
aged 124 per cent of parity. The actual price as a per cent
of the calculated parity price differed for each commodity
ranging from 78 and 92 per cent for potatoes and oats to
193 and 153 per cent for flaxseed and beef cattle. A drop
in farm product prices to the 90 per cent of parity level
would represent a decline from the present level of about
one-third. Since some commodities are not expected to de­
cline to support levels, the average price of all farm products
probably will continue above 90 per cent of parity for the
duration of the support price commitment.
A longer-run outlook for farm product prices is even more
heavily clouded by uncertainty. There is increasing evidence
that the large output of farm products during recent years
was due in large part to technological progress in agriculture
with unusually favorable weather making some contribution.
Further increases in production are anticipated with con­
tinued technological advances in agriculture. Unless demand
increases as rapidly as production, farm prices can be ex­
pected to follow a declining trend relative to prices of other
goods and services. Population still is increasing and will
provide some increase in demand. However, much of the
increase required to maintain farm product prices at a level
comparable to parity must result from a high per capita
consumption. With wartime incomes and shortages of in­
dustrial products, civilians consumed during recent years
from 10 to 15 per cent more food per capita than in 1935-39.
Continuation of a high level of employment and business
activity may provide sufficient demand to maintain the
average of farm product prices at about 90 per cent of
parity over a period of years. If, on the other hand, sub­
stantial unemployment should develop, it is quite possible
that the curtailed demands for farm products, in conjunction
with the large volume of production which is in prospect,
would result in prices materially below this level.
SHORT-RUN PROSPECTS GOOD

Recent weaknesses in the commodities markets—cotton,
grains, butter, eggs, and poultry—have dampened speculative
enthusiasm in many quarters but have been evaluated by
most traders as indicating a much less serious price readjust­
ment than occurred in 1920-21. While conceding generally
that farm product prices have passed their postwar peaks,
sufficiently strong demand is expected to prevail throughout
most of 1947 to sustain prices at a level, although below the
average for 1946, sufficiently high to yield a cash farm
income in 1947, possibly 5 per cent smaller than the record
23.9 billion dollars estimated for 1946. Production expenses
may increase further, with net farm income declining pos­
sibly 10 to 15 per cent. Prices are expected to weaken during
1947, largely as a result of factors operating to weaken de­
mand, both foreign and domestic. The high volume of pro­
duction of farm products during recent years is expected to
continue and will tend to depress prices.
general, parity is that price which bears the same relationship to
prices paid by farmers for commodities used in production, for family
maintenance, and for taxes and interest as prevailed during the 1910-14
period.

Business Conditions
A Review by the Federal Reserve Bank of Chicago

INDEX FOR THE YEAR 1946
AGRICULTURE

Farm Income and Indebtedness
Net Farm Income Levels Off. Apr., inside front
cover, 5-6.
Foreign
The Reconstruction of European Agriculture. Jan.,
1-3.
Prices and Production
A Feed “Crisis” Again. Mar., 1-3.
Confusion Rules Dairy Situation. June, 1-3.
Control of Agricultural Prices Continued. Sept.,
inside front cover, 5.
Farm Price Outlook. Dec., inside front cover, 8.
Livestock and Feeds Face Readjustment—I. July,
inside covers.
Livestock and Feeds Face Readjustment—II. Aug.,
5-7.
Propose Raising Parity Prices. May, 1-4.
The Meat Situation. Nov., inside covers.

FEDERAL RESERVE BANK OF CHICAGO

Directors and Officers, Federal Reserve Bank of
Chicago. Jan., inside back cover.
INDUSTRY

Industry Analyses
District Faces Urban Housing Crisis. Feb., 1-4.
Financial Trends in Meat Packing. Nov., 1-4.
Seventh District Coal Crisis. June, 4.
Reconversion
Reconversion in the Seventh District—III. Apr., 7-8,
inside back cover.
War and Postwar Manufacturing Employment
Trends. Dec., 1-4.
INTERNATIONAL FINANCE AND TRADE

Lend-Lease in Review. Feb., 5-8.
NATIONAL SUMMARY OF BUSINESS CONDITIONS

Feb., Mar., Oct., inside back cover.
BANKING AND FEDERAL FINANCE

Banking
Deposit Behavior in the Transition. Aug., 1-4.
Recent Money Market Developments. June, inside
front cover.
Seventh District Bank Debits Decline. Feb., inside
front cover.
Federal Finance
Federal Financial Outlook. Oct., inside front
cover, 8.
Results of the Victory Loan. Jan., inside front
cover, 8.
Summary of the Budget Message. Mar., inside front
cover, 7-8.
ECONOMIC CONDITIONS—GENERAL

Business Population
Business Population Expands. Mar., 4-6.
Economic Conditions
Full Employment: Comparison of Estimates. Oct.,
1-7.
Two Postwar Booms Compared. Sept., 1-4.
National Income and Product
Measuring National Income and Product. July, 6-8.



RETAIL TRADE AND CONSUMER CREDIT

Credit
Banks Expand Consumer Instalment Financing.
Aug., inside covers, 8.
Credit Re-emerges as Spending Factor. July, 1-3.
Retail Credit Expanded in 1945. July, 4-5.
Trade
Consumer Spending Since V-J Day. May, inside
covers, 8.
STATE AND LOCAL FINANCE

Federal Grants
Federal Aid for Public Airports. June, 5-7.
State Finance Analyses
Illinois State Surplus and Debt—I. Apr., 1-5.
Illinois State Surplus and Debt—II. May, 5-7.
Illinois State Surplus and Debt—III. June 8, inside
back cover.
Wisconsin State Finance—I. Sept., 6-8, inside back
cover.
Wisconsin State Finance—II. Nov., 5-8.
Wisconsin State Finance—III. Dec., 5-7.
Unemployment Compensation
Financing Unemployment Compensation. Jan., 4-7.




SEVENTH FEDERAL

IOWA

RESERVE DISTRICT