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BUSINESS CONDITIONS
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FEBRUARY, 1947

Agricultural Research to Expand
Extensive Program Planned Under 1946 Federal Act

The President, in his recent economic report to Congress,
stated that the United States will this year invest more than
one billion dollars in research. American industry in 1940
employed over 70,000 people in research work of various
types, in over 2,200 laboratories, at an annual cost of 300
million dollars, according to the National Resources Plan­
ning Board. Industrial expenditures for this type of work
have increased materially in recent years. Total expenditures
on agricultural research from Federal, state, and local funds
averaged about 37 million dollars annually in the late
’thirties. Also,' individuals and private concerns expended
unknown but significant amounts on agricultural research.
Such private expenditures have increased in recent years,
particularly in the production of hybrid seeds. However,
agriculture, as well as other small businesses, probably will
continue to rely largely on public funds for research.
Federal aid to the scientific investigation of the many
phases of agricultural production and marketing operations
was given strong support by the last Congress which passed
an act authorizing increased appropriations for these pur­
poses in an amount of 9.5 million dollars for the fiscal year
ending June 30, 1947, increasing to 61 million dollars for the
year ending June 30, 1951. With the intent of assuring agri­
culture a position in research equal to that of industry, and
thereby aiding in the maintenance of an equitable balance
between agriculture and other sections of the economy, the
Congress declared its policy to promote the efficient produc­
tion and utilization of products of the soil as essential to the
health and welfare of our people and to promote a sound and
prosperous agriculture and rural life as indispensable to the
maintenance of full employment and national prosperity. For
the attainment of these objectives, the Secretary of Agricul­
ture was authorized and directed to conduct and stimulate
research into the laws and principles underlying the basic
problems of agriculture in its broadest aspects.
Although the scope of the legislation is very broad, author­
izing research on almost any conceivable agricultural prob­
lem, particular attention is devoted to the industrial utiliza­
tion and marketing of farm products. Included in the re­
search activities authorized are: the discovery, introduction,
and breeding of new plants and crops, particularly those that
may be utilized in the chemical and manufacturing indus­
tries, and of improved farm animals; investigations into
human nutrition, the nutritive value of agricultural com­
modities, and changes in nutritive values that occur during
production, distribution, processing, and preparation for con­
sumer use; conservation of land, forest, and water resources;
and the development of more efficient farm buildings and
machinery.
Emphasis is placed on marketing research by directing that
certain of the funds appropriated must be applied to studies
in this field. Among the specific activities authorized in the



marketing of agricultural products are: the determination of
the best methods of handling, processing, packaging, trans­
porting, storing, and distributing farm products; the deter­
mination of marketing costs; the development and improve­
ment of standards of quality; the development of new or
expanded markets and uses for farm products; the collection
and dissemination of market information, including outlook
information; aids in the extension of consumer education;
the conducting of programs designed to eliminate artificial
trade barriers; and assistance in the improvement of trans­
portation and market facilities. In addition to research studies
in marketing, the provision of services such as inspecting and
grading agricultural products and providing market news
services is authorized. From these types of activities it is pre­
sumed that the costs of marketing can he reduced and the
total demand (particularly the industrial demand) for farm
products increased.
PROGRAM IS FLEXIBLE

The Secretary of Agriculture has wide discretion in the
execution of the program. He is directed to make full use of
the facilities of the Federal Government, the state aericultural experiment stations, and the Federal and state Exten­
sion Service. Beyond this he is authorized to make agree­
ments with states and agencies of states, private firms, institu­
tions, and individuals for the purpose of conducting research
and service work.
Part of the funds authorized to be appropriated by the
Federal Government must be allocated to the states. The
states must, in turn, match part of the funds available to
them from the Federal Government with new funds from
state sources. This “matching” feature has been used ex­
tensively by the Federal Government in providing financial
aid for activities of this type as a means of increasing the
total resources applied to the solution of certain problems
and to encourage the efficient use of Federal funds by state
agencies.
The authority of the Secretary of Agriculture to contract
with private research organizations, individuals, or firms
which are well qualified in his judgment to conduct research
or service work on some of the projects undertaken, is ex­
pected to facilitate the studies of the marketing and the in­
dustrial utilization of farm products. In these fields of activity
the facilities and personnel available in Federal agencies and
state experiment stations are apt to prove inadequate to carry
out the size of program visualized.
Officials in the Department of Agriculture who are charged
with the responsibility for developing the research program
have moved with deliberation, recognizing the dangers in­
herent in a whirlwind expansion of research projects.
(Continued on Inside Back Cover)

Post V-J Day Wage and Salary Trends
Weekly Money, Real Earnings Diverge After Price Decontrol

Average weekly money earnings of employees in the in­
dustries of the Seventh Federal Reserve District states of
Illinois, Indiana, Iowa, Michigan, and Wisconsin now con­
siderably exceed their V-J Day levels, hut average weekly
real earnings are generally lower. The postwar rise in weekly
money earnings in manufacturing has been over 12 per cent,
and in non-manufacturing even more. In several individual
industries, particularly in the non-manufacturing and soft
goods manufacturing groups, employees have regained or
exceeded their wartime peaks. First round wage increases
have not been sufficient, however, to offset the post V-J Day
reduced work week in the District’s durable goods manufac­
turing industries; weekly money earnings in these industries,
therefore, are still considerably under those of the flush

A 10 per cent increase in wage rates will roughly restore
average weekly real earnings in manufacturing to V-J Day
levels if prices remain constant. A further advance of 5 per
cent in the cost of living would require a 15 per cent rise in
wage rates to re-establish end-of-war real earnings; a decline
of 5 per cent in the cost of living correspondingly would
reduce the required wage increase to less than 5 per cent.
These estimates assume a continuation of the current work
week and apply to real weekly earnings both before and
after taxes. In the case of income taxes, they allow for the
20 per cent cut currently proposed in Congress.

war years.
Second round wage increases and some tendency toward
a longer work week in the last few months of 1946, par­
ticularly in industries which have been handicapped by
material shortages, should result in continued rising average
weekly money earnings in the foreseeable future. New wage
settlements in such industries as meat packing, rubber, and
oil, together with estimates of future wage agreements else­
where, suggest that second round wage increases will range
between 10 and 15 per cent. Such increases in themselves
will be sufficient to expand over-all weekly money earnings
in manufacturing from 8 to 12 per cent over current levels.

As outlined in the January 1947 issue of Business Condi­
tions, the cost of living throughout the District from V-J
Day to July 1946 showed only minor increases. Elimination
of price control led to increases of eight to 15 per cent in
living costs in leading District cities. At the outset of 1947,
for manufacturing as a whole, average weekly real earnings
in the District states were more than 3 and 15 per cent below
their V-J Day and wartime levels, respectively. In all in­
stances, however, current real earnings remain above those
in 1939.
The decline in weekly real earnings since July 1946 is
the major argument underlying organized labor’s current
demands for second round wage increases. Price rises since
decontrol have probably priced many persons out of the
market for individual goods, thereby contributing toward
building up surpluses of these goods in spite of high over-all
money expenditures. Labor argues that second round in­
creases are necessary to prevent this pricing-out-of-the-market
process from assuming even more serious proportions. On
the basis of the first round pattern to date, approximately
one-fifth of manufacturing workers and about three-fifths of
employees in trade, service, and finance will receive no
second round raises. These employees, the preponderance
of whom probably do not belong to trade unions, are there­
fore in a particularly vulnerable salary-price relationship
position.
It is clear to more people now than ever before that further
increases in money earnings will benefit employees receiving
them only if the prices of commodities which they buy are
not again raised correspondingly. Industry spokesmen point
to the price rises which followed first round wage increases
and claim the process will be repeated if another round of
wage increases ensues. Under control, price increases could
not precede wage increases. Now that price control no longer
exists, industry may raise prices in anticipation of wage
increases or other rises in costs. Insofar as managements
already have anticipated second round wage increases in
their post-OPA price advances, and there is some scattered

AVERAGE WEEKLY EARNINGS OF WAGE EARNERS
IN MANUFACTURING IN THE UNITED STATES AND
4 SEVENTH FEDERAL RESERVE DISTRICT STATES,
1939, JANUARY 1945, V-J DAY, AND NOVEMBER 1946
Weekly Earnings
Money
1939 .................................
January 1945 .............
V-J Day (August
1945) .........................
November (or Octo­
ber*) 1946 ................
Real (before taxes)1
1939 .................................
January 1945 .............
V-J Day (August
1945) ........................
November (or Octo­
ber*) 1946 ...............
Real (after Social Se­
curity and Federal in­
come taxes for a family
of four)1
1939 .................................
January 1945 ..............
V-J Day (August
1945) .........................
November (or Octo­
ber*) 1946 ................

United
States

Illinois

Indiana

Michi­
gan

$23.86
47.50

$26.70
50.19

$25.78
48.55

N.A.
$56.92

$26.09
48.33

41.72

44.28

46.42

43.98

44.33

45.65

51.33

41.15*

53.36*

49.09

31.03
48.32

34.23
50.95

34.33
50.36

N.A.
58.56

33.66
49.32

Wiscon­
sin

41.72

44.28

46.42

43.98

44.33

39.05

43.21*

36.45*

46.85*

41.99

30.72
45.91

33.88
47.91

33.98
47.68

N.A.
54.17

33.33
46.68

40.50

42.64

44.36

42.54

42.69

38.23

41.52

36.09*

44.80*

40.55

^Real earnings were determined jy deflating money earnings reported
to the several states by the consumers’ price index of the U. S. Bureau
of Labor Statistics for the principal city in that state. August 1945
(V-J Day) was used as the base in computing real earnings.
N.A.—Not available.
SOURCES: U. S. Bureau of Labor Statistics, Illinois Department of
Labor, Indiana Employment Security Division, Michigan Department of
Labor and Industry, and Industrial Commission of Wisconsin.




LIVING COSTS AND EARNINGS

Page 1

evidence of this, new wage gains may not result in propor­
tionate increases in prices of products affected. To the extent
that this condition prevails and profit prospects allow, pos­
sibilities of collective bargaining frictions and second round
work stoppages would seem reduced.
Another means of avoiding further price rises is through
increased output per man hour. Over short periods of time,
the major factors influencing output per man hour are avail­
ability of materials and worker efficiency. Data are not
available on which to base quantitative estimates of probable
increased output per man hour over the course of the next
year. Although scarcities still exist, materials are in general
flowing more smoothly than they did a year ago. This may
lead to a repetition of the post-World War I situation in
which output per man hour, after leveling during the war,
spurted for a few years as industry surmounted its problems
of reconversion and took full advantage of wartime im­
provements in technology.
STATE MANUFACTURING PATTERNS

Average weekly money earnings in the manufacturing
industries of Illinois, Iowa, and Wisconsin exceeded both
the V-J Day and January 1945 levels in November 1946.
This contrasts with the experience of Indiana and Michigan,
which have followed the pattern set by the United States
as a whole in not yet having regained the January 1945 level,
although remaining considerably above that existing at V-J
Day (see accompanying table). This contrast in behavior
results primarily from the differing combinations of indus­
tries in the two groups of states. Indiana and Michigan have
much higher proportions of durable to total manufacturing
employment than Illinois, Iowa, and Wisconsin. As already
mentioned, the trend toward a shortened work week between
V-J Day and the last quarter of 1946 exercised its greatest
depressing influence on weekly money earnings in the
durable goods industries.
Many of these industries suffered from material shortages
and were forced to cut the actual work week below the basic
schedule of 40 hours to which they had converted from the
wartime 48-hour schedule. Another factor influencing uni­
formity within the same industry regardless of location is
industry-wide bargaining over wage rates and other condi­
tions of work. For example, post V-J Day trends in weekly
money earnings in the meat packing industry are very similar
in Illinois and Wisconsin; the same thing is true of blast
furnaces and rolling mills in Illinois, Indiana, and Michigan,
and automobiles in Michigan and Wisconsin.
In all the District states except Michigan average weekly
real earnings before and after social security and Federal
income taxes1 were lower at the end of 1946 than they had
been at V-J Day (see Chart 1). The automobile industry,
which accounts for almost one-half of Michigan’s manufac­
turing employment, started reconverting to peacetime pro­
duction early in 1945. Average hours worked per week and
average weekly earnings consequently had fallen relatively
much more than in other manufacturing industries by V-J
1Social security and Federal income taxes are computed here on the basis
of a family of four including one wage earner.

Page 2



Day. This situation largely explains the singular behavior
in Michigan’s weekly real earnings trends. Conversely, the
relatively poor showing of average weekly real earnings in
Indiana is partly due to the predominance of iron and steel
and to the fact that V-J Day was a relatively high base for
that industry. Because the choice of a base date necessarily
is somewhat arbitrary, Chart 1 and succeeding charts show
figures for several dates: prewar, war, V-J Day, and the
latest available month. Available evidence indicates that both
during the war and since V-J Day, women workers in District
manufacturing establishments have experienced somewhat
greater relative gains in average weekly money earnings than
men. In non-manufacturing, the reverse appears to be true.
The manufacturing trend has resulted largely from the in­
creased demand for women workers and the “equal pay for
equal work” precedent set by the War Labor Board. In non­
manufacturing the result reflects initially the loss of lower
paid male workers to the armed services and war work and
more recently the return of men at higher wage levels to
these same industries.
TRENDS IN INDUSTRIAL AREAS

Manufacturing in Chicago and Milwaukee showed de­
creased weekly real earnings between V-J Day and the
end of 1946, whereas the reverse was true of Detroit (see
Chart 2). The explanations of these trends are similar to
those underlying the respective state trends and reflect the
importance of each city in its state economy.
Variations among manufacturing industries in a given
industrial area are shown in Chart 3 covering Chicago and
Milwaukee. Wage increases based on cost of living would
have to vary considerably to bring present real earnings in
the various industries to a par with the level of any given
previous date.
Real earnings trends in manufacturing are available for
sixteen smaller industrial areas in Illinois, Michigan, and
Wisconsin (see Chart 2). Considerable variations exist in
CHART

I

AVERAGE WEEKLY REAL EARNINGS IN MANUFACTURING FOR THE U. S.
AND FOUR STATES IN THE SEVENTH FEDERAL RESERVE DISTRICT
1939,

JANUARY 1945,

V-J DAY,

(AUGUST

BEFORE

TAXES

PER CENT

1945

AND

NOVEMBER

AFTER SOCIAL SECURITY AND
FEDERAL INCOME TAXES FOR
A FAMILY OF FOUR
per CENT
LEGEND
_____ UNITED STATES
--------- ILLINOIS
MICHIGAN
WISCONSIN

SOURCES-

SEE TABLE

1946

* 100)

CHART

2

AVERAGE WEEKLY REAL EARNINGS BEFORE TAXES
SELECTED MANUFACTURING INDUSTRIES, CHICAGO AND MILWAUKEE
1939,

JANUARY

1945,

V-J DAY, AND

(AUGUST

CHICAGO
CENT

1945

NOVEMBER

1946

* IOO)

MILWAUKEE
PER

CENT

—n iso

0—0- CLOTHING

«

again in manufacturing.
Other non-manufacturing industries such as transportation
and public utilities have more nearly resembled manufactur­
ing in post V-J Day trends in hours worked per week, per­
centage of workers receiving first round wage increases, and,
consequently, in average weekly money and real earnings.
As with manufacturing, individual non-manufacturing in­
dustries showed similar trends in the several Seventh District
states.
REAL EARNINGS BEFORE AND AFTER TAXES

SOURCES

SEE TABLE

war and postwar earnings amplitudes among these areas.
They result from differing combinations of individual in­
dustries, uneven impact of the war particularly with respect
to the influx of war plants and their continuance in produc­
tion after the war, differences in extent of unionization, and
variations in severity and length of work stoppages.
Although wartime real earnings levels have not been re­
gained in any of the sixteen areas, in nine areas V-J Day
levels have been exceeded. The location in Michigan of five
of these nine areas is partly due to the influence of auto­
mobile manufacturing and to the fact, already mentioned,
that earnings in this industry were relatively depressed on
V-J Day, the base used for purposes of this article.
NON-MANUFACTURING INDUSTRIES

Non-manufacturing industries such as retail trade, hotels,
and laundries normally have a 48-hour work week and have
experienced little or no reductions in hours worked per week
since V-J Day. In many areas some workers in these indus­
tries have had first round wage increases. Consequently,
both weekly money and real earnings are now considerably
above V-J Day levels.
Under the wartime pressure for munitions and other goods
used by the armed forces, manufacturing industries increased
the length of the work week and wage scales to a greater
extent than most non-manufacturing industries. Conse­
quently, earnings increases in trade and services were less
than those in manufacturing. Since V-J Day, however, the
reverse has been true. Faced with heavy demands for their
commodities and with manpower shortages, trade and service
industries have experienced smaller declines in hours worked
per week than manufacturing.
Trade and service industries, however, again stand the
risk of lagging behind. As already indicated, a greater per­
centage of manufacturing workers received first round in­
creases and the pattern will probably be repeated during the
second round. Hours worked per week are also rising once



In 1939 manufacturing workers in the Seventh Federal
Reserve District states had average weekly money earnings
in the neighborhood of $25. In most non-manufacturing
• industries the average was even lower. The prewar allow­
ances of $2,500 for married persons and $400 for each
dependent exempted most workers from the income tax,
leaving them subject only to the Social Security tax of one
per cent of their weekly pay.
During the war, money earnings among manufacturing
workers in the District reached an average in excess of $50
a week. This approximately doubled money earnings; how­
ever, it did not result in an equivalent increase in real
earnings. The cost of living rose slightly more than 50 per
cent from 1939 to December 1946, and a greater number of
workers have begun to pay income taxes because of lowered
wartime exemptions. For example, between 1939 and Novem­
ber 1946 weekly money earnings of the average Wisconsin
manufacturing worker went up 88 per cent while real earn­
ings before taxes increased only 25 per cent and, if he had
a family of four, only 21 per cent after taxes. The impact
of taxes becomes greater at any income level the fewer the
dependents. It also increases for any given number of de­
pendents as income rises.
Reduced income taxes in 1947—already promised by Re­
publican Congressmen—, the slowing up and eventual re­
versal of the rise in cost of living, and second round wage
increases all point to an end of the recent downward trend
in real earnings in the coming months. If employment can
be maintained at high levels, these factors will support in­
creased consumer expenditures, both in terms of the money
and physical quantities involved.
CHART S

AVERAGE WEEKLY REAL EARNINGS BEFORE TAXES IN MANUFACTURING
FOR SIXTEEN INDUSTRIAL AREAS IN THE SEVENTH FEDERAL RESERVE DISTRICT
( AUGUST 1945 ■ IOO)

SOURCES-SEE TABLE.

Page 3

Debt Retirement Halts Deposit Expansion
Large Banks Show Greater Decline

The wartime growth in hank deposits, the greatest ever
recorded in America’s financial history, came to a halt and
was reversed in 1946. Treasury debt operations, the primary
factor contributing to the wartime deposit expansion, brought
about in this last year a sharp reduction in bank holdings of
total deposits, as debt expansion gave way to debt retire­
ment. In reducing its working balance to a level consistent
with the smaller volume of peacetime expenditures the
Treasury conducted a program of cash redemption of matur­
ing Government securities, using for that purpose the large
war loan accounts which had been built up during the
Victory Loan Drive. Inasmuch as more than 75 per cent of
the Government securities redeemed by the Treasury in cash
were held by the commercial banking system and the Federal
Reserve banks, a considerable reduction occurred in total
deposits.
Although United States Government deposits declined
sharply throughout the nation during 1946—88 per cent at
weekly reporting member banks—deposits of individuals and
businesses continued to expand, but at a slackened rate.
Where the Treasury’s debt retirement program involved
holdings of nonbank investors, it caused not a drop in total
deposits but rather a transfer of funds from war loan accounts
to active private accounts, thus explaining the continued
expansion in deposits of individuals and businesses. Also
important in tending to offset the post V-J Day decline in
public bank credit and tending to increase private deposits
has been the considerable expansion since the end of the
war in private bank credit other than for purchasing or
carrying Government securities, including business loans,
mortgages, and consumer credit.
Banks in the Seventh Federal Reserve District shared in
these broad deposit movements and in the factors influencing
them. Weekly reporting member banks in the District had
a gain in 1946 of about 8 per cent in deposits of individuals
and businesses, while Government deposits dropped 88 per
cent. These banks showed declines in all categories of
Government security holdings with the exception of U. S.
Bonds. At the same time, however, bank loans other than
security loans increased, particularly during the second half
of the year, and thus contributed to the growth of private
deposits in the District.
The last survey of estimated ownership of private demand
deposits in the Seventh District as of July 31, 1946, provides
a more detailed analysis of deposit trends for the first half of
1946. From January 31 to July 31,1946, total demand deposits
of individuals and business firms in the District rose 3.3
per cent and reached a level of 10,954 million dollars. Unlike
the preceding six-month period, when there were sharp
fluctuations in deposit ownership, the six-month period end­
ing July 31, 1946, was marked by great stability among all
of the ownership components.
Page 4



Manufacturing and mining accounts, for example, reversed
a severe downward dip of the previous period and gained
1.5 per cent, due to the general overcoming of reconversion
problems and some increase in bank lending, which was
partially the result of work stoppage and rising costs and
prices. Trade accounts gained 5.5 per cent as compared with
13 per cent in the previous period, and financial business
deposits increased 3.6 per cent as compared with 20 per cent.
Personal deposits continued to increase at a faster rate than
combined business deposits, although the rate of increase
appeared to be declining. Contributing to this behavior in
personal deposits are continued high levels of income and
substantial cashing of war bonds, which appear to have more
than counteracted increases in spending. To an increasing
extent, moreover, expenditures are being financed through
the use of consumer credit without requiring the reduction
of deposits. The accompanying table shows estimated private
deposit ownership in the Seventh District on July 31, 1946,
for all commercial banks and for those with demand de­
posits of individuals and businesses over 100 million dollars.
DEPOSITS IN THE LARGE BANKS

Although the upward trend in total deposits for the bank­
ing system has been reversed, one major wartime trend has
continued. During the war, deposits of the smaller banks
grew more rapidly than those of larger city institutions. In
recent months deposits of country banks have continued to
expand somewhat while deposits of reserve and reserve city
banks declined. One reason is that war loan accounts have
represented a smaller segment of deposits at small than at
large banks, so that their 1946 decline has had less effect
on total deposits. Time and demand deposits other than war
loan accounts, however, have also tended to increase more
ESTIMATED OWNERSHIP OF DEMAND DEPOSITS
OF INDIVIDUALS AND BUSINESSES
ELEVEN LARGEST BANKS AND ALL COMMERCIAL
BANKS, SEVENTH DISTRICT, JULY 31, 1946
Eleven Largest Banks All Commercial Banks
Type of Owner
Manufacturing and mining....
Public utilities ...........................
Retail and wholesale trade....
All other nonfinancial
businesses ................................
Total nonfinancial businesses
Insurance companies ..............
Trust funds of banks..............
All other financial businesses
Total financial businesses......
Nonprofit organizations ........
Personal (including farmers)
Total demand deposits of
individuals and businesses..

Millions of
Dollars
1,829
375
524

Per Cent Millions of Per Cent
Dollars
41.0
2,790
25.5
8.4
534
4.9
11.8
1,823
16.6

266
2,994
164
158
325
647
147
670

6.0
67.2
3.7
3.5
7.3
14.5
3,3
15.0

633
5,780
236
221
591
1,048
369
3,757

5.8
52.8
2.2
2.0
5.4
9.6
3.4
34.2

4,458

100.0

10,954

100.0

rapidly at country banks than at central reserve and reserve
city institutions.
This difference between deposit behavior in large and
small banks has been clear-cut in the Seventh District. Banks
with demand deposits of individuals and businesses over 100
million dollars experienced a gain of 60 per cent in these
deposits in the war years, December 31, 1941, to July 31,
1945, and a 3.3 per cent decline in the year following V-J
Day, July 31, 1945, to July 31, 1946. The remainder of the
banks in the District had wartime gains of 127 per cent and
a continued gain of 17 per cent in the year following V-J
Day.
The inverse correlation between deposit growth and size
of bank is largely a function of uneven distribution of the
increment among the various types of depositors. As deposit
ownership surveys made clear, not all types of depositors
have expanded their cash assets at the same rate. In some
lines of economic activity demand deposits actually showed
a net decline, with the result that banks which hold heavy
concentrations of deposits of these types of businesses ex­
perienced relatively little deposit growth in recent years.
Deposit ownership data for the largest District banks—those
with deposits over 100 million dollars—available for seven
survey dates covering a period of three years illustrate this
relationship between deposit growth and deposit ownership.
The eleven banks in the Seventh Federal Reserve District
with demand deposits of individuals and businesses over
100 million dollars held 4,458 million dollars in private
demand deposits, or slightly over 40 per cent of the District’s
total on July 31, 1946. More than 65 per cent of the Dis­
trict’s manufacturing and mining accounts, 70 per cent of
its public utility accounts, and almost 62 per cent of its
financial business accounts are held in these eleven large
banks. On the other hand, less than 29 per cent of the
retail and wholesale trade deposits and less than 18 per cent
of personal deposits are in these banks.
In the accompanying chart cumulative percentage changes
are shown for the eleven banks combined in total demand
deposits of individuals and businesses and in the major

CUMULATIVE PERCENTAGE CHANGES IN OWNERSHIP
OF PRIVATE DEMAND DEPOSITS
ELEVEN LARGEST BANKS IN THE SEVENTH DISTRICT
JULY 31, 1943 TO JULY 31, 1946




/"DEMAND DEPOSITS

V PUBLIC UTILITIES

ownership components from the date of the first ownership
survey, July 31, 1943, through each of the six successive
surveys. It can be seen that although the total deposit figure
remained relatively constant, reaching a peak of 4,610
million dollars on January 31, 1945, there were severe fluc­
tuations in deposit ownership. Manufacturing and mining
accounts from July 1943 to July 1946 dropped about 400
million dollars or almost 20 per cent. The major decline in
these accounts occurred between July 1945 and January
1946, a period of heavy reconversion for these businesses.
However, even in the following six-month period, when
banks in the District as a whole registered a slight gain in
these deposits, the eleven large banks experienced a further
decline. Since, as is indicated in the table, manufacturing
and mining accounts constitute a much larger proportion,
40 per cent, of total deposits in the large banks than they
do in the rest of the banks in the District, the sharp decline
in this class of account which occurred throughout the
nation following V-J Day worked much more strongly in
pulling down total private demand deposits at the eleven
banks than at smaller banks.
Public utility accounts also exerted a downward influence
on large bank deposits. These accounts dropped sharply in
the first six months after July 1943, and although they gained
in 1944, did not reach the mid-1943 level. After V-J Day
these accounts dropped again, so that by July 31, 1946, they
were 13 per cent below their level of three years previous.
Although they fluctuated during the three years, personal,
trade, and financial business deposits made heavy gains,
slightly more than counteracting the losses by these eleven
banks in manufacturing and public utility accounts. Per­
sonal deposits in those three years rose almost 200 million
dollars, or over 40 per cent, the greatest percentage gain
being made in the six months following V-J Day. Deposits
of retail and wholesale trade establishments in the large
banks gained almost 29 per cent in the three years, reaching
a peak in January 1946. As mentioned above, personal
and trade accounts, which increased more rapidly than the
other ownership components through the war years, are
relatively less important at large banks than at small, con­
tributing to the disparate deposit trends as between large
and small banks.
Although ownership data are not yet available for the period
since July 31, 1946, figures showing current trends in total
deposits at these eleven banks are available. Since mid-1946
through the first week of January 1947, deposits of individ­
uals and businesses at the eleven banks combined made an
almost imperceptible gain—about 1 per cent. However, total
deposits at these banks have continued to decline because
of continued rapid reduction in war loan deposits and a
small loss in interbank deposits. If in the coming months
there should develop a movement of funds out of the hands
of individuals and small retail businesses into the possession
of large manufacturing concerns, the small banks may ex­
perience a reduction in their relative share of private de­
posits. Conversely, if the trends of the past year should
continue, the smaller banks’ deposits should continue to
grow both absolutely and relatively to deposits in the larger
banks.
Page 5

Indiana State Finance — II
State Credit Resources Used Sparingly

Despite the fact that the State of Indiana has seldom in
the past one hundred years been without long- or short-term
obligations to financial institutions or investors, since the
adoption of the Constitution of 1851 borrowings have been
of diminishing relative significance. The State government
early acquired its knowledge of the consequences of the
excessive use of government credit by way of concrete ex­
perience and not by precept or horrendous comparison with
other states. Loans authorized for public works and particu­
larly the Wabash and Erie Canal were made in the latter
1830’s; default followed shortly thereafter. The adjustment
and refinancing of an unmanageable debt burden was under­
taken in 1846 and 1847. When the Constitution of 1851 was
adopted, it reflected the well crystallized sentiment against
the use of credit for public works which emerged from a
recent and vivid experience.
The 1851 Constitution prohibits the State from incurring
debt except to meet casual deficits, to pay interest on existing
state debt, to repel invasion, suppress insurrection, and
defend the state in time of war. The section reads as follows:
Sec. 5.—No law shall authorize any debt to be contracted, on
behalf of the State, except in the following cases: To meet casual
deficits in the revenue; to pay the interest on the State debt; to repel
invasion, suppress insurrection, or, if hostilities be threatened, provide
for the public defense.l

This provision has reasonably effected the result intended
—it has prevented Indiana from using credit for large spend­
ing programs including such public works as highways and
waterways. It has not, however, been construed to prohibit
various agencies of the State including the Board of Agri­
culture, Indiana University, and Purdue University, from
pledging a variety of real properties such as exhibition halls,
armories, stadiums, hospitals, residence halls, and other edu­
cational buildings as security for loans to be serviced through
earnings, fees, state appropriations, and even from the levy of
a state property tax.
AGENCY BORROWING

A distinction between the State and its agencies, even
though they may be wholly its creatures, is recognized which
Constitution, Article 10, Section 5. Sections 2 and 6 also contain refer­
ences to debt policy; the former dedicates proceeds from the sale of public
works owned by the State and annual surpluses from general State opera­
tion to debt retirement; the latter prohibits the assumption by the State of
local or corporate debts. These sections read as follows:
“Section 2. Payment of Public Debt. All the revenue derived from the sale
of the public works belonging to the State, and from the net annual in­
come thereof, and any surplus that may, at any time, remain in the
treasury, derived from taxation for general State purposes, after the pay­
ment of the ordinary expenses of the government, and of the interest on
bonds of the State, other than bank bonds, shall be annually applied, under
the direction of the General Assembly, to the payment of the principal of
the public debt.”
“Section 6. County Indebtedness for Stock—State Assumption of Debt. No
county shall subscribe for stock in any incorporated company, unless the
same be paid for at the time of such subscription ; nor shall any county
loan its credit to any incorporated company, nor borrow money for the
purpose of taking stock in any such company; nor shall the General As­
sembly ever, on behalf of the State, assume the debts of any county, city,
town or township, nor of any corporation whatever.”




permits these agencies to pledge assets and use state ap­
propriations and taxes for debt service without, in a legal
sense, contracting a debt in behalf of the State and thus
exposing the transaction to the constitutional prohibition.
Strictly speaking, not only is the state not legally obligated
by such transaction, but the credit used by the issuing agency
is limited by statute to a pledge of property acquired or to
be acquired with the proceeds of a given loan and to the net
income of such property. It has been noted in earlier articles
in this series that a roughly similar interpretation has been
placed on the borrowing of educational institutions in both
Wisconsin and Illinois.
The loans of the universities and colleges have been in
largest measure for the plant of athletic departments, dor­
mitories, and student recreation buildings—facilities which
readily lend themselves to separate operation and accounting.
Thus earnings, sales, or fees may be specifically earmarked
to a given facility and used to cover direct operating expenses
and that portion of overhead costs required for interest and
principal repayment. The security to lenders involved in the
pledge of a given physical asset is thus enhanced by the
sequestration of all net earnings from operations. To such
economic and legal assurances may be added the moral
prestige and standing of the borrower. This latter considera­
tion is no doubt a dominant factor in loans solely secured by
a pledge of property and paid from “any income of the
university.” In 1937 the Attorney General held that “any in­
come” may include proceeds from the educational improve­
ment tax levied from time to time, if the indebtedness con­
tracted was for a similar purpose, namely, “for improvements
and additions to the physical plant under the control of the
Board of Trustees,” Beginning in 1943, the legislature has
appropriated approximately one hundred thousand dollars
for interest and principal payment on the bonded indebted­
ness of Indiana University. Neither of the examples cited
can be construed as an assumption of responsibility on the
part of the State for university indebtedness.
The total of outstanding borrowings for higher educational
institutions in Indiana has never been in excess of 7 million
dollars or approximately 60 per cent of the total annual ex­
penditures for the universities and colleges; in recent years
the average relationship has been much lower, about 30 per
cent. Past experience is not, however, in this case an in­
fallible guide for the future. The proportion of high school
graduates seeking higher education is steadily growing. As a
result of educational aids extended to veterans, the current
enrollments at universities are far in excess of any previous
records. There is responsible opinion holding that, given a
continued high level of income payments, there will be even
after the veterans’ program has expired, far greater demands
for advanced general and specialized training than ever be­
fore. It also seems probable that the proportion of students
cared for in private institutions will diminish because of re-

••

cent and apparently continuing declines in endowment fund
earnings and the effect of the high level of Federal income
tax rates on the accumulation of personal fortunes and
estates from which gifts to endowed institutions are made.
These considerations point to an immediate and pressing
need for larger physical plants for education, not only at
State supported institutions in Indiana hut elsewhere as well.
Such expansion will undoubtedly be implemented with the
financial tools which have been employed in recent years.
The constitutional restriction on state borrowing and the
demands on current revenue for other state functions may
be expected to impose the financing of whatever new capital
outlays expansion requires on the type of credit instruments
these institutions have pioneered.
The loans of the State Fair Board (Indiana Board of Agri­
culture) and the Armory Board are similar to those of the
universities. Prior to 1921, the Board of Agriculture was a
private non-profit corporation which had the functions of
promoting the science of agriculture and of operating the
Indiana State Fair. In that year the corporation was dis­
solved, and a State agency with a like name took over the
*

INDIANA
OUTSTANDING STATE DEBT 1920-45
(In millions of dollars)

Fiscal Year1

Total2

Deficit3

1920
1921
1922
1923
1924

.2
.3
1.8
3.0
3.8

—
—

Institutions4

State Fair
Board5

BORROWING FOR CASUAL DEFICITS
Armories6

.2
.2
.2
.2
.2

1.5
1.8
2.5
2.0

.1
.1
1.0

.2
.4
.7
1.2
1.1

1.0
1.0
1.0
.9
.8

—
N.A.
N.A.
N.A.
N.A.
N.A.

2.1
2.6
2.3
2.2
2.1

.8
1.0
1.0
.9
.9

1.6
1.5
1.4
1.3
1.2

—
—

—

1.1

,

—
—

1925
1926
1927
1928
1929

3.2
1.4
1.7
2.1
1.9

1930
1931
1932
1933
1934

4.5
5.1
4.7
4.4
4.2

1935
1936
1937
1938
1939

3.9
4.4
5.7
5.9
9.1

___
—
—
—
—

2.1
2.8
4.1
4.3
7.0

7*
.6*
.5*
4*
.8*

1.1
1.0
1.1
1.2
1.3

1940
1941
1942
1943
1944

8.9
8.5
7.8
7.4
6.9

_
_
—
—
—
—

6.8
6.5
6.1
5.9
5.4

.8
.8
.7
.6
.6

1.3
1.2
1.0
.9
.9

1945

6.4

—

5.1

.5

.8

_
_
—
—

—

.

—
—

—

—

1For years 1920-33, indebtedness is shown as of September 30, and in
1934 and thereafter, as of June 30.
-’Does not include interfund borrowing and loans from trust funds.
8Consists of bank loans for current ordinary expenses of the State
government.
4Until 1928 the entire indebtedness in this category consists of loans
for a hospital and dormitories at Indiana University ,* in 1929 loans
were made 'or dormitories at Purdue University, and in 1930 for
dormitories at the two normal colleges. In 1930 and thereafter, approximately one-half of the total debt is for Indiana University, and
the greatest part of the second half is for Purdue University. Loans
were also made for gymnasium, Union Buildings, Halls of Music, and
Education and Administration Buildings.
5Was called the Board of Agriculture prior to 1941.
°Includes the total debt of the Board of Armory Trustees.
♦Denotes debt outstanding on December 31.
N.A.—Not available.
SOURCES: Statistical Report for the State of Indiana; Yearbook,
Indiana.




property of the corporation subject to a substantial indebted­
ness which was immediately paid from State funds. Shortly
thereafter the Board was able, despite temporary reverses in
the courts, to borrow funds for capital improvement and the
funding of the State’s earlier advances. State tax levies were
also initiated in these years for the use of the Board of
Agriculture with no specific statutory limitation on the pur­
poses for which the money was to be spent. In practice,
most of the funds are used for payment of principal and
interest on the borrowing.
In 1925 the State Armory Board inaugurated a building
program for the housing of State Militia in various cities of
the state. Building sites were received largely from private
and public contributors; however, the State Armory Board
had neither ready cash nor the authority to encumber State
property by mortgage. A separate corporation, the Board of
Armory Trustees was formed, which issued bonds for each
of the local armories and then leased the property to the
State. Rentals received from State appropriations were ap­
plied to principal and interest payments, and, at the expiration
of the lease, the title to the property reverted to the State.
The equity created by contributions plus the assurance of
regular State contributions for rentals made borrowing
possible.

The constitutional authority in the Indiana Constitution
to incur debts for casual deficits is an important financial
and budget-making aid. It introduces an additional element
of elasticity into financial planning that is generally lacking
in states where temporary loans are precluded or are re­
stricted to nominal amounts. In these states a biennial pro­
gram of state expenditure and taxation is expected to antici­
pate any and all contingencies affecting either the general
revenue or the level of governmental expenditures. This may
be accomplished by making the revenue system extra-ade­
quate, that is, by underestimating its yield in light of the
economic conditions that will probably prevail in the period
ahead. This calculation has become increasingly unreliable
as state fiscal systems have progressed from dependence on
property taxes, whose instability is conditioned only by
sudden changes in the level of tax delinquency, to reliance
on sales taxes, excises, and net income levies. The best esti­
mates of revenue from these levies are vulnerable to assump­
tions regarding the level of economic conditions and income
payments.
The converse budget policy to underestimation of tax
yields—the overestimation of expenditures—has a too large
obvious disadvantage to be commonly employed. However, it
is used on occasion in connection with programs that enjoy
wide public acceptance and appeal and for which there may
be a recognized factor of uncertainty and contingency. It is
also found to yield budget flexibility in a more roundabout
fashion in the case of earmarked programs. Thus the policy
of utilizing the entire proceeds of a given tax for a particu­
lar function may have a quasi-permanent status subject only
to casual biennial review. Flexibility is attained when in such
cases tax yields provide more funds than are needed or likely
Page 7

to be spent for the designated function. The surplus thus
created may then be available for interfund loans or per­
manent transfer. In the past two decades highway finances
provide the best illustration of this budget policy.
Greater flexibility in state finances can also be attained by
the accumulation of an unearmarhed surplus which is avail­
able to bridge unanticipated gaps between revenues and ex­
penditures. The larger this cushion the less necessity there
is for deliberately underestimating revenues or overestimat­
ing expenditures. It facilitates the adoption of a' tax program
which is based on the most probable course of events instead
of the least favorable combination of circumstances which is
within the realm of reasonable probability. That is to say
that government officials will attempt to obtain authorization
for expenditures that will enable them to meet not only fixed
and certain demands but also a variety of contingencies none
of which, or only a few of which, may occur. In their
revenue estimates they will be inclined to the most conser­
vative forecasts. A surplus which can be made available
under appropriate safeguards and proper government author­
ity to absorb the unlikely eventualities and those that are
completely unanticipated will ordinarily be conducive to
more realistic and better budgets and, in the long run, lower
expenditures.
The authority to incur debt for casual deficits offers much
the same opportunities for flexible and more accurate budget­
ing as the unearmarked surplus. This is particularly true in
a state like Indiana which has no large outstanding debt for
highways, soldiers’ bonuses, or other public works, and
where, as a consequence, the State’s credit is fully available.
Indiana thus has two instruments of financial policy—a
comfortable surplus and the capacity to borrow for operating
deficits—which enable it to approach the problems of postwar
services and taxes realistically and with comparative indiffer­
ence to improbable vicissitude in economic conditions.
It is unfortunate that early experience in Indiana from
about 1880 to 1924 with borrowing for casual deficits does
not establish a record of accomplishment from which prece­
dents for future policy can be drawn. In those years the State
relied on the constitutional license for funding casual deficits
to postpone unreasonably and to defer through refunding
operations an obvious need for reduced expenditures or
higher taxes. It also financed non-recurrent capital outlays
out of general fund appropriations and a resultant deficit
without a pretext of estimating a balance between income
and outgo.2 Despite these abuses the State Supreme Court
was disposed to a liberal interpretation of the casual deficit
clause in the case of Hovey v. Foster when legislative discre­
tion under that clause was subjected to legal attack.3 It ac­
corded recognition to the logical alternative of deficit financ­
ing-surplus accumulation:
“. . . it was foreseen that without gathering from the pockets of the
people and carrying a large surplus in the treasury of the state, no
human provision could prevent occasional deficits in the revenues.
The tax levy could not possibly be so adjusted to the necessary ex­
penses of carrying on the state government, and of providing and
2See Frank G. Bates, “The Borrowing Power Under the ‘Casual Deficit’
Proviso of the Indiana Constitution,” Indiana Law Journal, March 1933,
Pp. 341-358.
321 N.E. 39, (1889).

Digitized Page 8
for FRASER


maintaining the public buildings and institutions of the state, and for
such other appropriations as are clearly within legislative discretion,
without an occasional surplus or deficit.”

The court also recognized that the historical basis for the
prohibition against state debts was directed at incursions into
the field of public works, and that so long as the General
Assembly did not trespass into such fields, a large measure
of discretion should be allowed.
"So if it were known that the legislature had or was about to authorize
the use of state funds in the construction of a railroad, canal or other
public work or institution, not within the ordinary and legitimate
needs of the state, and that such a loan was about to be authorized
to meet appropriation made to defray the expense of such work under
the guise of meeting a deficit to carry on the government of the state,
it would he the duty of the courts to . . . arrest what they would
judicially know to be a mere pretext to evade the constitution . . .
The court has no such knowledge concerning the enactment of the
law here in question. On the contrary, the court has knowledge that
the state has been engaged for several years in providing public build­
ings and necessary state institutions, and that unusual and unforeseen
expenditures have been required, calling for appropriations of public
money . . . All these are subjects which pertain to the public welfare
of the people, and are within ordinary legislative discretion.”

Even though the position of the court in this case may
look well in perspective, it must at the time it was written,
have been regarded with alarm in some quarters. The state
debt then totaled about 8 million dollars, which in 18,90 was
roughly equivalent to two years of state revenues. In terms
of Indiana’s fiscal resources this was a very large debt; a
comparable one for the state government of today would be
between 250 and 300 million dollars. The failure of the court
to check the then current financial practices may have in­
directly had the effect of compelling the legislature and the
executive to institute reforms on their own responsibility. In
any case, beginning in 1893 a policy of debt retirement was
instituted which in the course of a little over twenty years
retired all obligations under the casual deficit proviso. Since
that time, the State has only briefly (1922-25) resorted to
deficit financing. It did not grant a soldiers’ bonus follow­
ing World War I, the chief reason noted in the governor’s
statement following his pocket veto being that the people
were neither in the mood nor the financial condition to stand
an expenditure of 20 to 25 million dollars. Neither did In­
diana emulate its neighbors in a large-scale, concentrated
highway program. Highway development plans were ex­
panded when highway-user revenues increased, and con­
tracted when highway-user revenues decreased. Encourage­
ment of local indebtedness for highways has never been a
matter of state policy. Gradually many of the roads built by
townships and counties became a part of the state system,
but the Constitution precludes any assumption of township
or county debts (see Section 6 of footnote 1 above). Even
during the acutely depressed economic conditions of the
1930’s the budget was annually balanced or the cash balance
on hand drawn upon to avoid outside loans. By consolidation
of operating funds and the elimination of much earmarking,
the State has also largely avoided the necessity after the
early 1920’s of interfund loans. A tradition of twenty years
standing resting on pay-as-you-go or surplus financing has
been established. While qualified by special borrowing aj.rangements for certain agencies, the State generally appears
committed to use its credit only as a last resort.

AGRICULTURAL RESEARCH TO EXPAND
(Continued, from Inside Front Cover)

Emphasis to date has been on the development of an effective
administrative organization to outline, initiate, and control
the contemplated program. The Act provides for the estab­
lishment of a national advisory committee, to be named by
the Secretary, which will make recommendations regarding
research and service work and assist in obtaining cooperation
among Federal and state agencies, producers, farm organiza­
tions, and private industry. All interested groups have been
invited to submit recommendations for the operation of the
extended research program.
No funds have been appropriated or requested at this
writing under the new authorization. There has been some
criticism of the apparent slowness with which the program
is getting under way. However, time devoted to careful plan­
ning and coordination of the program before large expendi­
tures are made is recognized quite generally as time well
spent. There is no assurance that the present and succeeding
Congresses will appropriate funds in anything approximating
the volume authorized by the basic legislative Act. However,
if substantial benefits can be demonstrated, relatively ade­
quate financial support is expected.
One of the major handicaps of the program will be limited
supply of personnel adequately qualified by inherent ability,
training, and experience to conduct the high quality of re­
search work which is needed. Also, the record enrollment in
educational institutions throughout the country is expected
to continue for at least several years, with teaching activities
requiring the full-time attention of many of the personnel
qualified to plan and direct research activities. Some of the
funds appropriated might well be employed to aid the train­
ing of research personnel. A further handicap to the rapid
expansion of the program lies in the inadequacy of present
basic data with which to work. The basic statistical facts
descriptive of how the present production, processing, and
marketing functions are performed lack both breadth of
coverage and detail. Finally, the physical plant and equip­
ment for the conduct of many of the researches visualized
will be inadequate and require expansion. None of these
handicaps is insurmountable. Each can be solved adequately,
given time and resources.
The program may suffer from “overselling.” Most of the
benefits will emerge slowly and be of a long-run nature.
Consequently, the current surge of interest and support may
dwindle unless extensive results are demonstrated within a
year or so.
The introduction or breeding of improved varieties of crops
or livestock is a long-time procedure involving much ex­
perimentation and testing. The benefits possible from this
type of activity should not be discounted, however, due to
the long period of time required before practical results are
achieved. The great contributions to society of such phenom­
enal developments as hybrid corn, disease resistant high
yielding wheats, and other improved crops and livestock are
striking examples of possibilities in this field of research. An
important consideration here, from the social standpoint, is
that the benefits are readily distributed throughout the econ­
omy. For example, the development of hybrid corn increased



the yield per acre and reduced the cost of producing corn.
The larger output of corn resulted in increased production of
livestock products with consumers benefiting from both the
increased supplies and reduced costs.
It is suggested frequently that less improvement has been
made in distribution or marketing techniques than in pro­
duction. Directing that certain of the funds authorized by
the Act be used for research in marketing, the Congress pro­
vides for “a scientific approach to the problems of marketing,
transportation, and distribution of agricultural products simi­
lar to the scientific methods which have been utilized so
successfully during the past 84. years in connection with the
production of agricultural products.”
Research directed to the development of more efficient
marketing has received much popular support through a
comparison of prices paid at retail to prices received by
farmers for comparable units of commodities. During the
1935-39 period, farmers received about 40 cents from each
dollar spent for food at retail by consumers. During recent
years, with a much higher price level, farmers have received
from 44 to 54 cents of the consumer’s food dollar. It has been
popular to conclude from these and similar data that “dis­
tribution costs too much.” However, conclusions as to where
and how distribution costs can be reduced have not been
provided so readily. This is one of the prime problems which
the expanded researches in marketing are expected to answer.
Even after possible economies are made evident by careful
study of present processing and distributive practices, it is
by no means clear that current practices will be modified
readily. However, once the facts are made available, more
intelligent decisions should be possible by all who are con­
cerned with the marketing processes, with more efficient
marketing resulting.
The possibility of increasing the size of the market for
farm products through increasing the industrial utilization
of such commodities has received some attention. Studies in
this field are to be increased under the present Act. Those
who anticipate startling results may be disappointed. Prob­
ably the major benefits from research along these lines will
flow from the development of processes which better adapt
agricultural products to the requirements of industry, thereby
retaining markets in which farm products have tended to be
displaced. The development of new products which enrich
living through having a greater variety of commodities avail­
able for consumption may also be of importance. If past
experience can be considered indicative of results, there may
develop from this type of research fully as many techniques
which economize on the industrial utilization of farm prod­
ucts as techniques which increase the outlets for farm prod­
ucts. Even so, society as a whole is likely to benefit.
The greatly expanded program of agricultural research
authorized by the last Congress is expected to play an im­
portant role in the postwar development of American agri­
culture. By providing the means for launching a coordinated
attack upon the many problems, present and potential, con­
fronting producers and processors of agricultural products,
the ground work has been laid for a significant long-run
contribution to the welfare not only of farmers but of
consumers generally.




SEVENTH FEDERAL

IOWA
ILL ■ INO

RESERVE DISTRICT

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