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A n n u a l rep o rt 1954 F E D E R A L R E S E R V E B ANK OF C H I C A G O To the Member Banks of the Seventh Federal Reserve District: I am pleased to submit to you the 1954 Annual Report of the Federal Reserve Bank of Chicago. Your continued cooperation and counsel have made possible improvements in our operations so that we can more effectively serve the needs of the financial community, business and the public generally. In this 40th Annual Report we feature a review of Midwest agriculture and the natural and economic forces that give to it its distinguishing characteristics. We expect in succeeding reports to present analyses of other aspects of the Mid western economy. On behalf of the Directors, Officers and Staff, I extend to you the warmest thanks for myself and our entire organization. Very truly yours, FEDERAL RESERVE BANK OF CHICAGO DIRECTORS Chairman Deputy Chairman John S. Coleman Bert R. Prall President President Burroughs C o rp o ra tio n B utler Brothers D e tro it, M ich ig a n C hicago, Illin o is Walter J. Cummings William J. Grede William A. Hanley C ha irm a n o f th e Board C o n tin e n ta l Illin o is N a tio n a l Bank P resident G re d e Foundries, Inc. D ire cto r Eli L illy a n d C om pany and Trust C om pany o f C hicago M ilw a u k e e , W isconsin In d ia n a p o lis , In d ia n a Nugent R. Oberwortmann C hica go , Illin o is Walter E. Hawkinson Vivian W. Johnson Vice President in ch arg e o f Finance P resident P resident a n d S ecretary First N a tio n a l Bank C e d a r Falls, Iow a The N o rth Shore N a tio n a l Bank A llis-C halm ers M fg . Co. o f C hicago C hica go , Illin o is M ilw a u ke e , W isconsin J. Stuart Russell Farm E ditor Des M oines Register and Tribune Des M oines, Iow a MEMBER OF FEDERAL ADVISORY COUNCIL Edward E. Brown C h a irm a n o f the B oard The First N a tio n a l Bank o f C hicago C hicago, Illin o is MEMBERS OF INDUSTRIAL ADVISORY COMMITTEE John W. Evers Walter Harnischfeger Edward M. Kerwin President P resident S enior Vice President C om m onw ealth Edison C om pany H arn isch feg e r C o rp o ra tio n E. J. Brach a n d Sons C hicago, Illin o is M ilw a u k e e , W isconsin C hica go , Illin o is G. Barret Moxley James L. Palmer President K ie fe r-S tew a rt C om pany In d ia n a p o lis, In d ia n a P resident M a rs h a ll Field & C om pany C hica go , Illin o is DETROIT BRANCH DIRECTORS Ira A. Moore William M. Day John A. Hannah Vice President a n d G e n e ra l M a n a g e r President P resident M ic h ig a n Bell Telephone C om pany M ic h ig a n S tate C olle g e Peoples N a tio n a l Bank o f G ra n d Rapids D e tro it, M ich ig a n East Lansing, M ic h ig a n G ra n d Rapids, M ic h ig a n Howard P. Parshall Raymond T. Perring Ernest W. Potter President President President Bank o f th e C om m onw ealth The D e tro it Bank C itizens C om m ercial & Savings Bank D e tro it, M ich ig a n D e tro it, M ic h ig a n Flint, M ich ig a n Watson H. Vanderploeg P resident K e llog g C om pany B attle C reek, M ic h ig a n F E D E R A L OF R E S E R V E B A N K C H I C A G O 1954 Annual report Midwest agriculture, cornucopia of America Corn Belt and Dairy Belt Where Corn is King The crown secure? Livestock— corn on the hoof Queen Dairy Roughage, the raw material Demand for milk 4 6 8 10 14 18 18 24 Activities in 1954 Assets and liabilities Earnings and expenses Operations: volume, membership, personnel 30 30 33 36 Midwest agriculture CORNUCOPI A M idwesterners generally are aware that they live in an important agricultural region. Most of them have seen the black soil which they assume to be rich; they have noted broad expanses of cropland where only the farmstead itself is uncultivated; and they have reconciled themselves to suffer through hot, humid growing seasons which “must be good for the crops” since they blow ill to all else. To have fertile land, level topography, generous rainfall and favorable temperatures combined in good balance is a rarity, and to have this rare condition extend over a large area is exceptional indeed, even though we have the world to choose from. Sticking to the United States we find that one hundred million acres — 5V2 per cent of the nation’s total land area— have been described by soil technicians as “excel lent” for the production of grains, grasses and legumes. Nine-tenths of this land is located in the Midwest. But that is not the whole story. Reveling in the abundance of the area’s favorable natural attributes, it is easy to overlook other factors which provide important spokes in the wheel that makes the Midwest the world’s greatest agricultural area. Outstanding among these are the farmers themselves and their customers. The abundance that has become widely known as “the American standard of living” includes good markets for farm products. These are provided in the large and rap idly growing populations of cities in the Midwest and throughout the nation. While many agricultural com modities today seek national and international. 4 Annual report, 1954 OF A M E R I C A markets and even bulky, highly perishable items once enjoyed only by consumers close to the source of supply are now transported swiftly and cheaply to consumers almost everywhere, it is consumers’ tastes and their ability to pay that are the critical factors. This is important to the Midwest since the livestock commodities produced there, for the most part, are those which consumers place high on their scale of preferences. Markets for these commodities expand not only with increases in population but also with Midwest has two farm areas marketing principally meat animals and dairy products C o rn B elt C om m o d ity D a iry Belt (per cent o f income, 1953) L iv e sto ck a n d liv e sto ck p rod u cts Hogs.......................................................... Cattle and calves................................... Dairy products........................................ Poultry and e g g s.................................... Other animal products.......................... . C ro p s C orn.......................................................... . Soybeans................................................. . W h e a t...................................................... Fruits and vegetables............................ . Other crops.............................................. 29 23 8 9 1 10 11 43 11 2 14 6 6 1 2 100 4 10 7 100 Stretching from the hills of Ohio to the dry plains of Nebraska and from Canada to the Ozarks, the Midwest is the world's greatest agricultural area. In the northern part o f the region Dairy Belt cows fill the nation's milk pail. To the south the Corn Belt’s fertile fields supply feed for livestock that provide the country's top-quality meat. greater consumption per person as consumer incomes per capita rise in real terms. The resourceful and energetic character of the population is important, too, in much more specific terms. Midwest farmers display these characteristics in abundance. They have rapidly adopted improved production practices and new technology developed at agricultural experiment stations, by industry and by research-minded farmers themselves. And they have persistently demanded more research—further advances in the techniques for more efficient produc tion and the more complete utilization of agricultural commodities— and improved programs of education to bring the results of research to Midwest farms. The advance in technology has been accompanied by a growing investment in modern farm machinery, equipment and buildings, as well as other improve ments, and by a rapid rise in annual cash outlays for fertilizer, feed and a wide range of chemical and Federal Reserve Bank of Chicago 5 Ninety per cent o f the “ excellent" land in the U.S. is located in the Midwest, most of it in the Corn Belt. Soil technicians describe this land as excellent for the production of a broad variety of crops: grains, grasses and legumes. biological products used to promote the growth and reproduction of plants and animals and to protect them from attack by insects and diseases. Output per hour of farm labor has been boosted phenomenally as a result of farmers’ investment in new equipment and processes for putting the ad vanced technology to work on their farms and by the improvement in managerial skill of the farmers them selves. The result has been a persistent increase in the flow of commodities from Midwest farms even though the number of farms and of people who work them has declined. Possibly no measure of increased efficiency is so spectacular as that which shows the rise in output per man-hour. Since 1940, for example, the total production of corn and other feed grains has in creased about one-fifth, the man-hours used to pro duce them have been reduced by more than onehalf, and the output of feed grains per man-hour has increased nearly threefold. A similar story can be told for soybeans. Substantial increases in output per man-hour have been stacked up also for other crops and for poultry, eggs, dairy products and meat animals. Since farm labor is only one of the resources used to produce agricultural commodities, taken alone it does not provide an accurate measure of the change in efficiency of agriculture, but it is indicative of the substantial changes that an alert and progressive farm population are making in the Midwest economy. Although Midwest agriculture has been spoken of as though it had a high degree of uniformity through out, it is in fact many things, but it can be divided into two broadly homogeneous regions— the Corn Belt and the Dairy Belt. The differences between these regions are firmly rooted; they arise from basic differences in soil and climate and productivity. Corn Belt and D airy Belt Prairie soils— black and deep— are the most fertile and provide much o f the “ excellent” land. However, the central forest soils also are very fertile in areas where the land is flat. 6 Annual report, 1954 The Corn Belt is bounded on the east by the foot hills of the Appalachians, on the south by the rough topography along the Ohio River and the Ozark uplift in southern Missouri. Its western boundary is estab lished by the dry weather of the Great Plains, and it is hemmed in on the north by the cool summer nights so characteristic of Minnesota, Wisconsin and Michigan. These latter states include the Midwest section of the nation’s Dairy Belt. Aeons ago, during the geologic age when Midwest soils were developed, the topography of the “prairie soils” zone which extends westward from Indiana was about as flat as it is today. There was compara- tively little erosion, and the natural vegetation con sisted of a luxuriant growth of tall grasses. Decom position of this vegetation produced the abundant organic matter that characterizes these soils today. And the small amount of erosion permitted the devel opment of a deep topsoil. These prairie soils are tops in fertility. To the north, east and south of the prairie soils zone there lies an area of so-called “forest soils.” The organic matter in these soils is from the decay of forest vegetation. In the northern parts of Minne sota, Wisconsin and Michigan geologic and climatic conditions were such that a highly fertile soil could not develop. Over the remainder of the forest soils zone the development of a good topsoil was related primarily to topography. In areas where the land was reasonably flat— southern Wisconsin, southern Michi gan and northern Indiana— a relatively good soil was built up and the land today is quite fertile. To the south and east of the Corn Belt the rougher topog raphy prevented this favorable soil development, while to the west the rainfall was too light and the vegetation was too sparse for the development of a deep topsoil of high organic content. Three-fourths of the nation’s excellent agricultural land is in the Corn Belt; only one-sixth is in the Dairy Belt. Average annual precipitation is quite uniform throughout the Midwest. It varies from 20 inches along the western boundaries of the Corn and Dairy Belts to 40 inches along the Corn Belt’s southeastern edge. Even more uniform is the summer precipitation which is very important in crop production. Through out most of the Midwest, average summer precipi tation ranges between 10 and 13 inches. In contrast with the rainfall pattern, temperature differences within the region are quite pronounced. The time between the last killing frost in the spring and the first killing frost in the fall varies from an average of 80 days along the Canadian border to 200 days in the southernmost part of the Corn Belt. Over the same territory, the average July tempera ture ranges from 60 to 80 degrees. Differences in temperature as well as in soil account for the fact that the Corn Belt is much more productive than the Dairy Belt. And this dissimi larity in productivity applies to many different crops. Normally the value of output per acre of land in farms in the Corn Belt is about 50 per cent higher than in the Dairy Belt, and about the same relation ship holds for land values and farm income per worker. There are important differences, too, in the kinds of commodities produced in the two regions. Dairy products, of course, dominate the income pic- Precipitation is quite uniform throughout the Midwest and is sufficient for the favorable growth o f most crops. However, the western boundary o f Midwest agriculture is established by the lack o f rainfall beyond the 20 inch precipitation line. Temperature differences within the Midwest are quite pronounced and exert a strong effect on the productivity o f land. The higher temperatures in the southern part of the region permit that area to excel in the production of many high-value crops including corn and soybeans. ture in the Dairy Belt while meat animals and corn take top billing in the Corn Belt. Moreover, these two belts differ markedly in the ease and readiness with which farmers can shift the use of their resources from the production of one commodity to another. The fixed resources— land and, to a considerable extent, buildings— in the Corn Federal Reserve Bank o f Chicago 7 dollars 200 — 150 Dairy Belt Corn Belt 100 50 C o rn B elt m o re p ro d u ctive output per acre of land in farms value of land and building per acre monthly income per farm worker 0 Value o f output per ocre and value o f land based on I 950 Census; income per w orker based on Department o f Commerce estimates fo r 1953. Belt can be utilized in many ways, whereas the capital resources in the Dairy Belt are more special ized. Even semifixed resources, like livestock and machinery, are more adaptable in the Corn Belt. In that region the typical livestock enterprise can be instituted, expanded, contracted or liquidated in a year or so. On the other hand, it takes several years to build up the typical dairy herd. Thus, the un specialized character of fixed resources in the Corn Belt and the relatively short period of production and investment for livestock give that belt the ability to adjust comparatively easily and quickly to chang ing economic conditions. This is in contrast with the Dairy Belt where the specialized nature of capital and the absence of attractive alternatives make ad justment to changes in demand slow and difficult. The strength and stability of Midwest agriculture, therefore, are tied closely to the productivity and adaptability of both its land and livestock. These are analyzed in some detail in succeeding paragraphs, first for the Corn Belt and then for the Dairy Belt. W h e re Corn is King The Corn Belt’s land and climate give it an advan tage over other areas in the production of many crops, including several different grains as well as legumes and grasses. Hence, farmers in that area can choose to specialize in the production of which ever happens to be the most profitable among the wide range of crops in which they have an advantage. In other words, with some obvious exceptions like cotton, tobacco, citrus fruits and the like, Corn Belt 8 Annual report, 1954 The greater productivity of the Corn Belt is reflected in value of output per acre, land values and income of farm workers. farmers get first choice among the crops. If farmers in other regions grow these same crops, they do so at a distinct competitive disadvantage. So other regions make their choices among the “leftover” alternatives and tend to specialize in those crops. The adaptability which characterizes Corn Belt land is the source of great strength and stability in the agricultural economy of that region. Not only are there a large number of alternative crops among which Corn Belt farmers get first choice, but these alternatives are relatively close to one another in profitability. Moreover, though the Corn Belt specializes in corn, several other crops are also grown and marketed there, although in much smaller quantities. This wealth of alternatives tends to stabilize farm income from year to year and, incidentally, provides a readily available fund of technical know-how to facilitate shifts between crops whenever conditions warrant them. The “Corn Belt” is appropriately named. The fertility of the area’s deep black soils is relished by the corn plant. Furthermore, the high organic con tent of the “prairie soils” is associated with desirable characteristics of cultivability, aeration, water-holding capacity and available nutrients; the relatively flat W lF topography permits an intensive corn cropping pro gram without excessive soil erosion, and the climate in the area is near-perfect for the crop. For top corn yields, there should be plenty of moisture in early spring, followed by a warm dry spell in the first half of May so that the corn can be planted about that time. In June the critical requirement is plenty of warm weather to give the crop a fast start. Corn “blooms” in July, and this is the critical month for rainfall. For best results there should be at least three inches of rain in that month. Plenty of hot weather is needed in July, August and September, and the latter months should be fairly dry. Killing frost should not come until after September has been discarded from the farmer’s calendar. One might guess that there never has been a “per fect corn year.” And that is true. But the above list of weather conditions is approximated in most years in the Corn Belt. The record holds the proof: the Corn Belt produces about three-fourths of the corn Federal Reserve Bank o f Chicago 9 harvested for grain in the U. S. and about 40 per cent of the world’s output of corn. The crown secure? For decades King Corn has ruled in the Midwest, his patronage secure, his pre-eminence unchal lenged. However, conditions change and the develop ment of new crops and new varieties of old crops is becoming increasingly common and spectacular. Such changes affect the relative profitability of crops. For example, not too many years ago soybeans and soybean products were practically unknown in the U. S. Today, soybeans are one of the more profitable Corn Belt crops; eventually this “garden plant gone to the field” might become more profitable than corn. In that event the region would simply shift to more soybeans and less corn though probably retain ing its advantage over other areas in the production of both. Or it is conceivable that “grassland farming” might eventually become superior to grain farming even within the Corn Belt. Again, the area simply would shift its crop specialization into grasses and legumes for which it also has a production advantage over other regions. Essentially the same thing can be said for many other crops. Regardless of its future, corn is today the most profitable major crop in the belt, and the area has built its agricultural economy upon it. Obviously, the relative profitability of a crop is influenced by its demand and supply conditions. In order to appraise the present economic position of corn and its future prospects, the sources of its demand and the limi tations to its supply must be examined. Demand and supply. The demand for com is derived largely from the strong consumer preference for high-quality meats. This has resulted in relatively high values for grain-fed livestock. About 60 per cent of the corn crop normally is fed to animals produced primarily for their meat. Dairy cattle and laying hens, although not fed primarily for their meat, wind up at the meat counter eventually. If they are included with meat animals, nearly 90 per cent of the demand for corn is accounted for. The importance of corn as a livestock feed is further emphasized by the fact that it accounts for more than half of all grain fed to livestock. H ow co rn is u se d : 1 9 4 9 - 5 1 T y p e o f use Total consum ption (per cent) Processed directly into food and a lcoho l.. Exports and seed........................................... Used as livestock fe e d ................................. 8 3 89^ For meat animals....................................... 6J_ Hogs........................................................ Beef ca ttle .............................................. Meat po ultry.......................................... 48 10 3 For non-meat animals............................... 28 Dairy ca ttle ............................................ Egg p o u ltry............................................ Other animals........................................ 11 10 7 100 Because consumer demand for livestock products — and especially meat— is quite responsive to changes in consumer income, the demand for corn will become progressively stronger as per capita in come rises. This assumes, of course, that corn will continue to hold its pre-eminent position as an eco nomical raw material for the production of highquality meat. It is possible that advancing tech nology might belie this assumption. For example, a combination of roughages, by-product feeds, such as molasses and soybean meal, and synthetic prod ucts, such as urea, may eventually produce top- 10 Annual report, 1954 quality beef and do it more economically than can be done by feeding rations heavily loaded with corn. But then, as pointed out earlier, the Corn Belt still would be in a strong position since it has an advan tage also in the production of soybeans and rough ages. And beef cattle alone constitute but a small part of the total demand for corn so that, even if this part of the market were lost, the damage would not be irreparable. Although most of the corn is fed to livestock on the farms where it is produced, still about onequarter of the crop normally is sold. Corn can be transported economically, and that of good quality can be stored a number of years without important quality deterioration. Thus, corn as a grain has a ready market. Of the 25 per cent of the crop that is sold, 15 eventually is fed to livestock, some of it a thousand miles or more from the point where it was grown. The remaining 10 per cent of the crop is used for seed and export or ends up in a wide variety of manu factured uses including corn sugar, starch and oil, breakfast food, corn meal and alcohol. The well-developed commercial market for corn provides the Corn Belt farmer an important alterna tive in marketing the output of his land. He is not forced to feed his crop to livestock. If prices of meat animals become unfavorable compared with the price of corn, he can cut down on his livestock feeding operations and sell or store his corn. This provides an element of flexibility in his operations not com mon to all areas. A rather sizable Corn Belt area specializes in so-called “cash grain” farming. That is, the bulk of V a lu e a n d a c r e a g e o f C o rn B elt cro p s, 1 9 4 1 - 5 0 Corn, producing the largest gross revenue per acre, has the largest share of Corn Belt crop acreage. Soybeans compete with corn and have a relatively small share. Oats and hay, despite their lower revenue per acre, have a substantial share because o f their place in rotations designed to maintain soil fertility. the crops are sold in the commercial market and relatively little livestock feeding is done. Since less than 10 per cent of the land in these areas is in permanent pasture and much of the clover is plowed under, the output of the land can be marketed with out very much livestock feeding. For the Corn Belt as a whole, the sale of all crops normally accounts for approximately one-fourth of farmers’ cash receipts from the sale of farm products. Limits on the corn supply. The fairly definite boundaries of the Corn Belt provide a restriction on the corn supply and tend to maintain its relative value. Farmers within the belt can profitably pro duce corn at a price and in a supply which makes it relatively unprofitable in most other places. That is why three-quarters of the crop is grown in the area. It is possible that, in the future, technological advances will make those boundaries less definite. For example, the upper boundary of the Corn Belt was moved perceptibly northward by the advent of hybrid corn adapted to a short growing season. Nevertheless, higher yields per acre within the Corn Belt have been more than adequate to account for all the increase in corn supply in the last 30 years. During the 1940’s the six major Corn Belt states Federal Reserve Bank of Chicago 11 produced a larger share of the total supply than they did in the 1920’s. In general, new developments like hybrid corn and the greater use of commercial ferti lizers have achieved their greatest results in the area which was most favored originally— the heart of the Corn Belt. So it is very possible that future tech nology will increase— rather than reduce— that region’s advantage in corn production. Six major Corn Belt states* Corn All other states U. S. total 101.4 86.9 -1 4 A creage (million acres) 1920-29 average 1941-50 average Per cent change 42.6 38.7 -9 58.8 48.2 -1 8 Yield per acre (bushels) 1920-29 average 1941 -50 average Per cent change 34.4 44.6 30 23.3 26.6 14 1,466 1,725 18 1,371 1,286 -6 Production (million bushels) 1920-29 average 1941 -50 average Per cent change — — — 2,837 3,01 1 6 *O h io, Indiana, Illinois, Iowa, Missouri and Nebraska. If, as seems likely, the Com Belt maintains and perhaps increases its advantage in corn production, then the value of corn in coming decades will depend on the race between (1) expanding demand origi nating in the increase in the nation’s population and the rise in per capita demand for meat and other livestock products versus (2) increasing supply stem ming primarily from the advance of technology and the consequent rise in yields per acre. Present indi cations suggest that the outcome of that race will not be unfavorable for the value of corn compared with other feed grains. If this proves to be the 12 Annual report, 1954 case, the Corn Belt is likely to continue to specialize in the production of the golden grain for many years to come. Crop rotations. Only about 40 per cent of the Corn Belt’s cropland is planted to corn. In part this is because corn’s requirement of plant nutrients is high; it frequently is described as “an exhaustive crop.” Also it is an intertilled crop, thus leaving the soil surface exposed to erosion. Hence, if con tinuous cropping of corn is feasible at all, it must occur only on fertile land with little slope and with heavy applications of fertilizer. At the present time almost all corn is grown in a “crop rotation” designed to maintain or improve the structure and productivity of the soil. On Mid western cash-grain farms, where com is produced most intensively, one type of rotation consists of the growing of corn and an oats-clover combination in alternate years. The usual practice is to divide the cropland into two equal parts, plant com on one part and the oats-clover combination on the other, and then rotate the crops year by year. This results in half the cropland being planted to corn each year. The oats and clover are planted together. Oats mature quickly; clover is a slow starter. Since they are a taller plant than clover, the oats can be har vested without much damage to the clover, and after the oats are harvested the clover can develop a good growth of foliage. In the fall the clover is plowed under as “green manure.” In fact, the primary func tion of the oats is to serve as a nurse crop to the clover, shading out weeds and providing some pro tection from wind and sun while the young clover plants become established. Oats have a low profit rating in the Com Belt, but they provide some in come from the land in its off-corn years. Primarily because of their usefulness in the crop rotation, oats are a major crop in the Corn Belt, occupying about 20 per cent of the cropland. And although the crop is not especially desirable from a profit standpoint, still it contributes an element of diversity to the marketable output of the belt. Clover is a legume— a type of plant which has a very useful property. Legumes serve as a host to a special type of bacteria that fix on the roots of the plant nitrogen which the bacteria take from the in exhaustible supply in the air. And nitrogen is an important plant food, especially for com. But plants do not have the ability to take it directly from the air. Hence, clover is grown and, when plowed under, it supplies the soil with both plant nutrients and organic matter. Moreover, some types of clover are deeprooted plants which help to keep the subsoil porous, thereby providing better drainage and aeration. It is possible that increased knowledge of soils and their management eventually will permit contin uous cropping of corn through at least part of the belt, but crop rotation undoubtedly will remain common in most areas for some years to come. If so, the belt will retain this element of diversity in its crop output. Land values— productivity and price. Because of the dominance of corn in the cropping pattern, the intensity of production of that crop can be used as a general index of the productivity of agricultural land and, consequently, of land values within the Corn Belt. Of course, this index is more accurate in the heart of the belt than along its edges where corn is relatively less important. Land values are highest in the area stretching from western Iowa to western Indiana, with the top values occurring in north central Illinois where the produc tion of corn per acre of land in farms is at its peak. Land values generally decline as one moves from the center toward the periphery of the belt. Lan d v a lu e s in th e M id w est The value o f farmland reflects the value of output of that land. The most productive land and the highest value per acre are found in the heart o f the Corn Belt, with productivity and values decreasing toward the periphery of the Midwest. The intensity of corn production is a function of yield per acre, proportion of cropland planted to corn and the proportion of land that is tillable. For example, in the Census years 1944 and 1949 the average yield of corn was 51 bushels per acre in Ford County, Illinois, but less than 100 miles south in Cumberland County, on the edge of the Corn Belt, the average yield was 37 bushels. In the best corn areas, a crop rotation which keeps half the cropland in corn each year is widely used. In areas having less advantageous conditions of soil fertility and topography, a smaller proportion of the cropland is planted to corn, as soybeans, wheat, clover, alfalfa or some combination of these Federal Reserve Bank of Chicago 13 crops is included in the rotation. For example, corn was harvested from 45 per cent of the cropland in Ford County in recent census years but from only 37 per cent of the cropland in Cumberland County. Furthermore, in the heart of the Corn Belt crop land comprises a high percentage of the land in farms. In Ford County over 90 per cent of the land in farms is planted to crops, compared with only 75 per cent in Cumberland County. In some areas along the southern edge of the belt no more than 60 per cent can be cropped primarily because of the rougher topography. Reflecting the differences in yield per acre and the proportion of land planted to corn, both the output of corn per acre of land in farms and the value per acre of land in Ford County in 1944 and 1949 were about 2 Vi times as high as in Cumberland County. Dairy Belt land values reflect the same influences. Output of milk per acre is the major factor affecting values, but distance from markets is relatively more important than in the Corn Belt. For example, a dairy farm 40 miles from Chicago tends to be worth more than a similar farm located 150 miles from the city since the transportation cost per 100 pounds of milk is 15 cents lower for the close-in farm. Geo graphic price differentials are much less pronounced in the Corn Belt. Within distances of 150 miles the average price of corn in the Corn Belt in 1941-50 frequently showed no significant differences and did 14 Annual report, 1954 not vary more than 10 cents per bushel from one end of the belt to the other. Livestock— corn on the hoof Crops are the foundation of agriculture. This is true of the Corn Belt as elsewhere, but in the Corn Belt they are only the foundation since most of the crops grown there are fed to livestock. Hence, live stock make up the superstructure of the Corn Belt farm economy and account for almost three-fourths of that region’s farm income. Within the belt, corn produces more digestible nu trients per acre than any other feed grain. Moreover, these nutrients are combined in a way that makes corn a highly desirable feed, especially for the fatten ing of hogs and beef cattle. The demand for corn, therefore, springs largely from the consumer demand for meat. Consumers have a strong preference for highquality meat— that is, they “eat as high on the hog” as their income permits. As has been indicated, con sumer demand for high-quality meat increases as the national economy expands and consumer incomes rise. Hence, Corn Belt agriculture is well attuned to the basic trends associated with economic growth. Another source of strength and stability is the adaptability of its livestock. The principal types of Corn Belt livestock— hogs, beef cattle and farm flocks of chickens— require relatively small investment in specialized buildings and equipment. Moreover, the bred production cycles for these kinds of livestock are relatively short. This permits farmers to adjust rather quickly to changing economic conditions. Since the Corn Belt farmer has the choice of selling his corn or of feeding it to either cattle or hogs and since he can effectively change those decisions within a year or so, he is in a position to take advantage of expected changes in the crop and livestock markets. Just as the variety of crops marketed in the Corn Belt lends year-to-year stability to the income of that region, so also— and more importantly— does the diversity of Corn Belt livestock products, assuming of course that general business conditions in the na tional economy are kept on a reasonably even keel. Hogs. About half the corn fed to all livestock in the U. S. goes to hogs. And about two-thirds of the nation’s hogs are raised and fed in the Corn Belt. Their sale normally accounts for approximately 30 per cent of the cash receipts of Corn Belt farmers. The belt is densely populated with hogs, but the area of greatest concentration lies in the eastern half of Iowa and the northwest quarter of Illinois. By feeding corn to hogs, farmers do a larger volume of business with only a limited addition to their investment in fixed resources. Obviously, little additional land is needed, and building and equipment requirements for this activity are not large. Hog feed ing is a method of utilizing more fully the farm oper ator’s labor and thereby boosting his annual income. On the average, the feed equivalent of 9 bushels marketed short-fed beef cattle feeding 10001b cattle feeder marketed cattle 12501b purchased medium-fed beef cattle feeding 7001b feeder cattle purchased cattle marketed 1200 lb ■ ■ ■ ■ lo ng -fe d beef cattle feeding 4001b feeder calves purchased beef cattle raising and feeding cattle marketed 1150 lb laying flock of chickens dairy cattle raising and milking cows bred years calves born over four years ------5 young cows begin to give milk 1 life 2 2 4 Pro ductio n p e rio d s fo r liv e sto ck Most Corn Belt livestock operations have production periods of less than one and a half years. Within that period o f time Corn Belt farmers can adjust the volume of their livestock production. The raising and milking of dairy cattle involves a much longer production period; hence, livestock production in the Dairy Belt is much less adaptable. G r a in - f e d ca ttle m a r k e te d , 1 9 5 3 Federal Reserve Bank of Chicago 15 of corn converts into about 100 pounds of live hog. Over the long run the price received by farmers for 100 pounds of hogs has averaged about 12 times the farm price of a bushel of corn. This is the famous “average hog-corn price ratio.” So for his non-feed costs and his labor, the hog feeder has received the value of about three bushels of corn for each 100 pounds of hogs he sells. Since this is a long-run average, it may be considered a “normal” return. The return in any particular year, of course, can diverge widely from the normal. A period of about 11 months elapses after the farmer decides on the size of his hog operation until the hogs are ready for market. During that period, his business is exposed to the risk of price changes. The hog enterprise on Corn Belt farms, however, can be completely re oriented within about a year’s time. Beef cattle. Between 10 and 15 per cent of the corn fed to livestock in the U. S. is fed to beef cattle. And about two-thirds of these “feedlot” cattle are fed in the Corn Belt. Their sale usually accounts for approximately one-fourth of the cash receipts of farmers in the belt. The feeding of beef cattle is rather common throughout the belt, but this activity is concentrated in two areas (see map). Most of the cattle that “serve a term” in Corn Belt feedlots are born on the western ranges in the spring. Some of them are shipped to the Corn Belt as feeder calves in the fall. Others are wintered in their home land and spend their second summer in the broad open spaces, after which they may have achieved a weight of 600 to 700 pounds, and then are bought by Corn Belt farmers and shipped to their feedlots. The heaviest movement usually occurs in October. Their diet, of course, is rich with corn, and they are fed to varying weights and degrees of fatness before being sold for slaughter. Many of them are marketed in the late spring and early summer, with the largest volume usually coming in June. The cattle-feeding operation has a production and investment period that ranges typically between 3 and 12 months; 6 to 8 months is the most common. Thus, the period within which substantial production adjustments can be made is not greatly different from that for hogs. Cattle feeding, as is the case with hogs, can be carried on with a relatively small investment in spe cialized buildings and equipment and, as with hogs, it involves a substantial investment in feed for a number of months. But cattle feeding, as it is carried on in the Corn Belt, typically involves the outlay of a substantial amount of cash for the purchase of feeder stock whereas hogs usually are bred and raised by the farmer who feeds them to market weight. Thus, 16 Annual report, 1954 credit plays a more important role in the cattle enter prise than is the case for hogs. Most of the credit is provided by commercial banks. The substantial investment required to purchase feeder cattle causes that enterprise to be somewhat more exposed to risk from price changes. Whereas the hog feeder need concern himself largely with two prices— hogs and feed— the cattle feeder must con sider three— fat cattle, feeder cattle and feed. A change in the price of fat cattle while animals are being fattened affects the selling price of that portion of the final weight that was purchased as feeder cattle as well as the portion that was added in the feedlot. And since the weight of cattle purchased as feeders usually will be equal to 40 per cent or more of the weight at the end of the fattening period, price changes while cattle are being fattened may result in substantial cash losses or profits. Southern Iowa, northeast Missouri and the adja cent counties in Illinois make up an area of rolling topography in which a considerable number of beef cattle are raised. Over one-third of the land in that area is kept in pasture and is utilized by maintaining herds of beef cows. However, the soil in the flatter parts is well adapted to corn, and enough is raised in the area so that the feeder cattle produced there can be fattened, as well as additional animals that are obtained from other areas. As far as investment, financing and risk are concerned, this operation has essentially the same characteristics as the production of hogs, except that it is somewhat less flexible since the investment is relatively higher and the production period is longer. Poultry. About 15 per cent of the corn fed to livestock in the U. S. is consumed by poultry. How ever, only one-fourth to one-third of the poultry is located in the Corn Belt. Sale of poultry and products accounts for about one-tenth of the cash receipts of farmers in the belt. Corn Belt poultry production is very widely diffused; most farms have at least a few chickens and on them “eggs for breakfast” and “chicken every Sunday” are more than catchy phrases. Nevertheless, only a small fixed investment in buildings and equip ment is required for the average farm flock, and the poultry enterprise is thought to utilize some labor which otherwise would be wasted. The period of pro duction is one year or less, and this livestock enter prise, too, can be quite readily adjusted to changes in markets and market prospects. In past decades eggs were the primary output of the chicken house. The production of chicken meat was distinctly secondary and to some extent a by-product. hog— corn price ratio For the Corn Belt as a whole this pattern generally continues to persist. But within the past 20 years an important commercial broiler industry has developed, for the most part outside the Corn Belt. It now far overshadows farm flocks as a source of chicken meat. Meanwhile, the consumption of poultry meat has been rising. In the last 15 years U. S. consumption has increased from 16 pounds per capita to 28. Poultry now accounts for nearly one-sixth of all meat eaten by the American public— twice as much as calves, sheep and lambs combined. However, beef and pork— the long-time favorites at the meat counter— have been holding their own, due largely to a strong expansion in beef. Since pre-World War II consumption of these meats has risen from 125 pounds per capita to 140. Alternatives call for decision making. The farmer chooses among his alternatives on the basis of his expectation of future prices. Normal price relationships give corn a strong profit advantage among the crops, so most Corn Belt farmers plant as much corn as is consistent with their ideas of good soil use. When harvest time approaches and the size and condition of the corn crop can be estimated reason ably well, farmers must make decisions regarding the marketing of the crop. For some farmers these are routine decisions; almost all their corn is regularly fed to livestock and their feeding programs vary little from year to year. However, there also are farmers C y cle s in p rice s a n d sla u g h te r o f hogs Peaks in the hog-corn price ratio (i.e., the price o f 100 pounds o f live hog divided by the price o f a bushel of corn) are associated with peaks in hog production and slaughter from one to three years later. Conversely, a low price ratio of hogs to corn results later in a curtailment of hog production and slaughter. who adapt their corn marketing plans to their expec tations of future prices for corn, hogs and cattle. If the price of corn is expected to be high com pared with livestock, the farmer may plan to curtail his livestock operations substantially and sell some or all of his corn. If he expects prices of both corn and livestock to be relatively low, he may take a price support loan on his corn. However, if he expects hog prices to be high relative to com, he may decide to expand his hog production, or if he thinks fat cattle prices will be high compared with the going prices of feeder cattle and corn, he may enlarge his cattle-feeding enterprise. In this manner the Corn Belt farmer adapts his operations to his price expectations ai}d, if those forecasts prove correct, he can navigate his business quite nicely through the shifting currents of economic change, as long as the incomes of consumers are maintained at a high level. However, Corn Belt farmers listen to the same market reports, they ob- Federal Reserve Bank of Chicago 17 serve the actions of one another and they compare recent experiences and current production plans. Hence they tend to share the same views of future price prospects. This leads to concurrent expansions and contractions in the supply of livestock products, as exemplified in the hog cycle. These variations in supply have their price effects which, in turn, influ ence farmers’ expectations regarding future prices. So farmers who accept the prevailing view of price prospects often fail to realize expected results. The adaptability of Corn Belt agriculture is partly responsible for this cyclical phenomenon, but that same adaptability is responsible for the fact that cycles in the production of Corn Belt livestock prod ucts are of relatively short duration. With the wider dissemination and greater acceptance of “outlook” information, which seeks to convey an objective appraisal of price prospects, it is hoped that these cycles will become less prominent. In any case the adaptability of Corn Belt agriculture is highly bene ficial to the community as a whole because an in crease in the demand for meat can be met rather promptly by an expansion of production, while an oversupply of a certain type of meat animal can also be remedied in a comparatively short time. Q u een D airy To the north of the Corn Belt lies the Midwest section of the Dairy Belt. These two belts shade into each other geographically. Milk is produced in the Corn Belt, especially in the northern part; corn is harvested for grain in the Dairy Belt, espe cially in the southern part. But taken as a whole the two belts differ substantially in soil and climate and, consequently, in their agricultural economies. The boundary line is related primarily to tempera ture. It generally follows the July 72° isotherm — the line that joins places whose average temperature in July is 72°. In only two localities does the Dairy Belt extend much below that line — in southwestern Wisconsin where the rough topography encourages dairy farming and around Chicago which provides a large market for fluid milk. Elsewhere in the Mid west, corn farming normally is the most profitable type below the 12° isotherm. However, corn is har vested as grain from 13 per cent of the crop acres in the Dairy Belt, largely along its southern edge. This compares with 40 per cent in the Com Belt. Roughage, the raw material When corn was first gaining a foothold in the Midwest, it was preserved and exported from the 18 Annual report, 1954 area largely in barrels — some as fat salt pork and some, after fermentation and distillation, as a potent, golden amber liquid. Much corn is preserved yet today in giant barrel-like structures, but for another purpose. Harvested before it is fully matured, the entire plant can be chopped up and packed into silos where, after fermentation, it is “preserved in its own juice” and is available as livestock feed in the form of roughage. Although this type of feed, by itself, is not very useful for putting a top-quality finish on meat animals like hogs and beef cattle, it is entirely suitable for dairy cows. For the Dairy Belt as a whole, the land and climate are such that its advantage over other areas extends to the production of only a few widely grown crops. Much of its cropland can be used most effectively for the production of roughages — hay and ensilage — and in the remainder of the belt the crop alternatives available are not much more profitable than hay. The yield of roughage is relatively high, although lower than in the Corn Belt. For example, from Meadows and hillside pastures provide much o f the roughage consumed by cows in the Dairy Belt. Another source of roughage is ensilage, made from corn and grasses, which is stored in silos for later use. 1941 to 1950 the average yield of corn ensilage in the Dairy Belt was 8.2 tons per acre, compared with 8.8 tons where “corn is king” ; for alfalfa hay the comparable yields were 1.9 tons and 2.1 tons. Ensilage is bulky and heavy relative to its value and deteriorates rapidly when removed from the silo. It cannot be economically transported for any sig nificant distance and, therefore, has no commercial market. Usually it must be fed on the farm where it was produced and stored. Likewise the commercial market for other types of roughage such as hay is predominantly local. These roughages generally are bulky, low-value commodities and are not transported any great distance except in unusual circumstances. text continued on page 22 Federal Reserve Bank o f Chicago 19 H prebipitatibn ^Ojinches Land productivity in Corn and Dairy Belts t ~ P ( July peralture The productivity of rural land in the Corn and Dairy Belts can be gauged by the output of corn and milk per square mile. Greatest concentration of corn production occurs in north central Illinois although output is high from eastern Nebraska to western Indiana. The concentration decreases toward the foothills of the Appalachians on the east, the rough topography along the Ohio River and the edge of the prairie soils zone on the south, and the 20 inch precipitation line on the west. The boundary between the belts generally follows the line joining places having an average July temperature of 72 degrees. Greatest concentration of milk production is found in southeastern Wisconsin, with a lesser area located along the MinnesotaWisconsin border. In the northern one-third of the Dairy Belt the concentration is very low because only a small percentage of the land is in farms; forests occupy most of that area. Dairy Belt m ilk p ro d u ctio n , 1949 (thousand h u n d re d w e ig h t p e r square m ile) B LJ | 1 --- 1 — Corn Belt corn harvested fo r g ra in , 1949 (thousand bushels p e r square m ile) P> ] L, 1 ioih ; z< M3 Thus, the value of roughage typically is determined by the value of livestock products that can be pro duced through its utilization as feed in the area where the roughage is grown. This is in sharp contrast with corn which, although predominantly fed on farms where it is grown, has a sufficiently high value per pound so that it can be shipped readily into areas where additional feed is needed. While the low value per pound of roughages insulates them from the com petition of roughages produced in other areas, there is a well-developed nationwide market for the live stock products roughages produce. In this way the products from the Dairy Belt come into competition with those from other areas. Hence, the Dairy Belt cannot escape the competitive effects of production advantages enjoyed by the Corn Belt. Oats. The climate of the Dairy Belt is favorable to the growth of oats — a cool weather, early matur ing crop. Consequently, the region has a modest advantage over the Corn Belt in its production. In the decade of the 1940’s the average yield of oats was 39 bushels per acre in the Dairy Belt, whereas it was only 35 bushels in the Corn Belt. Oats are an acceptable feed for most types of livestock. But the digestible nutrients in 39 bushels of oats, the average yield per acre in the Dairy Belt, are less than half the amount contained in 45 bushels of corn, the average yield of that crop in the Corn Belt during the 1940's. And since other grains that can be grown in the Dairy Belt also produce much less nutrients per acre than does corn in the Corn Belt, the Dairy Belt is at a disadvantage in the grainfattening of .meat animals. However, oats are very useful as a supplement to the primarily roughage diet of dairy cattle, and in the Dairy Belt about a quarter of the tillable land is planted to them. Specialty crops. Localized areas within the Dairy Belt specialize in the production of commercial fruits and vegetables. Ten per cent of the cash receipts of Dairy Belt farmers are derived from the sale of these products, compared with only 1 per cent in the Corn Belt. The outstanding area of fruit and vegetable pro duction is located along the eastern shore of Lake Michigan where the influence of the lake moderates temperature variations, producing a climate favor able to these crops. Smaller areas are scattered throughout Wisconsin, Minnesota and the lower peninsula of Michigan. However, the production of commercial fruits and vegetables in the Dairy Belt is limited by two factors: first, the climatic con ditions favorable to some of these crops are quite localized and, second, the market for these crops is 22 Annual report, 1954 corn D a iry B elt cro p s, 1 9 4 1 - 5 0 Roughages— hay and ensilage— are harvested from about 35 per cent o f Dairy Belt cropland. Oats account for an additional 25 per cent. not sufficiently extensive so that the belt as a whole can profitably specialize in their production. Con sequently, these specialty crops are only occasionally an attractive alternative to the present roughagemilk economy. But they do provide an element of diversity in the salable output of the region. Hay and pasture. The cool climate of the Dairy Belt is well suited to the growth of short-rooted grasses. For the deep-rooted legumes, however, the fertility of the Corn Belt soils more than offsets the disadvantage of that area’s hot summer temperatures. Despite this disadvantage in the production of legumes, the Dairy Belt plants as many acres to alfalfa as does the Corn Belt even though the latter region has almost three times as much cropland. The grasses that supply much of the roughage produced in the Dairy Belt grow on nontillable land, in permanent pastures and meadows. In addition, both grasses and legumes are planted on cropland and harvested and preserved as hay or ensilage. In terms of acreage, hay is the leading crop in the Dairy Belt. Primarily because of the rougher topography and poorer soils in the Dairy Belt, only 60 per cent of the land area is in farms and a smaller proportion of the land in farms is tillable. The proportion in permanent pasture, woodland and waste is consider ably larger than is the case for the Corn Belt. The land not in farms has little agricultural value and is utilized largely as a recreational area and for the production of wood products. Cropland Permanent pasture W oodland and waste (per cent o f total land in farms) Corn Belt Dairy Belt 75 62 18 23 7 15 The adaptability of permanent pasture and hay land is severely restricted. Pasture can be utilized effectively by only a few types of farm animals, dairy cattle being one. Thus the rougher topography of the Dairy Belt is a factor contributing to the special ization of that region in milk production. Nowhere is this better illustrated than in southwest Wisconsin. Climatically that area should be part of the Corn Belt. Corn and meat animal production is higher there than in any other part of the state. Neverthe less, it is predominantly a dairy area, primarily be cause of its rough topography. The average farm in that area has about twice as much permanent pasture as farms in adjacent areas to the east, south and west. The Corn Belt could produce much more milk per acre of land than the Dairy Belt because of its advantage in the production of feeds suitable for dairy cows. However, grains and meat animals are more profitable in that region than a roughage and milk economy would be. Milk production, a rejected alternative of the Corn Belt, becomes the most attractive alternative for the “roughage-producing” Dairy Belt. Hay can be harvested and stored in a number o f ways. The above picture shows a baler picking up the hay from a windrow in the field. The hay bales will then be hauled to a barn for storage. The scene below shows a field chopper picking up the hay, cutting it and blowing it into a wagon alongside. The chopped hay will then be hauled to a silo and blown into it for storage. Federal Reserve Bank of Chicago 23 Grasses grown on hilly land in the Dairy Belt can be converted into livestock products much more profitably by milk cows than by other roughage-consuming livestock. Elaborate and expensive buildings, designed specifically for milk production, reduce the ad ap ta bility o f Dairy Belt livestock operations. Dairy cows, the roughage converters. Since roughages form the foundation of the farm economy in the Dairy Belt, the livestock superstructure is made up of roughage-consuming animals. Cattle, sheep, goats and horses are the possible alternatives. Goats never have been important to American agriculture, and the horse has largely “gone the way of the buffalo.” Practical alternatives are few indeed: milk cows, raising feeder cattle and sheep. The belt specializes in milk production because price relation ships historically have made milk cows more profit able than the other two types of roughage-consuming livestock, which are produced largely on the cheaper lands further removed from markets and under climatic conditions less favorable to the growth of feed for dairy cows. Technological developments in recent years have introduced low-cost substitutes for dairy products which consist largely of milk fat, and this has made milk production relatively less profitable than it was formerly. However, the Dairy Belt has not shifted away from its specialization in milk because this alternative still remains most profitable for that area. Beef cattle could be raised in the Dairy Belt and sold as feeders for shipment into the Corn Belt to be fattened on grain. But, with the present small size of farms and price relationships, that would result in a rather drastic cut in farm income. Along the southern boundary of the Dairy Belt — for example, in southwest Wisconsin — enough corn is harvested for grain so that grain fattening of cattle is practical. Consequently, in the future the hillside pastures in that area may well provide a setting for more Herefords and Angus and fewer Holsteins and Guernseys. But there are few areas in the Dairy Belt that qualify climatically as a part of the Corn Belt. As for sheep, they are an even less profitable live stock alternative than the raising of beef cattle. So the Dairy Belt as a whole — but especially its upper portion — is likely to continue to specialize in the production of milk even though demand and supply conditions have made milk production less profitable than it was previously. Demand for milk As is the case with meats, the demand for milk originates in consumer preferences and incomes. Con sumers like the flavor and texture of dairy products. But they seem to be less inclined to shift their demand for dairy products in response to income or price changes than is the case for meat, i.e., the demand for dairy products is less elastic. Furthermore, the demand for dairy products appears to be more vul- 24 Annual report, 1954 d a iry bee f c a ttle p o u ltry hogs hogs p o u ltry dairy A A Corn livestock sold B e lt Dairy Belt C ro p s a n d liv e sto ck in th e tw o b elts nerable to technological change. For example, the flavor and texture of milk fat can be duplicated quite readily by the processing of vegetable oils; but it is difficult to conceive of a good vegetable substitute for a steak or rasher of bacon. Because of the nature of consumer preferences and the competition from other commodities, the demand for milk probably will grow somewhat less than the demand for meats as our national economy develops and per capita incomes rise. However, there is another side to the coin. Just as an increase in per capita income leads to a greater expansion in the demand for meat than for dairy products, so also does a fall in consumer income lead to a greater contraction in the demand for meat Grains are the major crops in the more productive Corn Belt whereas the Dairy Belt specializes in roughages. In both belts, the major portion is fed to livestock with meat animals predominating in one region and milk cows in the other. Grains are fed to all types o f livestock in the Corn Belt with hogs being the largest consumer. A sizable part o f the roughage in that region is fed to beef cattle. In the Dairy Belt most o f the roughage is eaten by milk cows which also consume much o f the grain grown in that area. Hence, livestock output in the Dairy Belt is less diversified than in the Corn Belt. In both regions some o f the crops are sold for cash, the proportion being higher in the Corn Belt where corn and soybeans are the principal cash crops. However, part of the cash corn eventually is fed to livestock in the same area. W heat is sold in both belts, but the principal cash crop in the Dairy Belt is fruits and vegetables. Federal Reserve Bank of Chicago 25 than for dairy products. Hence, in the past the price and the profitability of producing milk have been more stable through “boom and bust” than have the price and the profitability of producing meat animals. How milk is used. Milk can be used fresh or it may be manufactured into a number of other dairy products. As the following table shows, these two sources of the demand for milk are of approximately equal importance. M ilk U tiliza tio n , 1 9 5 3 T y p e o f use p' r o f total Fluid consumption.................................................................. 46.6 Fed to calves on farm s........................................................ 2.7 Manufactured dairy products............................................. 50.7 Butter.................................................................................. 26.9 Cheese......................................................................... . . . 10.7 Frozen dairy products..................................................... 6.5 Evaporated and condensed milk................................... 5.2 Dry whole milk........................................................................... 7 Other manufactured dairy products......................................7 100.0 There are important differences in the demands for the milk consumed as fresh fluid milk and that for use in manufactured dairy products. The milk set on the patron’s doorstep in the wee hours of the morning or purchased at the grocery store normally has been the most stable source of demand for the product of the dairy cow. At the present time per capita consumption of fluid milk is only 5 per cent larger than it was 30 years ago. This part of the demand for milk has increased only slightly faster than the growth in the nation’s population. Con sumption has not been stimulated much by the in creased per capita consumer incomes accompanying the growth of the national economy. By the same token it has not been discouraged much by depres sions; per capita consumption of fluid milk in the early Thirties was at about the same level as in the late Twenties. Moreover, fluid milk seems to be relatively secure against inroads of other commodities. It would ap pear difficult to develop a cheaper substitute having the flavor and texture of milk and containing the minerals and proteins that make milk the “near perfect food.” Technological advance should expand the market for fluid milk by reducing its transportation disad vantage. Fluid milk is more than 80 per cent water — an expensive commodity to transport, considering its value — and is highly perishable. It is quite possible that through concentration, drying, freezing or some similar process the product will be trans ported in a concentrated form in the future and 26 Annual report, 1954 reconstituted with water at the point of consumption. Considering all these factors, the future demand for fluid milk or its equivalent appears to be reason ably good. Although this product may not have as much growth potential as high-quality meat, still it should grow at least as fast as the nation’s population, and it should continue to maintain its historical stability through business cycles. The market for manufactured dairy products dif fers considerably from that for fluid milk. Further more, the various manufactured products have widely different demand characteristics, depending largely on the relative importance of milk fat in their make up. Consumers have a strong preference for ice cream and other frozen dairy products as well as cheese. As per capita incomes rise, the demand for these products can be expected to grow faster than the nation’s population. Since pre-World War II, per capita consumption of cheese and ice cream has increased 40 and 90 per cent, respectively, while the per capita consumption of all dairy products (on a solids basis) has increased only about 5 per cent. Milk proteins are the principal ingredient of cheese, so the competition of vegetable fats is not a large threat to the cheese component of the market for milk. Although milk proteins are also an ingredient of ice cream, the fat is a more important part of this product than in cheese, and the competition of vege table fats is more of a threat to it. In fact, consider able amounts of vegetable fats are now being used in “frozen dairy desserts.” Consumer preferences for butter and evaporated milk are not as strong as for ice cream and cheese. In fact as per capita consumer incomes have ex panded, the demand for evaporated milk has shown little response. This is due largely to the flavor of the product. Technical improvement on this count could change that picture. The principal ingredient of butter is milk fat — a product especially vulnerable to competition from other fats. Edible fats are derived from vegetable sources — like soybeans — much more economically than from milk. Butter already has lost about half its former market. Per capita consumption currently is at the annual rate of about 9 pounds, as compared with about 17 pounds prewar. The demand for milk fat and products for which milk fat is an important ingredient will probably continue to be under heavy pressure from cheaper fats. This will tend to depress the price of milk for use in manufactured dairy products. City milk sheds. Milk supplies for fresh fluid consumption and for manufacture are differentiated both geographically and quality-wise. Adjacent to most metropolitan centers there is a so-called “milk shed” area from which milk for fresh fluid consump tion is obtained. The milk shed for the Chicago metropolitan area extends more than 150 miles north of the city, well, into Wisconsin. Also included are the counties immediately adjacent to the city on the west and south, as well as several counties in north west Indiana. As pointed out earlier, the cost of transporting milk is relatively high in relation to its value. The price the city must pay to get its milk is at least equal to the cost of transporting the product from the furthest fringe of the milk shed plus a farm price at that location high enough to make milk production more profitable than other alternatives available to farmers in that area. Because the “alternatives” are much less profitable in the Dairy Belt than in the Corn Belt, the Chicago milk shed extends a consider able distance north of the city but only a short dis tance to the west and south. This accounts for its peculiar outline. Milk used for fresh fluid consumption must be of the highest quality and purity. Rigid sanitary require ments are imposed by city health officials, and peri odic inspections are made of farms and herds to ensure that those requirements are met. The require ments pertain, among other things, to the layout and equipment of the barn and milk-house. Most farm ers find it necessary to make additional investments in these facilities before qualifying to supply milk for the fluid market. This tends to hold down the number of farms which attempt to qualify and pro Seasonal variation o f milk production alters the extent o f a milk shed. From September through December, when production is slack, milk must be drawn from a larger area to supply city needs. vides some support to the price of milk on such markets. Prices are supported also by other insti tutional factors, including state and Federal regu lations. Furthermore, transportation costs limit competition from supplies produced some distance from the market. This provides an advantage to milk producers located close to a large city and explains why the area immediately adjacent to Chi cago is part of the Dairy Belt even though climati cally it is in the Corn Belt. Although the above sketch of the factors that determine supply areas for fluid milk markets is related primarily to Chicago, the same general prin ciples apply to Detroit, Milwaukee and MinneapolisSt. Paul, as well as other metropolitan centers. Farm ers selling to these markets have a dependable outlet for their product, but they also have a large invest ment in very specialized buildings and equipment. Moreover, their dairy herds have typically been built up over many years with careful attention paid to keeping them free of disease as well as to improving their .productivity. The large investment in special ized capital has greatly restricted the adaptability of such farms and has been an important factor in initiating the development and adoption of techniques for boosting and stabilizing prices in those markets. Federal Reserve Bank o f Chicago 27 Pro du ctio n o f m a n u fa ctu re d d a ir y p ro d u cts, 1 9 5 0 - 5 2 Wisconsin manufactures a large amount o f all types of dairy products but specializes in cheese and evaporated milk. Michigan is the leader in ice cream production. Minnesota specializes in butter. The largest share of Minnesota's milk is manufactured; in Wisconsin and Michigan the proportion is smaller as those states supply fresh fluid milk fo r the large Chicago and Detroit markets. 28 Annual report, 1954 Dealers distributing fluid milk in cities paid an average of $546 per hundred pounds for the milk they purchased in 1952. In the same year condenseries paid only $3.74. The fluid market probably will continue to be more profitable than the market for milk that goes into manufactured dairy products, and as time goes on an increasing proportion of the total milk supply will qualify for fluid milk markets. If, as seems likely, a more economical method can be found to transport milk and Midwest dairy farmers are permitted to supply milk for fluid consumption to markets outside the area, the prospects for parts of the Midwest Dairy Belt would be improved. The manufactured products. The farms that produce manufacturing milk typically need not be inspected and approved and therefore are not “tied” to any one market outlet for their product. The milk is graded and valued only on the basis of its condi tion when received at the factory, and for the most part any of several products may be manufactured from it. This flexibility is an outgrowth of improve ments in transportation, as these have affected the collection of milk from farms and have made obsolete the small crossroads dairy manufacturing plant in most areas. It is now practical to assemble at one point an adequate volume of milk to gain the benefits of economy of size and diversification in manufacturing. A modern country dairy plant is equipped to handle milk for several or all of its major uses — receive and ship milk for urban markets and manufacture butter, cheese, evaporated milk, ice cream, dried milk and possibly a number of specialty dairy foods. Such a plant can shift from one product to another, depending on their relative prices. A modern manu facturing outlet provides a much broader market for the dairy farmer than the local creamery or cheese factory of earlier days which typically manufactured only one product and was the only available market for most farmers. The exact mix of dairy end prod ucts is now very sensitive to price differentials, and these new manufacturing plants more quickly and effectively take advantage of any changes in consumer demand. One result has been to hold the relative prices of the different products about constant. Manufactured products as a group serve as the shock absorber of the dairy business. Unlike fluid milk, manufactured dairy products typically are pro duced for a nationwide market, and they must meet nationwide competition. Since they have a much higher value per pound than has fluid milk, trans portation costs account for a smaller part of the delivered price, and nearness to market is not so important in determining the location of producing areas. Most of the milk used in manufactured dairy products is produced some distance from large urban centers, and the products typically are produced from milk that does not meet the inspection standards for fresh fluid use. Although manufacturing milk is diverted to fresh fluid use only in exceptional circumstances, milk that qualifies for fluid markets is regularly diverted to manufactured products. Whenever the supply floods the market at established prices, this “surplus” is manufactured, and the manufactured products are stored or sold in competition with those produced outside the “milk sheds.” In this respect the manu factured products serve as a shock absorber for the fluid milk sector of the industry. Thus, any change in the total supply of milk or in the demand for any dairy product tends to affect the supply and price structure for all manufactured dairy products. The loss, of a substantial part of the butter market, therefore, has had a double-barreled effect of in creasing the supply of milk available for other uses and making less effective the residual cushioning effect which the butter market has conventionally provided for fluid milk and other manufactured dairy products. Adjustment in the Dairy Belt. Despite the open ing up of alternative channels for manufactured uses, the farm production of milk throughout most of the Dairy Belt remains quite unadaptable to chang ing economic conditions. Much of the milk destined for manufacture in the region is produced in the northern part of the belt where the next best use of the land is very much less attractive. Supply adjust ments to the inroads made by other fats on dairy markets, therefore, will be made largely in the south ern and western areas of the Dairy Belt where the alternatives to dairy farming yield more nearly com parable incomes. As indicated previously, corn and meat animals are close competitors of dairy cows along the southern edge of the belt while cash grain farming is an attractive alternative along most of its western edge. Insofar as production adjustments are made along the borders of the belt, the economic pressure on dairy areas that have little in the way of alternatives will be eased. Adjustments within the highly specialized dairy areas will be largely on the cost side of the ledger. Studies indicate that many dairy farmers can mate rially reduce their cost per pound of producing milk by making substantial additional investment in a three-stage program to: (1) increase the yield and per cent o f 1 9 3 5 -3 9 M ilk p rod uction a n d m ilk co w * A fter hitting a peak in 1944 the number o f milk cows in the U. S. began a long decline that terminated in 1952. During that period the production o f milk per cow continually increased, so that total milk output remained relatively stable. When cow numbers increased in 1953-54, total milk production leaped upward. Although farmers have been receiving lower prices for milk since 1952, production has not decreased because o f the limited a d ap ta bility of dairy farming. Over wide areas of the nation other livestock alternatives remain considerably less attractive than milk cows. The long uptrend in output per cow is likely to continue because that is one way in which the fixed resources on da iry farms can be utilized more efficiently. Hence, future adjustments in milk production probably will come about prim arily through the variation in cow numbers, chiefly in marginal areas. quality of hay and pasture, (2) step up the quality and number of cows and (3) push ahead in the mechanization of both the crops and dairy enter prises. Organized efforts are being made also to expand markets for the various dairy products. The prospect, therefore, is that dairy farming will continue to hold sway throughout most of the present Dairy Belt even if milk prices were to remain at a relatively low level, but that fewer, larger and more efficient farms will be recorded in future agricul tural censuses of the area. The changes probably will come slowly, however, because of the specialized nature of much of the investment in buildings and equipment and will be made only in response to powerful and persistent stimuli. This is in sharp contrast with the Corn Belt where the land, climate and relatively unspecialized capital provide the essentials for a highly adaptable agriculture. Federal Reserve Bank of Chicago 29 FEDERAL RESERVE BANK OF C H I C A G O Activities in 1954 n a financial system which serves a dynamic economy, each year brings new changes. The year 1954 was no exception. For the economy as a whole, it was a year of readjustment and subsequent resurgence. For the financial system it was a period of easier credit availability, lower interest rates and, in some sectors, greater activity. A ssets and liabilities The reflection of many of the year’s changes can be clearly seen in the annual financial statements of the Federal Reserve Bank. Such statements reveal with equal clarity the unique nature of our central banking structure — the Federal Reserve System. Assets and liabilities alien to most other institutions appear in large numbers on Reserve Bank books. These result directly from Congressionally-assigned responsibilities and powers and vary in magnitude as the Bank proceeds in the discharge of its statutory functions. Among the unique assets of a Federal Reserve Bank are its holdings of gold certificates. For the Chicago Bank, such holdings equaled 3.7 billion dollars on December 31, 1954. This total was equal to 45.2 per cent of the Bank’s combined note and deposit liabilities, nearly twice the legally required minimum proportion of 25 per cent. Over the year, however, holdings of gold certifi cates declined by some 170 million. In good part this stemmed from the ebb and flow of private financial transactions. Member banks, in making outof-District payments both for their own account and 30 Annual report, 1954 at the order of customers, draw upon their reserve balances at the Chicago Bank. In 1954, these drains were not fully offset by the amounts credited to Dis trict bank reserve accounts from receipts from out-ofDistrict residents. As a result, in the daily telegraphic clearings among Reserve Banks, the Chicago Bank often found itself with a debit balance, to be settled as customary by a transfer of ownership of gold certificates to the creditor Reserve Banks. In addition, the Chicago Bank’s gold certificate holdings were further reduced by the reallocation of participation in the System Open Market Account. U. S. Government securities held by the Account are reallocated among Reserve Banks from time to time in proportion to the total assets of each Bank. Any Reserve Bank receiving an increased allocation of Governments in this process makes payment by the transfer of gold certificates to those Banks with reduced allocations. In April of 1954, the Chicago Bank participation in the Open Market Account was increased from 17.2832 per cent to 17.4818 per cent. As a result, by year-end this Bank’s holdings of gold certificates were approximately 50 million lower and FEDERAL RESERVE COMPARATIVE BANK OF CHICAGO STATEMENT OF CONDITION Assets Decem ber 31, 1954 Gold certificates: Redemption fund for Federal Reserve notes . Other h o ld in g s .......................................................... Total gold ce rtific a te s .......................................... Federal Reserve notes of other b a n k s ........................... Other c a s h .......................................................................... Total cash .......................................................... 144,007,835 3,581,138,952 3,725,146,787 20,411,000 62,994,384 3,808,552,171 151,495,190 3,743,997,014 3,895,492,204 27,163,500 62,521,459 3,985,177,163 Discounts and advances: Member b a n k s .......................................................... O t h e r .......................................................................... Total discounts and a d v a n c e s .......................... 0 18.533.333 18.533.333 1, 000,000 2.055.000 3.055.000 U.S. Government s e c u r itie s .......................................... Total loans and s e c u r itie s ................................ 4,350,934,000 4,369,467,333 4.375.704.000 4.378.759.000 Uncollected cash i t e m s ................................................ Bank prem ises..................................................................... Other a s s e t s ..................................................................... 638,551,318 6,280,546 25,248,763 8,848,100,131 719,839,031 6,448,255 25,934,570 9,116,158,019 Federal Reserve notes in c ir c u la tio n .......................... 5,064,808,875 5,111,406,285 Deposits: Member bank— reserve a c c o u n ts ........................... U.S. Treasurer— general a c c o u n t .......................... F o r e i g n ..................................................................... O t h e r .......................................................................... Total d e p o s it s ..................................................... 2,979,096,001 97,480,973 66,998,000 15,350,338 3,158,925,312 3,250,620,030 30,188,768 56,060,400 17,775,265 3,354,644,463 471,408,427 2,318,473 8,697,461,087 505,628,000 3,016,988 8,974,695,736 38,353,850 96,565,887 1,429,384 14,289,923 8,848,100,131 35,000,850 90,791,918 1,429,384 14,240,131 9,116,158,019 Total assets ................................................. Decem ber 31, 1953 Liabilities Deferred availability cash it e m s ..................................... Other l i a b i l i t i e s ............................................................... Total lia b ilit ie s ............................................ Capital accounts Capital paid i n ............................................................... Surplus (Section 7 ) .......................................................... Surplus (Section 1 3 b ) ..................................................... Other capital a c c o u n ts ..................................................... Total liabilities and capital accounts . . . Federal Reserve Bank o f Chicago 31 Governments were 50 million dollars higher than the totals which would have obtained under the previous allocation formula. Despite this increased participation percentage, the total Chicago participation in U. S. Government se curities held in the Open Market Account amounted to 4,351 million dollars on December 31, 1954, down 25 million from the end-of-1953 total. These hold ings fluctuated a good deal during the year, as the Open Market Account bought and sold securities to adjust the total of available member bank reserves to levels commensurate with the aims of over-all monetary policy. In pursuing these aims the Federal Reserve System also employed other instruments of general credit control, such as reductions in discount rates and acquisition of Governments under repur chase agreement. The most important single System action affecting bank reserve positions, of course, was the midyear reduction in reserve requirements. Open Market Account sales of Governments were under taken from time to time to moderate the impact of these and other reserve-releasing influences, and the prevalence of such complementary open market transactions was reflected in the modest net decline in Chicago Bank holdings of Governments over 1954 as a whole. Discounts and advances to member banks showed a zero balance on the books of the Bank on Decem ber 31, 1954. Such a result, however, gives no in dication of the extent to which member banks utilized this flexible and temporary source of reserve funds in order to adjust to shifting financial currents during the year. It is traditional practice for member banks to retire any such indebtedness at the close of each year. Over the year 1954 as a whole, extensions of short-term reserve credit were made to 122 differ ent Seventh District member banks, virtually all on the basis of notes collateraled by U. S. Government securities. The largest single liability of the Bank is the out standing total of its Federal Reserve notes. Over 5 billion dollars of these notes were in the hands of commercial banks and the public at the close of 1954. The outstanding total dipped 1 per cent over the year as a whole, giving evidence of the lessened public demand for currency at the moderately reduced level of general business. These notes, together with those issued by the eleven other Federal Reserve Banks, comprise more than 85 per cent of the total dollar volume of do mestic currency and coin in use. For the most part, Federal Reserve Bank of Chicago notes circulate within the confines of the Seventh Federal Reserve 32 Annual report, 1954 District. The wide-ranging activities of individuals and businesses, however, carry a modest proportion of Federal Reserve notes over District lines. Until July 19, 1954, any fit notes of Federal Reserve Banks which found their way to the receiving departments of another Reserve Bank were required by law to be returned to the Reserve Bank of issue. With a change in enabling legislation, each Reserve Bank now may reissue the fit notes of any other Reserve Bank to satisfy public requests for currency. The result, as the later discussion of expenses indicates, has been a considerable saving in shipping costs. The most significant liability of the Reserve Bank on December 31, 1954, was its nearly 3.3 billion of member bank reserve deposits. As the funds which member banks are required to hold on deposit in fixed proportions to their own customer deposits, these reserves are the keystone of the bank credit structure. The ability of banks to extend loans and investments depends upon the relative ease of acquir ing and maintaining the required minimum volume of these reserve deposits. Most Federal Reserve policy actions, in turn, are aimed at expanding or contract ing the relative volume of these reserve deposits in the interests of promoting credit conditions conducive to economic stability and growth. Between the end of 1953 and the end of 1954, member bank reserve accounts at the Chicago Re serve Bank dipped by 272 million, or 8 per cent. Reserve-affecting operations carried out by the Fed eral Reserve were among the major causes of this de cline. Around midyear, the Board of Governors of the Federal Reserve System announced a reduction in the percentage reserve requirements applicable to member banks, in order to free ample funds to meet seasonal private and Treasury borrowing needs. The reduction went into effect in stages between June 16 and August 1, paring percentage requirements against time deposits from 6 to 5 per cent, and re quirements against demand deposits from 22 to 20 per cent for central reserve city banks, from 19 to 18 per cent for reserve city banks and from 13 to 12 per cent for other member banks. In total, the reduction released over 250 million in reserve funds for free use by Seventh District mem ber banks. Most of these funds were committed to use in one of two ways. Some subsequent lending and investing activity created additional District member bank deposits, and the dollar total of reserves required automatically rose proportionately. At the same time, other District bank earning asset acqui sitions involved payments to out-of-District sellers or borrowers, and these payments were made, directly or indirectly, by drawing down the newly-released reserves. To the extent earning asset purchases were made from private sellers, payments therefor usually resulted in transfers of reserves to the sellers’ banks. However, to the extent District banks bought Govern ments from the System Open Market Account (which was selling Governments during this period to mod erate the impact of the reserve requirement reduc tion) payments therefor resulted in a net absorption of reserves from the commercial banking system. Payments across District lines were also made and received by District banks on a routine basis through out the year. Not only bank investment operations but all types of check payments by bank depositors go on each business day, and the usual procedure for payment is the employment, initially or eventually, of transfers of reserve balances among the banks involved. When these payments cross District lines, the reserve account balances of banks in the respec tive Districts are altered. In 1954, the blend of payments made by District banks to Federal Reserve accounts and other out-ofDistrict institutions exceeded the amount received. This was true in most other Districts as well, for Federal Reserve activities absorbed a net of over 1 billion dollars from the national pool of bank re serve balances over the year as a whole. A modest concentration of reserve drains in Seventh District banks, however, led to a decline of greater than na tional average proportions in the reserve account bal ances shown on the books of the Federal Reserve Bank of Chicago. Besides deposit accounts of member banks, the Chicago Reserve Bank also holds a deposit account of the Treasurer of the United States. On December 31, 1954, this balance amounted to 97 million dollars, up 67 million from the year-ago figure. This net in crease is less significant than the percentage change might suggest. Through this account and similar balances in other Reserve Banks move almost all Treasury receipts and expenditures. Periodic calls upon Tax and Loan accounts at commercial banks are the Treasury’s chief device for replenishing its Reserve Bank balances as they are drained by the clearing of Government checks. Careful synchroniza tion of such calls with expenditures permits the Treasury to hold its Federal Reserve balances at a relatively low level and helps to minimize the strains on the banking system which result from the massive Federal financial flows. The Bank also holds a small volume of deposits for the account of foreign central banks and govern ments. At year-end, such accounts aggregated 67 million. These balances and those in other Reserve Banks are used for operational purposes and, in addi tion, form one part of the central monetary reserves for most of the owner countries. Total capital accounts of the Federal Reserve Bank of Chicago aggregated 141 million dollars on De cember 31, 1954. One-fourth of this total was paidin capital, contributed by the member banks over the Seventh District. Each member bank is required to purchase stock of its Federal Reserve Bank in an amount equal to 3 per cent of the bank’s combined capital and surplus and receives an annual dividend of 6 per cent on such holdings. During 1954, paid-in capital of the Reserve Bank was increased by nearly 3.4 million dollars. Most of this increase stemmed from the 111 million which District member banks added to their own capital and surplus accounts as a strengthening measure. Some 57,000 dollars were received in initial stock subscriptions from new mem bers of the Reserve System and 28,500 dollars in stock were cancelled as a result of mergers or bank withdrawals from System membership. Earnings and e x p e n se s For 1954 as a whole, total operating revenue of the Federal Reserve Bank of Chicago amounted to 76.3 million dollars, down 5 per cent from the pre vious year but the second highest in the history of the Bank. The major portion of the 1954 decline in earnings centered in income from discounts and ad vances. Such extensions of credit, primarily to mem ber banks, yielded only 633 thousand dollars in earn ings during the year, less than one-fifth as much as in 1953. This drop stemmed from two separate causes, each related to the policy of monetary ease which was pursued by the Federal Reserve System over the year. Early in the year, the discount rate of interest charged on such loans was twice reduced— from 2 per cent to 1% per cent on February 11 and from 13 per cent to 1Vi per cent on April 14. More A over, through such policy actions as open market pur chases of Government securities and reductions in member bank reserve requirements, the System .kept reserves abundantly available to commercial banks during most of 1954. As a result, member banks had much less need of borrowed reserves. Federal Reserve Bank o f Chicago 33 FEDERAL RESERVE COMPARATIVE BANK OF CHICAGO STATEMENT OF EARNINGS Current earnings: Discounts and a d v a n c e s ................................................ U.S. Government s e c u ritie s ........................................... All o t h e r .......................................................................... Total current e a r n in g s ........................................... AND 1954 EXPENSES 1953 632,661 75,691,706 14,920 76,339,287 3,564,394 77,107,351 20,597 80,692,342 Current expenses: S a la r ie s .......................................................................... Retirement c o n trib u tio n s ................................................ Postage and e xp re ssa g e ................................................ Provision and maintenance of f a c ilitie s ...................... Assessment for expenses of Board of Governors . . Cost of Federal Reserve c u rr e n c y ................................ All o t h e r .......................................................................... T o t a l .......................................................................... Less reimbursement for certain fiscal agency and other e x p e n s e s ..................... Current net e x p e n s e s ................................................ 11,573,199 1,083,646 2,196,737 1,944,292 578,800 1,077,102 1,496,401 19^950,177 11,006,886 1,004,699 2,470,456 2,289,358 561,000 1,784,003 1,475,242 20,591,644 3,589,960 16,360,217 3,635,765 16,955,879 Current net e a r n in g s ................................................ 59,979,070 63,736,463 72,999 11,578 84,577 292,477 123 292,600 Retirement system (increased benefits to members) . Reserves for co n tin g e n c ie s ........................................... All o t h e r .......................................................................... Total deductions........................................................... — 49,792 111,433 161,225 299,518 81,996 5,343 386,857 Net e a rn in g s ................................................................ 59,902,422 63,642,206 Paid U.S. Treasury (interest on F. R. n o t e s ) ..................... D iv id e n d s ................................................................................ Transferred to Surplus (Section 7 ) ..................................... 51,963,901 2,164,551 5,773,970 55,473,065 2,005,407 6,163,734 Surplus January 1 Transferred to Surplus— as a b o v e ..................................... 90,791,918 5,773,970 84,628,184 6,163,734 Surplus December 31 96,565,888 90,791,918 Additions to current net earnings: Profits on sales of U.S. Government securities (net) . All o t h e r .......................................................................... Total a d d it io n s ........................................................... Deductions from current net earnings: S u rp lu s A c c o u n t (Section 7) 34 Annual report, 1954 Receipts of interest on U. S. Government securities were also down slightly in 1954. Annual income from this source totaled 75.7 million and represented over 90 per cent of total Bank current earnings. The 2 per cent drop from the 1953 level occurred despite a fractional increase in average holdings. The lower interest rates prevailing in the securities market were gradually reflected in the Reserve Bank port folio as purchases, sales and exchanges of Govern ments were executed in the course of credit policy operations. As a result, for the year as a whole, the average interest rate earned by the Bank on its Gov ernment holdings approximated 1.8 per cent, down from 2.0 per cent for the preceding year. Developments in Bank expenses during 1954 pre sented a mixed picture. Heightened financial activity, particularly on the part of the Treasury, increased the demands for related Bank services. On the other hand, the lower level of general business activity, re sulted in modest reductions in the volume— and ex penses—of such other Bank services as the shipment and receipt of coin and currency. In addition, 1954 brought a number of improvements in operating pro cedures which resulted in substantial reductions in the costs of some departmental activities. Total salaries of personnel, which represent more than half of total operating expenses, exceeded the 1953 total by 5 per cent. The rise reflected adjust ments in rates of compensation and an increase of 2 per cent in the number of persons employed. The Bank’s 1954 activities were carried on by a staff of 2,554 at the Chicago office and 479 at the Detroit Branch. Changes in operating procedures and modest re ductions in total service volume had marked effects upon the more than 3 million in costs of postage and expressage and the provision of Federal Reserve notes. In 1954, these two cost items were reduced 11 per cent and 40 per cent, respectively, from the levels of the previous year. A major factor reducing shipping charges was the elimination, after midyear, of the requirement that all fit notes of other Federal Reserve Banks be returned to the Bank of issue or to the Treasury for redemption. The aggregate expense of providing and maintain ing facilities for the efficient execution of Bank opera tions amounted to slightly under 2 million dollars in 1954, a decrease of 15 per cent from the previous year. The chief cost reduction in this category occurred in outlays for the purchase of new furniture and equipment. This drop was a reflection of the sub stantial expenditures that were made for these purposes during 1953. In the case of a number of the fiscal agency services which it performs for the U. S. Treasury, the Bank is reimbursed for the expenses incurred. These pay ments are made by the Treasury from Congressional appropriations to the departments or agencies for whom the services are performed. In 1954, the total of reimbursements for fiscal agency and other services received by the Bank was 3.6 million dollars. For several of these services, the volume of items handled was greater in 1954 than in the previous years. Intro duction of numerous operating economies, however, helped to hold the total of reimbursable expenses 1.3 per cent below the 1953 level. In total, net Bank operating expenses during 1954 amounted to 16.3 million dollars, 3 per cent less than in 1953. Combined with the drop in total earnings, however, current net earnings declined 6 per cent to a 1954 total of just under 60 million. It has been the practice, since the inception of the System, for the Federal Reserve Banks to return the bulk of their net earnings to the U. S. Treasury. This procedure is in keeping with the intent of Congress as expressed in the Federal Reserve Act and reflects the public interest in which Federal Reserve functions are undertaken. Since 1947, this payment has been accomplished by means of an interest charge on out standing Federal Reserve notes of each Bank, levied by the Board of Governors and paid to the Treasury. In 1954, the Chicago Bank’s payment to the Treasury amounted to nearly 52 million, equal to 87 per cent of the Bank’s net earnings. Each year since 1916, the Federal Reserve Bank of Chicago has paid dividends on its common stock held by the member banks of the Seventh Federal Reserve District. By terms of the Federal Reserve Act, the annual dividend is cumulative and is set at 6 per cent of the paid-in capital stock. In 1954, such dividend payments aggregated nearly 2.2 million dol lars, 8 per cent more than in 1953. They were made to over a thousand member banks throughout the five Midwest states which comprise the Seventh District. After all such payments were effected, the remain ing earnings— 5.8 million— were transferred to sur plus as required by Section 7 of the Federal Reserve Act. This transfer, while slightly smaller than that effected in 1953, brought the total surplus (Section 7) of the Bank to a new high of 96.6 million. Federal Reserve Bank of Chicago 35 Volum e of o p eratio n s Among the many functions performed by the Chicago Re serve Bank, the services ren dered to member banks and to the U. S. Treasury occupy the largest proportion of the Bank’s personnel and facilities. During 1954, more than 62 per cent of the 3,000 persons employed at the Chicago Bank and its Detroit Branch were engaged in these operations. The tables on the following pages indicate the major changes that occurred during this past year in the volume of such services at the Chicago office and the Detroit Branch. These changes reflect, in large part, the shift in territories served by the two offices. On January 1, 1954, the area served by the Detroit Branch was expanded to include the entire lower peninsula of Michigan. As a result, the number of member banks within the Detroit office’s territory increased from 98 to 189. Inasmuch as the original 98 banks included the large Detroit members, the total deposits of banks in the Branch territory rose by only 18 per cent. Collections The sorting and routing of commercial bank and Government checks is the biggest physical task of the Bank. To do this job, the world’s largest check clear ing installation is operated by the Collectibns Depart ment at the Chicago office. In the Chicago and Detroit Departments combined, an average of over 1.7 million checks were handled daily during 1954. This represented an increase of 2 per cent over the 1953 levels. The dollar amount of all checks processed also in creased by 2 per cent. While the average size of com mercial bank checks dropped fractionally, there was an offsetting increase in the average amount carried by Government checks. This latter rise resulted chiefly from the sizable repayments of the 1953 and early 1954 CCC loan pool offerings, which were handled by the Chicago office. “Other items” handled are mainly comprised of (1) member bank sendings of checks directly to the Reserve Bank or Branch servicing the bank on which the item was drawn and (2) credits to member bank accounts due to the automatic collection of interest on securities in safekeeping at a Reserve Bank or Branch. Both of these transactions increased in dollar volume during 1954. This past year, direct sendings of Seventh District banks outside Michigan to Detroit 36 Annual report, 1954 for collection more than tripled. In addition, the use of the Reserve’s coupon-clipping service expanded, especially for large city banks, as the total of securities held in safekeeping grew. Cash operations The volume of operations of the Cash Department in 1954 reflected the slightly lower levels of business activity which prevailed during the year. Total coin and currency paid to banks decreased by 3 per cent, both in number of pieces and dollar volume. The change in the distribution of the total between Chi cago and Detroit was primarily due to the shift in territories served by the two offices. The most significant change in Cash Department operations came in midsummer. To promote economy and efficiency of operation, Congress amended the Federal Reserve Act to permit each Reserve Bank to pay out the Federal Reserve notes of other Banks. Up until that time, Federal Reserve notes could be paid out to member banks only by the particular Re serve Bank which had originally issued the notes. This change eliminated almost all inter-Reserve Bank shipments of fit Federal Reserve notes, with sub stantial attendant savings. Savings in shipping costs also continued to be realized from another innovation in Cash Department operations. Since the summer of 1953, each Federal Reserve Bank has been destroying all Treasury-issued currency unfit for further circulation rather than forwarding it to the Treasury as had been the previous practice. During 1954, the Bank and Branch incinerated 167 million pieces of silver certificates and United States notes, at the average rate of nearly 1 million dollars every business day. Safekeeping of securities All member banks have the privilege of holding their Government securities in safekeeping with a Federal Reserve Bank or Branch. The service, pro vided gratis, includes interest coupon collection and releases for sale or exchange. Over 65 per cent of all U. S. securities owned by Seventh District members at the end of 1954 were held in safekeeping either at Chicago or Detroit. Reserve Banks also provide free safekeeping facilities for savings bonds owned by the general public. The combined activities of the Securities Depart ment and Savings Bond Custody at Chicago and De troit increased considerably during 1954. This re- FEDERAL RESERVE BANK OF CHICAGO Collections m ade through the F e d era l R e se rv e Bank Chicago 1954 Detroit Branch Per cent change from 1953 Detroit Chicago Branch Total Total Dollar volume (millions) Commercial bank checks......... Government checks1................ Other items............................... 126,436 13,509 1,295 26,351 3,553 229 152,787 17,062 1,524 2 18 15 -6 -1 2 63 1 10 20 Pieces (millions) Commercial bank checks......... Government checks1................ Other items............................... 326 109 1 66 16 * 392 125 1 2 -2 7 16 5 21 4 -1 10 ■■■M l *Less than 500 ,000 or less than 0.5 per cent. 'Including Postal Money Orders. Cash d ep artm en t op eratio n s Chicago Dollar volume (millions) Currency paid to banks1........ Coin paid to banks1................ Coin w ra p p e d .......................... Unfit currency withdrawn from circulation.................... 1954 Detroit Branch 3,514 122 85 1,170 21 12 4,684 143 97 769 223 597 1,261 959 Total Per cent change from 1953 Detroit Chicago Branch Total 2 14 32 -3 4 4 992 -8 31 -1 186 224 142 783 1,485 1,101 -4 -5 -5 5 8 33 -2 -3 -2 183 49 232 -1 0 27 -5 Chicago Pieces (millions) Currency paid to banks1. . . . Coin paid to banks1................ Coin w ra pp ed.......................... Unfit currency withdrawn from circulation.................... -4 2 1 1954 Detroit Branch 13,301 12,893 118 3,930 3,810 19 17,231 16,703 137 43 49 8 -2 9 -2 9 32 16 19 11 6,046 1,155 7,201 7 12 8 382 329 1,347 101 81 207 483 410 1,554 12 12 6 -1 -2 9 9 9 6 726 119 845 8 18 9 'Excluding other Federal Reserve Banks. S a fe k e e p in g of securities Dollar volume (millions) Securities received................... Securities released.................. Coupons detached.................. Securities held as of December 3 1 ....................... Pieces (thousands) Securities received.................. Securities released.................. Coupons detached.................. Securities held as of December 3 1 ....................... Total Per cent change from 1953 Detroit Chicago Branch Total ■■■■■■■■ Federal Reserve Bank of Chicago 37 fleeted both an increase in the number and dollar volume of purchases and sales of securities by mem ber banks and a rise in the volume of Treasury financing during the past year. Offerings by the Treasury exceeded the previous year’s figure by 15 billion dollars, an increase of more than one-third. Total dollar value of securities in safekeeping rose 8 per cent during 1954. This compares with a 600 million dollar, or 6 per cent, expansion in holdings of Governments by all District member banks during the past year. Fiscal agency services The Federal Reserve System, in its capacity as fiscal agent for the Treasury, handles the issuing, exchange and redemption of all United States securi ties. The expanded volume of Treasury new issues during 1954 directly contributed to the greater volume of servicing operations in marketable securi ties at both the Chicago and Detroit offices. The volume of savings bonds handled also rose significantly during the past year. Although both the number and dollar value of new bonds rose, the dollar amount increased relatively more than did the number of pieces. This was due to the expanded role that large-size bonds played in the savings bond pro gram. Preliminary data indicate that sales of the 200 dollar-and-over denominations rose 15 per cent in 1954, compared with a 2 per cent increase in the smaller denominations. The dollar value of Federal tax receipts processed rose by 3 per cent in 1954. Of the total, withheld income tax and Social Security receipts accounted for 83 per cent; Federal excise taxes represented 15 per cent; and Railroad Retirement deductions made up the remaining 2 per cent. The Federal Reserve Bank of Chicago also serves as fiscal agent and custodian for the Commodity Credit Corporation. In this capacity, it handles the issuance, transfer and redemption of certificates of interest in established pools of CCC loans on com modities- These certificates of interest are sold to commercial banks on a subscription basis and are callable, redeemable and transferable. At the end of 1954, over 1 billion dollars of such certificates were outstanding. S erv ice s to the T rea su ry D epartm ent Chicago 1954 Detroit Branch Per cent change from 1953 Detroit Total Branch Chicago Total Handling o f marketable securities Dollar volume (millions) New issues a t par value....................................14,516 Redemptions a t maturity value...................... 13,671 Exchanges and transfers................................. 20,507 1,781 1,808 4,153 16,297 15,479 24,660 20 13 53 17 14 23 19 12 47 22 35 30 253 355 380 7 22 15 23 39 14 8 23 16 Pieces (thousands) New issues at pa r value..................... ........... Redemptions at maturity v a lu e .. . . ............. Exchanges and transfers................................ 231 320 350 Handling o f savings bonds Dollar volume (millions) New issues at maturity va lu e ......................... 1,286 434 52 949 298 1,720 1,247 34 Redemptions at redemption v a lu e *............... 2 38 38 9 New issues......................................................... 10,494 Redemptions*...................................................... 10,849 6,233 6,271 16,727 17,120 6 -4 20 29 11 6 4,355 1,094 5 Pieces (thousands) Handling o f Federal ta x receipts Dollar volume (millions)........................................ 4,355 Number (thousands)............................................. 1,094 ^Includes Armed Forces Leave Bonds. 38 Annual report, 1954 3 3 5 Changes in m em bership C han g es in p ersonnel On December 31, 1954, member banks of the Federal Reserve Bank of Chicago numbered 1,020. Of these member institutions, 190 were located in the newly expanded Detroit Branch territory and 830 in the territory served by the Chicago office. During the year nine state and national banks joined the ranks of members, while two banks with drew from membership and one additional member bank merged with another member. The nine new members included five state banks which became affiliated with the System: Britt, Iowa First State Bank Titonka, Iowa Titonka Savings Bank Kent City, Michigan Kent City State Bank Metamora, Michigan Metamora State Savings Bank Roscommon, Michigan The Roscommon State Bank and four new national banks which became members upon opening for business: Kewanee, Illinois Kewanee National Bank Moline, Illinois Uptown National Bank of Moline Peoria, Illinois Prospect National Bank of Peoria University National Bank of Peoria The resources of three additional banks were brought into the System through the merger of mem ber and nonmember banks. As a result, at year-end the total assets of all member banks of the Federal Reserve Bank of Chicago topped 27 billion dollars. During 1954, the following promotions were made in the official staff of the Bank: Arthur M. Gustavson to Assistant Vice President Hugh J. Helmer to Assistant Vice President C. Paul Van Zante to Assistant Vice President Le Roy W. Dawson to Assistant Cashier Kathryn E. Lee to Assistant Cashier Charles J. Scanlon to Chief Examiner Leland M. Ross to Assistant Chief Examiner The year 1954 also brought the retirement of a number of valued officers and employees of the Chi cago Bank. Among those retiring with more than thirty years of service were: Frank A. Lindsten, Assistant Vice President Ingolf J. Petersen, Assistant Vice President Ralph Huntington John F. Schmidt Anna C. Crear Sigurd Simonson Lawrence Breslin Taken together these retired members of the Bank family represent more than 250 years of service to this institution. Mr. Lindsten, Mr. Petersen and Mr. Huntington were employees of the Bank on the day its doors were opened for business on November 16, 1914. The Bank is grateful for these many years of devotion to duty and acknowledges the contribution which such loyalty has rendered to the discharge of Federal Reserve Bank responsibilities. Federal Reserve Bank of Chicago 39 FEDERAL RESERVE BANK OF CHICAGO OFFICERS CLIFFORD S. Y O U N G P resident ERNEST C. HARRIS, First Vice GEORGE W . MITCHELL, Vice President President NEIL B. DAWES, Vice President a nd S ecretary ARTHUR L. OLSON, Vice President WILFORD R. DIERCKS, Vice President ALFRED T. SIHLER, Vice P resident W AITER A . HOPKINS, Vice President RUSSEL A . SW AN EY, V ice President LOUIS G. MEYER, Vice President W IL L IA M W . TURNER, V ice P resident LAURENCE H. JONES, C ashier ERNEST T. B A U G H M A N , Assistant Vice President M A R K A . LIES, Assistant Vice President PHIL C. CARROLL, Assistant Vice President HAROLD J. N E W M A N , Assistant V ice P resident ARTHUR M. GUSTAVSON, Assistant V ice President BRUCE L. SMYTH, Assistant Vice President HUGH J. HELMER, Assistant Vice President C. PAUL V A N ZANTE, Assistant Vice President CLARENCE T. LAIBLY, Assistant Vice President H, FRED W ILS O N , Assistant V ice P resident EDWARD D. BRISTOW, Assistant C ashier KATHRYN E. LEE, Assistant C ashier LE ROY A . D AVIS, Assistant C ashier HARRY S. SCHULTZ, Assistant C ashier LE ROY W . D AW SO N , Assistant C ashier ELMER F. SHIREY, Assistant C ashier FRED H. G R IM M , Assistant C ashier GEORGE T. TUCKER, Assistant C ashier EDWARD A . HEATH, Assistant C ashier a nd Assistant S ecretary PAUL C. HODGE, G e n e ral Counsel JO H N J. ENDRES, G e n e ra l A u d ito r ORVILLE C. BARTON, Assistant G e n e ra l Counsel CHARLES J. SC ANLO N , C h ie f Exam iner and Assistant Secretary LELAND M. ROSS, Assistant C h ie f Exam iner DETROIT BRANCH RUSSEL A. SW ANEY, Vice President RICHARD W . BLOOMFIELD, Assistant V ice P resident ARTHUR J. W IE G A N D T, Assistant C ashier HAROLD L. DIEHL, Cashier 40 JOSEPH J. SRP, JR., Assistant C ashier G O RD O N W . LAMPHERE, Assistant G e n e ra l Counsel Annual report, 1954 Requests for additional copies of this report should be addressed to Research Department Federal Reserve Bank of Chicago Box 834 Chicago 90, Illinois
