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A n n u a l rep o rt 1954






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,







Deputy Chairman

John S. Coleman

Bert R. Prall



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






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






John W. Evers

Walter Harnischfeger

Edward M. Kerwin


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

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



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


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




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




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


Activities in 1954
Assets and liabilities
Earnings and expenses
Operations: volume, membership, personnel


Midwest agriculture


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.


Annual report, 1954



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

(per cent o f income, 1953)

L iv e sto ck a n d liv e sto ck p rod u cts
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..............................................







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


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.


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






Dairy Belt
Corn Belt


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


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


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
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
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


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


For meat animals.......................................


Beef ca ttle ..............................................
Meat po ultry..........................................


For non-meat animals...............................


Dairy ca ttle ............................................
Egg p o u ltry............................................
Other animals........................................


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-


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


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



U. S.

-1 4

A creage (million acres)
1920-29 average
1941-50 average
Per cent change


-1 8

Yield per acre (bushels)
1920-29 average
1941 -50 average
Per cent change





Production (million bushels)
1920-29 average
1941 -50 average
Per cent change

3,01 1

*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


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


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
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
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


Annual report, 1954

not vary more than 10 cents per bushel from one
end of the belt to the other.
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


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


short-fed beef cattle feeding
10001b cattle

medium-fed beef cattle feeding
feeder cattle

1200 lb

■ ■ ■ ■
lo ng -fe d beef cattle feeding
feeder calves

beef cattle raising and feeding
cattle marketed
1150 lb

laying flock of chickens

dairy cattle raising and milking



over four years ------5

young cows begin
to give milk






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

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


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,


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


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


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


H prebipitatibn

Land productivity in Corn and Dairy Belts

t ~


( July

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)


LJ |
--- 1

Corn Belt
corn harvested fo r g ra in , 1949
(thousand bushels p e r square m ile)



ioih ; z<


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


Annual report, 1954


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.



W oodland
and waste

(per cent o f total land in farms)

Corn Belt
Dairy Belt




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


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-


Annual report, 1954

d a iry

bee f c a ttle

p o u ltry



p o u ltry





livestock sold

B e lt



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


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........................................................
Manufactured dairy products............................................. 50.7
Butter.................................................................................. 26.9
Cheese......................................................................... . . . 10.7
Frozen dairy products.....................................................
Evaporated and condensed milk...................................
Dry whole milk........................................................................... 7
Other manufactured dairy products......................................7

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


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
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


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.


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
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







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
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


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











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



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


1, 000,000

U.S. Government s e c u r itie s ..........................................
Total loans and s e c u r itie s ................................



Uncollected cash i t e m s ................................................
Bank prem ises.....................................................................
Other a s s e t s .....................................................................



Federal Reserve notes in c ir c u la tio n ..........................



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







Total assets


Decem ber 31, 1953


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


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
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


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
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











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






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





Current net e a r n in g s ................................................





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



Net e a rn in g s ................................................................



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 ) .....................................



Surplus January 1
Transferred to Surplus— as a b o v e .....................................



Surplus December 31



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)


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
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


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.

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


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-






Collections m ade through the F e d era l R e se rv e Bank



Per cent change from 1953
Chicago Branch


Dollar volume (millions)
Commercial bank checks.........
Government checks1................
Other items...............................





-1 2


Pieces (millions)
Commercial bank checks.........
Government checks1................
Other items...............................







■■■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

Dollar volume (millions)
Currency paid to banks1........
Coin paid to banks1................
Coin w ra p p e d ..........................
Unfit currency withdrawn
from circulation....................









Per cent change from 1953
Chicago Branch














-1 0




Pieces (millions)
Currency paid to banks1. . . .
Coin paid to banks1................
Coin w ra pp ed..........................
Unfit currency withdrawn
from circulation....................







-2 9
-2 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 .......................


Per cent change from 1953
Chicago Branch


Federal Reserve Bank of Chicago


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



Per cent change from 1953


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











Pieces (thousands)
New issues at pa r value..................... ...........
Redemptions at maturity v a lu e .. . . .............
Exchanges and transfers................................


Handling o f savings bonds
Dollar volume (millions)
New issues at maturity va lu e .........................








Redemptions at redemption v a lu e *...............




New issues......................................................... 10,494
Redemptions*...................................................... 10,849








Pieces (thousands)

Handling o f Federal ta x receipts
Dollar volume (millions)........................................


Number (thousands).............................................


^Includes Armed Forces Leave Bonds.


Annual report, 1954



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








P resident


GEORGE W . MITCHELL, Vice 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

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



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



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