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ANNUAL REPORT Federal Reserve Bank of Chicago BERT R. PRALL Chicago, Illinois C h airm an a n d Federal Reserve A g e n t J. STUART RUSSELL, Farm Editor Des M oines Register and Tribune Des Moines, Iow a D ep u ty C h airm an ROBERT P. BRIG G S, Executive Vice President, Consum ers Pow er Com pany, Jackson, M ichigan J O H N H. C RO CKER, Chairm an of the Board and President, The Citizens N ational Bank of Decatur, Decatur, Illinois W ALTER J. C U M M IN G S , Chairm an of the Board, Continental Illinois N ational Bank and Trust C o m p any of Chicago, Chicago, Illinois W IL L IA M J. GREDE, President, Grede Foundries, Inc., Milwaukee, W isconsin W IL L IA M A. H ANLEY, Director, Eli Lilly and Com pany, Indianapolis, Indiana V IV IA N W . J O H N S O N , President, First N ational Bank, C e d a r Falls, Iow a G ERA LD F. LA N G E N O H L, Treasurer and Assistant Secretary, Allis-Chalm ers M anufacturing Com pany, Milwaukee, W isconsin DETROIT BRANCH DIRECTORS J O H N A. H A N N A H , President M ichigan State University East Lansing, M ichigan C h airm a n W IL L IA M A. MAYBERRY, President, Manufacturers N ational Bank of Detroit, Detroit, M ichigan IR A A. M O O R E, General Vice President, O ld Kent Bank an d Trust Com pany, G ra n d Rapids, M ichigan C. V. PATTERSON, Executive Vice President, Upjohn C om p any, Kalam azoo, M ichigan ERNEST W. POTTER, President, Citizens Commercial & S a vin gs Bank, Flint, M ichigan J. T H O M A S SMITH, President, Detroit Harvester Com pany, Detroit, M ichigan D O N A L D F. VALLEY, Chairm an of the Board, N ational Bank of Detroit, Detroit, M ichigan MEMBER OF FEDERAL A D V IS O R Y C O U N C IL H O M E R J. L IV IN G S T O N , President, The First N ational Bank of Chicago, Chicago, Illinois M E M B ER S OF INDUSTRIAL A D V IS O R Y COM MITTEE C. H A R V E Y BRADLEY, Chairm an o f the A dviso ry Board, W . J. Holliday & Com pany, Division of Jones and Laughlin Steel Corporation, Indianapolis, Indiana JO H N W. EVERS, President, Comm onwealth Edison Com pany, Chicago, Illinois E D W A R D M. K ER W IN , Senior Vice President, E. J. Brach a n d Sons, Chicago, Illinois FRED L. M A Y T A G II, President, M a y ta g Com pany, Newton, Iow a J A M E S L. PALMER, President, M arshall Field & Com pany, Chicago, Illinois Jan u a ry 1, 1959 PTaa C AR L E. ALLEN, President j ERNEST C. HARRIS, First Vice President ERNEST T. B A U G H M A N , Vice President ROBERT C. H O LLA N D , Vice President N EIL B. D A W E S, Vice President and Secretary C LAR EN C E T. LAIBLY, Vice President W ILFO R D R. DIERCKS, Vice President G E O R G E W. MITCHELL, Vice President ARTHUR M. G U S T A V S O N , Vice President H A R O L D J. N E W M A N , Vice President H U G H J. HELMER, Vice President ARTHUR L. O LSO N , Vice President PAUL C. H O DG E, Vice President, RUSSEL A. S W A N E Y , Vice President G eneral Counsel and Assistant Secretary LA U RENC E H. JO N ES, Cashier E D W A R D A. HEATH, Assistant Vice President and Assistant Secretary BRUCE L. SMYTH, Assistant Vice President C. PAUL V A N ZANTE, Assistant Vice President H A R R Y S. SCHULTZ, Assistant Vice President H. FRED W IL SO N , Assistant Vice President CAR L E. BIERBAUER, Assistant Cashier V IC T O R A. H A N S E N , Assistant Cashier LE R O Y A. D A V IS, Assistant Cashier W IL L IA M O. HUME, Assistant Cashier LE R O Y W. D A W S O N , Assistant Cashier R IC H A R D A. MOFFATT, Assistant Cashier LESTER A. G O H R, Assistant Cashier ROBERT E. SORG , Assistant Cashier FRED H. G R IM M , Assistant Cashier JO SEPH J. SRP, Assistant Cashier G E O R G E T. TUCKER, Assistant Cashier J O H N J. ENDRES, General Auditor C HARLES J. S C A N L O N , Chief Exam iner FRED A. D O N S, Assistant General Auditor ELBERT O. FULTS, Assistant Chief Examiner W IL L IA M C. G A LLA G H ER, Assistant Counsel LELA N D M. ROSS, Assistant Chief Exam iner DETROIT BRANCH RUSSEL A. S W A N E Y , Vice President W. G E O R G E RICKEL, Assistant Cashier R IC H A R D W. BLO O M FIELD, Assistant Vice President ARTHUR J. W IE G A N D T , Assistant Cashier PA U L F. CAREY, Assistant Cashier G O R D O N W. LAMPHERE, Assistant General Counsel Jan u a ry 1, 1959 To the Member Banks of the Seventh Federal Reserve District: I am pleased to submit to you the 1958 Annual Report of the Federal Reserve Bank of Chicago. The Report includes the Bank’s statement of condition, statement of earnings and expenses, and a review of developments in business, agriculture and banking in the Seventh Federal Reserve Dis trict in 1958. During the year, the following elections and appointments of directors were announced, in each case for a term of three years: Robert P. Briggs, Executive Vice President, Consumers Power Company, Jackson, Michigan, a Director since 1956, was reappointed for an additional term. John H. Crocker, Chairman of the Board and President, The Citizens National Bank of Decatur, Decatur, Illinois, was elected Director succeeding Nugent R. Oberwortmann, President, The North Shore National Bank of Chicago, Chicago, Illinois. William J. Grede, President, Grede Foundries, Inc., Mil waukee, Wisconsin, a Director since 1947, was re-elected for an additional term. C. V. Patterson, Executive Vice President, Upjohn Com pany, Kalamazoo, Michigan, a Director (Detroit Branch) since 1956, was reappointed for an additional term. Donald F. Valley, Chairman of the Board, National Bank of Detroit, Detroit, Michigan, was appointed Director (Detroit Branch), succeeding Raymond T. Perring, Presi dent, The Detroit Bank and Trust Company, Detroit, Michigan. The following official promotions were announced: Ernest T. Baughman, from Assistant Vice President to Vice President Hugh J. Helmer, from Assistant Vice President to Vice President Robert C. Holland, from Assistant Vice President to Vice President Harry S. Schultz, from Assistant Cashier to Assistant Vice President Richard A. Moffatt, from Senior Examiner to Assistant Cashier Elbert O. Fults, from Review Examiner to Assistant Chief Examiner The following officers retired: William W. Turner, Vice President, Check and Collection Departments, after 40 years of service Phil C. Carroll, Assistant Vice President, Credit, Loans and Safekeeping Department, after 26 years of service E. D. Bristow, Assistant Cashier, Collection Department, after 40 years of service The following employees, with service records of over 25 years, retired: Frank Gaik Leslie Gates Jack L. Goldberg George E. Hornsby Albert A. Merker Walter G. Olson Peter O’Neill Walter A. Rentzsch Joseph Sheerin Martha Siegmund Joseph Vavricka The Bank is grateful for the contributions made by the retired directors, officers and employees through their many years of faithful service. The total number of employees of the Federal Reserve Bank of Chicago averaged 2,866 during the year, of which 490 were employed at the Detroit Branch. On December 31, 1958, there were 1,021 member banks in the Seventh Federal Reserve District. During the year, five banks were admitted to membership, six were consolidated with other members and two banks withdrew from membership. # The new member banks are: First National Bank of Morton, Morton, Illinois South Des Moines National Bank, Des Moines, Iowa Peoples State Bank of Bloomingdale, Bloomingdale, Michigan Security National Bank of Manistee, Manistee, Michigan Southgate Bank, Southgate, Michigan Southgate National Bank of Milwaukee, Milwaukee, Wisconsin The First National Bank of Morton, Morton, Illinois, joined the System upon its conversion from a State to National charter. With the exception of the Peoples State Bank of Bloomingdale, Bloomingdale, Michigan, the other new member banks were organized during 1958. During the past year, the Federal Reserve Bank of Chicago initiated arrangements with a number of commercial banks in the District for the handling of cash distribution and check clearing activities during a period of national emergency in the event that the Chicago and Detroit offices were destroyed or rendered inoperable. This is part of the emergency planning developed over the past several years. Since 1951, copies of records that would be required for resumption of operations have been forwarded daily to a relocation site outside probable “target areas.” In addition to essential records, there is stored at the relocation site specialized equipment and supplies which could be utilized for emergency operations. For the purposes of handling distribution of cash and clearing of checks in an emergency situation, the Seventh Federal Reserve District has been divided into thirty-five areas for check clearing and sixteen for cash dis tribution. The check clearing areas have the same boundaries as the present subdivisions of the state banking associations; the areas for cash distribu tion are somewhat larger. One commercial bank in each of the areas has agreed to act as an agent of the Federal Reserve Bank of Chicago, if needed during a national emergency, to perform certain check clearing operations or the distribution of currency in its area. On behalf of our Directors, Officers and Staff, I extend our deep apprecia tion to you, our stockholders, for your continued interest and cooperation in the effective functioning of the Bank. Respectfully submitted, President n Assets Gold certificates: December 31, 1958 Redemption fund for Federal Reserve n o t e s ......................... 167,633,985 December 31, 1957 Other h o l d i n g s ............................................................. 3,326,227,453 157,089,620 3,805,144,656 Total gold ce rtifica te s................................................. 3,493,861,438 3,962,234,276 Federal Reserve notes of other b a n k s ..................................... 40,267,000 37,731,000 Other c a s h ......................................................................... 58,733,799 56,959,067 Total c a s h ................................................................. 3,592,862,237 4,056,924,343 Member b a n k s ............................................................. O t h e r ......................................................................... 3,885,000 2,559,700 8.750.000 710,000 Total discounts and a d v a n c e s ..................................... 6,444,700 9.460.000 U. S. Government securities..................................................... 4,585,614,000 4.140.164.000 Total loans and securities............................................. 4,592,058,700 4.149.624.000 Uncollected cash i t e m s ......................................................... 902,999,083 887,536,988 Bank p r e m is e s ..................................................................... 11,823,635 6,823,365 Other assets ..................................................................... 24,839,904 40,657,160 Total a s s e t s ............................................................. 9,124,583,559 9,141,565,856 5,302,680,770 5,334,242,805 Member bank— reserve a cco 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 ......................................................................... 2,809,517,559 48,619,185 33,605,000 8,403,768 2,905,985,812 62,020,625 48,422,000 10,424,010 Total d e p o sits............................................................. 2,900,145,512 3,026,852,447 Deferred availability cash i t e m s ............................................. 721,508,162 594,080,194 Discounts and advances: Liabilities Federal Reserve notes in c ir c u la t io n ......................................... Deposits: Other liabilities ................................................................. 3,967,466 2.474.384 Total l i a b i l i t i e s ......................................................... 8,928,301,910 8,957,649,830 Capital paid i n ..................................................................... Surplus (Section 7 ) ............................................................. Surplus (Section 1 3 b ) ......................................................... Other capital a c c o u n t s ......................................................... 49,664,950 132,158,534 — 14,458,165 46,569,750 121,503,625 1.429.384 14,413,267 Total liabilities and capital a c c o u n t s ......................... 9,124,583,559 9,141,565,856 C apital accounts STATEMENT OF EARNINGS AND EXPENSES 1958 1957 . . 1,219,562 128,023,207 41,270 5,656,908 127,819,903 53,469 Total current e a r n i n g s ................................................. . 129,284,039 133,530,280 Current expenses: S a l a r i e s ..................................................................... Retirement c o n trib u tio n s ................................................ . . 13,125,857 1,493,184 2,469,379 2,405,667 851,000 1,148,887 1,729,770 12,924,328 1,277,823 2,286,843 2,212,416 1,066,200 872,763 1,722,231 . 23,223,744 22,362,604 3,266,108 . 19,957,636 109,326,403 3,389,348 18,973,256 114,557,024 26,380 27,882 26,960 123,875 5,436 Total a d d i t i o n s ........................................................ 53,340 157,193 Deductions from current net earnings: Reserves for contingencies................................................ Retirement system (adjustment for revised benefits)................ 44,770 37,505 1,118,809 1,155 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 ..................................................................... Postage and e x p r e s s a g e ................................................. Provision and maintenance of f a c ilit ie s ............................ Assessment for expenses of Board of G o v e r n o r s ................ Cost of Federal Reserve c u r r e n c y .................................... All o t h e r ..................................................................... Total ..................................................................... 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 i n g s ................................................ Additions to current net earnings: Profits on sales of U. S. Government securities (net) . . . . Reimbursement for fiscal agency expenses incurred in previous y e a r s ......................................... All o t h e r ..................................................................... All o t h e r ..................................................................... . Total d e d u ctio n s........................................................ Net e a r n in g s ............................................................. Paid U. S. Treasury (interest on F. R. n o t e s ) ............................ . . D i v i d e n d s ......................................................................... Transferred to Surplus (Section 7 ) ......................................... . ________622 45,392 109,334,351 95,789,048 2,902,076 10,643,227 1,157,469 113,556,748 99,743,254 2,730,921 Surplus January 1 ................................................................. Transferred to Surplus— as a b o v e ............................................. Transferred to Surplus (Section 7) from Surplus (Section 13b) . . . 121,503,625 10,643,227 11,682 110,421,052 11,082,573 Surplus December 3 1 ........................ .................................... 132,158,534 121,503,625 11,082,573 Surplus Account (Section 7) The S e v e n th F e d e ra l R e se rv e District now has 32 "standard metropolitan a re as” as defined by the Census Bureau. These are cities over 50,000 and the counties which include them in their closely related communities. Waterloo | 1958 IN R E V I E W In b u sin e ss— decline a n d re c o v e r y D uring the early months of 1958, busi ness activity was in the midst of a sharp de cline which continued through April. In contrast with earlier postwar recessions, however, the transition from decline to re covery was clear cut. There was no period of languishing at the reduced level. Rapid recovery during the final two-thirds of the year brought the pace of physical production of goods and services to within 1 per cent of the previous record. Dollar measures of personal income and spending rose to new highs. Thus, the paths charted by many measures of business activity tended to be “V-shaped” and the recession over-all was relatively short and mild. Although the economy was operating at or near record levels at year end, resources were available to accommodate further addi tions to output in most sectors. The large investment in new plant and equipment in the 1955-58 period had added substantially to capacity in basic industries and the num ber unemployed was still relatively high. As in the earlier postwar recessions, total consumer purchases of goods and services slackened only moderately during the 195758 decline. For 1958 as a whole, consump tion spending was 2 per cent higher than in 1957, the previous record year, despite the sharp decline in spending on automobiles. Personal income was also higher by about 2 per cent. Credit markets reflected the rapidly chang ing pace of business. During the period of declining activity, from the fall of 1957 to the spring of 1958, credit demand slackened. The resulting increase in availability and decline in cost of credit were augmented by monetary actions. To this end, the principal tools of monetary management— open mar ket operations, discount rates and required reserves— were utilized. Reduced demands for funds, aided by an easier monetary policy, brought about sharp declines in interest rates from the highs of the previous year. However, coinci dent with the upturn in business activity in late spring, private reappraisals of the out look and increased demand for credit, to gether with a gradual shift from the policy of monetary ease, caused interest rates to rise again. By year end, rates had largely retraced their earlier declines. M id w e st hit b y so ftn e ss in h a rd lines Like most previous downturns, the 195758 decline was concentrated heavily in “dur able goods,” mainly the metal products. From the peak of over-all output in August of 1957 to the trough in April of 1958, pro duction of these hard goods declined 20 per cent, in contrast to a drop of only 5 per cent in the nondurable or soft goods lines such as food, clothing and chemicals. As a result, most centers in the Midwest under went a greater decline in activity than did the country as a whole. The five states which include the Seventh Federal Reserve Dis trict— Illinois, Indiana, Iowa, Michigan and Wisconsin— account for less than 17 per cent of the nation’s population but produce Federal Reserve Bank of Chicago 9 about 28 per cent of the durable goods. Within the District there was great varia tion in the impact of recession, depending on the type of activity in which individual areas specialize. In some centers the ad justment was severe; in others it was so mild as to elicit the question, “What recession?” For farmers, the entire year was relatively G e n e r a l a c tiv ity m e a su re s traced V-shapes in 1958 billion dollars millions prosperous. Abundant crops and high live stock prices boosted farm income. Reflecting the rise in farm income and increased sales to farmers, most Iowa cities witnessed only a moderate rise in unemployment during 1958. In the fourth quarter of the year, Iowa was almost alone among northern states reporting higher total employment than a year earlier. Michigan, in contrast to Iowa, was one of the hardest hit states in the nation. Al though Michigan’s proportion of the total employment in the automotive industry has declined over the past decade, that state still accounts for one-half of all auto workers. The depressed automobile market during most of the year caused unemployment in Michigan to average 14 per cent of the labor force compared with less than 7 per cent nationally. Illinois, Indiana and Wisconsin fared better than Michigan, but less well than the rest of the nation. This is because of the concentration of hard goods manufacturing in these states, particularly in the machinery lines, as indicated in the accompanying chart. In v e n to r y adjustm en ts per cent, 1947-49=100 per cent 10 Annual Report, 1958 An abrupt change from inventory accum ulation to liquidation played an important role in the 1957-58 downturn, as in the earlier postwar recessions; and this, too, had an important impact on District states. Over half of the drop in total spending for goods and services between the third quarter of 1957 and the first quarter of 1958 was ac counted for by the shift in the inventory sector. In a period of inventory liquidation, cur rent production, of course, drops below con sumption. Since inventories of business firms consist largely of processed goods, inven tory reductions have a greater effect upon the manufacturing centers than those which are primarily dependent upon trade, service, construction and agriculture. In the United States, manufacturing accounts for 34 per cent of total wage and salary payments, but it accounts for 51 per cent in Michigan, 48 per cent in Indiana, 45 per cent in Wisconsin and 40 per cent in Illinois. Among District states, only Iowa, at 30 per cent, is less de pendent upon manufacturing income than the nation. Inventories had been growing moderately at the onset of the business decline in 1957, but were being reduced at a rate of over 9 billion dollars per year in early 1958. This was the most rapid liquidation in the postwar period. Moreover, over 80 per cent of the inventory liquidation during the 195758 adjustment took place in the durable goods lines. Between September of 1957 and October of 1958, the book value of total business inventories declined by 6.4 billion dollars, or 7 per cent. During this period, inventories of durable goods alone dropped H a r d g o o d s lin e s dominate Midwest manufacturing U.S. Illinois Indiana Iowa Michigan Wisconsin by 5.2 billion dollars, or 11 per cent. A slowing in the rate of inventory liquida tion occurred after the first quarter of 1958, and this constituted one of the most impor tant plus factors in the recovery. By the fourth quarter, the inventory situation was about in balance, over-all, and restocking was taking place in some lines. For exam ple, factory orders and sales of household appliances and furniture— important Mid west industries— showed increases far in excess of the rise in consumer buying, in dicating that a move to increase stocks was under way again. Im p ro v e m e n t in m a ch in e ry Sales of machinery and equipment began to rise in the fourth quarter of 1958, lagging the upturn in total spending by about six months. The emerging recovery in produc ers’ durables followed a decline of 22 per cent in sales of these goods. Among the nation’s large cities, Milwau kee concentrates most heavily upon capital goods, turning out such products as electrical generating equip ment, traveling cranes, diesel en gines, rock and ore crushers, ma chine tools, farm tractors and power shovels. But other Mid west cities, including Chicago, nondurabies Indianapolis, Fort Wayne, Peoria, Rockford, Racine, Muskegon and Cedar Rapids, also depend heav ily upon sales of a wide variety of other durables capital goods. Not all of these centers experienced heavy unem ployment during 1958, but in all machinery and cases there was a significant let transportation equipment down in activity from the preced ing high levels. Farm machinery sales had re sponded earlier to the gain in Federal Reserve Bank of Chicago 11 farm income. For the first ten months of 1958, manufacturers’ sales of farm machin ery and equipment were about 15 per cent higher than in the same period in 1957. This was a great aid to activity in a number of Midwest centers. A related industry, construction machin ery, also heavily dominated by Midwest firms, had gone through a period of reduced sales during late 1957 and early 1958. An improvement in orders for construction ma chinery was noted in the spring, however, and at year end construction machinery plants were pushing output back toward earlier peaks. A large proportion of these machines is used in highway construction. Nationally, outlays on highways rose 8 per cent in 1958 and are expected to rise another 12 per cent in 1959. It is significant that total outlays on capital goods were rising once again after a shorter decline than had been expected. The need for modernization and relocation of facilities, E m p lo y m e n t c h a n g e s mirror varying impact of recession 12 Annual Report, 1958 together with the expansion required in con nection with growth products, was beginning to call forth a higher volume of capital spending even though unused capacity re mained large in many sectors. Spurring such a movement are higher profits and growing depreciation reserves as well as the con tinued rise in wage rates. C on struction sh o w e d stre n g th Like all other years since World War II, 1958 produced a new record outlay for con struction, although only by a small margin. Expenditures for private nonresidential building declined by more than 5 per cent nationally but this reduction was offset by increases in residential and public construc tion. The year started out at a reduced pace, with new construction contract awards off 5 per cent from the previous year nationally and by a much larger proportion in the Mid west for the January-May period. But an abrupt turn came in the late spring, and for the last seven months of the year construction contracts nationally were more than 20 per cent above the same months in 1957. The Midwest also scored gains during this period but, except for prosperous Iowa, increases were smaller than the national average. Busi ness construction was the only sector which made a poor comparative showing. Home building benefited from the greater availability of mortgage credit during most of 1958. This was especially important in the case of VA and FHA insured loans for which maximum rates are prescribed by law. The effect was somewhat less in the Midwest than in other regions because of the greater reliance upon conventional financing in this area. Meanwhile, the volume of savings flow ing into financial institutions which invest heavily in mortgages continued large. Interest rates of all types were rising dur ing the summer and fall, and there was some expectation that the rise in new home build ing would be dampened as a result. Never theless, based on the volume of contracts awarded and construction permits granted through December, home-building prospects remained strong. The vigorous pickup in residential con struction that began last spring carried the nation’s housing starts upward from a yearly rate just over 900 thousand to 1.4 million— a four-year high— by December. Despite its decidedly weak start, 1958 as a whole accounted for 1.2 million units, a total ex ceeded only twice before—in 1955 and rec ord 1950— since the War. The major centers in the Midwest, for the most part, shared in the 1958 gain, but by no means to the same degree as the nation. Permits issued in the Chicago area were up for the year by a modest 4 per cent, in con trast with the United States increase of 14 per cent. Detroit and Milwaukee, however, showed declines of 5 and 13 per cent, re spectively. Indianapolis and Flint turned up impressive gains, but against a relatively weak performance the preceding year. Des Moines scored an increase over 1957 of more than three-fifths for its best home-building year since 1950. A u to m o b ile output In 1958, the American auto industry as sembled only 4.2 million passenger cars, 30 per cent below 1957 and the smallest number in ten years. Truck production, at 870,000, was down 20 per cent from the previous year and the smallest in the postwar period. The reduced volume of automobile pro duction was primarily the result of reduced buying by cautious consumers. For the first ten months of 1958, new car registra- U tilizatio n of steel capacity in Chicago and Detroit exceeded U. S. rate in 1958 second half tions in the United States were 25 per cent below the same period in 1957. Wisconsin and Illinois reported declines of about this magnitude. In Michigan and Indiana, the de clines were substantially greater— in Iowa, much less. But the decline in production re sulted also from reduced exports and a rapid increase in imports of foreign cars, which accounted for 8 per cent of total domestic sales. Although hampered by work stoppages from September through year end, auto production was much higher in late 1958 than in earlier months. Nevertheless, unemployment in auto centers remained heavy. Auto sales in December of 1958 were about equal to the year-earlier pace, after lagging about 30 per cent below 1957 in the first eleven months of the year. Inventories at year end amounted to less than 600,000 compared with 750,000 the previous year. A vital issue in the automotive industry concerns the greater interest displayed by Federal Reserve Bank of Chicago 13 consumers in smaller cars, a factor pointed up by the rapid rise in imports and the rela tive success of certain compact domestic models. But Detroit observers were unani mous in the belief that production and sales of both cars and trucks would rise in 1959 from last year’s depressed levels. While there were differences of opinion concerning the extent of the rise, there was general agreement that the industry would show im provement. S te e l prod uction At the end of 1958, steel capacity na tionally amounted to 147.6 million tons. This total reflected an increase of about 7 million tons or 5 per cent during the year. Capacity in Detroit rose 11 per cent and in Chicago over 9 per cent. The latter center increased to 20 per cent its margin over Pittsburgh, the second largest producer on a metropolitan area basis. Steel output was running at less than 60 per cent of capacity at the start of 1958, both in the Midwest and the nation as a whole. By April, the operating rate dropped as low as 47 per cent nationally, 55 per cent in Chicago and 12 per cent in Detroit. At those levels of output, inventories of steel users were being liquidated rapidly. After April, steel production began to rise. By December, the operating rate was 75 per cent nationally, 87 per cent in Chicago and 97 per cent in Detroit. The higher operating rates in the Midwest are characteristic of periods of improving business activity and reflect the fact that steel consumption in this area exceeds local production. Although there was still a substantial amount of unused steel capacity at year end, a number of steel products were in short supply. Galvanized sheets, cold rolled sheets and tin plate were being informally rationed to buyers, and projects were being imple mented to increase facilities to produce these items. O n th e fa r m s— re co rd cro p s a n d h ig h liv e sto c k p rice s b o o st incom e B umper crops and high prices for hogs and cattle highlighted Midwest agriculture in 1958. The result was increased farm income, especially in the Corn Belt states. The agriculture of the District states di vides roughly into two types— Corn Belt and Dairy Belt. Illinois, Indiana and Iowa are predominantly of the Corn Belt type, with corn, soybeans, hogs and cattle as the major products. Farm income in Michigan and Wis consin, on the other hand, is predominantly from dairy products, supplemented with spe cialty crops, poultry and meat animals. The experience in these two agricultural areas differed greatly in 1958. 14 Annual Report, 1958 Iowa, the leading livestock state in the Seventh Federal Reserve District and the nation, had cash receipts from farm products nearly 13 per cent above the preceding year. Most of the increase was from livestock. The other two Corn Belt states— Illinois and In diana— also showed higher sales of farm products, but the gains were somewhat smaller than the 10 per cent rise shown for the United States. The dairy states turned in only small increases. Over-all, the five Dis trict states had total cash receipts from farm marketings of about 7.5 billion dollars, a gain of about 8 per cent over 1957 and equal to 23 per cent of the national total. C a sh re ce ip ts in Com Belt states show greatest increases over 1 95 7 billion dollars Illinois Indiana Iowa M ichigan W isconsin The regional differences in farm income gains affected the manufacturing and service establishments for whom the farm market is important. Farm machinery sales, for exam ple, showed substantial gains in Iowa and nominal gains in Illinois and Indiana, while sales in the dairy states held about even with the preceding year. While farm land values increased 6 per cent during the year for the nation, most states in the Midwest showed increases of 5 per cent. Michigan, however, showed only a 3 per cent rise. Since 1954, farm land values in District states have gone up 20 per cent or more, according to estimates of the United States Department of Agriculture. Illinois Indiana Iowa M ichigan Wisconsin United States At year end, country bankers quite generally reported that the higher farm income in the Corn Belt had boosted demand for land and the trend of values was still upward. The record harvest of grains in 1958 would have depressed prices severely except for Government supports. Much of the in crease in output of crops will move into the Government’s inventory of agricultural sur pluses. But since the support programs kept prices from sagging greatly, farm income from sales of crops showed changes roughly proportional to the changes in output. At the end of the year, over 8.5 billion dollars of commodities were in Government hands or under price support loans, and a record 9.1 billion was expected before the 1959 crops are harvested. The expenditures of the United States Department of Agricul ture for stabilization of farm prices and in comes increased from 3.2 billion dollars in 1957-58 to an estimated 5.4 billion in 1958 59. Thus, gains in farm income from sales of C a ttle a n d h o g producers received higher prices dollars per cwt. 1954November 1957November 1958 1958 (per cent change) +27 + 5 + 31 + 5 + 23 + 5 + 27 + 3 +20 + 5 + 27 + 6 Federal Reserve Bank of Chicago 15 Price d e clin e s offset by production increases for most major commodities per cent change, October-december 1958 from October-december 1957 H O ________ 0 __________H O ________ +20 ________ +30 ________ + 40 +50 U.S. Illinois Indiana 16 Annual Report, 1958 crops reflected in large part the increase in Government expendi tures for price support. Livestock p la y k e y role Sales of livestock and livestock products account for about twothirds of the cash receipts from farm marketings in the Seventh District states. Moreover, this area accounts for more than onefourth of the nation’s total out put of these commodities. In the case of hogs, more than half the total output is in the District states with Iowa alone accounting for nearly one-fourth. It is evident, therefore, that changes in prices of livestock can have a strong impact on Midwest farm income. Prices of both cattle and hogs were relatively high in 1958. A reduction of 10 per cent in number of cattle marketed helped to push cattle prices up more than 25 per cent over 1957 to the high est level since 1952. Drought breaking rains enabled ranchers to withhold cows and calves for rebuilding herds in the grazing areas, and Corn Belt farmers re tained feeder cattle longer than usual for additional gains in weight. The gross return for labor and overhead in a typical Illinois cattle feeding program in 1957-58 was above $50 per head com pared with a 5-year average on the order of $40. This favorable return, plus the large production of feed grains in 1958, caused farmers to ex- pand cattle feeding even though Farm lo a n s post large increases, the cost of feeder cattle rose deposits rise at "agricultural" sharply. At the end of the year, banks in District states the number of cattle being fat tened for market was 11 per cent per cent increase, 1957 -1958 above year earlier in the nation, s e ttin g a new re c o rd . Iow a Illinois showed a gain of 7 per cent; Illi nois showed a decline of 1 per cent. The largest increases were in the western states. Hogs are as important as cattle and calves in the farm income of Iowa the Seventh District, accounting for nearly one-fourth of the total. Prices of hogs in 1958, strongly M ichigan affected by the reduced marketing and higher prices of cattle and a reduction of 2 per cent in num W isconsin ber of hogs slaughtered, were 11 per cent above 1957 and reached their highest mark since 1954. Seventh District Under the stimulus of very favor able prices and abundant supplies of com and other feed grains, Government purchases of butter and cheese farmers farrowed 17 per cent more pigs in under the price support program had been the fall months than in the corresponding substantially reduced. period of 1957 and reported plans for further Agricultural exports in 1957-58 totaled increases in 1959. about 4.0 billion dollars, down nearly 15 Production of milk in Wisconsin and per cent from the record level in 1956-57. Michigan increased somewhat in 1958 even Most of the decline was in Government pro though output in the nation declined for the grams under Public Law 480 which provides first time in six years. Price support on milk for sales of United States surpluses for “soft” products was lowered in April, and the currencies, barter for “strategic” materials average price received by farmers was below and gifts to needy countries. While soybeans 1957 during the remainder of the year. Re and lard are the only District commodities flecting the higher prices for livestock and which move into world trade in substantial the moderate increase in production of milk, volume, the District feels repercussions of farmers in the District’s dairy states realized changes in exports of other commodities. Re larger cash receipts even though milk prices ductions in cotton in the South and wheat were lower. Consumption of cheese increased acreage in the West have brought expansion as consumers sought substitutes for highof feed grain and livestock production in priced meat, and at the end of the year the Federal Reserve Bank of Chicago 17 M e a t a n im a ls a n d feed cro p s are major sources of Corn Belt income; in Michigan and Wisconsin dairy products lead Cattle Hogs Dairy Poultry and eggs Corn Soybeans Other (percentage of total cash receipts from various commodities, average 1956 and 1957) e Ill in o i s ........................... . . 21.6 20.8 8.7 4.8 19.8 12.7 11.6 I n d i a n a ......................... . . 17.0 2 4 .2 12.7 10.0 12.4 9 .5 14.2 10.2 5.2 4.9 I o w a ............................. . . M i c h i g a n ...................... . . . W i s c o n s i n ..................... . . 32.1 11.7 12.0 32.1 5.8 10.4 8.0 28.4 52.6 7.5 9.1 9.0 6.0 2.3 * * 3 9 .0 13.7 "■Included in "Other." those areas and have made inroads on the markets of traditional Midwest commodities. In c re a se In fa rm d e b t The volume of farm real estate loans made in the first half of the year was below the year-earlier figure. During the second half, however, lower interest and greater avail ability of funds combined with increased optimism of farmers brought the volume of farm mortgage loans granted by major lend ers back to the 1956 level and nearly 50 per cent above the low level in the second half of 1957. For 1958 as a whole, farm real estate debt increased and at year end lend ers reported a large volume of commitments. Farmers’ non-real estate debt also in creased during the year. On December 31, agricultural loans of this type from District member banks showed an increase of 22 per cent over year ago. Most of the increase was due to higher prices for feeder cattle com bined with larger numbers of cattle on feed. Farmers’ financial situation remained strong at year end. Total farm assets and farmers’ equities in those assets increased proportionately with the rise in debt. Also, farmers apparently added to their savings during the year. Time deposits in a sample of “agricultural banks” in the District in creased 13 per cent during the year; demand deposits increased 7 per cent. In b a n k in g a n d credit— d e v e lo p m e n ts re fle ct b u sin e ss a d ju stm e n t T T h e deposits and earning assets of mem ber banks in the Seventh Federal Reserve District increased about 7 per cent during 1958. Total loans and investments of these banks rose by more than 1.5 billion dollars 18 Annual Report, 1958 — the largest annual gain in the postwar period— compared with a slight increase of only 40 million dollars in the previous year. More than 90 per cent of the rise in mem ber bank assets consisted of investments, mainly Government securities. Total loans increased in the second half of the year, but the gain did little more than offset the loan liquidation of earlier months. These developments reflected both the changing pace of business and associated credit de mands and the monetary actions taken dur ing the period of declining output and em ployment. The first of four cuts in the discount rate charged member banks on borrowings from the Federal Reserve Bank of Chicago was made in November 1957. During the spring of 1958, the reserves which member banks are required to keep on deposit at the Fed eral Reserve Banks were reduced in a series of steps. Open market operations of the Fed eral Reserve System were adjusted in keeping with changes in economic conditions. The timing and amounts of changes in discount rates and reserve requirements are listed in the table below. In the three years prior to 1958, commer cial and industrial loans had been the most expansive sector of bank assets. But these loans declined 8 per Discount rate. The rate charged on advances to member banks by cent at large District the Federal Reserve Bank of Chicago was changed five times during banks during 1958. 1958 in line with current credit policy and market developments. The Real estate and agri rates applicable to advances secured by Government obligations and cultural loans, on the discounts of and advances secured by eligible paper were as follows: other hand, rose ap In effect as of All member banks preciably. January 1, 1958 The reduced bor 3% January 24 2% rowing by business March 7 2'/« firms reflected the cut April 18 1% back in spending for September 5 2 new plant and equip October 31 2% ment and the smaller a m o u n ts of fu n d s Required reserves. The Board of Governors of the Federal Reserve needed to carry lower System announced a number of reductions in the percentage of net inventory and receiv demand deposits member banks are required to hold as reserves at the ables. Furtherm ore, Federal Reserve Bank of Chicago. This was accomplished in a series of businesses continued steps as indicated below and, in total, released roughly 50 million dollars to r a i s e a l a r g e of reserves to banks in the Seventh Federal Reserve District. amount of funds from Central Reserve Reserve Country nonbank sources. Cor In effect as of City banks City banks banks porate security issues January 1, 1958 20% 18% 12% for new capital were February 27 19% 17% only 13 per cent below March 1 11% the 1957 record and March 20 19 17 were larger than in April 1 11 1956. In this environ April 17 1816 April 24 ment, many corpora 18 16% tions strengthened Federal Reserve Bank of Chicago 19 banks located in Chicago, Detroit, Milwaukee, Indianapolis and Des Moines. Total loans and invest ments of these weekly reporting banks are approximately equal million dollars so_____ o -200 to the loans and investments of the other 983 member banks in metals and other metal products manufacturers the Seventh District, but they ac count for about 80 per cent of the seasonal borrowers total dollar volume of commercial (food processors,trade and textile firm s) and industrial loans. During 1958, loans and invest public utilities and coal, ments of weekly reporting banks oil and chemical producers rose by 5.3 per cent, considerably less than the 8.5 per cent increase sales finance companies for other District member banks. total commercial and industrial loans declined However, the most striking dif 3 4 9 million at District member banks ference appears when loans and all other-net investments are viewed separate ly. Loans declined by 4 per cent at the large banks during 1958, * A s reported by a sample of large banks in five leading cities. A s of September 1958, these banks accounted for 85 per cent whereas they rose by 8.5 per cent of commercial and industrial outstandings in these cities. at the smaller banks. Moreover, loans declined sharply at the large banks in the first half, while at smaller banks liquidity positions which had been weakened the loan rise was fairly continuous during the somewhat during the 1955-57 expansion. As year. Investments of large banks, on the a result, business loan demand showed only other hand, rose somewhat more rapidly a limited response to the rapid improvement than at small banks as would be expected in of business in the second half of the year. view of the loan differences. The la rg e vs. th e sm alle r b a n k s Both large and small banks in the District There was a marked difference in the added importantly to their real estate loans during 1958. This was consistent with the na experience of the largest and the smaller tional increase of nearly 15 billion dollars in Midwest banks during 1958. This is mainly total mortgage debt last year. Because nearly because large banks do an important part of half of country banks’ outstanding loans con their business with large firms; whereas small sist of real estate credits, this accounted for banks serve primarily smaller businesses, much of the greater relative loan strength consumers and farmers and make relatively at the smaller banks. Since real estate loans more real estate loans. constitute only 14 per cent of large city In the Seventh Federal Reserve District, banks’ total loans, an increase of about 10 there are 38 banks which provide a detailed per cent in their outstandings last year had condition statement to the Federal Reserve relatively less effect on their loan total. Bank of Chicago each week. These are large A ll m ajo r cla sse s of business borrowers reduced bank debt in 1 9 5 8 * 20 Annual Report, 1958 Consumer loans declined somewhat at weekly reporting banks and, although rising sharply toward year end, showed less strength than at other banks. Loan activity at the country banks was boosted also by the increased demand for agricultural loans, as noted earlier in this report. The decline in business loans reflected re duced borrowing by nearly all kinds of firms. However, metals and metal products firms accounted for a large share of the total de cline. After a brief rise in the first three months of 1958, the amount of loans to these borrowers declined steadily. Borrowing by businesses whose needs are primarily sea sonal— food, farm product and textile manu facturers and trade establishments— was moderately lower for the year as a whole, but in the second half of 1958 exceeded the same period of 1957. Borrowing by public utilities and petroleum firms also declined substantially, a development which was re lated to large sales of securities by these B a n k s increased their holdings of Government securities as loan demand declined and reserve pressures eased billions A s s e t sh ifts were sharper in the District's major cities __ -10 0 per cent change during 1958 *10 *20 0 + 10 — ~i--------1 weekly reporting banks other +20 member banks total loans and investments L loans and discounts U.S. Gov't, securities other securities demand deposits time deposits firms. Borrowing by sales finance companies declined in the first half of 1958, as these firms obtained a relatively large amount of funds from nonbank sources. From June to December, however, these companies bor rowed more than in the corresponding period of 1957. As District banks increased investments, the maturity distribution of their portfolios changed significantly. During the first half of the year, almost the entire amount of Governments acquired was in the longer ma turities— notes and bonds. This was partly due to the Treasury’s efforts to finance a larger part of the debt with longer issues. In addition, the unusually wide spread between the yields on short- and long-term securities encouraged some to lengthen portfolios be cause of the earnings differential and the pos sibility of further price adjustments in the long-term area. After midyear, the large banks reduced their holdings of notes and Federal Reserve Bank of Chicago 21 bonds and increased M e m b e r b a n k b o r r o w in g at the Federal Reserve Bank their holdings of bills of Chicago in 1 9 5 8 was at a low level compared with and certificates. Small other recent years, but showed a rising trend er banks, however, re tained their holdings million dollars of long-term issues. For the year ended in September, about 90 per cent of the Gov ernments acquired by country banks was in bonds and notes. T h e 7 p e r cent growth in m em ber bank deposits during 1958 contrasts sharply with the one-half per cent rise recorded in 1957. Gross demand balances were up 6 per cent in 1958, while time accounts rose 10 per cent. The relative ly greater gain in time when some slowing became apparent. Move deposits was particularly noticeable outside ments in demand deposits, on the other hand, the large cities. were more erratic during the year, in pan Time deposits had begun to move up because of heavy participation by the banks rapidly in 1957, and this rise continued un in Treasury financings. diminished into the third quarter of 1958 22 Annual Report, 1958