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ANNUAL REPORT Federal Reserve Bank of Chicago To the Member Banks in the Seventh Federal Reserve District: I take pleasure in submitting the 1959 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 District in 1959. The Bank was organized in 1914 and completed its 45th year on November 15, 1959. The Report concludes with a brief summary of the Bank's operations in that period. During the year 1959, Board appointments and elections were announced as follows: Bert R. Prall of Chicago, a Director since 1953 and Chairman and Federal Reserve Agent since 1956, was reappointed Chairman and Federal Reserve Agent for 1960. Robert P. Briggs, Executive Vice President, Consumers Power Company, Jackson, Michigan, a Director since 1956, was appointed Deputy Chairman for 1960, succeeding J. Stuart Russell, Farm Editor of the Des Moines Register and Tribune, Des Moines, Iowa. William A. Hanley, Director, Eli Lilly and Company, Indianapolis, Indiana, a Director since 1954, was re-elected for an additional term of three years. James H. Hilton, President, Iowa State University, Ames, Iowa, was appointed Director for a term of three years, succeeding J. Stuart Russell in that capacity. Vivian W. Johnson, President, First National Bank, Cedar Falls, Iowa, a Director since 1945, was re-elected for an additional term of three years. C. Lincoln Linderholm, President, Central Bank, Grand Rapids, Michigan, was appointed Director (Detroit Branch) for a term of three years, succeeding Ira A. Moore, General Vice President, Old Kent Bank and Trust Company, Grand Rapids, Michigan. J. Thomas Smith, President, Dura Corporation, Oak Park, Mich igan, a Director (Detroit Branch) since 1956, was reappointed for an additional term of three years. Homer J. Livingston, President, The First National Bank of Chi cago, member of the Federal Advisory Council from the Seventh Federal Reserve District since 1956, was reappointed member of the Council for 1960. The following official promotions were announced: Charles J. Scanlon, from Chief Examiner to First Vice President Laurence H. Jones, from Cashier to Vice President and Cashier Harry S. Schultz, from Assistant Vice President to Vice President Carl E. Bierbauer, from Assistant Cashier to Assistant Vice President Richard A. MofTatt, from Assistant Cashier to Assistant Vice President Dick Netzer, from Senior Economist to Assistant Vice President Joseph J. Srp, from Assistant Cashier to Assistant Vice President Charles G. Wright, from Special Representative to Assistant Vice President Leland M. Ross, from Assistant Chief Examiner to Chief Examiner John J. Capouch, from Supervisor to Assistant Cashier Francis C. Edler, from Assistant Chief to Assistant Cashier The following officers retired: Ernest C. Harris, First Vice President, after 17 years of service Neil B. Dawes, Vice President and Secretary, after 26 years of service Arthur L. Olson, Vice President, after 40 years of service H. Fred Wilson, Assistant Vice President, after 19 years of service The following employees, with service records of over 25 years, retired: Nellie C. Boland John C. Jones Vera Bolsis Anthony J. Kirchen Arvid P. Carlson Ann V. Lawless Cecil M. Casey Harry C. F. Stake Roy Christiansen Mathilde Steinkrauss Earl I. Curry Alfred J. Walter Angela Duffy Anna Wilk Christ M. Hansen Henry Zieger Agnes J. Henricks The Bank deeply appreciates the many years of loyal and valuable service rendered by the retired directors, officers and employees. The total number of employees of the Bank averaged 2,782 during the year, of which 464 were employed in Detroit. The corresponding figures for 1958 were 2,866 for the Bank, of which 490 were in Detroit. M The amount of payments to the United States Treasury in 1959 was $ 167,266,066.40, compared with $95,789,047.75 in 1958, as shown in the statement of earnings and expenses. In that connection the Board of Gov ernors of the Federal Reserve System issued the following statement on January 6, 1960: Preliminary figures received from the Federal Reserve Banks indi cate that during the year 1959 their current earnings amounted to $886 million, an increase of $144 million compared with 1958. Earnings on U. S. Government securities were $123 million more than in 1958, reflecting the combined effect of substantial increases in average yield and average holdings. Earnings from discounts for member banks were $28 million, compared with $7 million in 1958. Current expenses in 1959 were $144 million, $7 million more than in 1958, leaving current net earnings of $742 million, up $137 million from 1958. Net additions to current net earnings amounted to $98 million, resulting almost entirely from the discontinuance of certain reserves for contingencies. With such additions, net earnings were $840 million before dividends and payments to the United States Treasury. Payments of statutory dividends to member banks amounted to $23 million. Payments to the United States Treasury as interest on Federal Reserve notes totaled $911 million. These payments consisted of all net earnings after dividends and after provision for building up sur plus to 100 per cent of subscribed capital at those banks where sur plus was below that amount, and, in addition, the excess portion of surplus at those banks where the surplus account exceeded the level of subscribed capital (which is twice paid-in capital). The 1959 payments to the Treasury reflect a conclusion reached by the Board, after consultation with the Federal Reserve Banks, that the maintenance of a surplus at the level of subscribed capital would be appropriate in the light of present circumstances. It was therefore de cided to change the recent practice of adding approximately 10 per cent of the annual net earnings of the Federal Reserve Banks to the surplus accounts, and to pay to the Treasury the amounts by which the surplus accounts exceeded subscribed capital. The Directors, Officers and Staff of the Bank are grateful to you, our stock holders, for your continued understanding and effective cooperation in meeting the problems of bank and monetary management with which the Bank and the Federal Reserve System have been confronted. Sincerely, President BERT R. PRALL Chicago, Illinois C h a irm a n a n d Fed e ral Reserve A g e n t ROBERT P. BRIG G S, Executive Vice President Consum ers Power Com pany Jackson, M ichigan D ep u ty C h a irm a n J O H N H. C RO CKER, Chairm an of the Board W IL L IA M A. H ANLEY, Director and President Eli Lilly and C om p any The Citizens N ational Bank of Decatur Indianapolis, Indiana Decatur, Illinois JA M E S H. HILTON, President Io w a State University W ALTER J. C U M M IN G S , Chairm an of the Ames, Io w a Executive Committee Continental Illinois National Bank V IV IA N W. J O H N S O N , President and Trust C o m p an y of C hicago First N ational Bank Chicago, Illinois C edar Falls, Iow a G ERA LD F. LA N G E N O H L, Treasurer W IL L IA M J. GREDE, President and Assistant Secretary Grede Foundries, Inc. Allis-Chalm ers M fg. Co. Milwaukee, W isconsin Milw aukee, 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 a irm a n C. L IN C O L N LIN D ERH O LM , President ERNEST W. POTTER, President Central Bank G rand Rapids, Michigan Citizens Commercial & S a vin gs Bank Flint, M ichigan W IL L IA M A. M AYBERRY, Chairm an of the Board J. T H O M A S SMITH, President Manufacturers N ational Bank of Detroit Dura Corporation Detroit, Michigan O a k Park, M ichigan C. V. PATTERSO N, Executive Vice President D O N A L D F. VALLEY, Chairm an of the Board Upjohn C om pany N ational Bank of Detroit Kalam azoo, Michigan Detroit, M ichigan MEMBER OF FEDERAL ADVISORY H O M E R J. L IV IN G S T O N , President The First N ational Bank of Chicago Chicago, Illinois January 1, 1960 COUNCIL CARL E. ALLEN, President CHARLES J. S C A N L O N , First Vice President ERNEST T. B A U G H M A N , Vice President LAURENCE H. JO N ES, Vice President and Cashier W ILFO RD R. DIERCKS, Vice President CLAR EN CE T. LAIBLY, Vice President ARTHUR M. G U S T A V S O N , Vice President G EO R G E W. MITCHELL, Vice President H UG H J. HELMER, Vice President H A RO LD J. N E W M A N , Vice President PAUL C. H O DG E, Vice President, General Counsel and Secretary H A RR Y S. SCHULTZ, Vice President ROBERT C. H O LLAN D, Vice President RUSSEL A. SW A N E Y , Vice President CARL E. BIERBAUER, Assistant Vice President BRUCE L. SMYTH, Assistant Vice President ED W A R D A. HEATH, Assistant Vice President JO SEPH J. SRP, Assistant Vice President and Assistant Secretary R IC H A R D A. MOFFATT, Assistant Vice President C. PAUL V A N ZANTE, Assistant Vice President D IC K NETZER, Assistant Vice President CHARLES G. W RIGHT, Assistant Vice President JO H N J. C A P O U C H , Assistant Cashier FRED H. G R IM M , Assistant Cashier LE R O Y A. D A V IS, Assistant Cashier VIC T O R A. H A N SE N , Assistant Cashier LE R O Y W. D A W S O N , Assistant Cashier W IL L IA M O. HUME, Assistant Cashier F R A N C IS C. EDLER, Assistant Cashier ROBERT E. SORG , Assistant Cashier LESTER A. GO HR, Assistant Cashier G EO R G E T. TUCKER, Assistant Cashier J O H N J. ENDRES, General Auditor LELAND M. ROSS, Chief Examiner FRED A. D O N S, Assistant General Auditor ELBERT O. FULTS, Assistant Chief Examiner W IL L IA M C. GALLAG H ER, Assistant Counsel and Assistant Secretary DETROIT BRANCH RUSSEL A. SW A N E Y , Vice President W. G EO R G E R1CKEL, Assistant Cashier R IC H A R D W. BLO O MFIELD, Assistant Vice President ARTHUR J. W IE G A N D T , Assistant Cashier PAUL F. CAREY, Assistant Cashier G O R D O N W. LAMPHERE, Assistant General Counsel January 1, 1960 Assets Gold certificates: Redemption fund for Federal Reserve notes . Other h o l d i n g s .................................. Total gold certificates......................... December 3 1 , 1 9 5 9 1 6 7 ,6 3 3 ,9 8 5 . 3 ,0 0 0 ,4 5 9 ,8 9 4 3 ,3 2 6 ,2 2 7 ,4 5 3 . 3 ,1 8 2 ,8 1 6 ,7 1 4 3 ,4 9 3 ,8 6 1 ,4 3 8 3 9 ,9 0 9 ,5 0 0 4 0 ,2 6 7 ,0 0 0 Federal Reserve notes of other banks Other c a s h ................................................. Total cash December 3 1 , 1 9 5 8 1 8 2 ,3 5 6 ,8 2 0 ....................................... . 5 8 ,7 3 3 ,7 9 9 . 3 ,5 9 2 ,8 6 2 ,2 3 7 3 ,8 8 5 ,0 0 0 7 4 0 ,0 0 0 Discounts and advances: Member b a n k s .................................. O t h e r ................................................. Total discounts and advances . 6 5 ,4 4 7 ,1 7 5 3 ,2 8 8 ,1 7 3 ,3 8 9 4 3 ,6 6 8 ,7 0 9 . 2 .5 5 9 .7 0 0 4 4 ,4 0 8 ,7 0 9 6 .4 4 4 .7 0 0 U. S. Government s e c u r i t i e s ......................... . 4 ,6 0 4 ,3 6 5 ,0 0 0 4 ,5 8 5 ,6 1 4 ,0 0 0 Total loans and securities.................... . 4 ,6 4 8 ,7 7 3 ,7 0 9 4 ,5 9 2 ,0 5 8 ,7 0 0 . 1 ,0 3 6 ,2 4 6 ,4 9 3 9 0 2 ,9 9 9 ,0 8 3 Cash items in process of collection . Bank p re m ise s............................................ 1 5 ,5 9 6 ,6 3 7 1 1 ,8 2 3 ,6 3 5 Other a s s e t s ............................................ 4 4 ,8 9 9 ,6 6 6 2 4 ,8 3 9 ,9 0 4 . 9 ,0 3 3 ,6 8 9 ,8 9 4 9 ,1 2 4 ,5 8 3 ,5 5 9 . 5 ,3 2 4 ,4 4 1 ,8 0 5 5 ,3 0 2 ,6 8 0 ,7 7 0 . 2 ,6 3 7 ,8 8 8 ,8 1 7 2 .8 0 9 .5 1 7 .5 5 9 3 9 ,3 2 0 ,5 3 0 4 8 ,6 1 9 ,1 8 5 5 1 ,5 0 4 ,0 0 0 3 3 ,6 0 5 ,0 0 0 Total a s s e t s .................................. Liabilities Federal Reserve notes in circulation . Deposits: Member bank— reserve accounts U. S. Treasurer— general account Foreign ............................................ O t h e r ................................................. . Total d ep o sits,.................................. . 6 5 ,5 0 4 ,6 5 3 8 ,4 0 3 ,7 6 8 2 ,7 9 4 ,2 1 8 ,0 0 0 2 ,9 0 0 ,1 4 5 ,5 1 2 Deferred availability cash i t e m s .................... 7 4 7 ,3 1 8 ,5 7 7 7 2 1 ,5 0 8 ,1 6 2 Other l i a b i l i t i e s ....................................... 5 ,2 3 6 ,1 0 8 3 ,9 6 7 ,4 6 6 8 ,8 7 1 ,2 1 4 ,4 9 0 8 ,9 2 8 ,3 0 1 ,9 1 0 Total l i a b i l i t i e s ............................. . Capital accounts Capital paid i n ....................................... Surplus (Section 7 ) ....................................... Other capital accounts.................................. Total liabilities and capital accounts 5 3 ,6 6 6 ,9 0 0 4 9 ,6 6 4 ,9 5 0 1 0 7 ,3 3 3 ,8 0 0 1 3 2 ,1 5 8 ,5 3 4 . 1 ,4 7 4 ,7 0 4 1 4 ,4 5 8 ,1 6 5 . 9 ,0 3 3 ,6 8 9 ,8 9 4 9 .1 2 4 .5 8 3 .5 5 9 ' STATEMENT OF EARNINGS AND EXPENSES Current earnings: 1959 1958 Discounts and advances U. S. Government securities All other 4,913,984 148,276,884 49,873 1,219,562 128,023,207 41,270 Total current earnings 153,240,741 129,284,039 13,105,865 1,534,729 2,763,436 2,927,640 955,200 1,059,187 1,826,843 13,125,857 1,493,184 2,469,379 2,405,667 851,000 1,148,887 1,729,770 24,172,900 23,223,744 3,457,458 20,715,442 132,525,299 3,266,108 19,957,636 109,326,403 33,137 12,966,576 27,653 13,027,366 26,380 (44,770) 26,960 Deductions from current net earnings Net earnings 449 145,552,216 622 109,334,351 Dividends 3,110,884 167,266,066 (24,824,734) 2,902,076 Current expenses: Salaries Retirement contributions Postage and expressage Provision and maintenance of facilities Assessment for expenses of Board of Governors Cost of Federal Reserve currency All other Total . Less reimbursement for certain fiscal agency and other expenses Current net expenses Current net earnings Additions to current net earnings: Profits on sales of U. S. Government securities (net) Transferred from reserves for contingencies (net) . All other Total additions Paid U.S. Treasury (interest on F. R. notes) . Transferred to Surplus (Section 7) 8,570 95,789,048 10,643,227 Surplus Account (Section 7) Surplus January 1 Transferred to Surplus--as above Transferred to Surplus (Section 7) from Surplus (Section 13b) . 132,158,534 (24,824,734) 121 ,503,625 10,643,227 11,682 Surplus December 31 1 07,333,800 1 32,158,534 1959 IN REVIEW In business— continued e x p a n sio n , interrupted te m p o rarily b y steel strike jA -lth o u g h all major sectors of business scored substantial gains in 1959 over the levels of the previous year, there was a marked difference between the economic environment of the first half of the year and that of the second half. In the first six months, total industrial output was rising vigorously on a broad front, continuing the expansion which had been under way since the spring of 1958. This advance was par ticularly large because of the record output of steel which reflected, in part, the build-up of inventories in anticipation of a possible strike. In the second half, the rise in over-all ac tivity was halted temporarily by the steel strike which closed down 85 per cent of the nation’s ingot capacity beginning in midJuly and kept workers away from their jobs for 116 days. The strike was more than twice as long as any of its predecessors in the period since World War II. Following the return to work on November 7, steel output rose rapidly and, in December, reached a new high. Over-all, industrial pro duction at year end had nearly regained the pre-strike level. Until th e strik e — a n u p su rge By mid-1959, the nation’s annual rate of output of goods and services had advanced to 485 billion dollars— a new high— 6 per cent above the level of the beginning of the year and 13 per cent above the recession low reached in the first quarter of 1958. Consumer expenditures on goods and serv ices, by far the largest segment of total 8 Annual Report, 1959 spending, reached a record rate of 311 bil lion dollars as of midyear. This was 4 per cent higher than at the start of the year and 8 per cent higher than in the spring of 1958. For durable goods as a group— including automobiles, appliances, radio-TV and fur niture— the comparable increases were 11 and 20 per cent. The physical volume of industrial produc tion also reached a new high by mid-1959, 10 per cent above the level at the beginning of the year and up 26 per cent from the 1958 low. The hard goods industries, as usual, had accounted for a larger than pro portionate share of the 1957-58 decline in activity, and in the succeeding 1958-59 rise these industries were again in the forefront. Output in the metals and metal products H ard g o o d s output in forefront of recession and recovery per cent, 1957 = 100 lines, which are relatively much Steel strike has sharper impact than more important in the Midwest than in most other areas, had 1 9 5 7 -5 8 recession in Gary-Hammond area advanced 13 per cent from the per cent, 1957 =100 beginning of the year to June of 1959 and 31 per cent from the recession low. All the major Mid west hard goods industries ex perienced a brisk rise in orders and output. Among the strongest lines were steel, industrial ma chinery and equipment, farm ma million dollars, seasonally adjusted chinery, construction equipment, railroad freight cars and locomo tives, autos and trucks, house hold appliances and furniture. The rise in employment had been somewhat sluggish in late 1958. But in the first half of 1959, hirings accelerated and employment rose by 1 million persons. Unemployment, which had been 6 per cent of the labor force at the end of 1958 and 7 Vi per cent in the spring of that year, dropped to less than 5 per cent by the spring of 1959. The accounted for by the shift from inventory improvement in the employment situation liquidation to inventory accumulation. was particularly marked in the Midwest Other important factors which provided where one center after another was removed a strong push to total output were increased from the list of “substantial labor surplus” purchases of goods and services by the Fed areas. eral Government, principally defense and In part, the rise in activity in the first public construction, and a higher level of half of 1959 represented inventory build private residential construction. ing, with the durable goods lines accounting The strength of home building during for most of the increase. Additions to steel 1959 is illustrated by the fact that building inventories, mentioned earlier, were partic permits in the nation rose by more than ularly important. But inventories of other one-third in the first half over the same pe raw materials, as well as goods-in-process riod of 1958. The Seventh District saw a and finished goods, also rose as activity ex gain of similar magnitude, although the ex panded. About one-third of the total rise in perience of the major urban centers varied. activity between the first quarter of 1958 It was apparent that the principal forces and the second quarter of 1959 was directly Vi Federal Reserve Bank of Chicago 9 which had initiated the general business up trend and propelled it through the first half of 1959 were rising less rapidly at midyear. Even without a major work stoppage, there was reason to believe that the rate of rise in total activity would have slowed in the sec ond half of the year. Nevertheless, it still ap peared that a 500 billion dollar rate of total output would be achieved before year end. The reason for this expectation was the con tinued and growing strength in demand for both consumer goods and business plant and equipment. The economy remained basically strong during the second half of 1959. Many ac tivities unaffected by the steel strike con tinued to move up throughout the period. As a result, total spending on goods and services dropped only about 1 per cent dur ing the third quarter, and this reduction was more than accounted for by the change from inventory accumulation to inventory liqui dation in the hard goods industries. Spend ing by consumers continued to rise quarter by quarter through the year. However, be- Rise in auto output hampered by steel shortages in late 1959 10 Annual Report, 1959 tween June and October, total output of mines and factories dropped 9 per cent. The impact on the steel-producing and steel-fab ricating centers, of course, was much more severe. In some Midwest centers, princi pally the Gary-Hammond area (steel) and the Detroit and Flint areas (autos), the ef fect of the strike was more severe than that of the 1957-58 recession. Nevertheless, at year end, activity was at a record level in the steel centers and was rising rapidly in the auto centers. A g o o d y e a r fo r a u to s a n d trucks It was expected at the start of 1959 that car and truck production and sales would expand sharply over the depressed levels of 1958. However, for the first ten months of 1959, production topped expectations of all but the most optimistic. Output of passenger cars exceeded that of the same period of the previous year by 55 per cent, and production of trucks was up 47 per cent. But in Novem ber and December, steel shortages caused production curtailments. The popularity of smaller, more econom ical cars— the “compact” autos— was wel comed by producers located in Kenosha, Wisconsin, and South Bend, Indiana, where such autos were in production throughout the year. One or more compact models was included in the 1960 lines introduced in the autumn of 1959 by each of the industry’s “big three” producers. The wider selection available to consumers, the apparent favor able reception accorded to the 1960 models and the fact that steel shortages had held down car inventories in late 1959 indicated at year end that production of the automo bile industry was headed for a strong up ward surge. During 1958, Michigan had been among those states which were hardest hit by the Unem ploym ent in Midwest centers declined in 1959 Rate of Unemployment M ay 1958 November 1958 M ay 1959 November 1959 Cedar Rapids Des Moines K e n o sh a Cedar Rapids Cedar Rapids Des Moines Under 3 per cent Kalamazoo Quad Cities K e n o sh a Madison Milwaukee Quad Cities Racine Rockford Chicago Cedar Rapids Des Moines Chicago Des Moines Indianapolis Indianapolis Fort W a y n e Kalamazoo 3 - 6 per cent Kalamazoo Kalamazoo Grand Rapids Indianapolis Madison K e n o sh a L a n sin g Milwaukee Madison Madison L a n sin g Quad Cities Quad Cities Milwaukee Muskegon Rockford Rockford Peoria Peoria Racine Saginaw Rockford S o u th B e n d Chicago Chicago Fort W a y n e D e tro it Fort W a y n e 6 - 9 per cent Flint Grand Rapids Terre Haute Indianapolis Fort W a y n e Muskegon K e n o sh a L a n sin g S o u th B e n d Racine Milwaukee Terre Haute Terre Haute Peoria Racine Saginaw Terre Haute Grand Rapids Grand Rapids L a n sin g 9 - 1 2 per cent S o u th B e n d Flint Peoria Muskegon Saginaw O ve r 12 per cent D e tro it D e tro it D e tro it Flint Muskegon Flint S o u th B e n d Note: The District's major automotive centers are in bold type. Federal Reserve Bank of Chicago 11 recession. All of the cities primarily con cerned with the manufacture of motor vehi cles had high rates of unemployment in May of 1958— ranging up to and beyond 12 per cent of the labor force. By September of 1959, these centers, with the exception of Detroit and Flint, had ceased to be “sub stantial labor surplus” areas, according to the classifications of the Department of La bor. Even in the latter cities unemploy ment had declined substantially, and further improvement was occurring at year end as steel flowed in increasing volume. C a p ita l e x p e n d itu re s m o v e h ig h e r One of the most interesting aspects of the early phase of the recovery from the 1958 recession was the upturn in capital expendi tures by business firms. This upturn began A utom otive d e ale rs led retail sales upsurge per cent increase, 1959 from 1958 0 5 10 1 5 autom otive building m aterials drug stores general merchandise to tal retail sales furniture 8 appliances service stations apparel eating 8 drinking establishm ents food 12 Annual Report, 1959 20 earlier than had been expected in view of the large increases in capacity in 1956 and 1957. Prior to the dampening effect of the steel strike, surveys had indicated a 9 per cent increase in total outlays on new plant and equipment. A strong, broadly based upswing in capi tal goods spending was in progress as 1959 came to a close. The major difference be tween the current movement and the capital goods expansion in 1955-57 is that the em phasis this time is less upon increasing ca pacity to produce basic materials and more upon modernization and finishing capacity to produce new products and semifinished goods. Order backlogs for railroad equip ment, trucks and trailers, electrical appara tus and industrial machinery were rising during the latter part of 1959. Despite a slowdown in the road-building program and in residential construction, the important Midwest construction machinery industry was experiencing excellent demand for its products, partly because of the orders of foreign buyers who constitute 30 to 40 per cent of the market. Prices stab ilize ? The consumer and wholesale price in dexes showed considerable stability after the spring of 1958. This stability continued through May 1959 for consumer prices and through the entire year for wholesale prices. However, it was a rather uneasy stability, made up of reductions in farm products and foods which offset further moderate in creases in the prices of finished goods and services. Price inflation continued a prominent matter of public and private concern in 1959. Could the United States economy continue in a strong expansion without gen erating substantial upward price pressures ■ as in 1956 and 1957? The answer was still not evident at year end. However, larger unused resources of men and facilities than in 1955, increased foreign competition in many kinds of commodities and higher interest rates were helping to re strain upward pressures on prices. One of the most promising signs was the fact that the 1960 models of automobiles were intro duced in the autumn of 1959 without any over-all price increase for the first time in several years. However, there were reports that many producers were deferring consid eration of price hikes until the probable ef fects of the wage settlement in the steel in dustry were evaluated. In the farm sector— expe n ditu re s rose alth ou gh income declined X arm income declined in 1959, largely re flecting the effects of lower prices for hogs, poultry and eggs. Nevertheless, farmers spent more on purchases of machinery, equipment and supplies as they expanded the acreage of crops and continued to en large the size and improve the efficiency of their farms. To finance these purchases, farmers drew down demand deposits and increased borrowings. The demand for farm real estate remained at a high level and land prices increased further, although at a slow ing pace as the year progressed. Receipts from sales of farm products de clined about 2 Vi per cent in the United States, and realized net farm income was about 15 per cent below 1958. In each of the five District states, cash receipts were below the preceding year and showed a de cline of about 5 per cent for the area. Real ized net farm income probably declined more in the District than in the nation. In the Com Belt, the outstanding feature of 1959 was the larger volume of hogs mar keted and the resulting price declines. Hog marketings were 15 per cent above 1958, and prices were down about 29 per cent. At the end of the year, the price of hogs was low relative to corn, and farmers had re ported plans to reduce production of hogs in 1960. Income was also reduced by de clines in prices of poultry and eggs which reached their lowest levels since before World War II. Prices of fat cattle remained above a year earlier through most of 1959, reflecting a small decline in the number of cattle slaugh tered. Profits realized from fat cattle sold during the first half of the year were above average, though not as high as in 1958. With increased marketings toward the end of the year, cattle prices declined. Many Corn Belt farmers, who had paid relatively high prices for feeder cattle in the fall of 1958 and the first half of 1959, realized little or no profit when these animals were sold for slaughter in the latter part of the year. Prices of feeder cattle declined sharply in the autumn, thus improving the possibility of profitable fat tening of cattle purchased at the lower prices. Smaller cash receipts from livestock and livestock products in the dairy states more than offset increased income from crops and resulted in lower farm income in that area as well as in the Com Belt. Production of milk declined in 1959 for the second succes sive year, following six years of increase. The major reason was the continued rigor ous culling of dairy herds under the impetus Federal Reserve Bank of Chicago 13 of high prices for beef. Purchases of dairy products by the Commodity Credit Corpor ation were substantially reduced in 1959, and by the end of the year the CCC’s stocks of butter, cheese and dried milk were largely liquidated. Even though milk prices climbed slightly above a year earlier in the spring, this was not sufficient to offset the effect on income of the smaller output. Crop production in 1959 matched the record output in 1958 and brought further additions to the surpluses, as reflected in the inventory and crop loans of the CCC. At the end of the year, the CCC stockpile reached a new high and was expected to total 10 billion dollars in early 1960. The largest crop of corn ever harvested was produced in 1959. As a result of changes in price supports and the soil bank program, the acreage planted to corn was increased 15 per cent. In Iowa a record acreage was planted, and in Illinois and Indiana the acre ages were the largest in over thirty-five years. The yield per acre was almost equal to the previous yield in 1958. The support price for corn in 1959— $1.12 a bushel, national average— was six cents higher than in the previous year for most farmers. Support prices on other feed Corn an d livestock production increased, grains and on soy large price declines for hogs and eggs cut income beans, a major crop alternative to corn for prices Corn Belt farms, were received by farmers reduced and produc per cent change, 1959 from 1958 -30 -20 -10 0 +10 tion of these crops de clined. However, total output of feed grains, including corn, climbed 5 per cent above the previous record output in 1958. The high level of feed grain p r o d u c t i o n , combined with large stocks and a steady decline in prices since the early 1950’s, has provided the basis for further expansion of livestock production. F a r m e r s ’ use o f credit climbed rapidly during 1959. In Oc tober, “ short-term ” farm loans outstand 1 Pigs raised from sow s farrow ing June to M ay. ing at member banks 2 Num ber of cattle on feed, average, January 1, April 1, July 1 and October 1. ■ 14 Annual Report, 1959 in the Seventh Fed Farm land prices have risen sharply in District states, eral Reserve District surpassing the previous record high in 19 2 0 were 29 per cent average dollar value per acre above a year ago and 46 per cent above two 1959 30 0 _ ■■ farm real estate prices years ago. These in creases were greater than the comparable gains of 19 and 36 per cent reported for the United States. Banks in the cattle feeding areas of Iowa and Illinois experi enced the greatest in crease in farm loans: up 37 per cent in the past year and 61 per cent in the last two years. In large part, Illinois Indiana Iowa Michigan W isconsin this r e f l e c t s the sharply higher prices of feeder cattle, which in the fall of 1958 years. Agricultural banks in Iowa have had were nearly 50 per cent above the same the greatest increase and decline, reflecting period in 1956. The increase in farm loans the importance of livestock in determining in the remainder of the District has been farm income in that state. Time deposits at about half as great as in these areas. agricultural banks, however, have continued Demand deposits at agricultural banks in to increase in all areas of the District at the District declined in 1959 nearly as much about the same rate as during the preceding as they increased in 1958. This corres three years. ponded to farm income changes the past two In b a n k in g — stro n g credit d em an d s from n e a rly all sectors (C r e d it demands were strong during 1959. Nearly all sectors of the economy borrowed aggressively, but demands were exception ally heavy in the short-term area where commercial banks are the predominant sup pliers of funds. Business firms required ad ditional credit to help finance the rise in inventories and receivables and the increase in expenditures for new plant and equip ment. Residential mortgages and consumer credit outstanding rose sharply. Farmers boosted borrowings to help finance pur Federal Reserve Bank of Chicago 15 chases of feeder cattle, machinery and real estate. And, despite conditions of general prosperity, the Treasury incurred a cash defi cit in excess of 7 billion dollars for the cal endar year. This deficit was about as large as in 1958, a year which was marked by recession. The rising trend of business activity, ac companied by larger credit demands, stirred public apprehension that inflationary pres sures would be intensified. To minimize current and prospective upward pressures on prices, monetary policy was directed to ward restraining the growth in bank reserves and the supply of money. As a result, the strong over-all demand for credit pushed in terest rates to higher levels. B a n k lo a n s ro se sh a rp ly During 1959, loans of Seventh District member banks rose by 1.5 billion dollars, or about 13 per cent. This increase, the largest since 1955, compares with a rise of only 1 per cent in 1958 and 5 per cent in 1957. Funds for additional loans provided largely from sales of securities billion dollars 16 Annual Report, 1959 Despite the substantial growth in loans, total earning assets of member banks rose by only 1.5 per cent, compared with 7 per cent in the preceding year. Banks sold Government se curities in large volume to accommodate the growth in loans. During the year, Govern ment security portfolios of District member banks were reduced by 1.3 billion dollars, or 12 per cent. Although all major categories of bank loans rose substantially during 1959, the over-all increase was dominated by the growth in loans to businesses. After a grad ual rise in the first half, commercial and in dustrial loans rose sharply in the third quarter and, except for the reductions in in ventories and receivables and the postpone ment of capital outlays as a result of the steel strike, might well have continued to increase through the year. Until the fourth quarter, the metals and metal products firms had shown the largest increase in borrowings, although as inven tories of steel were “consumed,” these firms reduced borrowings and acquired sizable holdings of cash and short-term Govern ments. Public utilities, petroleum and chem ical producers, and sales finance companies also used substantially more bank credit in 1959 than in 1958. Many businesses borrowed at banks in preference to floating new issues of securi ties. Sales of bonds and stocks for new capi tal were 15 per cent less than in 1958, when a considerable amount of bank debt incurred during the previous boom was refinanced. The higher interest rates in 1959 probably caused postponement of some issues of long term bonds. Sales of common stock were substantially higher in 1959 than in the year earlier but were far less than in 1957. District banks also supplied additional amounts of consumer and real estate credit. A m o n g business borrow ers, b a n k lo an s to metals and metal products manufacturers showed largest increase trade firms increased more than to other seasonal credit users million dollars farm product dealers and processors were similar to 1958 0 - 50 -1 0 0 -150 sept public utilities did not decline as in 1958 when loans were repaid from proceeds of capital issues + 50 0 -50 mar june sept dec -200Li i i I i i i I i i i I i i i i I i i i 1 i 1 i i i i I i i i I i i i 1 i i 1 i 111 i i i 1 1 1 1 1 1 mar june sept dec fuel and chemicals producers increased somewhat Consumer loans increased rapidly through out the year. The rise in real estate loans, mainly on residential property, reflected the high level of housing starts and commit ments made to builders during the first half of the year before the availability of credit tightened further. form of bills and notes as the 414 per cent legal ceiling on coupon interest rates on marketable Governments of more than five years maturity precluded new issues of long term bonds after the spring of the year. The basic rate charged by large banks to top credit risks— the “prime” rate on busi ness loans— was increased from 4 per cent at the beginning of the year to per cent in May and to 5 per cent in September, where it remained through the remainder of the year. In the capital markets, rates ad vanced despite reduced placements of new long-term bonds. Late in the year, seasoned high-grade corporate issues were yielding AVz In te re st ra te p re ssu re s With aggregate credit demands tending to exceed the supply of funds available, interest rates rose almost continuously through the year, with pressures especially strong in the short- and intermediate-term areas. Most of the Treasury’s new borrowing was in the District a re a s vary in asset and deposit changes Illinois Indiana Iowa Michigan percent chonge november 26, 1958-november 25, 1959 -20 -10 0 tIO -O 0 Indianapolis other mm 18 Annual Report, 1959 +10 Wisconsin about 33z£-per cent, and tax-exempt munici pals over 4 per cent. Many new issues car ried yields well in excess of these rates. The Federal Reserve Banks’ discount rate charged member banks was raised three times during 1959 and stood at 4 per cent at year end. During 1958, the discount rate had been as low as 1% per cent. More than 250 member banks, about one-fourth of the total number in the Seventh Federal Reserve District, borrowed from the Federal Reserve Bank of Chicago at some time during 1959. The average daily volume of loans and discounts was 145 million dol lars, about three times the 1958 level. Banks in smaller towns accounted for an unusually large proportion of the number of borrowers, although a small proportion of total borrow ings. Many agricultural banks encountered deposit declines at the same time that the demand for loans was at a very high level, especially in the cattle feeding areas. The Federal Reserve Act was amended in July 1959 to give the Board of Gover nors the power to allow vault cash to be included in the legal reserves of member banks. In late November, the Board an nounced that cash in excess of 2 per cent of net demand deposits at central reserve and reserve city banks and 4 per cent of net de- In tere st rates rose further in 1959 per cent per annum mand deposits at country banks could be included in reserves. This change recog nizes the differing cash needs of individual member banks. The increase in reserves re sulting from the November announcement is quite small in the aggregate, about 230 mil lion dollars for all member banks in the United States. Because seasonal needs of the economy always call for the provision of ad ditional reserves in the pre-Christmas weeks, this addition to bank reserves did not rep resent any basic change in monetary policy. Federal Reserve Bank of Chicago 19 o 1914 TO 1959 Forty-five y e a rs o f B a n k o p e ratio n s n November 15, 1959, the Federal Re serve Bank of Chicago completed its fortyfifth year. Since the Bank’s organization in 1914, its operations have expanded gradu ally in response to the requirements of a growing economy and rapidly during the nation’s participation in two major wars and billion dollars 10 ‘ billion dollars 20 Annual Report, 1959 the Korean conflict. Cyclical swings in busi ness activity have also influenced the vol ume of operations. The relative importance of certain functions has been altered over the years by changes in the Federal Reserve Act and in the financial institutions and practices in the area. Trends in a number of measures which give an i n d i c a t i o n of changes in the Bank’s operations are shown in the accompanying charts. As measured by to tal assets, charted at five-year intervals, the Bank has grown con tinuously. The sharp est rise came during W orld W ar II; assets more than d o u b l e d from 1939 to 1944. Reserve Bank as sets now co n sist mainly of gold certific a t e s an d U n i t e d States Government se curities. In its early years, however, the Bank’s principal as sets consisted of re discounts of member banks’ com m ercial, industrial and agricul tural paper and ad vances collateraled by such paper. Growth of assets in the 1930’s was mainly in the form of gold certificates issued by the Treasury against the large vol ume of gold acquired following the Gold Reserve Act of 1934. The sharp expansion during World War II and the further in creases in subsequent years have come about largely through the acquisition of Govern ment securities. Each Reserve Bank is re quired by law to maintain gold certificates equal to 25 per cent of its note and deposit liabilities. At the close of 1959, this Bank’s ratio was 39.2 per cent. The principal liabilities of a Federal Re serve Bank are its notes (currency) out standing and the reserve deposits of its member banks. The amount of reserves is governed mainly by System policy, but the amount of Federal Reserve notes reflects largely the desires of the public as to how much currency it wishes to hold. Within in dividual years, seasonal factors cause sharp fluctuations in the amount of such currency held by the public; but over long periods of time, the volume of notes outstanding tends to rise gradually with the growth of popula tion and business activity. At the close of 1959, reserve deposits of District member banks totaled 2.6 billion dollars. Successive reductions in required reserves, relative to deposits, from the high levels of the early Fifties explain the decline in reserve balances over recent years despite continued growth in deposits at member banks. The number of both member and non member banks declined sharply in the early Thirties as the drastic declines in prices of commodities, securities and real estate re sulted in the liquidation of many commer cial banks. During the past ten years, the number of member banks has remained about constant as mergers and consolida tions have offset the formation of new banks. However, the number of banking offices, in cluding branches and branch offices, has risen. Total assets of member banks now comprise more than 80 per cent of the as sets of all banks in the Seventh Federal Re serve District, a somewhat higher propor tion than in the mid-Twenties when the number of members was at a peak. Employment at the Federal Reserve Bank of Chicago reached its highest level during the war years when an unusually large staff was required to handle the issue and re demption of savings bonds and to perform other tasks as fiscal agent of the Govern ment. Most of the Bank’s personnel is en gaged directly in activities incident to the operation of an efficient system for the mak ing of financial payments. These activities include: the par collection of checks; the receipt, sorting and shipment of currency and coin; the making of loans to member banks; the purchase, safekeeping and servic ing of member banks’ securities; the wire transfer of funds and Treasury securities; and the performance of the services inherent in the Bank’s role as fiscal agent of the United States. C ollections The Bank’s largest and most rapidly growing service function is the processing of checks received from member banks and other Federal Reserve Banks and branches for collection. In 1959, a total of approxi mately 600 million items with a value of over 200 billion dollars was handled. This repre sented an increase of 5 per cent over 1958 and was triple the peak number handled prior to World War II. The daily average number of items processed in 1959— about 2 million— was approximately equal to the total number handled during the entire first Federal Reserve Bank of Chicago 21 number number billion dollars year of the B a n k ’s operations. The Bank processes Treasury checks and postal money orders and collects a variety of noncash items, in cluding maturing se curities and coupons, for member banks; but the bulk of the collection operation consists of checks on c o m m e r c i a l b a nk s . Each check must go through at least two sorting operations be fore it is routed to the bank on which it is drawn. C h e c k s are processed continu o us ly— twenty-four hours a day, six days a week. This activity accounts for almost half of the Bank’s to tal personnel. Banks receive credit within two business days for checks sent to the Re serve Bank for collec tion. At the time the Federal Reserve Sys tem was organized, most checks written on distant banks were collected only after c o n s i d e r a b l e d e l ay and costly exchange charges. C a sh o p e ra tio n s In addition to issu- 22 Annual Report, 1959 ing the Federal Reserve notes, which com prise about 85 per cent of the nation’s “pocket money,” this Bank supplies to the Seventh District member banks all the types of currency and coin needed for their trans actions. Cash is constantly being shipped to some member banks and received from oth ers, according to their individual needs. The currency and coin received at the Reserve Banks and branches is counted and credited to the reserve accounts of the remitting banks. Currency and coin which has been damaged is withdrawn from circulation and replaced with new stock received from the Bureau of Engraving and Printing and the United States mint. Worn-out Federal Re serve notes are sent to the Treasury for de struction, but Treasury currency — mostly one dollar bills— is cancelled and destroyed at the Reserve Banks. In 1959, the Federal Reserve Bank of Chicago received and counted 820 million pieces of currency, having a value of 5.0 billion dollars. The trend in this operation has been quite steadily upward for the past two decades. Close to 1.5 billion coins were received and counted in 1959, and almost 2.3 billion were shipped to member banks. About 90 per cent of all coin shipped was in wrapped form, a service that has been available to member banks since 1946. The postwar ex pansion in the volume of coin handled re flects the growth of the economy, the mak ing available of wrapped coin and the wide spread use of automatic vending machines, parking meters and other coin-operated, selfservice devices. D iscou nts a n d a d v a n c e s The provision of credit to individual mem ber banks to assist them during temporary periods of unexpected stress has always been an important function of the Federal Re serve Banks. In the early years of the Sys tem, discounting of commercial and agri cultural paper was the principal means by which Reserve Bank credit was extended. Use of the “discount window” was designed to automatically provide an “elastic” cur rency suited to the changing needs of the economy. In the 1930’s, legislation was enacted to permit banks to borrow on any satisfactory asset. But banks had a large volume of ex cess reserves during this period and there was little need to borrow. During and fol lowing World War II, banks held large port folios of Government securities and com mercial banks usually sold securities, rather than borrowed, to acquire needed reserves. As the excess liquidity of the early postwar years was absorbed and support levels for U. S. securities abandoned, member banks began to make more extensive use of the discount window. During 1959, about 3,500 discounts and advances totaling more than 15 billion dollars were made to member banks in the Seventh Federal Reserve Dis trict. In recent years, almost all borrowing has been done through advances on Govern ment securities, although a few member banks have rediscounted customers’ notes. S a fe k e e p in g securities Over 7.2 billion dollars of securities, in cluding those pledged as collateral for Treas ury deposits at commercial banks, were held in custody for banks and other owners at the end of 1959. Coupons on securities in custody are clipped and redeemed when payable. The proceeds are normally credited to the reserve account of the owner-bank or its correspondent. These totaled 218 million dollars last year. Funds may be transferred for banks and Federal Reserve Bank of Chicago 23 thousand p•eces 600 securities received for safekeeping 400 20011-------- 0 L-----~--~----------~----------~----~----L_____. 1949 1954 1959 1944 1924 1929 1934 1939 1914 1919 their customers through a network of leased wires maintained by the Federal Reserve System. Transfers totaling 240 billion dollars in 1959 were three times the volume of ten years earlier. Fiscal agency functions cash received aoa------------------------------40 0 ~--------------------~---------------------------1954 1959 1944 1949 1929 1914 1919 1924 1934 1939 m•l lion p1eces 500 checks collected 400 3001 - - - - - - 200>1---- -----u.s Government- 100-- 1919 24 1924 1929 Annual Report, 1959 1934 1939 1944 ---- Services performed for the Treasury Department currently account for about 15 per cent of the Bank's total work force. Foremost among these tasks is the servicing of the United States Government debt: the issuance and redemption of savings bonds and marketable Treasury securities, payment of interest coupons on these securities, denominational exchanges and telegraphic transfers of securities. This Bank also acts as fiscal agent for the Commodity Credit Corporation, receiving deposits for the CCC's account and paying drafts issued by the Commodity Stabilization Service offices. In addition, the Federal Reserve Bank of Chicago maintains a share of the Treasurer's General Account and receives and processes Government checks. It qualifies commercial banks and other corporations in the Seventh District as issuing agents for Series E savings bonds, supplies bonds to be issued and approves financial institutions to redeem savings bonds for individuals. Records are kept of all deposits and withdrawals in Treasury Tax and Loan Accounts at some 2,000 of the District's banks which serve as Treasury Tax and Loan depositaries. Payments of withheld taxes and certain excise taxes and payments for newly issued Treasury securities are credited to the Treasury's accounts at these depositary banks until they are needed by the Treasury. The volume of fiscal agency operations, of course, varies with Government receipts, expenditures and debt transactions. These functions constituted a rather small part of the Bank's operations prior to the huge expansion of debt during World War II. The largest of these activities currently is the processing of U.S. savings bonds. In 1959, almost 18 million savings bonds were issued and over 16 million were redeemed. The number of transactions in marketable issues is much smaller than for savings bonds, although the dollar volume is much larger. In 1959, the activity in marketable Government securities was unusually high as many individuals, attracted by high yields, placed investment funds in the so-called "magic 5's" and other new issues of Treasury notes. • ♦ ■ i