Full text of Business Conditions (Federal Reserve Bank of Chicago) : August 1949

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BUSINESS CONDITIONS




A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO

Grain Storage Capacity Inadequate
Situation Intensified by Price Supports
Available grain storage capacity is inadequate to
handle the large volume of grain production realized in
recent years. The acute shortages experienced last fall are
present again. A number of factors, including the large
carry-over of grains, indicated near-record production
this year, and prospects for some decline in export volume,
combine to create a record demand for grain storage ca­
pacity. The situation is further intensified by efforts to
maintain grain prices at relatively high levels.
LARGE SUPPLIES ON HAND

July 1 carry-over of grain from the previous year’s
crops was unusually large, in excess of two billion bushels,
more than double the year-ago amount. The major part
of the increase was accounted for by corn with stocks
estimated at 1,277 million bushels, the largest on record
for July 1 and nearly three times the relatively small
stocks of a year ago.
Oats stocks were also at record levels, 60 per cent
above a year ago, and barley inventories were the largest
for any year except 1943. Combined holdings of corn,
oats, and barley—the three leading feed grains—totaled
43 million tons, two and one-half times the July 1 total
a year earlier and a record high.
Wheat carry-over from the 1948 crop was 293 million
bushels, the largest since 1944. In addition, the carry­
over of flaxseed, soybeans, and grain sorghum was larger
than last year and mostly above average. Corn produc­
tion this year (July 1 condition) is indicated at 3,530
million bushels. The carry-over from the 1948 crop (Oc­
tober 1) probably will be at least 750 million bushels
making a total supply of about 4,280 million bushels.
This is 15 per cent more than the record 1948-49 supply
for which storage was generally inadequate. Oat and
barley production (July 1 indication) apparently wdl be
less than in 1948 by about seven per cent for oats and
23 per cent for barley.
The wheat harvest, nearing completion, is estimated
at 1,189 million bushels. This, with the carry-over from
1948, would provide a total supply for 1949-50 of about
1,482 million bushels, a near-record volume and about
equal to a year ago.
Flaxseed production is indicated at 10 to 15 per cent
less than in 1948, but a large carry-over will maintain
storage requirements for this crop at a high level. Planted
acreage of soybeans is six per cent less than a year ago,
but growing conditions are as favorable as last year.
Although indications are that production of most
grain crops this year will be somewhat less than in 1948,
the larger inventories carried forward from preceding
crops will result in total supplies and storage require­
ments comparable to 1948. It is possible, of course, that



final 1949 production may be materially more or less than
the amounts indicated here depending upon growing and
harvesting conditions to the end of the season, particu­
larly for corn.
Exports of grain set a new record in the year ended
June 30—686 million bushels, 17 per cent more than in
the previous year. Wheat exports, including flour and
macaroni products, totaled 500 million bushels; other
grains and grain products, 186 million bushels.
The outlook for grain exports in 1949-50 is somewhat
uncertain. Undoubtedly, large import needs will continue
to exist in many countries but these do not necessarily
assure markets for American grain. Four-fifths of total
grain exports in the past year were to countries receiving
financial aid from the United States, occupied areas, and
ECA countries. This indicates that a large part of the
recent high export volume is predicated upon the foreign
aid programs which contemplate a gradual reduction in
import requirements of the recipient areas. Domestic
export volume will receive support in the year ahead as a
result of moderately lower grain production in Canada
and Europe.
Any falling off of demand, either domestic or foreign,
will result in additional requirements for storage capacity.
This is particularly important under present conditions
with grain prices being supported. In these circumstances
a weakening of demand will be characterized largely by
reduced utilization rather than a fall in price.
CURRENT MEASURES TO EXPAND CAPACITY

Enactment of legislation early in July authorizing the
Commodity Credit Corporation to undertake a nation­
wide grain storage program, followed promptly by an­
nouncement from the Secretary of Agriculture that the
Government, through the CCC, would grant “distress”
price support loans to farmers on wheat “stored” on the
ground in the Southwest and in temporary shelters in
more humid areas, pointed up the seriousness of the situ­
ation as well as the importance attached to storage as a
means of “delivering” on the Government commitment
to support grain prices.
In recent weeks, the CCC has called for bids for the
construction of 50 million bushels of bin-type storage
capacity at country delivery points. This will double the
present capacity owned by this agency. In addition to the
expansion of Government owned space, agreements are
being developed with private agencies for the storage of
grain in structures which can be adapted to that use. The
CCC estimates that it needs to lease additional storage
space for at least 100 million bushels in the Com Belt.
Government loans for new construction are provided
(Continued, on Inside Back Cover)

Public Housing Boom Ahead1
Homebuilding and Finance Face Impact of New Federal Program

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Final enactment of the long discussed and highly
controversial Housing Act of 1949 on July IS, promises
to have a marked impact upon both the homebuilding
industry and the numerous institutions and individuals
which provide residential financing. The new legislation
authorizes sufficient Federal aid to build an anticipated
810,000 dwelling units of low-rent public housing during
the next six years. Provisions for slum clearance, urban
redevelopment, community development, rural housing
improvement, and vastly broadened housing research,
in addition to authorization for a housing census in
1950, are contained in the newly enacted law. Also, the
mortgage-insuring powers of the Federal Housing Administration (FHA) have been extended; the secondary
mortgage market through the Federal National Mort­
gage Association (FNMA) has been expanded; and
Federal statutes regulating member bank operations
have been amended to permit broader investing and
underwriting activities in housing bonds.
As in the earlier public housing legislation—the United
States Housing Act of 1937—dual purposes for the new
program are set forth in the recently enacted law. The
first purpose is essentially social in that it stresses the
need for acceptable minimum housing and general living
conditions for all people. The second aim is more strictly
economic, with emphasis laid upon the need for a con­
tinuing high level of activity in the construction in­
dustry because of the effects of this industry upon
general business and employment levels. In the United
States Housing Act of 1937 the objective of stimulation
of construction had first priority, and that of better
housing to improve general welfare second, in reverse
order from the bill just enacted. This changed emphasis.

no doubt, reflects the fact that general construction
activity in the nation is continuing at an exceedingly high
rate in contrast to depressed activity before the war.
The most far-reaching question concerning the effects
of the new legislation upon the future level of general
business is whether the additional expenditures for public
housing will be countered by further decline in private
housing expenditures. Unless this occurs, it seems likely
that a high volume of residential building is assured for
the longer-run future.
Quite obviously, the lag in time necessary for public
housing operations to get started, even though many
local agencies have plans which are well advanced, means
that direct stimulating effects are not likely to be large
in the immediate future. The official estimate calls for
about 50,000 units to be started by mid-1950. Past
experience suggests, however, that only a small fraction
of this total will actually get under way in 1949,
probably not more than 10,000 units.
However, the effects upon businessmen’s expectations
in the construction, finance, and building materials
fields promise to be more direct and immediate. If a
public housing program of the magnitude outlined is
expected by private home builders and financial ex­
ecutives to have a sharply adverse effect upon demand
for privately built homes—particularly of the single
family type—speculative operations no doubt will be
curtailed rather soon, with a consequent decline in
private starts. However, if these businessmen believe
that public housing will have no adverse effect upon
their market—even possibly a belief that a building
materials price increase may result from the augmented
public housing program—speculative operations may
increase rather than decline.

PUBLIC AND PRIVATE HOUSING

WHAT THE ACT PROVIDES

NUMBER OF DWELLING UNITS STARTED
UNITED STATES, 1930-49
THOUSANDS OF UNITS

THOUSANDS OF UNITS

PRIVATELY

FINANCED

PUBLICLY
FINANCED

!S30

'ZZ

-M

*3*

'ZB

'40

JJ ESTIMATED
SOURCE: U S BUREAU OP LABOR STATISTICS.




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General Terms—The provisions of the Housing Act
of 1949 are essentially an extension and a modification
of presently operating programs, as authorized by the
United States Housing Act of 1937 and the National
Housing Act. In general, the changes relating to public
housing: (1) give greater participation and veto power
to local and state governing bodies, (2) encourage pri­
vate financing and private enterprise building of the
projects, (3) set higher cost limits for public housing
construction, (4) allow for veterans’ preferences in ten­
ant selection, (5) make special provision for large
families of low income, (6) reduce the maximum amor­
tization period of housing bonds from 60 years to 40
years, and (7) provide for annual subsidies covering a
lA discussion of plans and status of public low-rent housing in the Seventh Federal
Reserve District will appear in a subsequent issue of Business Conditions.

Page 1

vastly greater number of projects and housing units.
Low-Rent Housing—As previously stated, the sixyear program of building—the time can be extended by
further act of Congress—contemplates the starting of
810,000 dwelling units, no more than 10 per cent of
which may be built in any one state. The Act recom­
mends that these be started at the rate of 135,000 in
each fiscal year beginning with July 1, 1949, but per­
mits a range of from 50,000 to 200,000, depending upon
the opinion of the President and the Council of Eco­
nomic Advisers as to the probable effects of the program
upon the construction industry in general. Whether this
flexibility in fact will be important can only be known
as the program develops. It is important to recall, how­
ever, that hesitancy of local participation thus far has
acted more importantly as a deterrent to the total
number of public housing units constructed than limits
as set forth in the law.
In order that a Federally subsidized low-rent public
housing project be erected in any community it is re­
quired that the local governing body shall by resolution:
(1) approve the local housing authority’s application
for a preliminary loan, and (2) enter into an agreement
with the local housing authority to provide all coopera­
tion, which in practice means local tax exemption.
It is likewise necessary for the local housing authority
to convince the Public Housing Administration (PHA)
that there is a need for such low-rent housing which is
not being met by private enterprise builders, and that
the lowest rents charged for comparable units under
private enterprise are at least 20 per cent higher than
the highest rents contemplated for the proposed project.
Temporary Loans and Grants—If the foregoing con­
ditions have been met, the local housing authority may
apply for a temporary loan from PHA for the purpose
of initiating development work on surveys, plans, land
acquisition, or other preliminary work connected with
a proposed housing development. These loans are to be
paid back within 18 months or as soon as the permanent
financing is carried out, and must not carry interest at
less than the “applicable going Federal rate,” now
2.5 per cent.
In the event that the land to be acquired is a slum
or blighted area, the local housing authority, in addition
to the temporary loan previously mentioned, may apply
for a grant from the Housing and Home Finance Agency
(HHFA) which may total as much as two-thirds of
the difference between the gross cost of the land after
it has been readied for construction and the appraised
value for the intended use of the land.
Thus, the Federal grant-in-aid for slum clearance
absorbs two-thirds of the cost of demolition, relocating
streets, and other necessary work, with the local or
state government standing the other one-third. The
cleared land need not necessarily be used for public
housing. In fact it may be used for any public or
private purpose which conforms with a community plan.
It is anticipated that eventually some slum-cleared land
will be bought or leased for industrial and commercial
purposes. HHFA grants for slum-clearance are author­

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ized up to a total of 500 million dollars.
Construction of the Homes—Having acquired either
vacant or slum-cleared land by means of loans and
grants from the Federal Government, the local agency
is then ready to let bids to private contractors for con­
struction of the project. The normal maximum construc­
tion cost permitted by the new law is 1,750 dollars per
room. Under certain conditions, however, the Admin­
istrator of the HHFA may permit the cost per room
to go as high as 2,500 dollars. Nevertheless, the Act
states that projects must not be “of elaborate or ex­
travagant design or materials,” and to assure that local
housing agencies follow this practice, all general contracts
for construction must be approved by the HHFA.
Financing the Project—Long-term financing is to
be carried out where possible through the sale of bonds
by the local housing authority to the public. These issues
will carry exemption from Federal taxation as is the
case with other municipals. However, PHA is authorized
to buy local housing bonds up to a total of one billion
dollars at the applicable going Federal rate.
In order to stimulate private financing it is provided
that the annual contributions (subsidies) of the Federal
Government shall be pledged as security for the bonds.
If any local housing authority is in substantial default
on its bonds for a particular project, it must either
convey title to the project or deliver possession of it
to the Federal Government, which in turn will reconvey
the project to the local agency after the defaults have
been corrected.
Federal Subsidy—Under the new Act a maximum
of 308 million dollars is authorized to be paid as annual
contributions by the Public Housing Administration to
the local housing authorities so as to offset losses which
might otherwise be incurred in operation. Actual rents
to be paid by tenants will vary with localities, but in all
cases, as previously stated, they must be at least 20
per cent less than the lowest rents on adequate private
housing which is available. Also, the rent per family
must be at least one-fifth of the family’s income. When
all expenditures for maintenance and debt service on
the project are ascertained, and when the probable in­
come from rents can be estimated, the Public Housing
Administration will determine the amount of subsidy
needed and enter into a contract with the local housing
authority to pay this amount.
Local Subsidy—Before any low-rent project can be
authorized the local governing body must have agreed
to exempt the project from local taxes. In most cases
this constitutes the local contribution (subsidy). Like
the earlier legislation, however, the present Act pro­
vides that the project, in lieu of local taxes, may pay
to the local government an amount equal to 10 per cent
of the rents collected. The experience of many existing
low-rent projects indicates that this payment often may
be greater than the aggregate taxes previously paid by
the owners of the former slum area, even though the
earlier act stipulated a payment of five per cent of the
rents rather than ten.
In general, the current expenditures of a low-rent

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housing project would consist of (1) interest on bonds,
(2) payments for serially maturing bonds, (3) main­
tenance costs, (4) project administration, and (5) pay­
ments in lieu of local taxes. Income would consist of
shelter rents from tenants and annual contributions from
the Public Housing Administration. The Federal subsidy
cannot exceed the applicable going Federal rate plus
two per cent on the development cost (including land
acquisition) on the project. It is expected that in most
cases the Federal subsidy will take care of the principal
and interest charges on the bonds, leaving the balance
of expenditures to be covered by the rents.
Banking Law Amended—Member banks are per­
mitted by changes in Sections 5136 and 5200 of the U. S.
Revised Statutes to purchase or underwrite the short­
term or long-term securities or other obligations of local
housing agencies without regard to the 10 per cent legal
limitation contained in the general banking statutes.4
This provision makes it possible for banks to par­
ticipate in public housing finance to a greater degree
than heretofore, both from the standpoint of purchasing
the bonds for investment and of underwriting their sale.
It represents a further means of establishing a ready
market for the local authority’s bonds, as well as ad­
ditional investment outlets for participating banks.
ECONOMIC SIGNIFICANCE OF THE PROGRAM

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The many highly controversial questions concerning
the probable economic results of the newly enacted
public housing and slum clearance program fall into two
principal groups: (1) influences upon the construction
industry itself, and (2) influences upon finance, not
only as respects mortgage finance per se, but also the
broad effects upon the Federal budget and the municipal
bond market.
Construction—Aggregate expenditures in the nation
for all types of construction in the first six months of
1949 totaled nearly four per cent above the first half
of 1948. This record exists in spite of a 12 per cent de­
cline in expenditures for private residential construction
which deficit has been offset by increases in privately
financed construction of churches, schools, hospitals,
and utilities, and by publicly-financed (chiefly state and
local) schools, hospitals, highways, and other public
works. In general it can be said that 1949 declines from
the comparable months of 1948 in privately financed
construction—down 300 million dollars—have been made
up twofold by expanded public works.
Public housing and whatever other kinds of building
may result from slum clearance are likely to incline
toward the “heavy construction” type. At least, such
contracts will have to be let to contractors who are
organized to handle large projects of the “brick and
steel” kind. Therefore, the small homebuilder—whether
of the speculative or custom type—is not likely to feel
that the program will help him directly. In fact, he
has some reason to believe that a public housing de*For additional detail see Washington Bulletin, No. 4-4S, American Bankers Assotiation, July 15, 1949.




velopment of the size here contemplated, on the one
hand, will undermine part of his potential market, and,
an the other, prevent needed cost reductions by keeping
prices of materials and labor at high levels. Reduced
costs of private builders are essential in minimizing the
need for still more subsidized public housing.
Public housing advocates maintain: (1) that the
market they serve is not part of the potential market
of private builders, and (2) that the total stock of
housing would not be affected by slum clearance lowrent housing because new units would be accompanied
by equivalent demolitions. If experience shows these
claims to be well-founded, many businessmen may well
adopt the attitude that the new Federal housing pro­
gram assures a high level of construction, which in turn
will have beneficial effects upon general business and
employment. It should be pointed out, however, that
all public housing under the expanded program will not
be of the slum clearance kind, and therefore some net
addition to the total housing stock probably will occur.
Finance—Aside from the general reaction which the
public may have regarding a further increase in Govern­
ment expenditures, the specific effects which the new
housing program will have upon the residential mort­
gage and municipal bond markets are worthy of atten­
tion. The changes which the new legislation makes in the
mortgage insuring provision of the National Housing Act
con”01 .appear to
vefy far-reaching, but the additional
500 million dollars authorized for secondary market
(FNMA) purchases should have the effect of easing
the tight portfolios of lenders now about “loaned up.”
Quite significant are mortgage lenders’ views on the
probable effects of the public housing and slum clear­
ance program on the private housing market generally.
To the extent to which they foresee a net effect of
lowered demand for private homes and apartments, their
lending policies no doubt will become more selective and
their appraisals more conservative. However, the slow­
ness with which the public housing program seems likely
to get, under way will delay crystallization of many
lenders’ views. The present attitude appears to be one
of caution and “wait and see.”
A further major influence on finance will be the
probable marketing during the next six years of a
possible six to seven billion dollars of tax-exempt hous­
ing bonds. This volume is about 30 per cent of the
estimated 19.5 billion dollars of currently outstanding
tax-exempt bonds.
The bonds will be issued serially with maturities
running from one to 40 years. Since the longer ma­
turities—above 20 years—will exceed those of most
outstanding tax-exempts, there is some reason to be­
lieve that an additional market must be forthcoming
or else the yields of these tax-exempted bonds may tend to*
equate the yields of long-term Governments on an “after
taxes” basis. It is commonly held that maturities under
20 years may prove attractive to investors interested in
the tax-exemption feature. Moreover, these shorter
issues may sell at net yields considerably under even
the higher grade state and municipal issues.
Page 3

Improving Congressional Fiscal Machinery
Adoption of New Appropriations Procedures Likely
Among the various “economy” measures recently
generated by realization of the large and increasing
burden of Federal expenditures have been efforts to
devise procedures to enable the Government to cope
with the budget problem intelligently. The reports of
the Hoover Commission and its task forces point out
opportunities for reducing expenditures by reform and
reorganization in the executive branch of the Govern­
ment. The legislative branch has a counterpart to this
in recent proposals for revising Congressional budgetary
procedures.
The methods which Congress utilizes to process
fiscal legislation, particularly appropriations, have long
been considered too cumbersome to permit full Con­
gressional control over and evaluation of the basic com­
ponents of fiscal policy. Since the passage of the Budget
and Accounting Act of 1921, the authority to review the
budget requests of administrative agencies and depart­
ments and recommend appropriations has been concen­
trated in a single committee on appropriations in each
House. The 1921 Act provided for Presidential responsi­
bility for review of agency estimates and formulation of
the Government’s fiscal program. Subcommittees of the
House Appropriations Committee consider the President’s
budget, hear testimony from agency representatives, and
draft the appropriations bills, which rarely are altered
by the full committee or amended by the House of Rep­
resentatives. The Senate Appropriations Committee acts
as a channel for appeals by the agencies from the House
subcommittees with compromises between the Houses
the usual solution.
While Congress thus exercises detailed control over
expenditures, it had no machinery before 1946 for con­
sidering the general problems of relating total expendi­
tures to total receipts or distributing the fiscal resources
among the various functions of the Government. Today,
with large and far-reaching Federal expenditures, this
deficiency has become serious.

expenditure ceiling, it is devised to make it more diffi­
cult to overlook over-all fiscal consideration.
The legislative budget was originally conceived of
as a device for reconciling expenditures with receipts, and
for comparative analysis of the various expenditure cat­
egories.1 In the three years of its existence Section 138
has accomplished somewhat less than its proponent had
expected. The salutary effect of focusing public opinion
on the appropriations process has not been sufficient to
overcome the obstacles to achieving the goals of the
reforms. The Joint Committee on the Legislative Budget
in both sessions of the 80th Congress did not find it
possible to make thorough analyses of the President’s
budget, due to both the brevity of the time allotted to
them (about one month) and the lack of staff. Instead,
the Joint Committee, in both 1947 and 1948, resorted
to the expedient of altering the President’s total ex­
penditure and receipts estimates, lowering the former
and raising the latter. In neither year did the Committee
indicate in which functions the expenditure reductions
would occur.
The lack of specific information in the Joint Com­
mittee reports enabled the legislative budget to be util­
ized as a vehicle for party programs. In 1947 a Senate
amendment to the concurrent resolution introduced by
the Joint Committee provided for an expenditure ceiling
1.5 billion dollars greater than that in the original, and
the differences between the House and Senate were not
resolved. In 1948 the concurrent resolution passed both
Houses, but in neither years was the expenditure ceiling
effective in reducing expenditures (see Table). In the
first session of the 81st Congress the date of reporting
1 Hearings Before the Joint Committee on the Organization of Congress, 79th
Congress, First Session (March 13—June 29, 1945), pp. 273-275, 776, 780-781, 899-904.

RECOMMENDED AND ACTUAL BUDGET TOTALS
FISCAL 1948 AND 1949
(In billions of dollars)

THE LEGISLATIVE BUDGET
Item

An important attempt to improve the fiscal proce­
dures is found in the Legislative Reorganization Act of
1946. Section 138 of the Act provides for joint meetings
of the full appropriations and revenue committees of
both Houses of Congress early in each session in order
to draw up a legislative budget, that is, a statement of
total estimated receipts and expenditures, with a pro­
vision for debt retirement or expansion in the event of
an estimated surplus or deficit. There is also provision
for debate on and adoption of a concurrent resolution
based on the Joint Committee report. While this policy
statement does not compel Congress to adhere to the
Page 4




President’s Report of Joint Committee Actual
on the Legislative Budget
Budget

1948
Estimated receipts..........
Estimated expenditures .
Excess of receipts............

37.7
37.5
.2

39.1
31.5
7.6

42.2
33.8
8.4

1949
Estimated receipts..........
Estimated expenditures .
Excess of receipts............

44.5
39.7
4.8

47.3
37.2
10.1

38.2
40.1
-1.8

Note: Because of rounding, detail may not add to totals.
SOURCES: The Budget of the United States, 1948, 1949, and 1950.
80th Congress, First Session, House Report 35 on H. Con. Res. 20 (February 17,
1947); 80th Congress, Second Session, House Report 1361 on H. Con. Res. 147
(February 9, 1948). Daily Statement of the United States Treasury, June 30, 1949.

of the legislative budget was postponed from February the procedures implicit in the 1946 Act. The action of
15 to May 1 and as the latter date approached the the present Congress in setting a later date (May 1)
majority fiscal leaders introduced a resolution to suspend for agreement on the legislative budget, fixing a maxi­
operation of Section 138 (S. Con. Res. 33). By August mum limit on expenditures, accomplished a necessary
19 of this year no further action had been taken.
first step. A second is to provide an adequate staff for
The usual disinclination to abandon traditional meth­ appropriations work on the pattern of the staff of the
ods and approaches probably bears a part of the re­ Joint Committee on Internal Revenue Taxation. The
sponsibility for the failure of the legislative budget, along third step would be to consolidate all appropriations
with deficiencies in timing and staffing. However, al­ bills into a single omnibus bill.”
though the legislative budget provisions of the Legis­
A more extensive program of innovations is that
lative Reorganization Act have not proved successful, sponsored by Representative John W. Byrnes of Wis­
the current attention to other reform measures is evi­ consin, in a bill introduced on May 31, 1949 (H.R. 4909)
dence that Congress has not lost interest in improving The bill provides for: (1) performance budgets and ap­
its fiscal machinery and that further experimentation
propriations, (2) reorganization of the legislative budget
will be forthcoming.
and the Legislative Budget Committee, (3) a Joint
Committee on Appropriations, as a vital counterpart of
CONSOLIDATION OF APPROPRIATIONS
the Joint Committee on Internal Revenue Taxation, (4)
a new timetable for the submission of reports essential
The general consolidated appropriation bill, a subject to sound budgeting and appropriating, and (5) a con­
of repeated proposals in the past, appears likely to be­ solidated general appropriation bill.3
come a reality in the near future. This bill, divided in
A performance budget, one in which the classifications
to two titles, one for the military establishment and one are based on functions, activities, and projects, in the
for civilian functions, and subdivided into chapters cor­
words of the Hoover Commission report on Budgeting
responding to the existing 12 general appropriation bills,
and Accounting (p. 8) “would focus attention upon the
would facilitate Congressional recognition of the total
general character and relative importance of the work
magnitude of Federal expenditures and thereby make
to be done or upon the service to be rendered, rather than
it possible to examine individual expenditure proposals
in their relation to the over-all fiscal situation. At present upon the things to be acquired.” The second point, re­
it is often possible for the largest items of appropriations organization of the legislative budget, refers to provisions
to evade scrutiny due to the absence of information early for replacing the existing 100-odd-member Joint Com­
in the sessions as to the total expenditure picture. Senate mittee on the Legislative Budget with a 25-member
Concurrent Resolution 18, introduced by Senator Byrd committee composed of 10 members each from the Joint
and co-sponsored by Senators Butler, Bridges, O’Connor, Committee on Internal Revenue Taxation and the pro­
Knowland, Gillette, Ferguson, and Wherry, on which posed Joint Committee on Appropriations and five mem­
hearings have been concluded by a subcommittee of the bers from the Joint Committee on the Economic Report.
Senate Committee on Rules and Administration, pro­ Both new joint committees would have independent
vides for general consolidated appropriations bills; it permanent staffs. The report developed by the Legis­
has received wide support, especially from Congressional lative Budget Committee would no longer have to be
fiscal leaders. House Appropriations Committee Chair­ adopted by concurrent resolution, for the report itself
would constitute a legislative budget. In addition, all new
man Cannon’s endorsement is a notable example.
bills authorizing appropriations would be referred to the
Joint Committee for estimating their future costs and
OTHER REFORM PROGRAMS
effects on total expenditures.
The omnibus appropriation bill is but one component
The provision for a new timetable for the submission of
of the various programs for the reform of Congressional essential reports the President’s three messages (State
fiscal procedures. One of the most important of these of the Union, Economic Report, and Budget), the re­
programs, in terms of both its content and its influence, ports of the Joint Economic Committee and the Leg­
is that of the Committee for Economic Development islative Budget Committee and that on the consolidated
(CED), contained in its statement on national policy, appropriation bill—-is designed to enable Congress to
"Tax and Expenditure Policy for 1949,” issued in May give orderly consideration to these vital documents. This
1949. The CED program emphasizes both Congressional contrasts with the present overlapping in reporting.
reforms and improvements designed “to facilitate more
Congress is not likely to act in this session on the
informed public participation in the control of Govern­ Byrnes bill or any other program of comprehensive pro­
ment expenditures;” the latter include use of the cash- cedural reforms. However, the inadequacies of existing
consolidated budget, clarifying policy issues by improved methods combined with current widespread interest in
budget classifications, issuing a shorter budget state­ Government reorganization probably will result in a
ment, and defining public choices by spelling out future series of individual changes which in the course of sev­
cost perspectives for existing long-run undertakings and eral years may signify a major overhauling of the legis­
proposed new programs. The CED, in regard to Congres­ lative processes.
sional procedures, suggests “perfecting and implementing ^Congressional Record, Volume 95, Page A 3533, May 31, 1949.



Page 5

Business Mortality Rises
Increasing Competition Hits Weaker Firms
The postwar upsurge in business population in the
Seventh Federal Reserve District and the nation came to
an end in 1948. Since then a moderate decline has been
in progress, which promises to continue at least through­
out the remainder of this year. Business failures are still
only two-thirds of the prewar rate, but the rise in this
District during the past year has been much sharper than
in the country generally because of the somewhat later
impact of the business downturn here. Failures in the
Seventh District currently are running about 95 per cent
ahead of a year ago, compared with 75 per cent in the
nation. In recent months, however, this regional-national
difference has been narrowing.
These developments in business population are largely
the result of the widespread shift from sellers to buyers
markets and are the almost inevitable sequel to the record
expansion in new and untested business firms following
the end of the war. Because numerous lines of business
have not yet completed their readjustments to more nor­
mal market conditions, and competition is expected to
intensify, further increases in business mortality can be
anticipated, particularly among firms with weak manage­
ments, high costs, poor quality products, and unaggressive
sales efforts. Business on the whole continues to be in
excellent financial condition, with most of the difficulties
to date arising among smaller firms inexperienced with
competitive markets. No change in this condition is now
foreseen.
BUSINESS POPULATION TRENDS

depend for the most part on the strength of demand
for the product or service, ease of entry into the field, and
the ability of existing establishments to expand. At one
extreme, contract construction firms have increased 75
per cent during the postwar period, while those engaged
in food processing have dropped four per cent. Certain
manufacturing industries important to this District, e.g.,
electrical machinery, transportation equipment, and fab­
ricated metals, have increased substantially in numbers
to meet the huge demand for durable goods. However,
listings by Dun and Bradstreet and the U. S. Bureau of
the Census show that the total business population of the
five District states has been slipping slightly since 1939
relative to the national total. While the actual number
of firms has increased substantially in all District states,
far greater increases have been recorded in the South,
Southwest, and Pacific Coast areas. Only Michigan of
the District group gained at a faster rate than did the
nation as a whole.
Retailing dominates total business population figures
and normally accounts for about 45 per cent of all busi­
ness firms. The largest gains nationally in specific types
of retailing since the war have been 52 per cent for auto­
motive dealers, one-third for home furnishings stores,
and over 90 per cent for appliance and radio outlets.
Illinois, Michigan, and Iowa sales tax returns point to
parallel retail developments in the Seventh District, with
the exception that the total number of retailers in these
states appears to have increased into the third quarter of
last year while the nation peaked out in the second
quarter.

From the end of the war to the beginning of 1949,
1,700,000 new business firms were started in the United
States and about 300,000 in Illinois, Indiana, Iowa, Mich­
igan, and Wisconsin, which comprise the Seventh District
states. It is well known that new firms have high mor­
tality in their early years. Consequently many of these
new businesses launched since the end of the war have
been among the million which have closed their doors
during the same period. The net increase (i.e. new entries
less discontinuances) to date has been almost 700,000 for
the nation and probably about 100,000 for the Seventh
District states.
_
At the end of 1948 almost four million individual busi­
nesses were operating in the nation, and 700,000 in the
District states. The peak in business births was reached
in 1946. Discontinuances, however, did not exceed new
starts until about the middle of last year. Subsequently,
business mortality has outdistanced business births, and
the total population in both the nation and this District
now stands roughly one per cent under last year’s record
level.
_
Changes in numbers of businesses in a given industry
6
Digitized forPage
FRASER


UNDERLYING CAUSES

What were the reasons for the great increase in busi­
ness population during the first three postwar years? The
most important expansion factor was the sizable deficit,
about 700,000 firms, existing on V-J Day in the number
of establishments needed to provide properly for the pro­
duction and distribution of civilian goods and services.
During the war many firms were forced to shut down
because key men were mustered into the service or be­
cause scarce materials became unobtainable for civilian
use. These losses were made up in some lines as conver­
sion to war production was completed, but most non­
essential establishments had to wait for peace to resume
business. In addition, a 10 per cent rise in human popu­
lation and a sharp increase in business activity both in­
fluenced the numbers of business firms needed.
By the end of 1947, according to calculations of the
U. S. Department of Commerce based upon human popu­
lation and business activity, the immediate postwar deficit
in business population had been eliminated. The net

increase in operating firms nevertheless continued, but
at a much slower rate through the second quarter of 1948.
Prosperous postwar conditions and scarcities plus
availability of needed funds made possible the fulfillment
of the desire of many Americans to go into business for
themselves and “be their own boss.” The case of the GI’s
illustrates the spirit that helped bring the great influx of
new firms after the war. At separation centers 25 per cent
of all veterans expressed a desire to start up a small busi­
ness. The actual number carrying through these inten­
tions was considerably less, but nevertheless substantial.
Throughout the nation about 40,000 have taken ad­
vantage of the Veterans’ Administration offer to guaran­
tee or insure business loans up to $4,000 if used to pur­
chase real estate, and $2,000 for non-real estate purposes.
The Chicago VA office, covering the state of Illinois and
three northern counties of Indiana, endorsed over 5,000
business loans from the start of the program through June
1949. Applications were accepted in large numbers in
1946 and 1947, but this year they have dropped to a mere
trickle, with June bringing only 15 per cent as many as
the same month two years ago. Counselors at VA offices
feel that the early postwar desire to “start a little busi­
ness of my own” has largely subsided.
SOURCES OF FUNDS

How did the new business firms obtain the funds
needed to start and operate? Despite the supposed gen­
eral lack of equity capital, it appears that the host of new
enterprises were able to obtain adequate financing during
the initial postwar years. Veterans and others accumu­
lated substantial liquid savings during the war which
could be invested in new firms, either directly or with
other individuals interested in the venture. Banks, trade
suppliers, and the Reconstruction Finance Corporation
(RFC) also helped in many cases.
The Department of Commerce last year made an ex­
tensive survey of the progress made by wholesale and
retail firms started during the period 1945-47. These busi­
nesses were estimated to have required seven billion dol­
lars of initial capital. Retailers were found to have ob­
tained 56 per cent of these funds from their own personal
savings, 14 per cent from bank loans, 10 per cent from
credit granted by suppliers, 7 per cent from capital stock,
and 13 per cent from other sources, principally friends
and relatives. For wholesalers the sources were similar
except that capital stock and suppliers’ credit were some­
what more important and personal savings less so. It is
estimated that about two-thirds of all needed funds were
provided by equity sources, either the owner’s savings or
through issuance of capital stock. By the end of 1947,
these new trade firms were doing 25 per cent of total
wholesale business and 15 per cent of all retail, and ap­
peared to be increasing their share of the market.
Bank loans to business roughly doubled in the Seventh
District during the three years following the end of the
war. Investigation shows that the bulk of these loans
went to established businesses owning substantial fixed
assets. Many new firms, however, were able to accumu­



late sufficient financial strength during the period to
qualify for bank credit in 1947 and 1948.
The security markets were not utilized to any great
extent in obtaining funds for new postwar businesses.
Common stock was usually purchased by the managers
themselves or their relatives and friends. Some stock was
offered indirectly as a gift to lenders who provided money
on notes paying substantial rates of interest.
Life insurance companies which buy the great bulk
of all corporate bonds are not ordinarily inclined to seek
out new or small business enterprises as outlets for funds.
Hence, this source has not proved to be important, with
few new business firms having any bonded indebtedness.
DISCONTINUANCES AND FAILURES

Since last fall business failures1 recorded by Dun and
Bradstreet have been rising steeply. These figures ac­
count for only a small proportion of all firms ceasing
operations, but they do provide a good indicator of trends
in business population. Record low failure rates of four
or five per 10,000 concerns were established for the Dis­
trict and the nation in 1945 and 1946. If the experiences
of the first half of 1949 are duplicated in the second half,
the rate will be about 35 per 10,000 firms for the entire
year 1949. This would still be well below the level in
almost any prewar year. The number of failures occurring
in the Seventh District during the first six months of this
year is up 115 per cent from the similar period of 1948,
while the total for the nation has risen 80 per cent.
Although the Seventh District states account for al­
most 18 per cent of the total companies listed by Dun
and Bradstreet, the number of failures during the first five
months of last year was only 12 per cent of the national
total. Despite the greater rise this year the proportion of
total failures occurring in the District states during the
comparable months of 1949 is still less than 15 per cent
of the total. The current regional “share” of failures is
also below the proportion found in the late thirties.
Further expected cutbacks by the heavy goods pro­
ducers important to this District are likely to be felt
more strongly by all business as the year progresses.
Among the District states, Michigan has the highest
failure record when compared with a year ago, having
experienced a threefold increase, while Iowa has had the
extremely low failure rate typical of predominantly agri­
cultural states at the present time.
In this five state area, it appears that to an increasing
extent the new failures are small firms. The average cur­
rent liabilities per failure has dropped from about $60,000
in the first six months of last year to less than $40,000
currently. This same trend, however, has not been evi­
dent nationally.
During 1949 the heaviest failures relative to number
of enterprises have been in manufacturing, both in this
District and the nation. This group represents less than
10 per cent of the total business population, but has suf­
1 Failures recorded by Dun and Bradstreet are defined as '*firm» involved in court
•or voluntary proceedings likely to result in loss to creditors.” For every firm in­
cluded in the Dun and Bradstreet figures there are probably three or four in financial
difficulties which result in reorganization, change of management, or adjustment among
creditors that are never recorded as "failures.”

Page 7

it is apparent that some further adjustments must be
fered almost one-quarter of the failures.
The over-all “death rate” for business enterprises (for made to lower levels of activity in many lines. The imany reason) in 1948 was about 10 per cent of the number pact, as in the past, is likely to be greatest upon the new­
of firms operating at the beginning of the year, indicating est and smallest firms.
No serious wave of failures is now foreseen because,
an average potential business life expectancy of about 10
business
in general, and especially the largest companies,
years. Discontinuances nationally last year numbered
have
sufficient
financial strength to withstand the mod­
371,000, up 27 per cent from 1947 and 64 per cent from
erate
type
of
recession
currently in progress. Excessive
1946. Only a small proportion of these firms which with­
drew from the field actually “failed” in a legal sense. debt is not likely to be a great problem for most firms.
About one-half, according to a Department of Commerce Corporate capital structures, bolstered by large retained
estimate, ceased operations simply because of retirement earnings, for the most part are well-balanced. Bank lend­
or illness of persons important to the enterprise. Most ing policies have been conservative. These factors, cou­
of the remainder are “economic failures” in that they did pled with prevailing low interest rates tend to suggest
not provide a suitable return upon investment, and man­ that debt service problems will contribute less to bank­
ruptcies in the period ahead than in previous downturns.
agers wound up the business as best they could.
Inventory depreciation also poses a much smaller threat
because prices are less subject to drastic declines, and in­
CAUSES OF FAILURE
ventories already have undergone considerable down­
It is well known that some business firms fail in the ward adjustment.
Many of the newer firms are, and will be, pinched for
best of times. “Unwise management” usually is charged
cash
necessary for efficient operations. Owners already
with the responsibility. When recession comes a rash of
have
placed wartime savings in their businesses and that
failures always occurs. In this case the “business cycle”
source is closed. In some cases, firms are being “milked”
gets the blame.
In a sense the causes for all failures can be laid at the to maintain owners’ living standards, despite sales and
door of management, whether because of poor operating earnings declines. Some veterans who have received
practices, excessive debt, inadequate working capital, guaranteed loans to get started now find themselves with
over-expansion, sharp price declines, or lowered demand. insufficient cash to keep operating. Approximately five
Most enterprises, however, survive even the worst crises. per cent of veterans’ business loans in the Chicago area
Therefore, the process of natural selection is merely more have resulted in claims against the guarantee fund. Some
intense in hard times. Shortcomings that are glossed over further rise may be anticipated.
Although business shutdowns bring unemployment,
during periods of great prosperity are magnified now.
Experience shows that the typical firm involved in sales of distressed merchandise, loss of proprietors’ say­
bankruptcy proceedings is likely to be small in size and ings, and other serious repercussions, certain benefits in
less than five years of age. The large influx of new post­ the form of increased efficiency are possible through
war firms, therefore, can be expected to inflate the failure “shaking out the weak sisters.” However, a sharp increase
totals in the months ahead. Almost 70 per cent of all in failures undoubtedly will include firms which deserve
firms which failed in 1948 had been formed after the war. some sort of outside help. What kind of aid should be
Less than one per cent of these failing postwar businesses made available to them?
The Department of Commerce is launching a camhad 20 or more employees to start. In many cases they
were organized hastily to take advantage of the reservoir paign to help small businessmen with their managerial
of demand and purchasing power generated by the war, problems. However, mere information will not salvage
and often the managers were inexperienced and prone to firms already deep in financial embarrassment. An injec­
bad judgment in purchasing and merchandising. Only a tion of cash is their only hope for survival, and money
minimum of management was necessary so long as infla­ from the normal sources may not be available. This prob­
tionary tendencies were dominant and inventory profits lem was recognized during the early 1930 s when Congress
covered all but the worst errors. But these conditions provided legislation enabling the Federal Reserve Banks
have changed, and all managements are being put to a and the RFC to make loans to businesses which appear to
be good credit risks but cannot obtain funds elsewhere.
keen competitive test.
The long-run experience of the Reserve Banks and
the
RFC with loans granted during the last half of the
IMPLICATIONS FOR THE FUTURE
thirties has been profitable, but good business during the
Further irregular rise in the failure totals can be ex­ war years was required to “bail out” many doubtful cases.
pected through the remainder of the year. Even an up­ Most of these loans were made at a time when business
turn in general business conditions is not at all likely to was at a low point, after which conditions steadily im­
restore the extremely low failure rates of recent years. proved. Losses are likely to be greater if general con­
Before the year-end the Seventh District will probably ditions deteriorate while the loans are outstanding.
The current situation offers a challenge to private
be contributing its full share to the national figures as a
lenders
to meet the needs of all deserving borrowers, and
result of additional cutbacks in the durable goods indus­
tries. Although the business population does not appear thereby lessen the demand for business lending through
to be greatly over-expanded for present levels of demand, special agencies.
Digitized forPage
FRASER
8


»

a

^

,

GRAIN STORAGE CAPACITY INADEQUATE
(Continued, from Inside Front Cover)

to encourage farmers to increase storage capacity and ac­
cumulate grain stocks on their farms. In general, it is
believed desirable to hold the accumulated grain stocks
on or near the farms where they were produced so as to
avoid unnecessary transportation costs and have them
readily available for use when needed. The CCC will
underwrite loans for five years at four per cent and up to
85 per cent of construction cost if made to farmers to
construct new storage. In general, the loans could be
repaid from payments earned by storing grain. Farmer
cooperatives and other private businesses may also be
encouraged to construct new storage facilities at both
country and terminal locations although no substantial
measures to attain this have been announced to date.
Storage payments are made to farmers to postpone
delivery of grain to the CCC in settlement of price sup­
port loans, also to encourage farmers to increase storage
capacity. Programs announced to date for 1949-50 apply
to wheat, oats, barley, and corn.
Wheat on farms from the 1948 crop and under loan or
purchase agreement, if resealed by July 30, was eligible
for a storage payment of seven cents a bushel for the
1948-49 storage at time of resealing and an additional 10
to 11 Vz cents (depending on area) for continuing storage
to April 30, 1950, if the grain is delivered to the CCC at
maturity of the loans. A similar arrangement was offered
for oats and barley except that no payment was made for
the 1948-49 storage. The allowance for continuing storage
until April 30, 1950, is eight cents a bushel for oats and
10 cents for barley.
Loans on 1948 corn can be renewed through October
and a storage allowance of 10 cents a bushel earned by
holding it on the farm. Corn under purchase agreements,
if placed in acceptable storage, is also covered.
Loans and purchase agreements had been extended on
532 million bushels of corn by June 30, the cutoff date
for the program. This was nearly twice the previous high
of 302 million bushels placed under loan in 1939-40. At
least 200 million bushels may be delivered to the CCC,
following maturity of the loans on September 30, the re­
mainder being largely resealed on farms. More than onethird of the corn under CCC loan and purchase agree­
ment on June 30 was in Iowa, 192 million bushels. Illi­
nois had the next highest amount, 114 million bushels.
Although there is general agreement that grain stor­
age capacity should be increased, there is much less
unanimity of opinion as to how much additional capacity
is justified. The amount of grain storage space required
depends, among other things, on the purposes for which
grain is stored. Moreover, on the justifiable purposes of
storage there are differences of view.
PURPOSE OF STORAGE CHANGES

Civilized man has always been confronted with the
problem of adjusting seasonal and annual variations in
food supply to his relatively uniform daily needs. His­
torically, this has been the primary purpose of grain stor­



age and still is of great importance. But this is only one
of several objectives of present day grain storage.
Some expansion of storage capacity apparently is
needed to obtain optimum seasonal distribution of large
grain crops such as have been produced in recent years.
This is indicated by exceptional price weakness at harvest
time.
In addition, some expansion of capacity may be justi­
fied to improve the distribution of grain supplies over
periods of several years. Some students of the farm econ­
omy maintain that rates of livestock production could
and should be stabilized by carrying large reserve stocks
of feed grains. Available information indicates that some
progress could be made in this direction.
Tension in relations with the governments of other
countries and the possibility of armed conflict provide
another reason for carrying relatively large reserves of
grain at this time as a part of our general stockpiling of
strategic defense materials.
A further reason for storing grain, the reason which
largely dominates the current situation, is to raise prices
by withholding grain from consumption. This objective,
of course, stems from the price support program for agri­
cultural commodities.
OVERPRICING, A BASIC PROBLEM

The current chaotic situation with respect to grain
storage results very largely from a confusing mixture of
objectives. Of immediate concern is the provision of suf­
ficient storage capacity to permit withholding from usual
market channels of enough of the current and prospective
grain supply so prices will reach support levels, the other
purposes of grain storage receiving only secondary con­
sideration.
Submerged for the present is the fact that establishing
a specified price level as the dominant goal in a grain stor­
age program makes much more difficult, if not impossible,
achievement of the other objectives. Increasing storage
capacity and accumulation of stocks is an inappropriate
and, in the long run, ineffective means of supporting grain
prices. Temporarily, the “surplus” can be “hidden” but
for commodities in which production can be expanded
the useful life of this measure will be very short indeed.
If prices are to be established as goals and largely re­
moved from their usual functions of guiding production
and consumption, then measures must be developed which
will effectively control production or consumption, or
both. Carrying large reserve stocks may well be one part
of the measures needed. But the storage program should
be designed primarily to perform those functions for
which it is adapted, namely, providing optimum distribu­
tion through time of available grain supplies. Perform­
ance of this function is complicated rather than eased by
emphasizing storage as a price support measure.
This does not detract from the need for some increase
in storage capacity for grains. Rather it emphasizes that
factors other than the relationship of market prices to
support prices should govern the amount, location, and
type of new storage constructed.




SEVENTH FEDERAL

WIS W /MICH
IOWA
ILL jINO

RESERVE DISTRICT