Full text of Business Conditions (Federal Reserve Bank of Chicago) : December 1956

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A review by the Federal Reserve B an k of Chicago

Business
Conditions
1956 December

Contents
Saving on the uptrend?

Liquid assets and
bank liquidity

Irrigation in the Midwest

The Trend of Business

2-5

T„

turn of the year is the time-honored oc
casion for pronouncements as to what lies ahead
for business. Behind each such “looking for
ward confidently” or “viewing with alarm” lies
a pointed and sometimes surprisingly compli
cated consideration of the factors that affect
the course of business. For some forecasters,
weighing these considerations is an intensely
personal task, drawing upon individual expe
rience, perception and instinct. Others may rely
heavily upon published statistics and the trends
they seem to be pointing for the future. How
ever his final conclusion is reached, it is char
acteristic of the business analyst to want to
compare the hopes and fears attending his ap
praisal with others of his breed. As a conse
quence, the late autumn scene is dotted with

Latest rise in output more sus
tained than two prior upturns . . .

G R O S S N A T IO N A L P R O D U C T

BUSINESS

huddles of forecasters comparing preforecast
notes.
What goes on in such circumstances can be
illustrated by the happenings last month on the
campus of the University of Michigan, where
the school’s Department of Economics spon
sored its Fourth Annual Conference on the
Economic Outlook. Here some 115 economists,
mostly from leading business and financial con
cerns across the country, gathered to weigh the
future. The program was one of formal speech
es followed by discussion—often lengthy and
vigorous when a controversial issue was
touched. The speeches were designed to pre
sent a variety of methods of economic fore
casting, focused upon areas of strategic sig
nificance to business. Doing the talking were

a major cause has been persistent
climb of investment outlays . . .

par cant
of flritquartar

G R O S S P R IV A T E D O M E S T IC IN V E S T M E N T

r 100
3rd quarter !9 5 4 -3 rd quarter 1956

stosonally adjusted quarterly totals at annual rates

2
B usin ess C o n d
itio n s, D e c e m b e r 1 9 5 6

saasonally adjusted quarterly totals at annuol rates

some of the nation’s leading business and
academic economists.
G ro w th p o te n tial

The lead-off speaker outlined the probable
capabilities of the economy in 1957, based
upon studies by the staff of the Joint Congres
sional Committee which receives and analyzes
each year the Economic Report submitted by
the President. The key factors in this projec
tion were the long-run historical relationships
within the economy in the past years of high
employment. Within this sort of framework, a
rise in every major segment of domestic de
mand was projected for 1957. Total consump
tion outlays were expected to increase 14 to 18
billion dollars. Governmental outlays were
ticketed for a 4-6 billion increase, of which
scheduled Federal defense expenditures might
account for at least 2 billion. Even expenditures
on housing seemed likely to rise; a projected
further slip to the 1 million annual rate in new
housing starts would be more than offset by
the effects of increased prices, larger homes
and stepped-up repair and modernization
spending. All told, such demands were ex

pected to push up the nation’s total output of
goods and services next year to the 430-440
billion range (1956 estimate: 412 billion); the
gain would come partly in physical output and
partly via a continued moderate price advance.
C o n su m e r attitu d es

For a more intensive look at the nation’s big
gest spender — the consumer — the analysts
heard a report of studies undertaken by Michi
gan’s pioneering Survey Research Center. The
Center carries on a formal program of inter
views to plumb individuals’ attitudes and in
tentions. The latest rounds of interviewing sug
gested a continuation of underlying optimism,
but of the sort that would accompany a highlevel stability in buying rather than a substan
tial further increase in consumer spending.
In probing for weaknesses in the consumer
sector, the Survey Research Center had tried
to throw some light on four “bogey-man” ques
tions about the American consumer: Are his
desires for durable goods becoming saturated?
Is his interest in new housing on the wane? Is
instalment debt currently a burden on borrow
ing families? Has the trend to “buying on time,”

along with other influences, weakened the will
to save? Interviews revealed a set of consumer
attitudes, compounded of past experience and
innate desires, which suggested a negative an
swer on the part of the consumer to each of
these questions so long as changes in his in
come flow or the general business picture did
not upset his expectations.
On the other hand, the impetus for any major
lift to the economy through a new upsurge in
consumer spending was difficult to find. Like
liest candidate was judged to be the improve
ment in consumer asset-to-debt ratios as 1956
progressed, but this is the gradual sort of in
fluence that seldom can trigger a sudden gen
eral reaction.
Business su rv e y s — ca p ita l sp e n d in g

The gist of surveys of businessmen as well
as consumers was also reported to the Confer
ence. The McGraw-Hill Publishing Company,
still in the midst of its annual study of business
intentions regarding plant and equipment
spending, was not in a position to present re
sults of the latest survey. However, gleanings
from previous questionnaires suggested that
plant and equipment outlays would rise mod
erately throughout 1957. Some slackening in
such expenditures might materialize thereafter,
but the survey-takers felt that it could not be
deep or long-lived in the face of the basic longrun vitality underlying the capital spending
boom.
This projection of capital outlays by business
is supported by regional surveys recently com
pleted in several areas. Such findings carry spe
cial significance at this juncture since the busi
ness boom of the past two years has rested
heavily on the tremendous expansion in the
capital goods industries. Furthermore, the
strong demand for credit to help finance the
capital goods expenditures has limited the ex
pansibility of credit for other uses such as
residential construction.
C =

— 46.8 +

.618 (W t) . . .

At the opposite extreme as a forecasting
device was the statistical “model” of the do

Busin for C o n d itio
Digitized ess FRASER n s, D ecem b er 1 9 5 6

mestic economy to which the Conference was
introduced. Basically the model is a set of
twenty-two equations, describing the short-run
relationships between important variables (e.g.,
consumption expenditure) which are deemed to
play active roles in shaping the level of over
all economic activity. Which factors are chosen,
and precisely what are their mathematical re
lationships, are subjects of continuing study in
the University’s Seminar on Quantitative Eco
nomics. The statistical model is a device for
supplying concise answers to specific ques
tions, based upon the past experience of the
American economy as recorded in statistical
records. Fed a dozen triggering assumptions
concerning 1957, the model generated an “an
swer” concerning probable over-all output
which coincided closely with estimates pre
sented by other speakers.
The record of accuracy of the model in its
five years of operation is intriguing—often re
markably accurate yet occasionally very much
in error. For example, it predicted total na
tional output within 1 per cent for the years
1953, 1954 and 1956; yet in 1955 its estimate
of gross national product was a 4 billion rise
instead of the 30 billion gain which material
ized, and the calculations were relatively as
much in error for several key sectors of over-all
activity in one or more years.
Spe cial m a rk e ts

Besides attention to the broad picture, the
convening forecasters spent a good bit of time
discussing some particular markets within the
economy which were believed to hold signif
icance for the pace of activity in 1957. A labor
specialist described the labor market outlook
for the coming year as one of continued ad
vance in wages with probable drives for a
shorter work week and added fringe benefits; at
the same time, the relative lack of major wage
contract terminations foreshadowed a year of
comparative labor peace.
A similar intensive look at the consumer
instalment credit market led to the expectation
of a further rise, albeit of moderate dimensions,
in the coming year, in line with expected new

passenger car sales of 6.5 to 6.7 million units
at retail.
Finally, conditions in the markets for money
and credit were analyzed. Outstanding in this
picture was the striking dimension of demands
already placed upon such markets and the
probability of some further net increase in bor
rowing in coming months by most credit users
other than the Federal Government. Attention
focused also on the sharp reductions in cor
porate and bank liquidity which have occurred
over the past two years and on indications that
some liquidity positions might be approaching
a practical minimum. The result is to make the
banking system far more responsive to changes
in over-all monetary policy from now on than
it has been up to now.
A consensus

As the fruits of two days’ discussion were
reviewed in the concluding session, the business
analysts found themselves with considerable
areas of general agreement. No one foresaw

a substantial downturn in 1957, nor did any
one see a serious inflation immediately ahead.
The consensus seemingly lay close to the esti
mates presented at the outset: total output up
5-6 per cent, about half of which might stem
from price increases. However, there were some
clouds remaining on the horizon. Some feel
ing persisted that present capital spending levels
might be subject to cutback if either profit mar
gins continued their recent narrowing trend or
credit conditions were allowed to become exces
sively stringent. A more vague cause of un
easiness was the delicate international situation.
The economists had little choice but to base
their judgments on the assumption of no sig
nificant change in that turbid area. The realiza
tion existed, however, that such an assumption
might not be correct and that any major change
could have rapid repercussions on the pace and
direction of domestic business activity. With
this usual note of uncertainty but an unusually
large area of agreement, the forecasting con
ference for forecasters came to a close.

Saving on the uptrend?
rom late 1953 to early 1955, American
consumers showed a marked tendency to spend
more and save less. The annual rate of new
personal saving declined more than 3 billion
dollars even though consumer income was ris
ing steadily. Thus, income channeled into sav
ings during this period represented a declining
portion of a rising income stream.
Beginning with the first quarter of 1955,
however, personal saving has reversed its
downward trend and now is an increasing por
tion of the rising total income. Preliminary
estimates put saving during the second and
third quarters of 1956 at an annual rate of 21
billion dollars—the highest since the fourth
quarter of 1953. At this rate, the amount of

new personal saving for the first nine months
of 1956 was nearly one-third greater than for
the same period last year.
For the nation’s commercial banks, evidences
of the pickup in saving activity have been a
more recent development. Gains in time de
posits, largely savings accounts, in these banks
barely kept pace with the previous year’s growth
during the early months of 1956. Around mid
year, however, the growth began to quicken,
and by the end of the third quarter, the rise
had exceeded 1Vi billion dollars, roughly onethird more than the nine-month increase dur
ing 1955.
Time deposits in Midwest commercial banks
have followed essentially this same pattern.

P e rso n a l s a v in g s increased in
1955 - 56 , still below 1952-53

as per cent of income
billion dollara

p « r c o n t o f d lt p o t o b la In co m a

One of the most comprehensive of the many different
measures of personal saving in common use is provided
by the Department of Commerce. This measure, which
is charted above, is derived within the framework of
the national income estimates and is the difference be
tween personal income after taxes, i.e. disposable in
come, and personal consumption expenditures for
goods and services. The accuracy of this "residu al"
measure of personal saving is, of course, dependent
upon the accuracy of estimates of the two much larger
quantities, income and spending. Also, "s a v in g " in this
sense is a broader concept than the term itself gen
erally suggests. All uses of current income other than
for consumption expenditures in a given year (such as
debt repayment) add to savings while expenditures
financed by other means than current income (such as
borrowing) subtract from savings.
Within this framework, net additions to personal
holdings of liquid assets such as currency and deposits,
savings and loan shares, Government bonds, and munic
ipal and corporate securities are viewed as savings.
Increased equities in private life insurance and pension
funds are also classified as saving. New investment in
housing and in plant, equipment and inventories of
unincorporated businesses and farms is included, after
allowance for depreciation on existing property. Finally,
repayments of consumer, residential m ortgage and
unincorporated business and farm debt add to personal
saving while additions to such debt are counted as
subtractions from saving.

n s, D ecem b er 1 9 5 6
B usin ess C on d itio

Through May, deposit growth lagged behind
the year-ago pace. Recently increases have ex
ceeded by a substantial margin the comparable
1955 rise. As a result, time deposits gains have
caught up percentagewise with the rise in over
all personal saving. To the banker, the rise in
time deposits may appear less impressive be
cause of the continuing strong demand for
bank credit. As in most savings institutions,
the recent increase in flow of new savings seems
a trickle compared with the flood of loan de
mand.
Exact measurement of growth in the sav
ings deposits of individuals is somewhat re
stricted by the inclusion in time deposit totals
of accounts other than regular savings. Time
certificates of deposit, savings club funds, trust
department accounts and various other types of
time accounts are included in the over-all fig
ures. Their share of the total dollar volume,
however, is small enough to have little influ
ence on the measures.
S a v in g s d e p o sits in the M id w e st

For commercial banks in the major Midwest
centers, a monthly survey of regular savings
deposit trends provides more direct and de
tailed evidence of what is happening to this
form of personal saving. Recent results of this
survey show that not all areas have shared in
the upturn of commercial bank savings de
posits. Among the Seventh District’s 44 centers
(excluding Chicago) for which figures for the
first three quarters are available for both 1956
and 1955, 19 showed net gains in savings bal
ances greater than in 1955. In an additional
three cities, deposits declined less this year than
last. But in the remaining 50 per cent of Mid
west areas, such balances showed either smaller
net gains or larger net declines than in the com
parable period of 1955.
Among the major metropolitan areas, both
Milwaukee and Indianapolis banks showed a
net rise in savings deposits for January through
September 1956 compared with a net decline
in the first three quarters of 1955. Savings bal
ances in Des Moines banks, while continuing
to rise this year, fell somewhat short of their

1955 gains. Detroit was the only large Midwest
city to show a decline— about twice as great in
dollar volume as the rise for the first nine
months of 1955. Among the smaller centers,
even greater diversity appears. In the aggregate,
commercial bank savings balances for all cities
excluding the District’s two largest cities—
Chicago and Detroit—showed a somewhat
greater rise in January through September 1956
than in the comparable period last year.
Many factors typically influence the growth
of commercial bank savings deposits in any
given area, including the amount of funds going
into competing forms of saving and the tempo
of local business conditions. But recent growth
of savings deposits in Midwest banks appears
to reflect strongly the widespread increases in
interest rates paid on savings balances. In many
cases, interest rate differentials seem to be an
important— if not the sole—factor in explain
ing divergent growth trends in commercial
bank savings balances among Midwest areas.
A consideration of the gross flows affecting
savings balances sheds further light on recent
trends in savings deposits in Midwest commer
cial banks. In 28 of the 44 cities, the total in
flow of new savings (deposits) exceeded last
year’s volume during the first three quarters of

For every dollar deposited in savings
accounts during Jan.-Sept. 1956
in this number
of Midwest areas

these amounts were withdrawn

1956. However, the total outflow of savings
(withdrawals) has also risen, exceeding the
year-ago rate in commercial banks in 31 cities.
In fact, in numerous cities, withdrawals have
increased enough to more than offset a rising
inflow. Commercial banks, of course, have been
but one of the major kinds of savings institu
tions with rising turnover in savings funds dur
ing recent months. Increasing competition for
the savings dollar has resulted in a general rise
in the rate of turnover of such funds.
O th e r liq u id s a v in g s

Not all forms of saving have exceeded their
year-ago growth. Growth in time deposits in
the nation’s mutual savings banks, for example,
was slightly less than in the first three quarters
of 1955. While savings deposited were 4.8 per
cent above 1955 levels, withdrawals were up
5.5 per cent, for a smaller net gain.
Net increases in savings accounts in savings
and loan associations throughout the nation
during the first eight months of 1956 exceeded
gains in the comparable period of 1955 by only
6 per cent. Here again, while a record amount
of money was deposited, withdrawals also in
creased substantially. Among the four largest
Midwest areas, Chicago and Detroit showed net
increases in savings capital of insured savings
and loan associations substantially in excess of
that of a year ago. In Milwaukee and Indian
apolis, on the other hand, growth fell moder
ately short of the 1955 rise.
Cumulative sales of E and H savings bonds
in the nation through August were roughly 3
per cent below the year-ago total. The excess of
such sales over redemptions was only 300 mil
lion dollars compared with 570 million in 1955.
About 75 per cent of Midwest centers reported
combined E and H savings bond sales below a
year ago during the first eight months. Among
the remaining 25 per cent, increases ranged
from less than 1 to more than 16 per cent. In
the aggregate, District area sales ran slightly
more than 5 per cent under a year ago.
Year-to-date gains in these particular forms
of liquid savings were not alone in falling short
of the rise in over-all personal saving. Saving

through private insurance, which is usually
based upon a contract and is subject to less
variation than the foregoing kinds of saving
activity, was slightly below the year-ago gain
through August.

D eb t becomes a more important offset
to financial assets of individuals
Financial assets: includes holdings of cur

rency and deposits, savings and loan shares,
U.S. Government and state and local gov
ernment securities, and private and Govern
ment insurance and pension reserves; ex
cludes individuals' holdings of corporate
securities.

Securities h o ld in g s up

The question then arises as to what form the
recent upturn in personal saving has actually
taken. The higher level of commercial bank
time deposits alone accounts for not much more
than 10 per cent of the indicated gain.
From figures recently published by the Secu
rities and Exchange Commission for the first
half of 1956, increases in security holdings of
individuals appear to be a major factor in the
saving upturn during this period. Whereas new
U. S. savings bond holdings lagged behind last
year’s level, holdings of other U. S. Govern
ment securities were greater. These holdings,
plus increased investment in corporate and
other securities and state and local govern
ment obligations, accounted for well over half
of the 3 billion dollar increase in liquid savings
estimated by SEC for the first half of the year.
It should be noted, however, that much of this
new investment, particularly in government
issues, was made by nonprofit organizations
and personal trust funds, rather than by indi
viduals as such.
C on su m e r in d eb ted n e ss d o w n

A second major factor in the rise in personal
saving is the decline in the purchase of auto
mobiles. Inasmuch as credit normally plays a
major role in car buying, the effect upon saving
has been double-barreled. With the reduction
in spending for automobiles from the peaks
reached during 1955, the volume of new con
sumer borrowing also has declined. Moreover,
repayment of such debt contracted in 1955 and
prior years has' continued to mount. Both fac
tors have resulted in a slowing down in the rate
at which consumers add to their outstanding
debt, which in turn has increased saving.
Viewed in a different way, with personal in
come after taxes rising more rapidly than consumption expenditures, mainly because of re-

B usiness C ond itio
ns, D ecem b er 1 9 5 6

1 950

1951

1952

1953

1954

1955

y ear end

duced purchases of autos, the residual of income
after expenditures, i.e. saving, has increased.
For the first half of 1956, consumer indebt
edness increased less than 1 billion dollars, in
the SEC estimates, compared with roughly
2Vs billion in the same period last year. That
consumer debt was not an even smaller offset
to personal saving this year is due largely to the
fact that credit extended for car purchases has
not declined as much as auto sales. The drop in
auto sales during the first six months was
heaviest in the cash sales.
Prospects

Whether or not the apparent revival in per
sonal saving will be sustained depends, as al
ways, on the collective decisions of consumers.
Saving is typically a volatile quantity influ
enced by numerous factors including changing
consumer needs, income, assets, indebtedness
and, quite importantly, expectations.
Viewed against the whole post-World War
II experience, the currently rising ratio of sav-

ing to disposable income may represent a re
turn to a more “normal” relationship between
these two measures. Even the relatively high
rate of saving at midyear represents no more
than the average percentage of disposable in
come saved during the period 1951-54. The
second and third quarter ratios of roughly IVi
per cent could increase further in the months

ahead without exceeding the levels established
as recently as the 1951-53 period. On the other
hand, if consumers should decide to increase
their spending relative to income, say by bor
rowing to buy more automobiles, the saving
rate would again ease off. In any case, what
happens to consumer indebtedness is likely to
be the key to future trends in saving activity.

Liquid assets and bank liquidity
B a n k e r , face the same investment considerations that confront businessmen and individuals,
except on a generally more pressing basis. For
a consumer, his potential investment outlets
are legion— cash, savings bonds, time deposits
and common stocks, to mention only a few.
How does an individual decide which of the
alternatives to choose and in what proportions?
Many times this decision is made by whim or
even by default. More often it is based on an
implicit recognition of the paradox raised by
different forms of investment, while in other
cases these conflicting factors are carefully
weighed.
The investor’s paradox can be briefly stated:
more liquidity means less earnings; more earn
ings mean less liquidity. At the extreme, the
asset with perfect liquidity—cash itself—yields
no income at all. Other liquid assets, those that
can be readily converted into cash with little
risk of price fluctuations, usually rank just
above cash in the lower end of the interest scale.
Conversely, if an investor prefers a high yield
on his funds, he must be willing either to hold
an asset not readily salable or one that may
undergo large price swings in the market.
An investor may be willing to give up a high
return in favor of liquidity for several reasons.
First, the funds may be tagged for some specific
purpose and may have to be paid out shortly.
Second, an individual or businessman may want

to be in a position to take advantage quickly of
profitable business opportunities that may arise.
And, third, he may desire to be able to meet
any unexpectedly large outlays he may be called
upon to make. These factors will sway most
investors to keep at least a portion of their
funds in liquid assets.
For bankers, decisions on what to do with
the funds received both from depositors and
from repayments on outstanding obligations
are of vital importance. Earnings on loans and
investments are a bank’s lifeblood. In 1955,
income on earning assets accounted for 90 per
cent of net current earnings. On the other hand,
a bank must be prepared for any large-scale
drain on its deposits. Demand accounts, which
must be paid to depositors upon request,
amount to 64 per cent of the liabilities of the
nation’s commercial banks. No other business
or institution has such a high proportion of
callable obligations. A banker therefore must
manage his funds in such a way as to hold
sufficient liquid assets and yet cover his costs
and earn a reasonable profit for his stockholders.
W h a t a re liq u id a sse ts?

The usual definition of bank liquid assets in
cludes a variety of balance sheet items. “Cash
assets”—currency held in vaults, balances with
correspondent banks, reserves on deposit at the
Federal Reserve Banks, checks in the process

of collection and short-term Government secur
ities—are normally grouped together as the
most liquid of bank assets. At mid-1956, hold
ings of these items accounted for a fifth of
total bank footings.
The largest portion of such holdings, how
ever, is essential to the functioning of the bank
and hence in an operating organization cannot
be transferred to other uses or paid out to de
positors without replacement. For example, of
total reserves that members keep in their ac
count at their Reserve Bank, 97 per cent are
legally required to be held at all times, while
only 3 per cent represent excess reserves, or
funds that can be paid out. Moreover, a bank
must always keep on tap enough coin and
paper money to satisfy its customers’ demand
for hand-to-hand currency. Deposits with cor
respondent banks likewise do much to facil
itate banking transactions. On the record, vault
cash and correspondent balances have either
increased slightly or remained virtually stable
over the past two years of surging demand for
bank loans. Although this indicates that banks
are carrying on a substantially larger business
on very little more additional working capital,
it also indicates that they have felt unable to
reduce these assets to accommodate additional
credit demands.
Thus, we come down to the short-term in
vestment issues as the predominant assets that
banks hold as a liquidity cushion. At the end
of last June, Treasury bills, which mature in
three months from their issuance, and certifcates—issues that have a year or less maturity
—made up less than 2 per cent of bank assets.
Liquid ity is re la tiv e

All earning assets of commercial banks have
some degree of liquidity, though they do not
measure up to bills and certificates in the dual
criteria of salability at a relatively stable price.
In what sense are they liquid? Some assets are
readily marketable, such as intermediate- and
long-term Governments, but at a market price
that may fluctuate widely. A change of onehalf of a percentage point in the yield on an
outstanding 5-year bond, for instance, is re
Busin ess C on d itio
n s, D e c e m b e r 1 9 5 6

flected by a change of over 2 per cent in its
market price. Over the past two years, the
yield on such issues has increased about IV2
points. VA- and FHA-guaranteed mortgages
are also examples of assets readily salable at a
price determined by the supply of and demand
for such instruments. Typical FHA mortgages
now sell for around $97 per $100 face value,
whereas in the very easy credit conditions of
June 1954, their market price was only a half
of a percentage point below par.
The VA- and FHA-backed obligations con
tain another element of liquidity. These obliga
tions are paid in instalments, so that they pro
vide a continual stream of repayments, thus
generating funds available for reinvestment.
Similarly, repayments upon maturity give
“terminal” liquidity to any loan or investment
which a bank may hold. At Midwest banks,
for example, over one-third of all bank loans to
business mature within three months. Within
six months, more than 60 per cent of such
business outstandings come due. But much
of this is credit that will not actually be re
paid as scheduled. Both lender and borrower
fully expect that many business loans now on
the books will be renewed at maturity. Accord
ing to a recent study by the Federal Reserve
Bank of Cleveland, 75 per cent of all loans
made for less than three months are renewed.
Moreover, it is often considered poor customer
relations for a bank to call demand loans, which
make up 7 per cent of Midwest bank port
folios. Nonetheless, the stream of cash repay
ments flowing regularly into the nation’s com
mercial banks is large by any standard.
These two dimensions of bank asset liquidity
—salability and periodic repayment—are basic
ally supplementary. But they may change in
opposite directions under the influence of shift
ing economic conditions. Interest rates gen
erally rise in periods of rising economic activity,
thus reducing the market price and, hence, the
liquidity of outstanding intermediate- and long
term Government securities as well as other
fixed coupon-rate issues. On the other hand, the
ability of business and consumers to repay their
obligations promptly is ordinarily enhanced by

B a n k p o rtfo lio s show sharp swings over past two /ears
Distribution of earning assets
All commercial
Price range

Central reserve

Reserve city

ban ks

city banks

banks

Low

Mid-

1954

1956

1954

1956

1954

1956

1954

1956

1954-to-date
High

(per $100 face value)
Callable loans

Country banks

..........

(per

cent

total)

Salable assets
Treasury bills

........

100.95

98.60

1
*

Treasury certificates . ___

Treasury notes ....... . . ..
U. S. b o n d s ............ ___

100.34

96.22

100.32

92.19

Other securities

100.32

87.40

. . . . ___

FHA- and VAguaranteed

m ortgages.

99.5

97.1

Total ...................

Nonsalable a s s e t s .......

*Less than .5.
N o t e : P r ic e s a r e b a s e d o n th e f o l l o w i n g o b l i g a t i o n s — T r e a s u r y c e rtific a te s: h y p o t h e t ic a l 1 - y e a r 1 V 2 % iss u e ;
T r e a s u r y n o te s : 1 % % , 2 / 1 5 / 5 9 ; U . S . b o n d s : 2V2°/o, 9 / 1 5 / 6 7 - 7 2 ; o t h e r se c u r itie s : h y p o t h e t ic a l 2 0 - y e a r 2 1 4 %
F H A - a n d V A - m o r t g a g e s : p r ic e s o n s a l e s o f t y p ic a l F H A - g u a r a n t e e d m o r t g a g e s .

prosperity. Similarly, falling interest rates and
rising security prices generally accompany a
downswing in business conditions, at the same
time that borrowers are less likely to be able
to meet their scheduled payments. In planning
for the utilization of cash flows, banks have to
give careful attention to the shifting liquidity
character of their assets as business and credit
conditions change.
Liq u id ity in the b o o m

Over the past two years, the demand for
loans has expanded sharply. Between Septem
ber 1954 and September 1956, outstanding
loans at the nation’s commercial banks showed
a gain of 20 billion dollars, or 30 per cent. Over
the same time span, total bank assets rose by
only 14 billion dollars. The boost in loans over
and above the growth in total bank loans and
investments was made possible by substantial

iss u e ;

reduction in bank holdings of Government
securities. Treasury issues in the portfolios of
commercial banks now total 57 billion dollars,
about 10 billion under the September 1954
level. This represents 35 per cent of total loans
and investments, the lowest percentage figure
in the postwar period and a drop of 8 per
centage points from the third quarter of 1954.
Moreover, in the two years ending in mid1956, virtually all of the decline in bank hold
ings of Treasury issues was recorded in the
within-one-year maturity class. These securities
—bills and certificates plus notes and bonds
maturing within 12 months—represent 9 per
cent of all loans and investments at midyear,
compared with 14 per cent two years earlier.
The drop in liquid assets has been sharpest
in the nation’s largest banks (see table). These
lenders generally hold their excess reserves as
close to zero as possible, regardless of loan

demands. Smaller banks, as typified by the
“country” bank group, ordinarily maintain
reserves well above those required, the amount
of surplus reserves fluctuating with changes in
the credit picture. Excess reserves at country
banks, after reaching a recent peak of 740
million dollars in August 1954, dropped 270
million in the following two years.
The large and medium size banks have also
been faced with a bigger boost in their out
standing loans. Borrowing at country banks has
increased by a fourth between mid-1954 and
mid-1956, while all other members have regis
tered a 34 per cent climb.
Moreover, the large banks, while increasing

A lth o ugh liquid assets
of commercial banks have
declined sharply . . .

N e w situ atio n

p e r cen t of earn in g a s s e ts
10

“

mid-1953

mid-1954

mid-1955

mld-1956

repayments due on outstanding
credit show relative gain
per cent of earning assets

itio ns, D ecem b er 1 9 5 6
Busin ess C o nd

their loans by a third, have barely shared in
the increase in deposits since 1954. Though total
deposits of all commercial banks have increased
by 12 billion dollars, or 7 per cent, those at
central reserve city banks have risen by a mere
2 per cent.
While liquid assets of commercial banks have
dropped substantially, the stream of repayments
has grown enough in dollar terms to maintain
virtually the same relation to earning assets
(see chart). A boost in the return flow of funds
from the large increase in commercial and in
dustrial loans, with a sizable portion coming
due within half a year, has been largely offset
by an increasing share of assets going into the
long-lived real estate mortgages and by a slight
extension in the average maturity of consumer
instalment loans.

These developments have placed the bank
ing system in a position which is more or less
unique by postwar standards, As a result of
the recent decline in their liquid assets, com
mercial banks are more sensitive to monetary
policy. For one thing, they are increasingly
dependent upon the continued growth in de
posits as a means of expanding their outstand
ing loans. Moreover, a further rise in interest
rates would mean an additional drop in the
market price of medium- and long-term issues.
Banks are also influenced to a greater extent
by changes in the economic climate. With debt
repayment a larger factor in bank liquidity, the
ability of borrowers to maintain payment sched
ules becomes correspondingly more important.
The banking system today, however, remains
much more liquid than it was 25 to 30 years
ago. In addition, many safeguards have been
set up to ward off the type of debacle that oc
curred in the early Thirties. Deposit insurance,
stock margin requirements, more careful bank
examination and supervision and the like have
all strengthened the nation’s monetary struc
ture. Moreover, the Federal Reserve System is
in an improved position to supply the banking
system with the liquidity necessary to forestall
financial crisis.

Irrigation in the Midwest
.inartificial watering of growing crops traces
back through antiquity to the transition of man
kind from pastoral societies to agrarian cultures.
The ancient pyramids of Egypt, for example,
were erected by workers fed through the use of
a crude type of irrigation. The occasional intro
duction of new techniques has enabled the prac
tice to persist and spread throughout its history
of several thousand years. A relatively recent
method—sprinkler irrigation—shows signs of
giving the old usage one of its most spectacular
boosts.
A farm equipment trade publication has
estimated that by 1960 a total of 400,000 farms
in the U.S. will be irrigating 40 million acres,
about 10 per cent of our cropland. In 1954
some 300,000 farms irrigated less than 30 mil
lion acres. This projected increase would re
quire the investment of something like 500
million dollars in new capital, most of it for
sprinkler irrigation equipment. Although the
above projection may be overly optimistic, it
nevertheless indicates the potentialities that
this development may contain.
A rid a n d h u m id a re a s

In the United States irrigation was largely
confined to the arid West until recently. In that
area the predominant method of applying the
water involved the flooding of fields from canals
and trenches supplied by river reservoirs, or
deep wells in some cases.
Although east of the Great Plains average
annual precipitation is sufficient for most Tem
perate Zone crops, the moisture supply varies
considerably from year to year, as does its dis
tribution within the year. Hence, even in humid
areas natural precipitation does not guarantee
a fully adequate moisture supply throughout a
crop’s entire growing season. This can cut the
yield substantially, especially if the water de
ficiency occurs at critical stages in the plant’s
development. Consequently, the output of many

crops can be raised considerably by irrigation
even in humid areas.
Artificial watering on a commercial scale is
a rather expensive practice. Installation of the
equipment requires a large investment outlay,
and annual costs of operating the equipment
are high. For this reason, in the eastern half of
the U.S.—where irrigation is not subsidized by
Government-developed water supplies—the
usage gained its first footholds in areas special
izing in the commercial production of vege
tables, because these return a high value of out
put per acre and are especially sensitive to a
steady supply of moisture.
In this part of the country, the water is
typically applied by sprinklers—large-size rela
tives of the type commonly seen watering lawns.
The water is obtained from wells, streams or
ponds and is pumped to the sprinklers through
portable pipes. Where a considerable area is
involved, the apparatus is moved around the
field in order to supply moisture to all parts of
it. Obviously, the development of lightweight
aluminum pipe has been a boon to this activity.
S p rin k le rs sp r e a d in g sw iftly

In 1954, according to the Bureau of the Cen
sus, a total of 2.6 million acres of farmland was
irrigated in the 31 states east of the Great
Plains, i.e. east of a line from North Dakota
to Texas. Although ten times as many acres
were irrigated in the West, the total in the hu
mid region represented a jump of 73 per cent
during the previous five years, compared with
an increase of only 10 per cent in the West. In
the humid area, very large percentage gains
were scored by a number of states along the
Atlantic Seaboard and in the Appalachian and
Delta regions, as well as in the Corn Belt states
of Missouri, Ohio and Illinois.
Irrigated acreage in Illinois leaped from
1,510 acres in 1949 to 6,789 in 1954. (Total
cropland harvested in Illinois comes to about

gain of 40 bushels per acre due to
irrigation.
Acres irrigated
Total crop acres
These tests were conducted for
Size o f farm
1949
1954
1954
periods of only one to four years,
(thousand acres)
whereas a longer span of time
Under 100 acres .............
7,067
11,251
7,438,963
100 to 219 acres .............
5,065
12,497
30,036,641
would be desirable for conclusive
O ver 219 acres ..............
38,847
20,531
34,360,277
results. However, an Iowa study of
Total
32,663
62,595
71,835,881
rainfall records has disclosed that
there were an average of more than
S O U R C E : U .S. B u r e a u o f th e C e n s u s .
three “dry periods” in June, July
and August each year during the
20 million acres.) Several other states in the
past 20 years at Ames. A dry period was de
Seventh Federal Reserve District had earlier
fined as 10 or more consecutive days during
experience with the practice. Michigan and
which there was no more than one-quarter inch
Wisconsin had significant amounts of irrigated
of precipitation on any day. “Every year in the
acreage already in 1949 (see chart). Never
past 20 had at least one period of 13 or more
theless, those acreages nearly doubled in the
days with no effective rainfall; sometimes these
succeeding five years, with most of the increase
periods last 20 days or longer.”
occurring on fruit and vegetable farms, the
This State study suggests that irrigation of
types that previously had accounted for most of
corn might be warranted merely from the stand
the irrigation in that region. In Illinois, Indiana
point of supplying supplemental moisture dur
and Iowa most of the gain in sprinkled acreage
ing dry spells. However, an important addi
occurred on cash grain (primarily corn) farms,
tional advantage of artificial watering lies in
although Indiana also showed a significant addi
the fact that it permits other changes in crop
tion on grain and meat animal farms.
production practices. For example, it has been
Irrigation in the Seventh District is not pri
known that highest corn yields can be obtained
marily a small farm phenomenon. In both 1949
from good soils if heavy applications of fertil
and 1954 the bulk of the sprinkled acreage was
izer are used along with dense stands of plants,
found on farms exceeding 219 acres in size.
i.e. more than 15,000 per acre. However,
However, the largest percentage increase be
moisture deficiency can sharply reduce the
tween those two dates occurred on farms in
effectiveness of fertilizer, and dense stands may
the 99-219 acre size class which includes the
actually reduce yields in dry years. The sheer
majority of District farms.
threat of inadequate water—that is, the mere
uncertainty connected with lack of irrigation—
W a te r a n d corn
undoubtedly has held planting and fertility
practices below optimum levels. Several observ
A considerable amount of experience has
now accumulated concerning the irrigation of
ers report that installation of irrigation equip
ment usually should be accompanied by a 50
corn in the Midwest. Purdue University special
to 100 per cent boost in fertilizer application in
ists report that irrigation “doubles and triples”
order to utilize soil potentialities most fully.
corn yields in some sections of Indiana. A three“For best results, fertility, water and plants per
year test in northern Illinois showed an average
acre should all be high.”
com yield of 144 bushels per acre on sprinkled
land against a 50-bushel yield on nonirrigated
It ta k e s m o n e y
soil. In a four-year Wisconsin test nonirrigated
In view of the results obtained through irriga
corn averaged 45 bushels per acre whereas full
tion, it may seem surprising that the practice is
irrigation plus heavy fertilization boosted the
not already more widespread in the Midwest.
yield to 96 bushels. Tests by Iowa State College
Undoubtedly part of the explanation is provided
on heavy Iowa soils in 1955 showed an average

Irrigate d acre age in District states

B usin FRASER
Digitized foress C o n d itio n s, D ecem b er 1 9 5 6

by the cost of the necessary equipment. Pump,
pipe and sprinklers cost from $40 to $80 per
acre irrigated, depending on the location of the
water supply, the layout of the fields and the
farmer’s taste in machinery.
The cost of obtaining the water supply is
even more variable. Irrigation requires a lot
of water; almost 30,000 gallons are needed to
cover one acre with one inch of water. Sprinkler
systems in this region vary considerably in
capacity, squirting from 200 up to 1,500 gal
lons per minute. At the rate of 500 per minute
it takes about one hour actual sprinkling time
to cover an acre with an inch of water.
Sometimes the water is secured from streams
that flow throughout the year, and sometimes
small reservoirs are constructed to impound
surface runoff in rainy seasons. Frequently
shallow wells or sump holes are dug near creeks
to utilize both surface runoff and underground
water. Where the flow from these holes is small,
the water is pumped into reservoirs over a
period of time with the supply being drawn
down when irrigation is necessary. Other sys
tems rely exclusively on underground water,
although some of them also utilize small reser
voirs for storage.
Most of the Seventh District is underlaid by
water-bearing strata yielding more than 50 gal
lons per minute to individual wells of suitable
depth and dimensions. Moreover, the ground
water level is close to the surface in the Mid
west, compared with the West where deep wells
are also used to some extent to provide irriga
tion water. Some Midwest farms have under
ground supplies capable of yielding more than
800 gallons per minute from a single well. It
is the judgment of authorities that irrigation as
currently practiced in the Midwest is feasible
for a high percentage of farms in this region.
If the required water can be secured from a
stream, pond or shallow well, the cost of secur
ing the supply may be relatively low. However,
the cost mounts rapidly if a deep well with a
wide bore, sometimes up to three feet in dia
meter and several hundred feet deep, is re
quired. A deep well may cost $5,000 or more.
It behooves a farmer to seek technical advice

before having such a hole drilled; its particular
location can make a lot of difference in the
cost. Also, the water laws should be investigated
before a large investment is made in an irriga
tion system. Although these laws are quite in
definite in most Midwest states, in general they
prohibit one user from interfering with normal
uses of other users.
Complete sprinkler systems—water supply
plus distributing equipment—require an invest
ment of from $40 to $200 per acre, with the
average around $90 in the Midwest, according
to a company which fabricates and installs the
equipment.
Various authorities are pretty well agreed on
the annual cost of operating a sprinkler system.
Iowa State College places the figure between
$20 and $30 per acre. A company that sells
the apparatus estimates average annual cost
per acre for a typical installation in this region
as follows:
Interest cost .......................................... $ 4.50
Insurance a n d t a x e s .................................... 45
Depreciation ..........................................
Electric e n e rgy for p o w e r ....................

6.00
4.00

L a b o r .....................................................
8.00
M ain te nan ce ..........................................
3.00
Total a n n u a l cost .............................. $25.95 per acre

Although such an addition to production
costs is sizable indeed, the profitability of in
stalling a system must be appraised in view of
the additional output and revenue that can be
obtained through use of the practice. Assuming
that over a number of years corn yields can be
boosted an average of 40 bushels per acre
(using the figure reported in the Iowa test re
sults) and further assuming that the com can
be sold for an average price of $ 1.00 per bushel,
the additional revenue produced by the innova
tion would amount to $40.00 per acre,, $24 in
excess of the added cost. Under these circum
stances, the investment would pay for itself in
four years. This probably explains why the use
of irrigation is expanding rapidly in the Mid
west despite the large investment and high an
nual operating cost associated with it.
Man’s never-ending quest to control and im-

oc rci
2 5 ,0 0 0

Michigan

Irrigate d are a
expanding rapidly
in all District states
except Iowa

20,000

Wisconsin/
15 ,0 0 0

Indiana
10,000

Illinois
5 ,0 0 0

prove his environment has led to a continual
succession of technological advances in meth
ods of agricultural production. Successful in
novations involve the altering of methods of
production in such a way that the average cost
of production is reduced. Income is improved
for at least those farmers who adopt the usage
reasonably early in the process. As the process
comes into general use and the price of the
product declines, the benefits tend to accrue to
consumers and the whole economy shares in
the gains.
Sprinkler irrigation is one of the more spec
tacular innovations that have been added re
cently to the tool kit of farming practices in
this region. However, the economic effects of a
widespread adoption of irrigation probably
would be similar to those following most other
improvements in farm technology.
The size of the individual farm business
would be expanded, although in this case not
necessarily the acreage. Capital investment per
acre (and labor too) would be increased, and

Busin ess C on d itio
n s, D ecem ber 1 9 5 6

farm production would depend to an even
greater extent on purchases of nonagricultural
materials and services. The organization and
operation of a farm business would become
even more complex and difficult, and the pre
mium on good management would be widened
even further.
Because of the larger investment required to
obtain an efficient farm business, fewer people
who desired to obtain such a unit would be able
to do so out of their own funds. Consequently,
the demand for farm credit probably would ex
pand further. Additional operating credit might
also be needed to finance the higher annual
outlays associated with use of the equipment.
Part of the uncertainty associated with vagar
ies of weather would be eliminated and total
farm production would be boosted. The larger
supply would tend to depress prices, but the
average cost of producing a bushel of corn
would be reduced for those farms which irri
gated successfully. For tracts on which cost
dropped more than price, land values would
tend to rise, especially if permanent installations
like wells and reservoirs were incorporated into
the real estate. Level land with easily accessible
water supplies might rise in value prior to the
installation of irrigation facilities, merely in
anticipation of their future use.
For the most part, these economic effects
would be extensions of current trends. How
ever, if irrigation is widely practiced in this
region—and the usage is spreading rapidly at
this time—those trends may be significantly
accelerated.

B u sine ss C o n d itio n s is published monthly by

the f e d e r a l r e s e r v e b a n k o f C h i c a g o . Sub
scriptions are available to the public without
charge. For information concerning bulk mail
ings to banks, business organizations and edu
cational institutions, write: Research Depart
ment, Federal Reserve Bank of Chicago, Box
834, Chicago 90, Illinois. Articles may be re
printed provided source is credited.

Business
Conditions
a review by the
Federal Reserve Bank of Chicago

In d e x for the y e a r 1 95 6

A griculture
What they’re saying— about farm prospects,
1956, January, 12-16.
Meat supply to diminish, July, 5-7, 15-16.
Attack on farm surpluses renewed,
August, 4-6, 14-16.
Upturn due in farm income,
September, 7-10.
Cheaper steak in the offing, November, 8-11.
Irrigation in the Midwest, December, 13-16.

Business finance (cont.)
The squeeze on corporate liquidity,
November, 11-16.

Consum er credit an d sa v in g s
A birthday for savings bonds, May, 13-16.
Consumer credit: debt rise continues,
October, 9-11.
Saving on the uptrend? December, 5-9.

Economic conditions, general
B an kin g, ge ne ral
The seasonal storm conquered,
February, 15-16.
District dimensions: banking, April, 8-9.
Harder working dollars, September, 5-7.
Liquid assets and bank liquidity,
December, 9-12.

Business finance
Business loan demands persist, March, 4-6.
Business loans at big Midwest banks,
July, 7-11.
Bank credit for small business, August, 6-11.
Credit for seasonal businesses, October, 5-8.

The price picture, pressures building up?
January, 8-12.
Tracing the flow of funds, February, 13-14.
Prices at retail counters, March, 9-12.
The trend of business, January, 2-4; Feb
ruary, 2-4; March, 2-4; April, 2-4; May,
2-4; June, 2-5; July, 2-4; August, 2-4;
September, 2-4; October, 2-4; November,
2-3; December, 2-5.

Em ploym ent a n d w a g e s
The economic consequences of the baby
boom, January, 4-7.
Payrolls spark income rise, March, 7-9.

Farm finance
Credit for the farm, March, 12-16.
Bank lending to farmers, April, 10-12.
Strong demand for farm loans, May, 5-6.
Who’s borrowing at country banks,
June, 8-9.
How banks finance farm machinery,
August, 11-14.

H ousing
Home building settles down, February, 4-10.
Meeting the demand for mortgage credit,
April, 4-7, 15-16.

Industry an d trade
Hard goods spark 1955 retail trade advance,
February, 10-13.
Furniture—stronghold of small business,
June, 5-7, 10-16.
Retail sales—barometer of consumer
demand, October, 12-16.

Re gion al economics
Deposits reflect income trends, April, 12-15.
Firming up the softer spots, May, 7-12.
Metropolitan government—too many cooks,
July, 11-15.
Midwestern economies, September, 11-16.
The Midwest holds its own, November, 4-8.