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1 ■I £ llililll ■IBBB ^. —I . BUSINESS CONDITIONS A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO - .V7\ Results of the Sixth War Loan Drive National Sales Exceed 21 Billion Dollars With the close of the Sixth War Loan Drive the Treas ury completed its third major financing effort of 1944. Though its goal was less than that set for the Fifth Drive, the latest campaign achieved a new sales record—producing 21 billion 621 million dollars through sales of securities to nonbank investors. This amount represents an excess of 54 per cent over the goal of 14 billion dollars set for the drive and an increase of 1 billion dollars over the proceeds of the Fifth War Loan Drive. As in previous drives, empha sis was placed on sales to investors other than banks. Total sales to individuals amounted to 5 billion 900 million dol lars, of which approximately 2 billion 900 million dollars were Series E bonds. Corporations and associations topped their previous records with purchases of 15 billion 721 mil lion dollars compared with the 9 billion dollar goal set for them. Sales of securities included in the drive to investors in the five Seventh District states amounted to 3 billion 241 million dollars—49 per cent above the combined quotas for those states and about 30 million dollars more than sales during the previous drive. In the Sixth Drive each of these states was well over its quota for sales to corporations and to individuals. Series E bonds were also over subscribed. MEDIUM-TERM SECURITIES POPULAR The types of securities offered in the Sixth War Loan were identical with those of the previous drive. Besides the series E, F, and G savings bonds and Series C savings notes, the basket included Vs per cent certificates, 114 per cent notes, 2 per cent bonds of 1952-54 and 2Vi per cent bonds of 1966-71. Of these issues the Treasury’s 2’s were most in demand, and sales of these bonds amounted to 6.9 billion dollars compared with 5.2 billion in the Fifth Drive —a larger increase than that reported for any other type of security. These bonds are attractive to banks seeking invest ment outlets for idle funds and owe part of their popularity to their eligibility for bank purchase after the drive. The 114 per cent notes have similar advantages but sales of these securities were 1.6 billion dollars compared with 1.9 billion dollars in the previous drive—reflecting the growing ten dency for both corporations and banks to buy medium-term issues. Sales of certificates, which totaled 4.4 billion dol lars were 400 million dollars smaller than in the Fifth War Loan. Combined sales of savings bonds and savings notes were 6 billion dollars but net sales over redemptions for November and December were 3.5 billion dollars, reflecting principally the redemption of savings notes in payment of taxes. The stronger demand for longer-term issues was apparent in the Seventh District states also. Sales of 2 per cent bonds in the Seventh District states amounted to 679 million dol lars or 21 per cent of total sales compared with 15 per cent in the Fifth Drive. Proceeds from the 2Vi per cent bonds were also somewhat larger. In contrast to national figures, the largest receipts were from the sale of certificates which totaled 926 million dollars. These, however, constituted a smaller proportion of total sales than in the last drive. (Continued on Page 83 SIXTH WAR LOAN SALES AND QUOTAS UNITED STATES AND SEVENTH DISTRICT STATES (amounts in millions of dollars) Individuals Grand Total Areas Sales Quota Per Cent of Quota U. S. total.. 21,621 14,000 154 Illinois......... Indiana......... Michigan. .. Wisconsin.. 1,532 364 323 635 387 1,034 239 178 472 253 148 152 182 135 153 Five state total......... 3,241 2,176 149 Sales Quota Other Issues Series E Total Per Cent of Quota Per Cent of Quota Sales 2,868 2,500 115 3,032 Sales Quota Corporations and Associations Per Cent of Quota Per Cent of Quota Sales 2,500 121 15,721 9,000 175 Quota Quota 5,900 5,000 118 400 132 143 250 125 351 120 98 228 107 114 110 146 109 117 194 75 72 148 66 174 68 53 141 55 111 110 136 105 120 206 58 71 101 59 177 52 45 87 52 116 111 157 116 114 1,132 232 180 385 262 683 119 80 244 146 166 195 225 158 179 1,050 904 116 555 491 113 495 413 120 2,191 1,272 172 FED, RES; Farm Mortgages Continue Decline Farmers Use High Incomes to Reduce Debt Farmers of the nation and the District have applied sub stantial proportions of their wartime net incomes to the reduction of mortgage obligations against their land. Pre liminary estimates of the total farm mortgage debt outstand ing as of January 1, 1945, set the total at 5 billion 250 million dollars. This figure indicates a reduction of 1 billion 336 million dollars from the total farm mortgage debt at the beginning of the war, January 1, 1940, a decline of 20 per cent. The national total farm mortgage debt reached a peak of 10 billion 786 million dollars as of January 1, 1923, and has shown a continuous decline since that date. Of the cur rent wartime decline, nearly two-thirds has been accom plished during the last two years, 1943 and 1944. The current situation is in sharp contrast to that prevail ing during the first World War. In the five years from January 1, 1915 to 1920 the national total increased from 5 billion dollars to nearly 8 billion 500 million dollars, an increase of 70 per cent. An even greater rate of reduction in the total mortgage debt than the 20 per cent shown for the nation for the five years 1940-45 was the net decline of 23 per cent shown for the total of the five states of the Seventh Federal Reserve District in the same period. The total for the five states declined from 1 billion 892 million dollars in 1940 to an estimated preliminary total of 1 billion 451 million dollars for 1945, a reduction of 441 million dollars. The rate of decline has been the greatest for Illinois farms, with a reduction of one-third in the total for the five year period. The outstanding farm mortgage debt for Illinois farms was estimated at 419 million dollars at the beginning of 1940. This total has been reduced to an estimated 278 million dollars for the first of this year, showing a net reduc tion of 141 million dollars for the period, and the largest total net reduction shown for any of the five states of the District. Iowa, the leading agricultural state, has, of course, the largest total farm mortgage debt in the nation. For that state the reduction is estimated to have been 111 million dollars, a net decline of 16 per cent from the 1940 total of 706 million dollars bringing the total for 1945 down to 595 million. Wisconsin farm owners had in 1940 an estimated farm mortgage debt of 357 million dollars. For the beginning of this year the estimated total is 262 million dollars, indicat ing a net reduction of 95 million, or slightly over one-fourth. For Indiana a decline of similar proportions is indicated. The 1940 total of 236 million dollars is estimated to have declined 59 million to a 1945 figure of 177 million dollars, a net reduction of 25 per cent. Michigan farm mortgage debt shows a reduction of 35 DISTRIBUTION OF FARM MORTGAGE DEBT BY TYPE OF LENDER (SELECTED YEARS, 1910-194S) PER CENT PER CENT miasm IFE INSURANCE: COMMERCIAL BANKS FEDERAL LAND BANKS, ETC- •OTHERS'' 1935 1937 19391 1941 I 1943 1945 t *. . ! 1 FARM SECURITY ADMINISTRATION ♦PRINCIPALLY INDIVIDUALS; AND JOINT STOCK LAND BANKS FOR EARLIER YEARS million dollars, or 20 per cent of the 1940 total of 174 million, bringing the estimated 1945 total to 139 million dollars. GEOGRAPHIC SHIFTS IN DISTRIBUTION OF DEBT In the history of farm mortgage debt for the nation and the states there have been some shifts in the proportional distribution of the totals held against the land in different geographical regions. During the last war period the five states of the District accounted for about one-third of the national total. In the current war period the same area has accounted for less than 29 per cent of the total. Illinois total debt was about 614 per cent of the national figure in the earlier period. In recent years this proportion has ranged around 514 to 6 per cent. In the earlier period the proportion accounted for by the state of Indiana was less than 3 per cent, while for the current wartime period the proportion has risen to about 314 per cent. For Iowa the World War I proportion was 14 per cent of the national total, compared with slightly over 11 per cent in the last few years. Michigan shows a slight reduction from around 3 per cent in the earlier years to a little over 214 per cent recently. Com parable proportions for Wisconsin were 6 per cent for the first period and just over 5 per cent for recent years. In general, the mortgage debt against the farms in the states of the Seventh Federal Reserve District has become a smaller proportion of the national total. MORTGAGE RECORDINGS INCREASING The figures thus far given on the net reductions in totals of farm mortgage debt outstanding are, of course, only the Page 1 net difference between mortgages paid off and new mort gages written, or renewals. Data on the trend in mortgage recordings indicate that on the whole the total dollar amounts for all lenders have been rising for the past six or seven years. It is estimated that the dollar amounts of mortgages recorded in 1944 were one-third larger than the figure for 1939 and more than one-fourth larger than the total for 1940. It appears from the data, how'ever, that this increase in dollar amounts is due primarily to the increase in the aver age size of mortgage recorded. The number recorded in 1944 was nearly 10 per cent less than in either 1939 or 1940. The average size of mortgage recorded in 1944 was nearly $3,300 for all lenders as compared with $2,200 in 1939 and $2,300 in 1940. According to estimates "indi viduals” have been the largest group of lenders in recent years both as to number of mortgages recorded and total dollar amounts loaned. This class of lender is estimated to be responsible for 30 to 40 per cent of the total amount of mortgages recorded. The number of mortgages recorded and credited to this group on the whole declined since 1937 but the dollar amount of such mortgages declined only from 1937 to 1940 and has been increasing since 1940. The estimated value of recordings for this group for 1944 was more than 70 per cent larger than the total value in 1940. The average size of loan by this group has increased from about $1,600 in the period 1938-40 to nearly $3,000 in 1944. Commercial banks are credited with writing a little over 25 per cent of the total amount of mortgages recorded dur ing recent years. The number of mortgages recorded has declined since 1940 and was 17 per cent less in 1944. The dollar amount of loans credited to this group in 1944 was 20 per cent larger than in 1940. The average size of loan made by this group of lenders has increased steadily from $1,900 in 1938 to over $2,800 in 1944. Insurance companies account for less than 10 per cent of the total number of mortgages recorded but are credited with between 15 and 20 per cent of the dollar amount of such mortgages. The trend in the number of mortgages recorded by life insurance companies during the war period has been fairly stable with a slight tendency downward. The dollar amount of these recordings has trended some what upward, with 1944 recordings about 15 per cent larger than the figure for 1940. The average size of loan recorded by insurance companies has shown the same up ward tendency as has each of the other principal groups of lenders. The average size of mortgage for this group in 1944 was about $7,300 compared with $5,500 for 1938 and 1939 and about $6,000 for 1940 and 1941. Federal Land Bank and Land Bank Commissioner loans in recent years have accounted for slightly more than 10 per cent of the total number of mortgages recorded and about 10 per cent of the dollar amount of recordings in the past few years. The trend in numbers of mortgage record ings has been, on the whole, downward during the war years, although 1944 estimated recordings were substan tially larger in number than in 1943. The dollar amount of mortgage recordings by this class of lender reached a war Page 2 time peak in 1941, dropped sharply for 1942, but has in creased substantially in the two years since 1942. The aver age size of loan recorded (taking Federal Land Bank and Land Bank Commissioner loans together) has not shown the same pronounced upward trend as has characterized the other major groups of lenders. The average for 1939 and 1940 was about $5,700, for 1941 and 1943 it was slightly over $5,800, and for 1944 just under $5,700. SHIFT IN HOLDINGS CONTINUED Rather marked shifts have taken place in recent years in the proportions of the total farm mortgage debt held by major lending groups. In 1910 life insurance companies and commercial banks together held one-fourth of the total out standing, with the other three-fourths held by a miscel laneous group consisting mainly of individuals. As between the insurance companies and commercial banks the hold ings were about evenly divided. By 1930 the life insurance companies held approximately 22 per cent of the total, com mercial banks 10 per cent, and the Federal Land Banks and related agencies 12.5 per cent, with only 55 per cent held by others. With the organization of the Farm Credit Ad ministration in 1934 a pronounced shift in the holdings among lending groups occurred. By 1935 Federal Land Banks and Land Bank Commissioner loans constituted slightly more than one-third of the total outstanding. At the same time holdings by life insurance companies had drop- ESTIMATED AMOUNTS FARM MORTGAGE LOANS OUTSTANDING JANUAfff 1,1910-1945* SEVENTH DISTRICT STATES- *1944 and 1945 are preliminary estimates, 1944 by Bureau of Agricultural Economics, 1945 by the Federal Reserve Bank of Chicago. ped to 17 per cent and by commercial banks to less than seven per cent. The holdings by -the Federal Land Banks and Land Bank Commissioner reached a peak of 42 per cent of the total at the beginning of 1939. The proportion has declined steadily since that time and at the beginning of this year they were estimated to hold slightly less than 30 per cent of the total farm mortgage debt outstanding. The Farm Security Administration entered the picture in 1938 and their holdings have increased steadily. At the begin ning of 1945 they were estimated to hold 3.6 per cent of the total. Holdings of life insurance Companies decreased from 22 per cent in 1930 to just over 14 per cent in 1937, but since that date their proportional holdings have tended to in crease to above 17 per cent for 1944 and 1945. Holdings by commercial banks fell below 7 per cent in 1935-37 and have since risen to a level of about 8 per cent of the total, at which figure they have remained for the last five or six years. Joint Stock Land Banks held 5.5 to 6.5 per cent of the total in the period 1930-34, but with the advent of the Farm Credit Administration a continuous reduction has taken place as these joint stock banks have been liquidated and today their holdings are insignificant. The miscellaneous group of lenders, principally individuals, which held prac tically one-half of the total mortgage debt outstanding in the early 1930’s has gradually decreased in relative im portance to the beginning of 1941 when they accounted for one-third of the total farm mortgage debt. Since that date their relative importance has tended to increase and it is estimated that at the beginning of this year they again hold more than 40 per cent of the total. INTEREST RATES CONTINUE AT LOWER LEVELS Contract rates of interest on farm mortgages averaged 6.4 per cent for the United States in 1923. Since then the rate has gradually declined to 6 per cent for the early 1930’s and to 4.5 per cent during the current war years. Rates for Illinois have always been slightly lower than the national average, reaching a peak of 6.1 per cent in 1923, declining to 5.7 per cent for the early 1930’s, and to 4.1 per cent dur ing the past few years. Rates for Indiana have been slightly above those for Illinois but below the national average. In the last few years they have averaged about the same as the national figure at 4.5 per cent. Contract rates for the state of Iowa have been significantly below the national figure, slightly lower than for Illinois in the early ’30’s, but in the last few years have run about 4.2 per cent. Rates for Michigan in the early ’30’s were very slightly above the United States average and during the past five years have been stable at 4.7 per cent. Contract rates for the state of Wisconsin have been 5 to 10 per cent below the national figure until very recent years and during the last five years have ranged around 4.2 to 4.3 per cent. LIQUID* POSITION OF FARMERS As a result of favorable farm incomes the financial status of farmers.has been greatly improved during the war period. According to the Bureau of Agricultural Economics in a recent study, the consolidated comparative balance sheet of the farms of the United States showed total assets valued at just under 53 billion dollars as of January 1, 1940. Farm real estate accounted at that time for 33 billion 600 million dol lars of this total. Of the non-real estate items in the evalua tion livestock was estimated to be worth 5 billion dollars, machinery and equipment, 3 billion dollars, and household equipment a little over 4 billion dollars. As of January 1, 1944, the farm real estate was estimated to have increased to a value of over 45 billion 500 million dollars, while the value of livestock on farms had nearly doubled and the worth of machinery and equipment was up one-third. Farmers were estimated to have had, in 1940, 4 billion dollars in currency and bank deposits and roughly a quarter of a billion dollars in United States savings bonds. By January 1, 1944, the total of currency and deposits in the hands of farmers had expanded to nearly 10 billion dollars, or nearly 2.5 times the 1940 figure. From every indication these items continued to grow substantially during 1944. During the same four-year period the balance sheet shows a ten-fold increase in holdings of United States savings bonds, rising to a total of approximately 2 billion 500 mil lion dollars at the beginning of 1944. On the liabilities and equity side of the balance sheet it appears that farmers’ equity in real estate rose from 27 to 40 billion dollars and equity in non-real estate property doubled, rising from 17 billion dollars in 1940 to 34 billion dollars in 1944. There are some dangers in drawing conclusions from this sort of balance sheet. For example, the increase of 12 bil lion dollars in the value of farm real estate could easily evaporate were farm prices to decline materially. Similar qualifications apply to the increases in the value of other asset items where such increases are due to placing a higher ' price’’ tag on the items merely as a reflection of current market conditions. Such qualifications do not apply to the increases in currency, bank deposits, and war bonds held by farmers. The total of these items increased nearly 8 billion dollars for the four-year period ending January 1, 1944, and farmer holdings of such items increased further during 1944. The increase in these liquid assets of farmers spells out a healthy situation from the standpoint of ability to weather less favorable economic conditions. In 1940 the total of these liquid assets was less than one-half the indebt edness of farmers and less than two-thirds of the farm mortgages indebtedness. By 1944 the total of such assets was nearly one-third more than enough to meet the total debt owed, and more than twice the farm mortgage debt. Never before in recent farm history have the farmers of the nation been in such a sound and liquid position. How well farmers will be able to maintain this improved position will, of course, depend on how well agriculture prospers in the next few years. There will no doubt be occasions when farmers will want to draw on these ac cumulations in the postwar years, and some dangers in volved in how they are handled, but it appears likely that farmers will give a good account of themselves in managing these savings. Page 3 Construction Declines Further In 1944 Small Building Activity Foreseen Until V-E Day Construction contracts awarded in the Seventh Federal Reserve District during 1944 totaled 334 million dollars, the smallest annual volume since 1935. The 1944 level was 20 per cent below 1943, and 73 per cent under 1942, the all time record year. During 1944, however, the Seventh Dis trict, which comprises most of Illinois, Indiana, Michigan, and Wisconsin, and all of Iowa, had a larger dollar amount of construction contracts than any other Federal Reserve District, aggregating 17 per cent of all such contracts awarded in the nation. The immediate outlook for building in the Midwest can not be considered favorable for several important reasons: (1) nearly all of the vast wartime construction program has been completed except for some additional plants and allied housing for war workers needed in the production of newly developed or redesigned weapons; (2) the general man power shortage obviously limits construction activity, par ticularly in light of the recent directive requiring War Pro duction Board (WPB) approval of all future civilian and military building in acute labor shortage areas, in which the Seventh District presently leads all other districts; (3) sup plies of lumber and certain other building materials are very limited; and (4) in the light of these conditions, numerous related wartime priority and conservation regula tions are certain to remain in force until at least some time after V-E Day. The WPB now estimates that if the war continues both in Europe and the Pacific throughout 1945, national con struction activity for this year will be about 18 per cent below the 1944 level. If the war in Europe ends before spring, but the Japanese war continues throughout 1945, the WPB estimates that construction may exceed last year’s volume by a very slight margin. On the basis of information now available it is fairly evident that 1945 will not be a big year for construction in the Midwest or the nation as a whole. This will be true particularly in comparison with either the highest war years or the early postwar years when the existing backlog for housing and public works is expected to be carried into a substantial building program. defensive weapons, followed by more war plants for offen sive weapons; and was marked in 1943-44 by large housing projects for workers who migrated to war production cen ters. The different timing in wartime construction in the Seventh District compared with the nation as a whole is attributable to (1) substantial building of powder and re lated ordnance plants in 1940-41, located in this District for security reasons, (2) a lag in 1942 as shipbuilding and aircraft production expanded greatly in the nation’s coastal areas, and (3) the huge industrial structure-defense housing program launched in late 1942 and 1943 in the District to provide new and improved war weapons found necessary after battlefront experience and to take advantage of under utilized manpower then available in the Midwest. WARTIME BUILDING CHANGES The major change which has occurred within the Dis trict’s construction industry since Pearl Harbor has been the marked shift from residential building to a concentration in heavy nonresidential construction for industrial and military purposes. Also apparent is the shift from many buyers to a few, dominated by the Federal Government. Nonresiden tial construction contracts, excluding public works and utili ties, which accounted for 27 per cent of total Seventh Dis trict awards in 1939, increased steadily to 53 per cent in 1942, subsequently declining to 40 per cent in 1943, but rising to 46 per cent in 1944. CONSTRUCTION ACTIVITY 1939-1944 SEVENTH FEDERAL RESERVE DISTRICT (1939 MONTHLY AVERAGE*1001 WAR PROGRAM NEARS COMPLETION By the end of 1944 the construction industry had com pleted the bulk of its war program, which, in the Midwest, got underway at the outset of the defense period but reached a peak somewhat later than in the nation as a whole. Most of the 1944 construction work in the District was for industrial structures and defense housing, with only small additions to military and naval installations. Thus, the past year witnessed the near completion of the vast war building boom which began in 1940 with the construction of large Army and Navy bases and cantonments; continued with the erection of industrial plants for the production of CONSTRUCTION IN PROGRESS-!/ SOURCE: CONSTRUCTION CONTRACTS AWARDED FROM F. R. Q00GE CORPORATION ^‘Construction in Progress” adjusts contract award data to take account of time required to complete each major type of contract. In 1942, the first full year of American participation in the contracts and the finished building is particularly sig the war, nonresidential construction awards in the Seventh nificant because this interval indicates the delay before ac District totaled 660 million dollars, a gain of 63 per cent tual training of the armed forces and war production can over the previous year, while residential contracts were 295 begin. million dollars, a decrease of 12 per cent from 1941. In To measure total construction in progress, monthly con 1943, nonresidential construction, measured by contracts tract awards can be adjusted to indicate the time required awarded, declined at a faster rate than residential construc to complete each major type of contract. The resultant tion, indicating the renewed importance of residences in the series, which includes the weight of contracts so long as form of defense housing. Contracts for nonresidential build they are known or estimated to be in force, indicates the ing in 1944 totaled 154 million dollars compared with 89 level of actual rather than anticipated construction. million dollars for residences and 91 million dollars for In the Seventh District, construction in progress reached public works and utilities. a post-Pearl Harbor peak in December 1942, four months Manufacturing buildings have not only continued to later than the high point in contract awards, reflecting heavy dominate nonresidential construction throughout the period construction activity throughout much of 1943. On a con since 1940, but have constituted the largest single type of tract award basis it would appear that construction activity construction in the Seventh District during 1942-44. This reached a low level early in 1943. Equally significant in striking growth is revealed in contract values which rose measuring the wartime upsurge in building is the more from 89 million dollars in 1940 to a record high of 521 regular and realistic trend of construction in progress com million dollars in 1942, but which subsequently declined to pared with the unadjusted contract award series which is 94 million dollars in 1944. The manufacturing proportion much more sharply influenced by large individual construc of total Seventh District construction increased from 14 per tion projects. cent to 42 per cent during 1940-42, and the expanded heavy CHICAGO LEADS IN CONSTRUCTION ordnance and aircraft programs kept this proportion above 28 per cent in 1944. The importance of urban-industrial construction in the Commercial buildings, which exceeded manufacturing Seventh District since Pearl Harbor (through 1944) is plants in value of construction contract awards in 1939, have indicated by the substantial proportion, 38 per cent, of total declined sharply since Pearl Harbor as a result of wartime construction contracts awarded within the five counties con building restrictions and some temporary lessening of de taining the five largest cities. Chicago (Cook County, Illi mand. The 1944 contract volume of 14 million dollars was nois) has had the largest wartime construction program, ag 80 per cent under the 1941 level. gregating 364 million dollars, or 18 per cent of the District With the exception of hospitals and institutional build total. Detroit (Wayne County, Michigan) with awards ings all other types of construction, including educational, valued at 240 million dollars ranks second, followed by Mil recreational, public, and religious buildings, have declined waukee (Milwaukee County, Wisconsin), 67 million since the outbreak of war. Residential building, as indicated, has participated heavily dollars; Indianapolis (Marion County, Indiana), 61 million in the defense-war construction program. After Pearl Har dollars; and Des Moines (Polk County, Iowa), 29 million bor the emphasis in residential building shifted to an im dollars. These five counties also have had 39 per cent of total portant degree from permanent to more temporary dwellings District nonresidential contracts, 53 per cent of all residen for workers in new and expanded war production areas. tial contracts, but only 19 per cent of construction awards Single family units for owner occupancy have fallen to for public works and power utilities. Chicago’s leadership is attributable principally to non negligible importance, but single family houses for sale or rent have remained the key element in residential con residential construction and more specifically to new indus struction. The role of multiple-unit housing during the war trial structures which have totaled about 200 million dollars is evident in the substantial growth of two-family dwellings since Pearl Harbor, or about 27 per cent of all such con and apartment buildings in 1941-43. While unprecedented tracts in the Seventh District. In Wayne County, Michi farm incomes have increased the demand for farm build gan, residential construction contracts have been twice as ings, more urgent urban-industrial needs commonly have large as nonresidential contracts. This relationship, how limited severely the amount of farm construction work dur ever, is largely the result of taking into consideration only ing the war. one county in the larger Detroit industrial area, which also includes Oakland and Macomb counties where many new CONSTRUCTION IN PROGRESS and large industrial structures have been built since Pearl Although construction contract data, such as provided by the F. W. Dodge Corporation, provide an excellent index Harbor. The trend of construction contract awards since 1939 has of building activity, it must be recognized that construction contract awards do not measure actual construction in prog been very similar in Chicago, Milwaukee, and Indianapolis. ress in terms of materials used, employment, or rate of com Total construction and nonresidential awards in these cities pletion, but rather indicate the volume of building about to reached record levels in 1942 following the outbreak of war, be started. During war the time between the awarding of (Continued on Page 7) Page 5 The President’s Budget Messsage Turning Point in War Finance Program Without making any prediction as to the length of the war, the President’s budget message for the fiscal year 1946, as reported to Congress on January 9, indicated that a turning point has been reached in the war financing pro gram. The tentative estimate of 83 billion dollars to cover total Government expenditures in fiscal 1946 is 17 billion dollars lower than the estimated 100 billion dollar peak for the current year, and represents the first sizable reduction in expenditures since the beginning of the defense program in 1940. Of the 83 billion dollars estimated for total expenditures, 70 billion, or approximately 84 per cent, has been designated for direct war outlays. This represents a decline of 17 bil lion dollars from the current fiscal year. Actually, the President suggested a range of from 60 billion to 80 billion dollars for war expenditure, depending on the possible turn in war events. Should the war in Europe end well before June 30, 1946, the estimate would no doubt be revised downward. The sharp reduction from the current year is mainly due to a shift from a “build-up” basis of war pro duction to a “maintenance” basis, as termed by Harold D. Smith, Director of the Budget. Initial equipment for the Army and Navy is nearly completed and the huge war building program almost ended. This factor is counteracted to some extent, however, by the increasing Treasury burden of pay and subsistence costs and increasing mustering-out payments. Of the total estimate for war expenditures, 39 billion dollars was designated for Army expenditure, 22 billion dollars for Navy, and 2 billion dollars for Maritime Commission. If the 70 billion dollar estimate for total war expenses proves to be correct, by mid-1946 total expenditures by this country for war purposes will amount to 360 billion dollars out of authorizations and appropriations of 450 bil lion, 36 billion dollars of which ha.ve been for lend-lease purposes. Approximately 13 billion dollars was requested by the President for non-war purposes, ordinary Government ex penditures accounting for 3 billion dollars of this amount. The remaining portion was designated for what the Pres ident termed the “three major aftermath of war” items. The most important of these is interest on the public debt for which 4 billion 500 million dollars has been requested. Veterans’ benefits accounted for 2 billion 600 million dollars —more than double the expected amount for the current year. Refunds to taxpayers, the third item, accounted for 2 billion 700 million dollars, about 1 billion of which will go to individuals because the withholding tax has taken more than the'proper amount of their income taxes. The rest will go to corporations, 1 billion dollars being set aside as provided in the law for 10 per cent postwar refunds of excess profits taxes. Page 6 Although expenditures were estimated at 83 billion dol lars, the President asked Congress for 87 billion dollars in appropriations, of which 73 billion was set aside for war purposes. War appropriations in a given period do not neces sarily coincide with war spending because funds obligated in one year are often spent in a later year. Thus in the fiscal year 1944 a record 128 billion dollars was appropriated for all purposes, but total spending was only 95 billion. In the present fiscal year, 1945, appropriations are expected to be 97 billion dollars, while spending is expected to reach 100 billion. TAX RECEIPTS Budget estimates indicate that in the fiscal year 1946 the Treasury will for the first time during the war suffer a sharp drop in tax receipts due primarily to reduced war spending by the Government which will be reflected in smaller war profits and individual incomes. As compared with actual tax receipts of 44 billion 100 million dollars in the fiscal year 1944 and expected receipts of 45 billion 700 million dollars in the current year, the budget estimates receipts of 41 bil lion 300 million dollars in fiscal 1946. This is based on the assumptions that tax rates remain unchanged and that no GOVERNMENT EXPENDITURES AND RECEIPTS Fiscal Years 1944-1946 (in billions of dollars) 1946 1945 Estimated Estimated 1944 Actual General and special accounts— Expenditures: War activities ....................................... 69.4 88.0 87.0 Interest on public debt....................... 4.6 3.7 2.6 Other activities...................................... 8.6 7.2 4.1 Total expenditures, general and special accounts ........................... 82.6 98.9 93.7 Net receipts ............................................... 41.2 45.7 44.1 Net deficit ................................................... 41.3 53.2 49.6 Government corporations and credit agencies net expenditures..................... 1.2 2.7 4.4 Public debt at beginning of year........... 251.8 201.0 136.7 Net deficit ........................................................ 41.3 53.2 49.6 Government agency expenditures less trust accounts net receipts................ .. 1.2 2.7 4.1 Change in Treasury cash balance.......... — 2.0 — 6.0 10.7 Increase in public debt during year........ 40.6 60.8 64.3 Public debt at end of year......................... 292.3 251.8 201.0 TREASURY RECEIPTS FROM TAXATION AND FROM BORROWING (amounts in billions) Total Receipts Fiscal Year Amount 1941 1942 1943 1944 1945 (e) 1946 (e) $ 14.4 34.5 86.1 105.9 95.2 ■ 81.8 Tax Receipts Borrowings* Amount Per Cent Amount Per Cent $ 7.6 12.8 22.3 44.1 45.7 41.3 52.8 37.1 25.9 41.6 48.0 50.5 $ 6.8 21.7 63.8 61.8 49.5 40.5 47.2 62.9 74.1 58.4 52.0 49.5 (e) Estimated * Based on changes in direct and fully guaranteed debt new taxes will be introduced. Individuals are expected to pay 3 billion 300 million dollars less in taxes in 1946 than in the current fiscal year. Corporations will pay 700 million dollars less in direct taxes, and excise taxes will be down 100 million. Businesses will have moved forward as the largest contributor to Federal Government revenues, a position held in early war years by individual taxpayers. Corporations will pay an estimated 16 billion 300 million dollars in direct taxes—a figure which is lower than the current year figure of 17 billion dollars, but higher than next year’s estimate^ individual tax' payments of 15 billion 600 million dollars. 18 billion dollars in new money to be raised by the sale of savings bonds, tax notes, and open market issues. In addition to this new money, the Treasury will carry out a consider able amount of refunding. The amount of Treasury direct and guaranteed issues, excluding Treasury bills, due or callable in the first six months of 1945 totals approximately 22 billion. The volume of Treasury financial needs for this fiscal year and the next compared with the actual amounts for the fiscal years 1941 through 1944 are shown in the accompanying table. It can be seen that new money borrowing reached a peak in 1943 when the direct and guaranteed debt increased 63 billion 800 million dollars. A slight reduction from this amount took place in 1944, and estimates for this and next year show a steady decline in the volume to be raised even under the assumption of the war continuing through mid-1946. By the end of 1944 the public debt was 232 billion dol lars. Budget estimates anticipate a total debt of approx imately 252 billion dollars by July 1, 1945. Borrowing of 40 billion dollars in fiscal year 1946, as tentatively suggested by the President, would bring the debt up to 292 billion by July 1946, a development which would, of course, re quire a further boost in the debt limit. Legislation to raise the debt limit was requested by the President in the budget message. CONSTRUCTION DECLINES (Continued from Page 5) TREASURY FINANCE REQUIREMENTS Even with smaller tax receipts, Treasury borrowings are estimated to drop 11 billion dollars in fiscal 1946 from the expected 51 billion dollar level this year. Of the estimated 40 billion dollars in required borrowing in 1946, 5 billion dollars is expected to be absorbed by investment of Federal trust funds, leaving a residue of some 35 billion dollars to be borrowed from individuals and financial and other institutions. Revised budget estimates for the current year indicate that the amount of Treasury new money needed by the Treasury for the first six months of 1945 will be less than the actual amount raised in the closing six months of 1944. This reduction is due primarily to the success of the Sixth War Loan Drive, which enabled the Treasury to begin 1945 with a General Fund balance of 22 billion dollars. It is estimated that this balance will be reduced to 15 billion 100 million dollars by June 30, 1945. It now appears that the Federal direct and fully guaran teed debt will increase some 20 billion dollars in the first six months of calendar year 1945 as against 29 billion 500 million dollars in the last six months of 1944. Of this 20 billion dollars about 2 billion will be financed by the sale of special issues to Government trust funds, leaving roughly but the residential peaks came in 1941 before wartime private building restrictions became effective. In Detroit and Des Moines, however, early defense activity brought the highest contract award levels in 1941. In Detroit the peak in residential awards was reached in 1940. ROLE OF GOVERNMENT FINANCING Since 1940, public funds, especially those provided by the Federal Government, have been used to finance the major portion of construction in the Seventh District and the nation. The proportion of total contract awards pub licly-financed in the Seventh District increased from 33 per cent in 1940 to 81 per cent in 1942, and has since remained above 60 per cent. Publicly-financed construction has been slightly more important nationally than in the Seventh District throughout the period since 1940. Government participation in the unprecedented industrial expansion program in the Seventh District caused the pub licly-financed proportion of all nonresidential contracts to increase from 26 per cent in 1940 to 92 per cent in 1942; and despite the sharp decline in industrial building, this proportion in 1944 was 65 per cent. Residential building, normally financed about 90 per cent with private funds, had 43 per cent public participation in 1942 and 22 per cent in 1944. Page 7 SIXTH WAR LOAM DRIVE (Continued from Inside Front Cover) Besides the sales of securities credited to the war loan drive, the Treasury obtained additional funds through sub scriptions of commercial banks, based on their time de posits, of 1 billion 14 million dollars, of which 886 million were for 2 per cent bonds. Another 767 million dollars of bonds were sold to Treasury investment accounts. The increase in Treasury bills outstanding in the month of No vember yielded an additional 400 million dollars. lars for the banking system compared with 9.5 billion dollars in the last drive. When the 1 billion 534 million dollar increase in loans on Governments at reporting banks for this two month period is added to these amounts, the total in crease in bank credit may be estimated at between 10 and 11 billion dollars. Of this amount 1 billion dollars was offered to banks directly. BANK RESERVES AFFECTED The familiar war loan drive shift from private deposits to reserve-free war loan accounts released bank reserves and BANK PARTICIPATION CONTINUED thus enabled banks to increase their loans and purchase the Despite the exclusion of banks from direct participation Governments offered by nonbank investors. This was par in the Sixth War Loan and the Treasury’s request that ticularly true for city banks where excess reserves have been banks refrain from making loans on Governments for specu maintained close to zero. The decline in demand depositslative purposes and from accepting subscriptions which adjusted and time deposits of reporting banks in 101 cities, were sure to be later sold to the banks, expansion of bank as customers drew down their accounts in payment for the credit was an important source of funds used by nonbank new Treasury issues, was 4 billion 149 million dollars from investors in the purchase of Sixth War Loan securities. In November 22 through December 27. During the same direct bank participation in the drives takes two forms— period United States Government deposits rose 9 billion purchase by banks of outstanding securities sold in the 238 million dollars. Increased loans and investments, the market by private investors and loans for purchasing or proceeds of which were used to place subscriptions for se carrying U. S. Government securities. Because of local curities through banks’ war loan accounts, were responsible sales pressure during each drive, some firms and individuals for the greater amount of change in Government deposits. without currently available funds sell securities acquired This type of transaction enabled banks to build up their during previous drives and use the proceeds to subscribe to portfolios without affecting their reserve positions. the new issues. Furthermore, the demand for the new The decline in required reserves of all member banks Governments after each drive, as banks purchase them in during the drive amounted to about 900 million dollars. the open market, has tended to encourage purchases of the Part of this was reflected in the rise in excess reserves to a war loan issues in anticipation of resales at a premium. level of about 1.3 billion dollars, most of which was in Measured, by the accounts of weekly reporting member country banks, from a low of 800 million dollars prior to banks in 101 cities, the expansion of bank credit in the the drive. In addition to the funds absorbed by the pur Sixth Drive was roughly comparable in amount to that of chase of outstanding securities in the open market, part of the Fifth. The accompanying table indicates the increase the reserves released were used to replenish bill portfolios in holdings of Governments other than Treasury bills and and to repay borrowings from Reserve Banks. loans on Governments for corresponding periods of the last The Federal Reserve Banks continued to stabilize the three drives. It will be noted that the composition of the market and to supply reserves to member banks where increase in the total amount of credit has shifted consider needed by increasing their holdings of Governments. Al ably in the Sixth War Loan. The Treasury achieved some most all of the 1.5 billion dollar increase in their holdings measure of success in its attempt to curtail loans for specu was in certificates and notes which banks are using more lative purposes—the increase during the period in loans on extensively in place of bills to adjust their reserve positions. Governments being about 1.7 billion dollars compared with 1.9 billion dollars in the previous drive. The outstanding INCREASE IN HOLDINGS OF U. S. GOVERNMENT amount of these loans, however, reached a new high of 3.1 SECURITIES AND LOANS ON GOVERNMENTS billion dollars in the Sixth Drive. Certificates and notes DURING WAR LOAN DRIVES* must be considered together due to the exchange of cer Weekly Reporting Banks in 101 Cities of the U. S. tificates for notes over the December 1 certificate maturity. (millions of dollars) These securities together made up a smaller proportion of the total increase in Governments while the expansion of Fourth Drive Fifth Urive Sixth Drive bond holdings was more than 600 million dollars greater during the Sixth Drive. 366 2,212 107 Certificates ................... For the entire banking system credit expansion for No 982 333 Notes and guaranteed. 2,022 vember and December was probably between 9 and 10 812 1,019 1,631 Bonds .............................. billion dollars. According to our estimates, based on the 976 1,916 1,696 Loans on Governments. change in holdings of Governments by the reporting banks in 100 cities outside New York, Government securities of 3,136 5,480 5,456 Total............................ all commercial banks increased about 7 to 8 billion dollars. covered are January 5 to February 16 for Federal Reserve Bank holdings rose 1 billion 459 million ♦The periodsJuly 12 for the Fifth Drive; and November thetoFourth Drive; May 31 to 8 December 20 dollars—yielding a total of between 8.5 and 9.5 billion dol for the Sixth Drive. Page 8 INDUSTRIAL PRODUCTION VOLUME SEASONAL NATIONAL SUMMARY OF BUSINESS CONDITIONS BY BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM 1937 1938 1939 1940 Federal Reserve index. for December, 1944. 1941 1942 1943 1944 Monthly figures, latest 6hown is WHOLESALE PRICES PRODUCTS /v ALL COMMODITIES OTHER' *939 1940 1941 1942 1943 1944 Bureau of Labor Statistics’ indexes. Weekly figures, latest shown are for week ending December 30, 1944. MEMBER BANKS IN LEADING CITIES Demand deposits (adjusted) exclude U. S. Government and interbank deposits and collection items. Government securities include direct and guaranteed issues. Wednes day figures, latest shown are-for December 27, 1944. MEMBER BANK RESERVES AND RELATED ITEMS 1944 Wednesday figures, 1944. latest shown are for December 27 Production and employment at factories increased somewhat in December. Retail buying was exceptionally active in December and the first half of January and wholesale commodity prices advanced. Industrial production ■— Total industrial production was maintained in December at the level of the preceding month, which was 232 per cent of the 1935-39 average, according to the Board’s index. Manufacturing out put showed a slight rise because of increased output of war products, wh"ile minerals production declined, reflecting a sharp drop in coal production. Gains over the November levels of activity in the machinery, transporta tion equipment, chemicals, petroleum refining, and rubber industries fol lowed a renewed drive to expand output of critical munitions. Military events in December resulted in higher production schedules for munitions and in additional Federal measures to assure manpower for war output and to increase inductions into the armed services. Stringent limits were placed on the use of metals in civilian products under the programs initiated last fall. Output of metals decreased somewhat further in December. In the first three weeks of January steel production continued to decline, partly because of severe weather conditions. Output of aluminum has been held at a level of about 90 million pounds per month since last autumn. The curtailment of aluminum sheet production during 1944 was reported in January to have led to a critical supply situation for this product in the light of the recently raised aircraft schedule. Lumber production showed the usual seasonal decline in December. Out put for the year 1944 was about 5 per cent below 1943, and a further decline is expected in 1945 due to continued shortages of manpower and equipment. Cotton consumption and output of manufactured foods were maintained in December at the level of the preceding month. There were declines in shoe production and in activity at paper mills Output of coal in December was about 12 per cent below average pro duction in the preceding 11 months. In order to assure supplies to meet the most essential needs, restrictions on less essential civilian uses of coal were instituted in January. Crude petroleum production was maintained in De cember in large volume, while output of iron ore showed the large seasonal decline customary in this month. Distribution—During the November-December Christmas shopping season department store sales rose to new high levels and were 15 per cent larger than in the corresponding period a year ago. The high level of sales was maintained in the first half of January, taking into account usual seasonal changes in trade. Carloadings of railroad freight declined more than usual in December. During the first two weeks of January loadings were 5 per cent less than during the same period a year ago, owing to decreases in all classes of freight except miscellaneous shipments. Commodity prices The general level of wholesale commodity prices advanced somewhat from the early part of December to the middle of January. Prices of most farm products were higher. After the middle of January grains and cotton declined but were still above early December levels. Steel scrap, which had been considerably below ceiling levels in the autumn, showed a sharp price rise. Prices of nonferrous metal scrap, cement, and various other industrial materials also increased in December and the early part of January. Bank credit In the four weeks ended January 17, Government security holdings at weekly reporting member banks increased further. Loans for purchasing and carrying Government securities declined from the level reached during the Sixth War Loan Drive; most of the decline was in the loans to customers, but .loans to brokers and dealers also were reduced moderately. The Government securities added to reporting member bank holdings in this period consisted mainly of bonds and bills. Excess reserves held by member banks declined relatively little from the peak reached during the Sixth War Loan Drive. Reserve requirements increased, but member bank reserve balances also increased by approximately the same amount. Spending of Treasury balances and a reduction of non member deposits at Reserve Banks more than offset a decline in holdings of Government securities by the Federal Reserve Bariks. Currency in circu lation declined 130 million dollars during the three weeks following the Christmas peak, the largest decline for any corresponding period since earlv 1942. ' Following the Sixth War Loan Drive, adjusted demand deposits renewed their increase, and time deposits increased at a more rapid rate than demand deposits. Between war loan drives, time deposits in all banks have been increasing at the rate of almost three-quarters of a billion dollars a month. SEVENTH FEDERAL IOWA RESERVE DISTRICT
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