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

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JULY 1949

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BUSINESS CONDITIONS




A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO

|ift

Federal Reserve Support Policy Modified
Additional Steps Taken to Ease Credit Conditions
The closing days of June brought three important
developments in Federal Reserve policy in the direction
of further easing credit conditions. On June 28, the Fed­
eral Open Market Committee issued this statement:
The Federal Open Market Committee, after consultation with
the Treasury, announced today that with a view to increasing the
supply of funds available in the market to meet the needs of com­
merce, business, and agriculture it will be the policy of the Commit­
tee to direct purchases, sales, and exchanges of Government securities
by the Federal Reserve Banks with primary regard to the general
business and credit situation. The policy of maintaining orderly con­
ditions in the Government security market and the confidence of
investors in Government bonds will be continued. Under present
conditions the maintenance of a relatively fixed pattern of rates has
the undesirable effect of absorbing reserves from the market at a
time when the availability of credit should be increased.

This statement was followed on June 29 by an an­
nouncement by the Board of Governors in connection with
the elimination of consumer credit restrictions and the
reduction in reserve requirements:
The authority under which the Board of Governors of the Federal
Reserve System issued Regulation W, establishing minimum down
payments and maximum maturities for consumer instalment credit,
expires June 30, 1949 and the regulation will not be effective after
that date. Notice to this effect is being sent to those who, in accord­
ance with the regulation’s provisions, have filed registration state­
ments with a Federal Reserve Bank.
The temporary authority granted by Congress for increased
reserves likewise expires June 30 and the Board has accordingly re­
vised the supplement to Regulation D, under which the following
reserve requirements will be effective with the beginning of the next
reserve period (June 30 for central reserve city and reserve city mem­
ber banks and July 1 for other member banks): Against net demand
deposits—24 per cent for central reserve city member banks, 20 per
cent for reserve city member banks, and 14 per cent for other
member banks; against time deposits—6 per cent for member banks
of all classes. The changed requirements will result in a reduction of
approximately $800,000,000 in required reserves.

The decision to abandon maintenance of the existing
rate pattern restored to the System some additional
flexibility in using the important instrument of open
market operations for the first time since early in the
recent war. In the first six months of 1949, the System’s
portfolio of Government securities was reduced almost
four billion dollars. Of this decline, more than three
billion was in Treasury bonds, most of which represented
market sales to hold down bond prices. These operations,
either directly or indirectly, absorbed largely bank funds
freed through the contraction in business loans and lower
required reserves.
The accompanying table shows the changes in the
portfolios of the Federal Reserve Banks and the weekly
reporting member banks since April 27. In the period
prior to the change in open market policy, System sales
of bonds almost balanced the easing effect on bank
reserve positions which had resulted from the release
of about 1.2 billion dollars by the lowering of reserve
requirements early in May. In the two weeks following
the announcement by the Open Market Committee and
the most recent reduction in reserve requirements, the
reporting banks acquired almost as many Governments



as in the previous two-month period. Purchases were
more heavily concentrated in the short-term issues, how­
ever. No net sales of bonds were made by the System.
Although central reserve city banks were not directly
affected by the change in reserve requirements, a sub­
stantial part of the demand for Governments came from
New York banks, which received funds from outlying
districts. Excess reserves of all member banks rose almost
800 million dollars to 1.4 billion in the week following
the reduction in requirements, but had declined to 930
million by July 13.
YIELDS ON GOVERNMENTS DECLINE

Reflecting the System’s withdrawal from the bond
market and the concurrent reduction in reserve require­
ments, together with continued slackening in the demand
for funds by business, the prices of all classes of Govern­
ment securities showed sharp advances in the early part
of July. Both the eligible and restricted long-term 2i4’s
rose more than a full point in the first two weeks of
trading. Yields have declined correspondingly, as shown
by the following comparison of yields (in per cent) on
taxable securities by maturity classes:
June 25

July 2

July 16

Bills, 3 months..................... 1.158 1.052 0.928
Certificates, 9 to 12 months. 1.21
1.16 1.02
Taxable issues, 3 to 5 years. 1.41
1.36 1.25
Bonds, 7 to 9 years............. 1.65
1.60 1.55
Bonds, 15 years and over. . .2.38 2.34 2.26
Because of the heavy demand for Treasury bills, par­
ticularly in the week ended July 13, the Reserve Banks
sold these issues from their portfolios to maintain an
orderly market. Nevertheless, the bill rate was allowed
to drop below one per cent on the issue dated July 14
for the first time since August 1948.
The change in open market policy removes the re­
straining influence of System sales of securities upon the
amount of reserve balances, and a continued flow of funds
into the Government market from commercial banks
and nonbank investors as well would result in a further
downward adjustment in interest rates.
CHANGES IN HOLDINGS OF GOVERNMENT
SECURITIES, FEDERAL RESERVE BANKS
AND REPORTING MEMBER BANKS
APRIL 27 TO JULY 13, 1949
(In millions of dollars)
Type of Issue
Bills..........................
Certificates............
Notes.......................
Bonds......................
Total...............

Federal Reserve Banks
April 27 to
June 29 tc
June 29
July 13
-584
-457
-84
-88
-2
-26
-1,125
—
-674
-1,691

Reporting Member Banks
April 27 to
June 29 to
July 13
June 29
+639
+5
+572
+259
+31
-4
+654
+147
+1,227
+1,076

Industrial Area Trends
Midwest Production Centers Face Declining Demand
The course of business during the remainder of the
year in the principal industrial areas of the Seventh
Federal Reserve District—Chicago, Detroit, Milwaukee,
and Indianapolis—will influence national business trends
to an unusual degree. This will be true because these
manufacturing centers have a dominant position in the
output of automobiles, steel, machinery, and railroad
equipment—all of which appear likely to face further
readjustments to more normal market conditions in the
months ahead.
Declining trends in production and employment in
these major areas of steel consumption now are of deep
concern not only to the local areas themselves but also
to the nation’s coal and iron mining sections, the Eastern
steel producing districts, and to business and the public
generally. The current downtrend which began in late
194S and early 1949 in these Midwest areas quite
probably will continue throughout the present year.
Moreover, unless some improvement in the volume of
orders for durable goods appears fairly soon, or at least
a leveling occurs in such orders—an even sharper de­
cline may be expected.
Throughout the war and postwar years, most business
observers have said that a decline from peak levels of
output to more “normal” production schedules was al­
most inevitable, and even necessary to correct wageprice-output distortions caused by abnormal shortages.
This expected slackening now is in progress, and in fact
well-advanced in many lines of business. Yet, fears of a
return to a more normal tempo in business are wide­
spread. In major Seventh District centers business and
employment so far have receded slowly with minimum
disruption to the Midwest generally. Based upon what
actually has occurred, therefore, the present situation
can be viewed as a “desirable” readjustment from the
peak of inflation, and helping to provide the basis for
more stable and enduring levels of business.
However, analysts have reasoned that the critical
stage of the transition to more “normal” peacetime out­
put and income would take place in the durable goods
industries, and particularly in basic steel and automobiles.
In the past, readjustments in this sector of production
have proved more far-reaching than in the “soft” goods
lines, probably because purchases of the former can be
postponed longer. Moreover, readjustments in durable
goods production often reflect the level of new invest­
ment, while in the “soft” goods lines production tends
to reflect the level of consumption. Persistent declines in
current orders for heavy goods and the relatively deeper
production cutbacks which these portend, seem to be
more significant in setting the current “bearish” tone of
expectations in this District than the actual slackening
in business activity to date. Widespread attempts are




being made to foresee the turning point in the present
business recession. While most observers still remain in
doubt, the view that a “bottoming out” will occur in the
first half of 1950 is gaining some new supporters mainly
because of a belief that conservative buying in the past
will require a re-entrance into the markets by that time.
MIDWEST INDUSTRIAL PATTERN

The automobile, steel, machinery, and transportation
equipment industries are the “prime movers” of Midwest
business, employing about 65 per cent of all factory
workers in the four principal industrial areas combined.
The favored market situation in these lines during the
early postwar years—in the case of automobiles up to
the present time—has been the chief factor supporting
the District’s business. It was primarily because of this
strong demand that general business expectations in the
Midwest remained higher during 1947 and 1948 than in
some of the nation’s other sections, notably the East
Coast and West Coast areas, where readjustments in the
nondurable goods industries were of greater local sig­
nificance. Consequently recent indications that “holdover
demand” has now come to an end in most durable goods
lines have caused attention to be directed to current
developments in the District’s major industrial centers.
Despite continued high production of passenger auto­
mobiles and steel in this District, declining sales in
such durable goods lines as motor trucks, major house­
hold appliances, office machinery, farm implements, and
industrial equipment have resulted in a persistent 10month drop in the combined manufacturing employment
of the four principal industrial areas. Since January 1949
the rate of decline—averaging 1.5 per cent per month—
has accelerated to the point where it now is somewhat
greater than the national rate of less than one per cent.
As would be expected, this employment and production
drop has occurred not only in the plants producing the
finished products, but even more so in the foundries,
machine shops, stamping plants, and other subcontract
and feeder industries. Such cutbacks are quickly trans­
lated into reduced orders for basic steel and to a con­
siderable degree account for the 12-week drop of 7 per
cent in Chicago District steel production, and the 20 per
cent drop in national output.
Forty per cent of all steel consumed in the nation for
metalworking purposes is used in Illinois, Indiana,
Michigan, Wisconsin, and Iowa, the five states lying
within the Seventh Federal Reserve District.1 About
one-fourth of all metalworking steel produced in the
1 See Iron Age, May 1949. About 80 per cent of all steel is used by the metalworking
industries, the balance it used directly for pipe lines, rails, construction, and other
miscellaneous purposes.

Page 1

nation is consumed in the Detroit, Chicago, and Mil­
waukee industrial areas. Sheet and bar steel are the types
most heavily used in these Midwest areas, about half
of all national production being consumed here. Approxi­
mately one-third of the total production of steel plate,
pipe, tubes, iron, and “unclassified” steel products find
their end use in these centers, as well as somewhat more
than a fourth of the tin plate and structural steel.
HARD GOODS MARKET FACTORS

From the concentration of steel consumption and dur­
able goods employment, and from the large growth of
these activities in Midwest industrial areas during the
last decade, two conclusions concerning business pros­
pects seem evident: (a) the future trend of orders for
finished durable goods will determine both the rate and
the extent of the general business decline in Midwest
centers, and (b) the level of employment and production
in these areas will act as a barometer for steel production
after the present inventory adjustment is completed.
Will there be sufficient replacement demand for auto­
mobiles at prices which provide a reasonable profit for
manufacturers and dealers? Can farmers be induced by
means of price cuts, and/or more efficient products to
continue spending for new power tools and implements
in the volume needed to maintain high production? Will
the competitive pressures in general markets—now that
the consumer is again in the dominant position—cause
manufacturers and shippers to modernize their equip­
ment at a rate sufficient to keep production schedules in the
machinery and industrial equipment industries at a high
level? Can consumers be induced to re-enter the market
for household equipment through the offering of improved
models at reduced prices? Finally, can the necessary
cost-price-inventory adjustments continue to be effectu­
ated in such a way as to avoid temporarily sharper de­
clines to levels much lower than longer-run demand would
indicate?
Precise answers to questions such as these can only be
CHART

CHICAGO

known as future events unfold. There is extensive evi­
dence, however, in the findings of the Federal Reserve
1948 Survey of Consumer Finances and numerous other
reports on buying intentions and ability to pay that cur­
rent consumer and business “needs” for up-to-date dur­
able goods and allied financial resources are sufficient to
maintain a high level of production in this District and
elsewhere. As adjustments are working themselves out,
the key word for consumers is -price; for businessmen it
is cost; and for general levels of employment and income
in the Seventh District it is timing—all plus confidence.
Cost-price reductions to be effective in stabilizing busi­
ness must come before unemployment rises sharply and
purchasing power is impaired—but such reductions can­
not be either too small as to cause further buying post­
ponement in anticipation of still greater cuts or too
sweeping as to disrupt business and spread fears of a
collapse. Admittedly, this is a difficult task.
Although Seventh District business radiates from its
four principal cities—Chicago, Detroit, Milwaukee, and
Indianapolis, 50 per cent of the population and nearly
45 per cent of manufacturing employment lie outside.
Many of the subsidiary centers indeed are more “in­
dustrialized”—in the sense that their local prosperity
is more dependent upon manufacturing industry—than
the major areas mentioned above. Economic trends in
these smaller production centers will be traced in a forth­
coming issue of Business Conditions. The present article
will be limited to trends in the four chief industrial areas.
CHICAGO1

Because the highly diversified character of Chicago’s
manufactures, services, and trade provides a better cross
section of the nation’s industrial pattern than any other
industrial area, current developments are likely to ap­
proximate national trends more closely than will those
in other Midwest centers. However, relatively heavy
2 For a detailed discussion of economic trends of the last decade, see Employment
Production and Income in the Chicago Industrial Area, Federal Reserve Bank of
Chicago, 1948.

I

DETROIT

BUSINESS
-15____-10

-3

O

+3

+10

*13

+20

*23

•20

TOTAL EMPLOYMENT

TOTAL EMPLOYMENT

MANUFACTURING EMPLOYMENT

MANUFACTURING EMPLOYMENT

METALWORKING EMPLOYMENT

METALWORKING

DEPARTMENT STORE SALES

DEPARTMENT STORE SALES

BANK LOANS TO 8USINESS

ISSSSSSSSSSl

BANK LOANS

BANK DEBITS

BANK DEBITS

TIME

TIME

DEPOSITS

-3

+3 tIO +15 *20

DEPOSITS

CONSUMER PRICES

CONSUMER

RESIDENTIAL BUILDING AUTHORIZED
TOTAL BUILDING AUTHORIZED
|

RESIDENTIAL BUILDING

Page 2

-10

TO BUSINESS

AVERAGE WEEKLY EARNINGS




-13

137 HALF 1949

EMPLOYMENT

AVERAGE WEEKLY

s

BUSINESS

PER CENT CHANCE I” HALF 1948 TO

PER CENT CHANGE 1ST HALF 1948 TO l»T HALF 1949

EARNINGS

i

PRICES

TOTAL BUILDING

AUTHORIZED

AUTHORIZED ]

concentration of the production of ingot and fabricated
steel and the great importance of machinery manufacture
mean that the level of activity in durable goods industries
will go far toward influencing the future level of business
here.
Steel Consumption—The Chicago area is not only a
leading producer of steel but also ranks second only to
Detroit in steel consumption. However, unlike Detroit,
where steel is largely limited to a few uses such as sheets
and bars, Chicago’s consumption is spread with remark­
able evenness over the various types. The area uses
about nine per cent of all steel produced in the nation
and in no type is its consumption more than 22 per cent
or less than seven per cent of national production.
Industrial Expansion—During the last decade Chicago
has led other industrial areas in the dollar volume of
investment in new plant and equipment, and this leader­
ship appears to be continuing in the current year. An
estimated 130 million dollars of new plant and equipment
expenditure have been awarded in the area during the
first six months of 1949 bringing the total since 1940 to
1.4 billion dollars. Major new plants in steel, oil refining,
chemicals, and screw machine products, as well as lesser
investments in industries producing food, electrical ap­
pliances, and nonferrous metals products have been con­
tracted for this year.
Current Business Measures—Total manufacturing em­
ployment in the Chicago industrial area during the first
half of 1949 is estimated to be 960,000, a decline of
five per cent from the same period of 1948.' Metal­
working employment—steel, machinery and transpor­
tation equipment—is off" seven per cent; but total em­
ployment in all nonagricultural lines—2.28 million workers
—is down less than three per cent from the year-ago
level. This suggests the greater current weakness of
manufacturing, and particularly metalworking, employ­
1 This figure is somewhat higher than might he suggested for the same period by the
recently released data of the 1947 Census of Manufactures. Variations in classifica­
tion and reporting procedures, appear to account for most of the difference. Recon­
ciliation of discrepancies and preparation of a revised series using strictly comparable
classifications await the release of detailed census data.

CHART

9

MILWAUKEE
PER CENT CHANGE

l*T

II

BUSINESS

HALF 1948 TO

-30

-23

-20

l*T

|HALF

-1 5____-10

INDIANAPOLIS

1949

EMPLOYMENT

BUSINESS

PER CENT CHANGE l*T HALF 1948 TO l*T HALF 1949

-1s_____(

»i

n

TOTAL EMPLOYMENT
MANUFACTURING

ment in comparison with trade and service activity. The
value of industrial production is estimated to be at an
annual rate of 11.5 billion dollars or also about five per
cent under the year-ago rate.
Department store sales and debits to individual ac­
counts in commercial banks during the first half of this
year are three per cent and two per cent, respectively,
below the 1948 level. Here again the declines are some­
what less than the comparable drops for the nation as a
whole, reflecting the continued market strength of the
area’s principal products.
Aggregate personal income in the Chicago area in
1949 is at an estimated annual rate of 10.9 billion dollars,
an amount which is still about five per cent above last
year’s first-half rate. Weekly earnings of industrial work­
ers have averaged only three per cent higher in 1949 than
a year ago, but earnings of salaried workers appear to
have increased more. The cost of living for moderate
income families in the area as measured by the Con­
sumers’ Price Index is only slightly—not quite two per
cent—above 1948’s level during the comparable months.
General prices have declined nearly three per cent from
the high point of September 1948, but not sufficiently to
cancel out last summer’s increases.
The greater rise in personal income as compared with
consumer prices no doubt explains in part the eight per
cent increase in time deposits in Chicago banks, an
upward trend which applies also—though not in the same
degree—to share accounts in savings and loan associa­
tions, savings bond purchases, and postal savings.
Short-Run Prospects—One factor seems likely to
strengthen Chicago’s fundamental economic position dur­
ing the current readjustment period. There seems little
doubt that this area’s competitive position in basic steel
production has improved during the last decade. Changed
pricing practices caused by the basing point decision have
highlighted the underlying strength which results from
Chicago’s combined advantages of convenience of raw
material assembly and proximity to market. The con­
tinued westward movement of population—and hence

tIO

♦5

»I0

♦IS

»20

»25

TOTAL EMPLOYMENT
MANUFACTURING EMPLOYMENT

i

METALWORKING
DEPARTMENT

EMPLOYMENT

METALWORKING EMPLOYMENT

STORE SALES

DEPARTMENT

STORE

SALES

____ 1

BANK LOANS TO BUSINESS

V'i

DEPOSITS

AVERAGE
CONSUMER
|

WEEKLY

■

1 3

BANK DEBITS
TIME

BANK LOANS

EARNINGS

a§

PRICES

RESIDENTIAL BUILDING AUTHORIZED
TOTAL BUILDING AUTHORIZED




1

TO BUSINESS

BANK DEBITS
TIME

DEPOSITS

AVERAGE
CONSUMER

WEEKLY

EARNINGS

PRICES

RESIDENTIAL BUILDING

AUTHORIZED

TOTAL BUILDING AUTHORIZED

j

£S3

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+30

steel consumption—during the last 10 years is the funda­ This amount is more than double that consumed by any
mental cause of the change, and in large part explains other industrial area except Chicago, and reveals the
why local steel capacity now is being utilized more fully extreme importance of Detroit as a market for the na­
tion’s steel industry. Most of Detroit’s needs are supplied
than in Eastern centers.
Continued decline in Chicago’s own steel consuming from the Chicago and Pittsburgh-Youngstown steel dis­
industries, however, together with the slackening of pro­ tricts. Although still largely dependent upon these sources
duction among steel using industries in other major of supply, important expansions locally have enabled
Midwest centers, obviously would have adverse effects Detroit to supply a larger part of its own needs than in
upon basic steel production here. Competitive advantage, prewar years.
General Business Trends—Department store sales in
if it persists, will mitigate but, of course, not fully counter­
balance the effects of an extended decline in durable the Detroit area have declined in 1949 by about four per
cent, as compared with 1948, a drop exactly equal to
goods production, if such occurs.
that of all such stores in the nation. Prices paid by
Detroit consumers in 1949 have averaged about equal to
DETROIT
those in effect during the same months last year. Al­
Base of Employment—Not diversification, but rather though the differentials are not great, the higher income,
highly integrated mass production industries enjoying a lower sales, and equivalent prices may help to explain the
competitive advantage form the base of Detroit’s em­ 2.5 per cent rise in time deposits in Detroit’s weekly
ployment and income. The last decade has seen an in­ reporting member banks, and other evidences of saving in
crease of over 50 per cent in Detroit’s industrial employ­ the area, during the past year.
As a whole, the automobile industry so far has ex­
ment reflecting substantial growth, but also making the
perienced
no serious difficulty in selling the all-time
area even more dependent upon manufacturing. The
record
first-half
production of 1949 cars and trucks.
nature of the increase has been such as to give added
Third-quarter
output
schedules are expected to continue
importance to the production of automobiles, metals,
at
or
near
present
levels.
Much more uncertain are pros­
and machinery. Since 1939 employment in plants pro­
pects
for
the
fourth
quarter,
with the general expecta­
ducing automobiles and parts has increased by about
tion
that
sales
and
therefore
production will be below
55 per cent, primary and fabricated metals by nearly 70
current
levels.
However,
even
though sales remained
per cent, and machinery by more than 100 per cent.
More than half of Detroit’s manufacturing workers strong, work stoppages, either in the automobile plants
today are employed in plants producing automobiles or themselves or in coal or steel, if extended, could re­
parts, and at least another fourth are engaged in the duce production markedly.
The market situation in automobiles poses one of the
production of metals and machinery. Detroit continues
major
questions facing business leaders in Detroit and
predominantly to be a durable goods producer, and its
throughout
the nation. It is commonly pointed out that
prosperity still rests primarily upon the national andi
the
proportion
of over-age passenger cars is still very
world market for automobiles. It likewise is true that
great,
that
the
potential market has increased since
to a considerable extent national and world prosperity
prewar,
and
that
automobile prices, since the recent re­
depends upon the output of Detroit’s factories, so sig­
ductions,
are
not
out
of line with prices in general. There
nificant is the automobile industry as a consumer of raw
is little doubt that a large replacement demand will
and semifinished industrial materials.
Employment and Income—Although a definite firm­ continue if general business does not decline too severely.
ing occurred in June, a gradual slide-off in manufacturing Regular model changes unquestionably will be instituted
has characterized employment trends in Detroit since to stimulate it. Likewise, manufacturers have not ex­
December of 1948. This decline has occurred principally ploited fully the possibilities of the smaller and less
in the durable goods industries, especially machinery, deluxe models within their various lines. In any event,
although the drop has been quite general as elsewhere the actual size and timing of this replacement demand
in the District. However, the slackening trend took place will have important effects upon both the short-run
from an unusually high level of 600,000 workers at the and longer-run business prospects in Detroit, the Mid­
end of last year, so that the average number of factory west, and the nation.
workers in 1949—580,000 is still above the average for
MILWAUKEE*
the first half of 1948.
Largely because of fewer interruptions to production
Production of tractors, farm equipment, heavy indus­
but also because of wage rate increases last year, weekly
earnings of manufacturing workers have averaged about trial machinery, and auto parts may not make Milwaukee
eight per cent higher this year than in the comparable as “famous” as the output of beer, but it plays a much
period of 1948, and aggregate personal income from all larger part in determining the trend of business in this
third most important industrial area of the Seventh
sources likewise appears to be somewhat higher.
Steel Consumption—Detroit is the nation’s leading District. The base of employment and income in Mil­
industrial area in steel consumption. Nearly five million waukee not only depends heavily on durable goods protons, chiefly in the form of sheets, bars, and strips, are 4 For long-run trends in Milwaukee production, employment, and income, see Business
consumed by Detroit’s metalworking industries annually. Conditions, August 1948 and October 1948.
Page 4




duction, but more specifically is related to the output of
capital equipment for the nation’s factories, farms, mines,
and construction companies. Along with these industries,
however, Milwaukee is an important producer of food,
beverages, clothing, shoes, and hosiery. Its dependence
upon steel consuming industries approximates the pattern
of the Chicago area more closely than that of Detroit.
Employment, Income, Sales—Manufacturing employ­
ment in the Milwaukee area during the first half of 1949
has averaged 175,000, about seven per cent below the
level of the same period last year. The drop has occurred
chiefly in the machinery industries and in the foundries,
machine shops, stamping plants, and other steel fab­
ricators. However, some of the decline has been general
throughout all industries in much the same manner that
the slide-ofF has occurred elsewhere.
Weekly earnings of workers in Milwaukee plants like­
wise have declined during the last six months, but aver­
age earnings of production workers during the first half
of this year, nevertheless, are still fractionally above the
same period in 1948. Prices paid by consumers this year
also have averaged slightly higher than last, so that
employed industrial workers have had about the same
purchasing power in both years. However, reflecting the
greater decline in employment—and in part exceptionally
high levels of last year—department store sales are now
six per cent under those of last year. This drop is greater
than that in the Seventh District as a whole, and some­
what larger than the declines in other major Midwest
centers.
Steel Consumption—Milwaukee ranks third among all
industrial areas in the nation in steel consumed for metal­
working purposes. The area ranks first in consumption
of plate steel chiefly because of a huge output of large
dimension gas and oil pipe. Hot rolled sheets and bars
also are consumed in enormous quantities in Milwaukee
factories producing auto bodies and frames, farm tools, and
material handling equipment for industrial installation.
Tinplate consumption, of relatively small importance in
the area at present, seems likely to be greatly increased
when two large new container plants are completed and
in production.
Unlike Chicago and Detroit, Milwaukee turns out no
ingot steel. Proximity to Chicago and Gary mills largely
accounts for this fact, since more than two-thirds of the
area’s needs are supplied from this nearby source.
The Months Ahead,—As other Midwest centers, Mil­
waukee must look to a firming of demands for durable
goods to halt the current downward direction of general
business trends. More specifically, future market develop­
ments in automobiles and in capital equipment for farms
and factories will determine business levels in the period
immediately ahead. Competitively, most of the area’s
firms appear strong, but heavy capital goods have been
exceedingly sensitive in the past to cyclical changes in
general business expectations. Now that the unusual
demand situation of the postwar period is nearing an end,
and a decline in capital expenditures for industrial pur­
poses has set in, Milwaukee’s heavy industries may be
expected to reflect this sensitivity until such time as



the readjustment is completed and general confidence is
restored. As a sustaining factor the area can count on
continued high production of road building and electric
generating machinery. Furthermore, Milwaukee’s im­
portant food, beverage, apparel, and leather industries
appear to have passed through a large share of the read­
justment in employment and production and may well
act as a stabilizing force in future months.
INDIANAPOLIS

Economic Base—A decade of vigorous industrial
growth has brought about a 20 per cent increase in total
population, a 50 per cent rise in total employment, and
a 100 per cent gain in manufacturing employment in
Indianapolis. However, business and employment are
less dependent upon manufacturing than is true of the
other major industrial areas of the District. A broad
diversification of manufacturing production likewise
causes the area to rank well below the other major
centers in durable goods output and steel consumption,
but by the same token, results in a relatively lesser
local dependence upon hard goods markets.
A wide range of products, nevertheless, are made by
the 50 per cent of Indianapolis’ manufacturing workers
engaged in metalworking occupations. Body and engine
parts for the automobile industry; bearings, castings,
gears, and other machined parts for the industrial ma­
chinery; fabricated steel, particularly forgings and struc­
tural shapes; aircraft engines; containers; and fabricated
nonferrous metals comprise the area’s varied output.
Electronic products, including radios, phonographs, tele­
vision and telephone equipment, as well as furniture and
building materials are likewise important consumers of
metals. Production of telephone equipment will be greatly
increased by a large plant now under construction.
Employment, Income, Sales—Nonagricultural employ­
ment has undergone a gradual decline since January of
the current year. The average number of workers during
1949 is two and one-half per cent below the like period of
last year, but manufacturing employment is down more
than three per cent, and metalworking somewhat over
six. Weekly earnings of employed industrial workers are
about two per cent above last year, and prices paid by
consumers have averaged about the same as a year ago.
The record of department store sales in Indianapolis
was consistently better than that of other major District
cities during the early months of 1949, but recent weeks
have brought declines from year-ago levels which are
about comparable. However, the higher volume during
the early months has caused total sales for the first half
of the current year to be within two per cent of last year’s
level.
In building construction also Indianapolis is showing
a better 1949 record in comparison with last year than
most other large Midwest centers. The large increase
is accounted for in part by a few big industrial and
public projects, but residential starts are also 35 per
cent higher than last year, a significant increase in a
year of national decline.
Page 5

Interest Charge on the Public Debt
Annual Interest Payments Currently Over Five Billion Dollars
According to the Federal Budget Document for 1950,
interest payments on the public debt amounted to 5,188
million dollars in fiscal year 1948, and will rise to an
estimated 5,325 million dollars and 5,450 million in fiscal
years 1949 and 1950, respectively. An annual interest
charge of over five billion dollars has an important
bearing on many phases of the nation’s economy—the
distribution of income, the money and capital markets,
and the operations of the commercial banking system—
as well as on economic activity as a whole.
The “burden” of the interest charge, the nation’s abil­
ity to support a given amount of interest payment, is
another important consideration. The interest “burden”
is usually measured in terms of national income, the
1948 interest charge representing approximately 2.4 per
cent of the national income for that year. Another meas­
ure of the size and significance of the interest charge
lies in its relationship to other budget expenditures and
budget expenditures as a whole. Interest payments in
fiscal 1948 ranked as the third largest budget expenditure
by function, exceeded only by expenditures for national
defense and veterans’ services. The 1948 actual figure
constituted almost 15.5 per cent of total budget expendi­
tures, and the estimates for 1949 and 1950 set aside for
interest approximately 13 per cent of total budget ex­
penditures in each of those years. Cash interest payments
to the public—excluding discount accrual and payments
to trust accounts and Government corporations and in­
cluding all accrual on savings bonds redeemed—amounted
to 3,871 million dollars in fiscal year 1948, more than
10.5 per cent of total cash payments by the Government.
Unlike other budget items which, within certain limits,
may be varied in amount according to current require­
ments or may even be eliminated from the budget, the
interest cost incurred through previous financing opera­
tions constitutes a fixed obligation upon the Federal
Government, subject to change only as securities are
retired or refunded and as interest rates change.
AVERAGE DEBT RATE NOW OVER 2.2 PER CENT

In analyzing the current interest charge on the public
debt and its development over recent years, use is made
of two Treasury concepts known as the “computed an­
nual interest charge” and the “computed annual interest
rate.” The computed interest charge represents the
amount of interest payable annually on the debt out­
standing as of a given date. It is neither a measure of
interest actually paid nor an indication of the rate of
return or yield on bonds sold at various prices above or
below par. Rather, it indicates the amount of interest
accruing and payable under the terms of the existing
debt. The computed interest rate is the ratio of the
Page 6




computed charge to the total amount of interest-bearing
debt outstanding, and is, in a sense, an average interest
rate on the debt. The interest charge and the computed
rate reflect not only the magnitude of the debt, but the
composition of the debt and the level of interest rates as
well.
The computed interest charge on the 249.9 billion
dollars of interest-bearing public debt outstanding May
31, 1949 amounted to 5,584 million dollars, with a cor­
responding computed interest rate of 2.234 per cent.
Marketable debt, which constituted 62 per cent of the
total interest-bearing debt, accounted for 55 per cent
of the total interest charge. Marketable issues carried
a lower average rate, 2.001 per cent, than any of the
other major debt classes—nonmarketable debt, special
issues, or guaranteed debt. Within the marketable debt
classification, Treasury bills and certificates of indebt­
edness, totaling some 40 billion dollars or over one-fourth
of outstanding marketable issues, accounted for only 16
per cent of the interest charge on marketables and carried
Table 1
COMPARISON OF OUTSTANDING INTEREST­
BEARING PUBLIC DEBT, COMPUTED INTEREST
CHARGE, AND COMPUTED INTEREST RATE,
BY TYPE OF DEBT AT SELECTED DATES
(Dollar amounts in millions)
Item

Computed Annual
Debt
Outstanding Interest Charge

Computed Annual
Interest Rate
(Per Cent)

June 30, 1940
Direct marketable debt:
Treasury bills...............
Certificates....................
Treasury notes.............
Treasury bonds...........
Other bonds..................
Total...........................
Nonmarketable debt....
Special issues....................
Guaranteed debt.............
Total debt

6,383
26,555
196
34,436
3,167
4,775
5,498
47,874

80
772
5
858
92
145
109
1,203

1.256
2.908
2.701
2.491
2.908
2.870
1.978
2.514

February 28, 1946
Direct marketable debt:
Treasury bills...............
Certificates....................
Treasury notes.............
Treasury bonds............
Other bonds..................
Total...........................
Nonmarketable debt....
Special issues....................
Guaranteed debt.............
Total debt.....................

17,032
41,413
19,551
121,635
180
199,810
57,206
20,897
539
278,451

64
362
248
2,827
5
3,506
1,451
522
7
5,486

.oio
1.270
2.324
2.675
1.755
2.536
2.498
1.349
1.970

11,544
28,710
3,596
111,440
162
155,452
62,523
31,915
20
249,909

136
346
49
2,574
4
3,110
1,646
828

May 31, 1949
Direct marketable debt:
Certificates....................
Treasury notes.............
Treasury bonds...........
Other bonds..................
Total...........................
Nonmarketable debt.. . .
Special issues.....................
Guaranteed debt.............
Total debt.................
•Less than $500,000.

.029

1,302

5,584

1.177
1.206
1.375
2.310
2.654
2.001
2.600
2.593
2.345
2.234

an average rate of 1.197 per cent.
million dollars. New bond issues offered during these
A computed interest rate of 2.234 per cent on total years amounted to 102.2 billion dollars. Of this amount,
direct and guaranteed debt compares with a rate peak at 95.8 billion was offered for cash, increasing the total
fiscal-year-ends in the last three decades of 4.339 per interest charge by the amount they carried. New bonds
cent reached in June of 1921. From that date the average offered in exchange for maturing issues, other than Treas­
debt rate declined steadily, reaching a fiscal-year-end ury bonds, carried an interest charge of 66 million
low of 1.92S per cent at the end of 1944, and increasing dollars as compared with the 50 million dollar charge
gradually again in the last five years. In Table 1, a on maturing issues. Therefore, considering all exchange
comparison is made of the computed interest charge, the transactions involving either new or maturing bond issues
average interest rate, and total debt outstanding in the in those years, there was a net reduction in the interest
last few years. The selected dates in the table mark off charge of 73 million dollars.
two distinct periods—from June 30, 1940, a pre-World
Perhaps even more important than the establishment
War II date, to February 28, 1946, the peak date in out­ of the rate pattern alone in reducing the average interest
standing public debt, and from March 1, 1946, to the rate was the substantial use made in the war years of
most recent available date, May 31, 1949. On June 30, short-term securities bearing interest rates well below
1940, the interest charge on the 48 billion dollars of the average rate on outstanding issues. In mid-1940,
outstanding debt was 1,203 million dollars and the aver­ short-term marketable debt consisted of Treasury bills'
age rate was 2.514 per cent. By February 28, 1946, the only and amounted to 1,302 million dollars, approximately
debt had risen to 278 billion dollars and the interest 3.7 per cent of total marketable debt. On February 28,
charge to 5,486 million while the average rate had dropped 1946, short-term issues amounted to 58,445 million dol­
to 1.970 per cent.
lars, or almost 30 per cent of the marketable debt. The
The decline which occured in the average debt rate average interest rate on these short-term issues was
during the years of financing World War II was in only .7 of one per cent, and thus exerted a strong down­
marked contrast with the experience of World War I, ward pull on the average rate on the total debt.
when the interest rate turned sharply upward. Unlike the
situation in World War I, interest payable to all lenders
POSTWAR INTEREST POLICY
on issues sold since early 1941 has been fully taxable for
the recipient and consequently represents an even lower
I he period since February 28, 1946, has been charac­
borrowing cost than a simple rate comparison between terized by forces operating almost in reverse of those
the two war periods would show.
in the war years. As Table 1 indicates, from early 1946
through May 1949, outstanding debt declined by ap­
WARTIME INTEREST POLICY
proximately 29 billion dollars, the computed interest
charge increased by almost 100 million dollars, and the
Two important features of the financing of World War
II made it possible for the Treasury to increase its out­ average interest rate rose from 1.970 per cent to 2.234
standing debt so tremendously at a declining average per cent. The rise in the computed rate reflected higher
average rates in each of the four major classes of debt.
rate of interest—one affecting the rate level, the other The
rise in the rate on marketable issues reflected in­
the debt structure. First, early in 1942 the Treasury and
creases
in the bill and certificate rates, partially offset by
Federal Reserve established a stable pattern of rates on
the refunding of maturing bonds with relatively high
debt issues, commonly known as the interest curve,
which permitted a range in interest rates from Z& of one coupon rates into shorter-term, lower rate issues. The
Treasury bill rate was released from the % of one per cent
per cent on 90-day Treasury bills to 214 per cent on wartime level in July of 1947, and the certificate rate
long-term bonds. Throughout the war years, new issues
was permitted to rise from % of one per cent in the
were offered at these established low rates.
last quarter of 1947. The effect of the relaxation of
Moreover, most of the refunding operations at the
controls on short-term rates on the average rate on
new rates were for securities originally issued at higher marketable debt did not show up, however, until well
rates in previous years. On June 30, 1940, for example, into fiscal year 1948. One of the main factors contribut­
there were some 26.6 billion dollars of Treasury bonds
ing to the rise in the average rate on marketable debt
outstanding, carrying an average interest rate of 2.9 per early in the period was the retirement of large amounts
cent. Between June 30, 1940, and February 28, 1946, of short-term debt bearing the relatively lower rates of
eight of these bond issues, amounting to 7.5 billion
interest. Although the average rate on marketable issues
dollars, matured. Of this 7.5 billion of maturing issues,
has increased in these recent years, there has been con­
1.7 billion dollars was paid off in cash. The remaining
currently a rather marked decline in the interest charge
5.9 billion dollars of maturing bonds, which had carried on this class of debt—almost 400 million dollars—reflect­
an interest charge of 191 million dollars and an average ing to a large degree the debt retirement and refunding
rate of 3.2 per cent, was refunded into an equal amount operations which have taken place.
of various new issues which had an annual interest charge
To the extent that the interest charge on total debt
of 102 million dollars and an average rate of 1.7 per cent. did continue to increase since the peak date in out­
Thus, as a result of these exchange operations, the in­
standing debt, it was a result of accelerated growth in
terest charge on the debt was reduced by some 89
two segments of the debt which have tended to carry



Page 7

relatively high interest rates—special and nonmarketable
issues. Because of increased available funds in Govern­
ment trust accounts which must by law be invested
in Government securities, the Treasury in the years
between February 28, 1946 and the end of May 1949,
increased the amount of outstanding special issues to
Government trust accounts by some 11 billion dollars
to a level of almost 32 billion. Cash obtained by the I reasury through the issuance of special obligations was to a
large degree used to retire marketable debt. The interest
rates on special issues are largely established by statute,
either directly or indirectly in terms of the earnings re­
quirements of the particular funds, and tend to be as
high or higher than the average rate on the entire debt.
As a result of this increase in the amount of these issues,
the interest charge on specials rose by more than 300
million dollars—almost equaling the decline in the interest
charge on marketable debt. On May 31, 1949 special
issues outstanding constituted over 12.5 per cent of total
debt, but because of relatively high rates accounted for
almost 15 per cent of the total interest charge. The in­
crease in the interest charge which resulted from non­
marketable debt operations reflected largely a growth
of more than 5 billion dollars in the amount of out­
standing nonmarketable issues, including the issuance in
this period of new nonmarketable securities—Treasury
bonds, investment series, and armed forces leave bonds—
and the increase in accruals on United States savings
bonds owing to a large volume of such bonds approach­
ing maturity and reaching higher accrual brackets. Of
some importance also was the rise in the rate paid on
Treasury savings notes from 1.07 per cent to 1.40 per cent.
INTEREST RECEIVABLE BY LENDERS

The effect of interest payments upon the economy is
dependent not only upon the total amount of such pay­
ments, but upon their distribution among the various ele­
ments of the economy. It is, therefore, necessary to analyze
the debt charge from the standpoint of the various lending
agencies. In Table 2, a comparison is made of debt hold­
ings, interest receivable, and average rate of interest for
each of the major classes of lenders which report in the
Treasury Department’s monthly survey of debt owner­
ship. The table covers three dates—June 30, 1941, the
earliest date for which detailed information on owner­
ship data is available, February 28, 1946, the date of
the debt peak, and March 31, 1949, the most recent
date for which information is available.
The change in the amount of interest any one group
receives reflects, as does the change in the total interest
charge, issuance or retirement of debt by the Treasury,
debt structure, and interest rate levels, plus one other
factor—amount of sales or acquisition of securities by
the lending group. Just prior to the outbreak of war in
mid-1941, commercial banks were already the largest
single holder of Government debt with more than 35
per cent of outstanding securities in their portfolios. The
interest receivable on the 19 billion dollars of Govern­
ments held by commercial banks amounted to approxi­
Page 8




mately 389 million dollars—or about 29 per cent of the
total charge. Although only slightly more than half of
commercial bank-held debt was in Treasury bonds, the
interest on bonds accounted for three-fourths of total
interest receivable by these institutions. “All other” in­
vestors, a classification which includes all nonfinancial
businesses, individuals, savings and loan associations, etc.,
received the second largest portion of the interest charge,
almost one-third of which was attributable to nonmarket­
able debt holdings. Government agencies and trust funds
and the Federal Reserve Banks together ranked third.
Life insurance companies accounted for about 10 per
cent of total interest payable but their holdings carried
the rate of interest next highest to the trust account rate
which is weighted by higher rates on special issues.
The tremendous wartime deficit, on the one hand,
and the small supply of private security issues and the
limited demand for loans on the other, resulted in a
sharp shift in the asset distribution, into Government
securities, on the part of most lending and investing
institutions during the war period. Between June 30,
1941, and February 28, 1946, commercial bank partici­
pation in war financing increased their debt holdings
approximately 68 billion dollars to a level of 87 billion.
Almost 22 billion dollars of the gain in bank holdings
was in % per cent certificates of indebtedness, while
Treasury bonds accounted for more than 35 billion. As a
result of this wartime increase in security holdings, in­
terest payable to commercial banks rose to some 1,450
million dollars on the date of the debt peak, but largely
because of heavy investment in short-term issues, the
Table 2
COMPARISON OF GOVERNMENT SECUR1 TY
HOLDINGS, INTEREST CHARGE, AND AVE1RAGE
INTEREST RATE, BY CLASS OF OWNERS HIP
AT SELECTED DATES
(Dollar amounts in millions)
Item

Holdings of interest-bearing debt:
Mutual savings banks.........................
Life insurance companies....................
Fire, marine, and casualty insurance
companies............................................
U. S. Government agencies and
trust funds, and Federal Reserve
Total debt outstanding...................
Computed annual interest charge:
Commercial banks................................
Mutual savings banks.........................
Life insurance companies....................
Fire, marine, and casualty insurance
companies............................................
U. S. Government agencies and
trust funds, and Federal Reserve
Total interest charge.......................
Computed interest rate (in per cent):
Commercial banks................................
Mutual savings banks.........................
Life insurance companies....................
Fire, marine, and casualty insurance
companies............................................
U. S. Government agencies and
trust funds, and Federal Reserve
All other investors................................
Average rate on total debt............

1941

February 28
1946

March 31
1949

19,187
3,361
5,517

86,613
11,099
21,185

54,845
11,647
16,396

1,353

3,019

4,236

10,665
14.665
54,748

50,861
105,675
278,452

59,352
103,115
249,573

389
88
151

1,451
256
503

1,091
273
400

36

68

92

292
380
1,336

855
2,354
5,486

1,329
2,388
5,572

2.028
2.618
2.737

1.675
2.303
2.372

1.989
2.344
2.439

2.683

2.256

2.174

2.738
2.590
2.438

1.681
2.228
1.970

2.315
2.315
2.233

averag6 rate on bank holdings dropped to 1.6/5 per cent,
tor all classes of debt owners the average rate on Gov­
ernment holdings, at the end of February 1946, was
lower than in mid-1941. Insurance companies retained
the highest average rate of private holders. The rate
on holdings by Government trust funds and Federal
Reserve Banks showed the sharpest interest rate drop
because of the Reserve System’s heavy acquisition of
low-rate Treasury bills. The largest recipient of interest
payable on the 1946 date was “all other” investors.
In the period between February 28, 1946 and March
31, 1949, net debt retirement amounted to 29 billion
dollars, but commercial bank holdings of Governments
dropped by almost 32 billion dollars. Certificate hold­
ings alone declined by 13 billion dollars and Treasury
note holdings by some 12 billion. Since bank holdings of
bonds dropped by only 6 billion dollars, bank portfolios
consisted in early 1949 of a much larger proportion of
longer-term, relatively higher-rate issues, and so, al­
though there was a decline in interest charge on bankheld Governments, the average rate on them rose to
1.989 per cent. In spite of this rise, the average rate for
bank holdings was the lowest of all ownership classes.
Life insurance companies experienced a decline in
their Government security holdings of 5 billion dollars,
second in size only to the commercial bank portfolio
drop. Almost the entire amount of the reduction in these
holdings consisted of bank-restricted Treasury bonds,
amounting to 3.5 billion dollars, plus 1.5 billion of eligible
bonds which were largely sold to the Federal Reserve
Banks under the bond support program, and which
account, in part, for the 9 billion dollar gain in holdings
by Government agencies and the Reserve Banks. Mutual
savings banks and fire and marine insurance companies
made gains in their debt holdings as well as in their
shares of the total interest charge. The holdings of “all
other” investors since February 1946, declined by more
than two billion dollars, but the interest charge on their
holdings rose almost 35 million dollars. Mostly responsible
for this was the accrual of interest on savings bonds and
the rise in the certificate rate. While certificate holdings
by this class declined a billion dollars, the higher rate
on new certificates resulted in a rise in the interest charge
on certificates held by “other” investors of almost 50
million dollars.
As of the end of the first quarter of 1949, 20 per cent
of the 5.6 billion dollar interest charge on the public
debt was payable to commercial banks, as compared
with a 30 per cent share in mid-1941, about 25 per cent
to Government trust funds and Federal Reserve banks,
10 per cent to insurance companies, 5 per cent to mutual
savings banks, and the remaining 40 per cent to “all
other” investors. Thus, only “other” investors held a
larger proportion of the debt than in 1941 and received
a larger share of the interest charge, almost two-thirds
of which resulted from vastly increased holdings of sav­
ings bonds. Of the 1,355 million dollars of interest pay­
able on bank-eligible bonds, about two-thirds was at­
tributable to commercial bank holdings; and of the 449
million of interest payable on bills and certificates, 137
million, or over 30 per cent, went to commercial banks.



CASH INTEREST PAYMENTS

In evaluating the amount of interest actually pay­
able by the Government each year, distinction must be
made between cash and non-cash interest charge and
between interest accrual and interest paid. Of the cur­
rent 5.6 billion dollar interest charge, approximately 2.7
billion dollars represents non-cash interest “payable.”
Discount accrual on Treasury bills and United States
savings bonds is the most important non-cash item,
amounting to some 1.7 billion dollars. The remaining
1.0 billion of the non-cash figure consists of interest
“payable” to Government trust funds—over 800 million
on special issues and the remainder on public issues held
by these accounts. In the case of savings bonds, except
Series G bonds, which are sold at par, discount accrues at
a varying, gradually increasing rate—an estimated 1,400
million dollars for calendar year 1949—but becomes pay­
able when such bonds are redeemed. Actual cash interest
payment on savings bonds occurs only when bonds mature
or are redeemed before maturity. Only Series D bonds,
among savings bonds now outstanding, are currently
maturing.
Although interest payments to the Federal Reserve
Banks on Government security holdings are considered
cash payments, a considerable part of the interest costs
on these securities will return to the Government, since,
in effect, about 90 per cent of Federal Reserve Bank
earnings are currently being paid into the Treasury as
miscellaneous receipts. Such Reserve System payments
to the Treasury amounted to 75 million dollars in fiscal
year 1947, the first year the requirement went into
effect, and about 100 million dollars in fiscal year 1948.
The Budget Document for 1950 estimates Federal Re­
serve payments to the Treasury of 175 million dollars
in fiscal 1949 and 250 million in 1950,
Despite the reduction in interest-bearing debt which
has taken place in recent years, there is no indication
as yet that the interest charge on the total public debt
will decline in the next few years. Budget estimates for
interest payments in fiscal year 1950 show a continued
upward trend.
Discount accrual on savings bonds will continue to
grow at an accelerated rate as bonds purchased during
the war approach maturity, and as additional sales in­
crease the size of that portion of the debt which carries
the highest average interest rate. Further shifting of the
debt structure from relatively low-rate marketable issues
to higher rate special issues to Government trust funds
will also tend to maintain the interest charge and the
average rate at a higher level. Continuance by the
Treasury of its present policy of refunding maturing
longer-term issues into short-terms, particularly certificates
of indebtedness, will tend to restrain the interest charge
on the marketable debt and interest income for the
major holders of marketable issues. The apparent end
of the postwar period of public debt reduction and the
beginning of a new rise in the debt in the current re­
cession will also mean an increasing interest charge in
the coming years.




SEVENTH FEDERAL

IOWA
ILL - INO

RESERVE DISTRICT