Full text of Business Conditions (Federal Reserve Bank of Chicago) : July 1950

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THE

A REVIEW BY

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CONDITIONS

FEDERAL RESERVE BANK OF CHICAGO

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JULY 1950

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Consumer Credit Reaches New Peak
Instalment Credit Paces Rise to New Record Highs
Consumer credit is playing an important part in the
current business boom. Instalment credit has continued
to increase rapidly, countering the seasonal decline in
charge account balances, with the result that total out­
standings were only slightly below the 1949 year-end
level at the end of April and doubtless passed this pre­
vious peak during May. Moreover, the very high level of
automobile sales, a reasserted demand for furniture and
appliances, and the effects of generally eased credit terms
promise a substantia] further rise in consumer credit dur­
ing the months immediately ahead.
Continuing the steep upward trend of previous post­
war years, total consumer credit increased by nearly 2.5
billion dollars during 1949, despite a more than seasonal
decline in the early months of the year. Furthermore,
nearly all of the growth was concentrated in instalment
credit and as such represented a substantial net addition
to consumer resources for purchase of durable goods, in­
cluding automobiles, home appliances, television sets, and
furniture. For the postwar period as a whole, consumer
credit has increased by more than 12 billion dollars, 70
per cent of which has been in instalment credit.
The rapid increase in consumer credit from 6.6 billion
dollars at the end of 1945 to 18.8 billion dollars at the
end of 1949 has caused concern in some quarters regard­
ing its soundness and stability. Proponents of the argu­
ment that credit is becoming too high point to the fact
that outstandings are 85 per cent above the prewar peak
established in September 1941 and 144 per cent above
the level attained in 1929. They believe that main­
tenance of payments on this amount of indebtedness
will become a heavy burden if personal incomes fall off.
Furthermore, they fear that eased credit terms are tend­
ing to attract marginal risks, which are likely to result
in increased delinquencies and losses.
Other observers express belief that the level of con­
sumer credit is not unduly high in relation to other meas­
ures of economic activity and consumer well-being. In
their opinion, increased employment and greatly expanded
personal incomes make possible a much greater volume
of credit than could have been supported at any time in
the past. Also, the large stock of liquid assets held by in­
dividuals constitutes an additional safeguard in assuring
the soundness of a large amount of indebtedness. Regard­
less of the relative merits of these divergent views, it is
clear that avoidance of any sharp decline in credit is im­
portant to business activity.

at any particular time. Extension of new credit adds to
the purchasing power of consumers, while repayment of
indebtedness reduces the amount of current income avail­
able for spending. Since a change in the level of credit
outstandings reflects the interaction of continuous flows
of new credit extensions and repayments, an increase in
indebtedness results in a net addition to purchasing pow­
er, while a decline in outstandings indicates a correspond­
ing reduction in “free” income over what it otherwise
would have been.
Therefore, a change in the total of credit outstandings
has a dynamic effect on spending. If an increase in con­
sumer purchasing power afforded by an expansion in
credit is to be maintained, it is necessary that indebted­
ness continue to increase at about a constant rate. A
leveling off in the total of consumer credit outstandings
will result in a decline in purchasing power from this
source, and a reduction in indebtedness will result, of
course, in a greater decline.
A large part of the consumer credit extended is of the
instalment type, i.e., is repaid in regular instalments over
a period of time. Most of the instalment credit extended
is for purchase of consumers durable goods, such as auto­
mobiles, radio and television sets, home appliances, and
furniture. It is this type of consumer credit which in the
past has fluctuated most violently with the business cycle,
primarily because of the postponable nature of most
consumer durable goods purchases. Historically, instal­
ment credit has increased rapidly during periods of high
and rising economic activity. The additional purchasing
power obtained through expanding credit has stimulated
(Continued on Page Eight)

TOTAL CONSUMER CREDIT OUTSTANDING
BY MAJOR PARTS
SELECTED DATES, 1941-50
(Dollar amounts in millions)
1941

Dec.
1945

Dec.
1946

Dec.
1948

Dec.
1949

April
1950

Cash loans................................

6,215
4,007
2,216
1,791
2,208

2,364
942
227
715
1,422

4,000
1,648
544
1,104
2,352

8,600
4,528
1,961
2,567
4,072

10,890
6,240
3,144
3,096
4,650

11,321
6,513
3,478
3,035
4,808

Service credit..........................

3,859
1,712
1,549
598

4,273
1,981
1,520
772

6,191
3,054
2,263
874

7,719
3,854
2,902
963

7,889
3,909
2,988
992

7,308
3,241
3,061
1,006

6,637 10,191

16,319

18,779

18,629

Type of Credit

Total consumer credit............... 10,074

Per Cent of Total

CONSUMER CREDIT AND BUSINESS ACTIVITY
Total non-instalment credit...

The significance of consumer credit to the business
community lies primarily in the direction and rate at
which it changes, rather than in the amount outstanding



39.8
21.9
38.3

14.2
21.4
64.4

16.2
23.1
60.7

27.7
25.0
47.3

SOURCE: Board of Governors of the Federal Reserve System

33.2
24.8
42.0

35.0
2o.8
39.2

A Review of the Savings Bond Program
Heavy Maturities Begin in 1952
A one-quarter trillion dollar Federal debt is one of the
legacies of World War II. More than one-fourth of this
public debt is in the form of nonmarketable securities
held by millions of individuals and institutions. The
major portion of this nonmarketable debt is comprised of
United States Savings Bonds, approximately 57 billion
dollars of which are now outstanding.
A concerted effort has been made to sell a maximum
of savings bonds and to keep voluntary redemptions to
a minimum during the war and postwar years. As a re­
sult of the success of this effort, the Treasury is now con­
fronted with the new but inevitable problem of refinanc­
ing the large-scale maturities of savings bonds, which will
begin in 1952 and will continue in heavy volume for sev­
eral years thereafter. The decisions which will have to
be made in meeting the maturity problem hinge to a
great extent upon the nature of this type of security and
its role both as an instrument of Government finance and
as a savings medium.
After the end of war financing, Series E, F, and G
Savings Bonds were retained as public debt instruments
with slight modifications in terms. Special sales cam­
paigns, such as the Opportunity Drive from May 16-June
jO, 1949, and the Independence Drive, have been con­
ducted from time to time. The Secretary of the Treasury
has described the objectives of savings bond sales pro­
motion in the postwar years as “maintenance of the wide­
spread distribution of the debt, to encourage thrift,” and
as an “aid in combating the strong inflationary pressures
which existed in the economy during a large part of the
postwar period.”

loan drives and the pay roll savings plan, annual bond
sales almost immediately tripled. Even though redemp­
tions also expanded substantially, net Treasury cash re­
ceipts in the war years rose to over 12 billion dollars in
1943 and to a peak of 12.7 billion in 1944.
There was widespread expectation that savings bond
sales would contract and that redemptions would soar
after the war. This in fact did happen, although not
nearly to the extent anticipated. In 1945 bond sales
dropped from the 16 billion dollar peak of the preceding
year to a level of about 13 billion while redemptions in­
creased to some 5.5 billion dollars, netting the Treasury
cash receipts of not quite 7.5 billion. In 1946, the first
full peacetime year, sales of savings bonds dropped 43 per
cent below the amount sold in 1945. At the same time
annual redemptions reached a peak of more than six
billion dollars, with the result that net cash receipts de­
clined to about a billion dollars. Since 1946 there has
been a decline in the amount of annual redemptions in
spite of the fact that the figures for these years are
weighted by small but steadily progressively growing
amounts of maturities as distinct from voluntary pre­
maturity redemptions.
In the years since 1946 annual net cash receipts from
savings bonds have ranged from one to 2.5 billion dollars,
with the latter figure reflecting the special one billion
dollar offering of F and G Bonds during 1948 without
regard to annual limitation, and the added provision per­
mitting commercial banks to acquire up to $100,000 of
the bonds. Sales and redemption experience during 1949
yielded the smallest net cash receipts since the prewar
era. Furthermore, net receipts from all bonds have been

SAVINGS BONDS AS A SOURCE OF TREASURY CASH

Savings bonds, all series combined, have constituted
a substantial net source of cash to the Treasury from
their inception in 1935 through the first five months of
1950, as is indicated in Table 1. In terms of cash bor­
rowing, the Treasury in the 15 years of the savings bond
program has borrowed a total of approximately 88 billion
dollars. Of this amount, it has had to repay to date—
excluding accrued discount, which is here regarded as a
regular budget cost1—about 34 billion dollars. Of the total
repayments, an estimated 2.5 billion dollars have been
for maturing issues.
During the first stage of the savings bond program,
from 1935 through 1940, sales and redemptions were both
relatively modest in amount. With the introduction of
the new Series E, F, and G Savings Bonds in 1941, a
sharp increase in sales appeared. Upon the entry of this
country into the war and the inauguration of the war
1 See footnote to Table 1.




TABLE 1
SALES AND REDEMPTIONS OF U.S. SAVINGS BONDS
ALL SERIES, EXCLUDING ACCRUED DISCOUNT1
(In millions of dollars)
Calendar Year

Sales

Redemptions

Treasury
Cash Receipts
Net

1935-1940...............
1941...............
1942...............
1943...............
1944...............
1945...............
1946...............
1947................
1948...............
1949...............
Jan.-May 1950...............
Total.............

3,449
3,036
9,157
13,729
16,044
12,937
7,427
6,694
7,295
5,833
2,650
88,251

369
162
343
1,576
3,321
5,472
6,243
4,889
4,840
4,708
2,165
34,088

3,080
2,874
8,814
12,153
12,723
7,465
1,184
1.805
2,455
1,125
485
54,163

lThe figures shown in this table and in table 2 differ from the savings bond fig­
ures carried in the public debt statement in that all accrued interest on Series A
to F Bonds (Series G Bonds carry no accrual) still outstanding, as well as in­
terest actually paid on bonds redeemed, has been excluded. This has been done
in order to obtain net cash receipts resulting from the savings bond program.
Accrued discount actually paid is treated here as a Budget expenditure, that is,
a cost of the savings bond program rather than a public debt expenditure, similar
to the way interest on other debt items is handled.
SOURCE: Treasury Bulletin.

Page 1

about 300 million dollars below 1949 during the first five
months of this year, reflecting both smaller sales and in­
creasing redemptions and maturities. Although the rate
of growth in the amount of savings bonds outstanding
has slackened markedly since 1944, these issues, together
with other nonmarketable debt, produced the only net
debt receipts in most of the postwar years. Savings bonds
provided an important part of the funds used for the re­
tirement of bank-held public debt.
COST OF SAVINGS BOND PROGRAM

Carrying an annual yield, if held to maturity, of 2.9
per cent for Series E Bonds, 2.53 per cent for F Bonds,
and 2.50 per cent for G Bonds, savings bonds represent
the most expensive current form of publicly-held Federal
debt. Since the E and F Series are “appreciation-type”
bonds, interest accrual represents a non-cash expenditure
to the Treasury until the bonds are actually redeemed or
matured. Because all three series of savings bonds carry
reduced yields if redeemed prior to maturity, however,
the actual annual cost of these issues so far has been con­
siderably less than the above rates indicate.
According to figures released by the Treasury, of all
the Series E Bonds issued since the beginning of 1942,
an average of approximately 19 per cent have been re­
deemed by the end of the first year after purchase and
have thus earned no interest at all. Another 10 per cent
have been redeemed by the end of the second year and
have thus entailed a cost of approximately nine-tenths
of one per cent. By the end of the fifth year another 16
per cent have been redeemed, costing an average of 1.5
per cent per annum.
The average annual interest cost of postwar savings
issues considered alone is even lower because of the ac­
UNITED STATES SAVINGS BONDS OUTSTANDING BY SERIES
(AT CURRENT REDEMPTION VALUES)
APRIL 30, 1941 - MAY 31, 1950
END OF MONTH FIGURES
BILLIONS OF 00LLARS

BILLIONS OF DOLLARS

6°|

T”

TOTAL
ALL SERIES.

TABLE 2
COMPARISON OF SALES AND REDEMPTIONS OF
SAVINGS BONDS, BY SERIES1, CALENDAR YEARS
1945-MARCH 31, 1950
(In millions of dollars)
Item

Sales:
Series A-D. .

Total.............
Redemptions:

Series G. ...
Total.............
Net Sales:

Series G. .. .
Total.............

1045

1946

1947

1948

1949

1st Quarter
1950

*
9,822
595
2,520
12,937

*
4,466
325
2,637
7,427

4"
4,085
342
2,267
6,694

4,224
498
2,573
7 295

4,208
233
1,392
5,833

1,127
96
590
1,812

179
4,925
104
264
5,472

302
5,330
185
426
6,243

367
3,813
196
512
4,889

436
3,575
211
618
4,840

631
3,274
189
613
4,708

359p
810p
47p
158
1,373

-179
4,897
491
2,256
7,465

-302
-864
140
2,211
1,184

-367
272
146
1,755
1,805

-436
649
287
1,955
2,455

-631
934
44
779
1,125

-359
317
49
432
439

^ee footnote 1 to Table 1.
pPreliminary.
♦Less than $500,000.
SOURCE: Treasury Bulletin.

celerated redemption of Series E Bonds after the end of
the war. Of the series sold in 1945, 28 per cent were re­
deemed by the end of the first year and thus carried no
interest charge. Since that time there has been some
decline in the redemption rate, and of the series sold in
1948, approximately 20 per cent were redeemed in 1949.
Hence, for the substantial dollar volume of Series E
Bonds which have been redeemed in the early years after
sale, the actual interest rate paid has been considerably
less than that for comparable marketable issues.
Series F and G Bond redemptions have not only been
much smaller but have proceeded at a much slower pace
through the age of the bond. For the “typical” F or G
issue, only two per cent of the total is redeemed by the
end of the first year and another 13 per cent by the end
of the fifth. Therefore, the effective interest rate on these
series tends to be much closer to their nominal rate than
in the case of Series E Bonds. The total interest cost of
the savings bond program (other than Series G Bonds)
is indicated by the following data, which show in millions
of dollars the interest accrued annually to date on savings
bonds, compared with the amount actually paid on re­
deemed or matured issues:
Calendar Year

---- J

SERIES

SERIES A-D

Page 2



SERIES F^

1935-1942
1943
1944
1945
1946
1947
1948
1949
Jan.-May 1950
Total

Total Accrued
Discount

303
169
295
484
640
742
872
981
428
4,914

Accrued Discount
Paid on Redeemed
Issues

22
9
20
86
185
237
303
394
238
1,494

«

Thus, on all savings bonds other than Series G sold
through May 1950, interest in the amount of 4.9 billion
dollars has accrued, and of this amount approximately
1.5 billion has been paid off on redeemed issues. This
leaves approximately 3.4 billion of unpaid interest ac­
crued on issues now outstanding. As these issues ap­
proach maturity, the rate and amount of accrual will
continue to grow until the large amounts of bonds sold
in the peak war years mature and are repaid.
Interest on Series G Bonds is paid semiannually and
has constituted a major part of the cash interest pay­
ments on total savings bonds to date. Payments on this
account amounted to approximately 400 million dollars
in fiscal year 1949.
Finally, added to the cost of interest must be the con­
siderable expense involved in processing sales and re­
demptions of savings bonds, which are in registered form
and number over one billion pieces. In terms of volume
of work the savings bond program represents the largest
administrative problem of the Bureau of the Public Debt.
Expenses must also include payments to the thousands
of paying agents.
SAVINGS BONDS AS A SAVINGS OUTLET

Looked at from the point of view of the lenders—the
American public—as distinguished from the borrower—the U.S. Treasury—, the savings bond program has had
a profound effect upon flow of individual savings. As a
result of the E Bond program, a great many people in
the lower and medium income brackets have become
owners of securities for the first time. In consequence,
the Government finds itself in debt to a group of creditors
whose future reactions are singularly difficult to foresee.
The appeal to the smaller investor to lend his money
to the Government has been confined during and since
the war period largely to Series E Savings Bonds. This
was done in a positive way by concentrating the mass
sales appeal on these bonds and in a negative way by
confining the denominations of marketable securities to
a minimum of $500. Probably the most significant “dis­
covery” made by the Treasury in the war finance years
was the pay roll deduction plan, through which almost
one-half of total E Bond sales in 1944—the peak year in
TABLE 3
PERCENTAGE DISTRIBUTION OF SALES OF
SAVINGS BONDS BY DENOMINATION*
FISCAL YEARS 1945-1949
Denomination at Maturity Value
Fiscal Year

$10 and
$25

$50 and
$100

$200 to
$10,000

1945...............................

26.9

28.5

44.6

1946...............................

22.5

21.6

55.9

100.0

1947...............................

12.2

14.4

73.4

100.0

1948...............................

10.9

15.9

73.2

100.0

1949...............................

10.4

15.4

74.2

100.0

♦Figures based on dollar amounts at issue price.
SOURCE: 1949 Annual Report of the Secretary of Treasury.




100.0

E Bonds—was made. It has been estimated that there
were from 25 to 28 million people participating in the
pay roll savings plan in 1944, with automatic monthly
salary deductions amounting to almost 500 million dollars.
A measure of the wartime success of the bond program
in absorbing excess consumer purchasing power is indi­
cated by the fact that in the five years, fiscal 1941 to
1945, about 4.5 per cent of disposable personal income
was absorbed by net sales of E Bonds.
Since the end of the war savings bond sales as well
as total personal savings have continued at comparatively
high levels in spite of considerable declines from their
wartime peaks. It was expected that liquid savings would
drop from the wartime high as an increasing supply of
goods became available, and in 1946 a sharp contraction
in bond sales and total new savings took place as con­
sumers increased spending to satisfy their deferred de­
mands. The character of total individual savings also
shifted, a smaller proportion going into the liquid or
near-money category and more into home construction
and other durable goods. Savings made a slight recovery
in 1947 and have continued at about the same level since
that year. Savings bond sales, on the other hand, con­
tinued downward until 1948 when a slight rise occurred
largely as a result of the special “Opportunity” Drive.
POSTWAR SHIFTS IN HOLDINGS

Recent years have brought a significant change in the
concentration of ownership of savings bonds. During the
war years a large proportion of savings bond purchases
was made by wage earners in industrial areas, who en­
joyed sizable increases in income at a time when the sup­
ply of consumer goods was limited. There is evidence
that the postwar experience with the savings bond pro­
gram, particularly E Bonds, largely reflected a reduction
in holdings by the smaller investor. Apparently, the E
Bond is being purchased to an increasing extent by mid­
dle and upper income groups. Recent developments in
the pay roll savings plan support this conclusion. Esti­
mated participation in 1948 was approximately 7.5 mil­
lion persons as contrasted with a wartime peak of over
25 million. Monthly pay roll deductions declined from
about 500 million dollars in 1944 to an estimated 150
million dollars in 1948.
Another source of evidence can be found in an analysis
of denomination of bonds sold and redeemed, since a fair­
ly reliable correlation exists between smaller denomina­
tion bonds and lower income investors. In fiscal 1945, as
Table 3 shows, bonds of the $102 and $25 denominations,
which presumably are most frequently purchased by in­
dividuals in the lower income brackets, accounted for al­
most 27 per cent of total savings bonds sold. This pro­
portion declined steadily until 1949 when these smallest
denomination bonds represented about 10 per cent of
total sales. Conversely, annual sales of the largest sav­
ings bond denominations of all three series grew from
less than half of the total in 1945 to almost three-fourths
2 The $10 denomination was offered only to members of the armed forces and has
recently been discontinued.

Page 3

in fiscal year 1949.
On the redemption side Series E Bond redemptions
in the first year following sale, which have always been
heavy, increased considerably during the late war and
early postwar years. This development reflected, among
other things, the temporary nature of the desires of in­
dividuals to buy bonds and the increased alternative uses
for cash which appeared after the war.
Since 1946, redemptions of small denomination bonds
have exceeded sales each year. Series E Bond redemptions
in the first year after sales, in the case of the $25 denomi­
nation, have risen from 33 per cent for the series sold in
1944 to 47 per cent in 1948, although the total volume
of redemptions has declined in line with the drop in total
sales. In the case of $100 E Bonds, first-year redemptions
rose to 20 per cent in 1945 and have since remained at
that level. For the largest denomination of E Bonds—
$1,000—first-year redemptions have been at 10 or 11 per
cent since 1945, while for the larger denomination F and
G Bonds—$500 to $10,000—redemptions at the end of
one year have been around 3 per cent since the end of the
war, although rising gradually. Of all the E Bonds sold,
approximately 43 per cent have been redeemed, com­
pared with 15 per cent for F and G Bonds.
It appears that many purchasers of small denomina­
tion savings bonds have had to redeem bonds to meet
emergencies or are still drawing upon their wartime ac­
cumulation of liquid assets in this form to supplement
current income. The decline in outstandings of small
denomination bonds has also probably reflected the level­
ing off of income and increased unemployment, the pref­
erence for other types of savings, and, of course, the in­
creasing availability of consumer and durable goods.
COMPARISON WITH OTHER SAVINGS MEDIA

The 1949 Annual Report of the Secretary of the
Treasury pointed out that, despite the expansion in the
popularity of savings bonds as a savings medium, “the
sale of savings bonds has not been at the expense of other
types of savings.” The Secretary stated that “individuals
increased their holdings of Series E bonds by 9% from
the end of 1945 through October 1949, but in this same
period, individuals increased their shareholdings in sav­
ings and loan associations by over 60 per cent; their life
insurance by 30 per cent; their deposits in mutual sav­
ings banks by 25 per cent; their savings accounts in com­
mercial banks by 15 per cent; their checking accounts by
about 10 per cent” and that, of the various forms of
liquid savings, “only currency holdings in the hands of
individuals declined.”
Surveys of consumer finances, conducted periodically
by the Federal Reserve System, have shown that, while
United States Savings Bonds have been the most popu­
lar form of liquid assets in the past three years, the mar­
gin of preference for this form of savings has declined
during the period. According to the 1949 Survey of
Consumer Finances, 44 per cent of all “consumer spend­
ing units’” held some savings bonds at the beginning of
1949, as contrasted with 56 per cent two years earlier.
Page 4



The proportion of units holding bonds ranged from 20
per cent of those earning less than $1,000 per year to 78
per cent with income of $7,500 and over, with the largest
decline shown by units in the $2,000-$3,000 income class.
MEETING THE MATURITIES PROBLEM

The problem of managing the savings bond pro­
gram in the years ahead promises to be much more
complex than any which has confronted the Treasury
thus far in the postwar period, largely because of the
forthcoming maturities of the heavily sold wartime issues.
As of May 31, 1950, there were 57.5 billion dollars of
savings bonds outstanding at current redemption value—
35.4 billion dollars in Series D and E Bonds, 3.7 billion
in Series F, and 18.4 billion in G Bonds. Although still
relatively small in amount, maturities will spurt to an
estimated four billion dollars in 1952 and will reach a
peak of nine billion in 1954, continuing for several years
thereafter in declining but substantial amounts.
In addition, fears have been expressed that the prob­
lem of these forthcoming maturities could be complicated,
in the event of the resumption of inflationary pressures,
by large-scale pre-maturity redemptions. In three years
of postwar inflation, however, the public made a net addi­
tion to its savings bond holdings. This would suggest
that in the absence of extreme inflation these fears are
likely to prove groundless. On the other hand, the largescale pre-maturity liquidation of bonds, which could be
expected to occur in the wake of a depression despite
complications in Treasury financing, would serve as a
useful cushion for the economy.
Whether funds paid out at maturity will be rein­
vested will have an important impact on the cash position
of the Treasury. Because of continued Government ex­
penditures in excess of receipts, there is little doubt but
that the Treasury will want to continue the savings bond
program. The degree to which the lenders to the Gov­
ernment on this type of security—the nonbank public—
will continue to provide the Treasury with funds through
the savings bond program will depend to a large extent
upon such economic factors as employment and income
levels, the desire for and availability of consumer durable
goods, and the relative attractiveness of other investment
and savings outlets. Considering recent sales and redemp­
tion trends, it appears that a relatively large proportion
of the maturing bonds may be redeemed for cash.
Several possible moves which the Treasury might take
to assure or encourage reinvestment of funds from ma­
turing issues have been suggested in recent months. To
date, only one step in this direction has been taken. In­
dividual holders of Series A, Series C—1938, Series D —
1939, and Series D—1940 bonds have been permitted to
reinvest the proceeds of the maturing bonds in Series E
Savings Bonds currently on sale, without regard to the
$10,000 annual limitation (maturity value) on purchases
of E Bonds.2
2 A consumer spending unit is defined as all persons living in the same dwelling and
related by blood, marriage, or adoption who pool more than half of their incomes for
their major items of expense.

Farm Debt Rise Continues
Total Still Low Relative to Assets
Farm debts continue the rise which started in 1946,
reaching a total on January 1, 1950, of about 10.8 billion
dollars, 3.2 billion or 42 per cent more than at the low
point reached in 19461. Increases have occurred in both
farm mortgage and non-real-estate debt but with the latter
showing by far the largest rise in both absolute and rela­
tive terms. Even with this large increase over the past
four years, however, the current level of farm indebted­
ness is only about 12 per cent above that in 1940 and is
far below the post-World War I peak reached in 1921.
Meanwhile the value of farm assets is more than double
prewar and net farm income is about two and one-half
times the prewar level.
Farm debts, therefore, generally are at moderate
levels. This is emphasized particularly when compared
with developments during and following World War I. In
this period debts nearly tripled with farm mortgage debt
and non-real-estate debts owed to principal lending agen­
cies reaching a peak in excess of 14 billion dollars in 1921
(see Chart 1). Estimates of non-real-estate debts owed
other lenders such as merchants and individuals are not
available for this period, but it appears that they also in­
creased sharply as there was a strong demand for such
credit and it was generally available.
1 Including farm mortgage debt and non-real-estate debts owed principal institutions,
merchants, and others.

CHART I

TOTAL FARM MORTGAGE DEBT AND NON-REAL-ESTATE
FARM DEBT OWED PRINCIPAL LENDERS *
UNITED STATES, JANUARY 1,1911-50
BILLIONS

lllll.l'll.lj.l.lltl.ll

OF DOLLARS

BILLIONS OF DOLLARS

16 I----- ---------

^^///
■ NON • RE At ■ ESTATE'

[mortgai

* EXCLUDES NONRECOURSE COMMODITY LOANS, HELD OR GUARANTEED BY THE
COMMODITY CREDIT CORPORATION.
SOURCE: US. DEPARTMENT OF AGRICULTURE, BUREAU OF AGRICULTURAL ECONOMICS-




MORTGAGE DEBT REACHES 5.4 BILLION DOLLARS

Farm mortgage debt, as estimated by the Bureau of
Agricultural Economics, reached 5.4 billion dollars on
January 1, 1950, following an advance of about one-sixth
from the low point in 1946. This increase occurred though
the number of farm transfers has declined.
Voluntary sales of farms for the year ending in March
1950 were 36 per cent below the peak volume reached in
1946 and 1947, and current reports indicate that the
number of transfers continues to decline. This trend is
not expected to be reversed soon, unless land values
should increase significantly.
Mortgage recordings declined moderately in 1949 to a
total of 1.4 billion dollars. This was about two per cent
less than the large 1947 volume, which exceeded the 1929
level as well as that of any subsequent year except 1934
when refinancing was at an exceptionally high level. In
the fourth quarter of 1949, however, mortgage record­
ings exceeded the year-earlier level. Thus, the debt rise,
which to date has reflected primarily a slow-down in re­
payments, may now be augmented by a step-up in vol­
ume of new mortgages written. Repayment rates declined
first in response to heavy expenditures for machinery and
improvements and to higher living costs, followed in 1949
and 1950 by the effects of lower net farm income.
lhe lesser decline in mortgage recordings than in
number of farm transfers indicates that farm mortgage
credit is being used for purposes other than the purchase
of farm real estate. Major capital investments such as
buildings, extensive soil improvements, and the like may
be financed in this way. Also, in those instances where
short-term debts have become burdensome they may be
refinanced over a longer period, using a mortgage on the
farm real estate as security for the loan. Appearance
generally of this type of short-term debt funding would
indicate financial stringency in agriculture. Although
major lenders report a noticeable increase during recent
months in requests for farm mortgage credit of this type,
the total number still is small.
Life insurance companies, commercial banks, and the
Federal Land Banks are the major institutional lenders
on farm real estate, each accounting for about one-fifth
of the total farm mortgage debt as of January 1, 1949.
Other major sources of this type of credit—largely in­
dividuals—accounted for nearly two-fifths of the total.
Farmers Home Administration holdings were about four
per cent of total outstandings. Mortgage recordings in
the fourth quarter of 1949, as reported by the Farm
Credit Administration, were divided among the major
lenders as follows: individuals, 32 per cent; commercial
banks, 29 per cent; insurance companies, 18 per cent;
Federal Land Banks, 14 per cent; and miscellaneous lendPage 5

ing agencies, 7 per cent. Insurance companies and the
Federal Land Banks appear to be acquiring an increasing
proportion of the new mortgages written, while a dimin­
ishing proportion is accounted for by individuals and
commercial banks.
The relatively low level of total farm mortgage debt
is revealed when it is compared with the current value
of farm real estate. At the beginning of the year such
debt accounted for only about nine per cent of the total
value of farms, compared with about 20 per cent in 1940.
Rising debt and reduced farm real estate values have in­
creased the debt-value ratio, but it still must rise sub­
stantially before it approaches the prewar relationship.
This modest level of over-all farm mortgage debt does
not indicate, of course, that all mortgaged farms can carry
their present real estate debt load without difficulty. The
debt total is low largely because of the increased propor­
tion of farms now owned completely free of mortgage
debt. Whereas 39 per cent of United States farms were
mortgaged in 1940, only 29 per cent were mortgaged in
1945, and the proportion may have declined since.
The rise in farm mortgage debt has been relatively
much greater in the Western and Southern states than in
the Northeastern and Midwestern states (see Chart 2).
It is interesting to note also that the absolute level of
mortgage debt in the Midwestern states is lower cur­
rently, relative to previous years, than for other areas.
The Midwest, of course, was the heart of the World-War­
I-born inflation of farm real estate values. Memory of
the distasteful aftereffects of this experience, no doubt,
has been an important factor in the moderation shown
in this area in recent years. Both farm owners and agen­
cies extending farm mortgage credit have generally fol­
lowed relatively conservative credit policies in recent
years. This is very trUe of Illinois and Iowa, among the
CHART

*

TOTAL FARM MORTGAGE DEBT AND NON-REAL-ESTATE
DEBT OWED PRINCIPAL LENDERS*
BY REGIONS, JANUARY I, 1911-50
BILLIONS

OF DOLLARS

BILLIONS OF DOLLARS
--------------1------------ 1---------------1-------------MIDWESTERN

21----- NORTHEASTERN
1--- —i----- 1--i

I

I

m

NON-REAL-ESTATE DEBT

i*

i

DEBT

NON-REAL
^■ESTATE DEBT

CHART

FARM
SEVENTH

3

MORTGAGE DEBT

DISTRICT STATES,

MILLIONS OF DOLLARS

1945-49
MILLIONS OF DOLLARS

IOWA

ILLINOIS
WISCONSIN

INDIANA
..............‘'MICHIGAN

SOURCE: U S. DEPARTMENT OF AGRICULTURE, BUREAU OF AGRICULTURAL ECONOMICS.

Seventh Federal Reserve District states (see Chart 3).
The great difference in experience to date during the
inflationary periods associated with the two World Wars
is due largely to differences in expectations which pre­
vailed in these periods. In the World War I period net
land returns averaged about four per cent of land values
compared with a mortgage rate of more than six per cent.
Land buyers were willing to pay six per cent interest on
farm mortgages to buy land yielding four per cent in the
expectation that land values would continue an upward
trend over a long period of years. From 1943-48 the rate
of return on land was about twice the mortgage interest
rate, but these returns were not, and in some instances
still are not, capitalized fully into land values. It was
generally expected that such favorable returns would be
short-lived and that real estate prices would adjust down­
ward shortly after the end of hostilities. Whether the
World War II judgments will prove as erroneous as those
associated with the World War I period, but in the op­
posite direction, remains to be seen.
NON-REAL-ESTATE DEBT DOUBLED SINCE 1946

MORTGAGE DEBT

WESTERN
NON-REAL-ESTATE DEBT
ORTGAGE DEBT

MORTGAGE DEBT

1910

1920

1930

1940

1950

1910

1920

1930

1940

1950

* EXCLUDES NONRECOURSE COMMODITY LOANS HELD OR GUARANTEED BY THE
COMMODITY CREDIT CORPORATION.
SOURCE: U S. DEPARTMENT OF AGRICULTURE, BUREAU OF AGRICULTURAL ECONOMICS.

Page 6




Non-real-estate farm debt, including that owed prin­
cipal lenders and others but excluding Commodity Credit
Corporation price support loans, totaled 5.3 billion dollars
on January 1, 1950, according to Bureau of Agricultural
Economics estimates, 76 per cent more than in 1940.
Ignoring the debts owed “other” lenders such as mer­
chants and individuals, for which estimates are not avail­
able for a long period of years, the current level of nonreal-estate farm debt is moderately above that prevailing
in the last half of the 1920’s but about one-fourth below

*

the peak level of the early 1920’s. Although the trend
still is upward, the rapid rise experienced in recent years
has leveled off (see Chart 4).
All operating banks in the United States reported a
total outstanding of non-real-estate loans to farmers on
December 31, 1949, of 2,048 million dollars, an increase of
five per cent from a year earlier. Seventh District banks,
however, reported an increase of 10 per cent to a total of
418 million dollars. A survey of country bankers in the
Seventh District early this spring indicated that they
expect a moderate rise in this type of loan in 1950.
As with farm real estate loans, over-all non-real-estate
farm debt is at a modest level, equaling about one-fifth
the value of livestock, machinery, and motor vehicles on
farms at the beginning of the current year, compared
with 37 per cent in 1940. If measured against farmer
holdings of bank deposits, currency, and United States
Savings Bonds, the comparable percentage figures are 28
in 1950, 72 in 1940.
The increase in non-real-estate farm debts since 1946
has been similar in all major areas (see Chart 5). There
are large differences, however, in the current volume of
such debts as compared with previous years. For all areas
except the Midwestern states the peaks reached following
World War I have been recently exceeded. In the Mid­
western area the current volume is only slightly more
than one-half the 1921 level.
The above-noted increase in non-real-estate farm debt
resulted largely from greatly increased expenditures for
livestock, machinery, motor trucks, automobiles, farm
improvements, and additional land as well as for current
production expenses and living costs. The future trend
in volume of this type of debt probably will be deter­
mined largely by the trend in farmer expenditures for
capital purposes. These expenditures, in turn, are likely
to reflect the level of farm income. If income declines
further, the volume of farm expenditures for capital pur­
poses and of credit associated therewith is likely to de­
cline. Also, more of the non-real-estate debt would be
converted into long-term obligations in order to extend
repayment periods. Both types of adjustment were im-

CHART S

NON-REAL-ESTATE LOANS TO FARMERS
HELD BY PRINCIPAL LENDERS*
BY REGIONS, JANUARY I AND JULY I, 1910 - 50
BILLIONS OF DOLLARS

0.4

BILLIONS OF DOLLARS

I----- 1----- 1

NORTHEASTERN
FEDERAL
AGENCIES

0.4

2.4
MIDWESTERN

02

2.2

BANKS

FEDERAL
AGENCIES

FEDERAL
AGENCIES

WESTERN

FEDERAL
AGENCIES

1910

1920

1930

1940

06

0.6

0.4

0.4

0.2

0.2

1950

1910

SANK

1920

1930

1940

1950

* EXCLUDES NONRECOURSE COMMODITY LOANS. HELD OR GUARANTEED BY THE
COMMODITY CREDIT CORPORATION.
SOURCE: U S. DEPARTMENT OF’ AGRICULTURE. BUREAU OF AGRICULTURAL ECONOMICS.

portant in the decline of the 1920’s and early 1930’s.
Although only limited information is available on this
point, it appears that most of the increase in volume of
non-real-estate debt in recent years resulted from in­
creased debts per borrower rather than increased number
of borrowers. If farm product prices and net farm income
decline further in the years immediately ahead, as now
appears probable, this situation may change. Certainly
the credit requirements of some present borrowers will
be reduced, thereby tending to reduce over-all short-term
credit to farmers. Other farmers, however, who presently
operate without resort to borrowed funds, are likely to
need credit to finance the acquisition of livestock and
machinery. In these circumstances the total volume of
non-real-estate farm debt probably would decline but
with the decline limited to modest proportions as lenders
accommodate the larger number of potential borrowers.

«mmt «

NON-REAL-ESTATE LOANS TO FARMERS HELD BY PRINCIPAL LENDERS*

DEBTS LIKELY TO RISE FURTHER

UNITED STATES, JANUARY I AND JULY I, 1910-50
MILLIONS

or'DOLLARS

Farmers Homa Administration
cxrn Production credit at*ociations»end Federal Intarmedlate
credit bank discounts from other lenders_______

m Active commercial banks
3,000

SOURCE :U.& 0EPARTMEHT OF AORICUtTWtt. MIRCAU OF WUCULTVRAL ECONOMICS.




The future trend in dollar volume of farm debts prob­
ably will be determined largely by the general level of
economic activity and prices. If relatively high levels of
employment, industrial production, and prices prevail
for the next several years, further price and income de­
clines in agriculture are likely to be quite moderate. In
this general economic setting total farm debts probably
would increase further. This development appears par­
ticularly likely for farm mortgage debt.
There are profitable opportunities on many farms in
most areas for the investment of additional capital to in­
crease the productivity of both labor and land. The ex­
tent to which both farmers and lenders recognize the
opportunities for such investments may determine wheth­
er non-real-estate loans rise or fall in the years ahead.

sale credit outstanding expanded 700 million dollars. De­
spite the relatively moderate expansion in instalment
the demand for durable goods at a time when plants were sale credit, however, consumer indebtedness had passed
approaching capacity levels of production and thus has its prewar peak by the end of 1946.
contributed to the inflationary pressures of such an ex­
As durable goods became more plentiful, instalment
sale credit expanded rapidly. Between the end of 1946
pansion.
In a retrenchment forced by declining incomes, how­ and 1948, automobile sale credit outstanding rose from
ever, consumers must spend a larger portion of their 544 million dollars to 1,961 million dollars, a growth of
available funds on nondurable necessities and so become 260 per cent in two years. Likewise, sale credit on other
less willing to purchase durable goods, either on a cash durable goods lines increased substantially, from 1,104
or credit basis. In addition, the credit obligations which million dollars to 2,567 million dollars. The rate of
they had incurred previously constitute a burden of in­ growth in other types of credit slackened significantly
creasingly serious proportions on their declining incomes, during this period, however, reflecting satisfaction of the
with the result that spendable income and consumer de­ most urgent of postwar demands for nondurable goods.
mand is reduced even further. Thus, fluctuations in con­ Charge account balances increased by 560 million dollars
sumer credit tend to reinforce the business cycle, adding in 1947, but by only 240 million dollars in 1948. Instal­
to demand during periods of prosperity and reducing ment cash loans, which include direct loans granted for
available consumer purchasing power during periods when purchases of automobiles and other durables as well as
for more general purposes, increased by a billion dollars
unused productive capacity exists.
in 1947 and by 725 million dollars in 1946.
Consumer credit declined in the early part of 1949, in
POSTWAR CREDIT TRENDS
part because of seasonal factors but still more because
Consumer credit, and particularly instalment sales consumers generally demonstrated increased buying cau­
credit, was limited sharply during the war years by the tion, particularly in the home appliance, housefurnishings,
general unavailability of consumers durable goods. As and apparel lines. In response to eased credit terms,
production was diverted to the war effort, many products somewhat lower prices, and more aggressive merchandis­
became virtually unobtainable, except on a special alloca­ ing by retailers, however, indebtedness resumed its pre­
tion or rationing basis. In addition, the Federal Reserve vious upward movement during the last half of the year.
System was granted the power during this period to regu­ By the end of the year outstandings had increased by
late the terms on which instalment credit could be ex­ nearly 2.5 billion dollars, of which 93 per cent was in the
tended. Relatively high down payments and short con­ instalment credit category. Consumer indebtedness
tract maturities were specified in an effort to curb the reached a total of 18,779 million dollars, 86 per cent
use of credit and thus restrain inflationary pressures re­ higher than at the prewar peak in September 1941 and
sulting from a demand for goods far in excess of avail­ nearly triple the 1945 year-end figure.
The distribution of oustandings by types of credit has
able supply.
trended
steadily back toward the 1941 relationship since
Credit outstandings began to increase gradually in
1944, but at the end of the war were still one-third lower the end of the war (see table). The major difference in
than at the prewar peak in 1941. Moreover, since non­
durable goods and services remained in better supply than
INDEXES OF TOTAL CONSUMER CREDIT,
durables and because the effects of Regulation W fell
INSTALMENT CREDIT, AND DISPOSABLE PERSONAL INCOME
primarily on the extension of instalment credit, the pat­
1929 - 49
(1935-39 YEARLY AVERAGE - 100)
tern of outstandings by types of credit was altered sub­
stantially (see accompanying table). Non-instalment
credit, including charge accounts, single payment loans,
and service credit, actually increased moderately between
1941 and 1945, while total instalment indebtedness de­
DISPOSABLE
clined by three-fifths and instalment sale credit dropped
PERSONAL INCOME
to less than one-quarter of its 1941 level. As a result,
non-instalment indebtedness constituted a much larger
part of total consumer credit at the end of 1945 as com­
pared with 1941.
TOTAL
CONSUMER
With the end of the war and reconversion of plant
CREDIT
capacities to peacetime production, consumers goods
reached the market in increasing volume, and consumer
INSTALMENT
*-\
CREDIT
\
credit began to expand rapidly. Initially, the major part
of the expansion was in types of credit related in larger
degree to expenditures on nondurable goods and services
than on consumers durables. Charge account balances
increased by more than a billion dollars and instalment
cash loans by 930 million dollars in 1946, while instalment
CONSUMER CREDIT REACHES NEW PEAK
(Continued from Inside Front Cover)

PER CENTPERCENT

1929'30

SOURCES: U S DEPARTMENT OF COMMERCE AND BOARD OF GOVERNORS OF THE FEDERAL

Page 8



the current distribution is that instalment cash loans
have expanded relative to instalment sales credit, primari­
ly as a result of increased lending to consumers for pur­
chase of automobiles and other durable goods by com­
mercial banks. The upward trend in instalment credit is
continuing at a rapid pace, however, and it appears that
this category will soon exceed the high 1941 proportion
of total consumer credit.
IS CONSUMER CREDIT TOO HIGH?

The primary test of the ability of consumers to incur
and repay indebtedness is the level and trend of personal
incomes. It seems likely that a rise in personal income
can support at least a proportionate increase in the vol­
ume of credit. Furthermore, it is apparent that consumers
can incur new indebtedness with greater safety when
income is expanding.
Although the postwar rise in consumer credit has been
very rapid, it appears that the relationship between out­
standings and disposable personal income (income of in­
dividuals after payment of taxes) is not out of line. In­
come trended steeply upward during and after the war,
with the result that consumer indebtedness has not yet
reached its 1935-39 proportion of disposable income (see
chart). Credit outstandings were in fact considerably
higher relative to consumer income in the immediate pre­
war years, 1939-41. The upward trend in credit has been
much steeper than that of income since the end of the
war, however, and with instalment credit continuing to
expand rapidly and personal income tending to level off,
the prewar average ratio soon may be exceeded.
A second important factor affecting the ability of con­
sumers to carry a high debt load is the trend of prices
relative to income. If incomes increase more rapidly than
prices, the portion of total income needed to meet basic
living costs will decline, and a larger proportion of cur­
rent income will be available for purchase of luxuries and
durable goods, for allocation to saving, and for servicing
and repayment of debt. This has been the case during
the past decade. Consumers’ prices have advanced 67 per
cent from the 1935-39 average, while disposable personal
income has increased by 190 per cent. Even allowing for
an expanded population, it appears that provision for
basic living needs requires a smaller proportion of per­
sonal income currently than before the war. Thus, the
current level of outstanding credit appears considerably
more moderate when compared to available income not
required to meet basic living expenses rather than to
total personal income.
The amount of savings held by individuals also must
be considered when evaluating the soundness of the
present level of consumer credit. Liquid assets of individ­
uals have increased markedly during the past decade.
The Board of Governors of the Federal Reserve System
has estimated that these holdings (including currency,
demand and savings deposits of banks, share accounts of
savings and loan associations, and U.S. Government
securities) increased from 49.6 billion dollars at the end
of 1939 to 174.8 billion dollars at the end of 1948, and the



additional gain during 1949 amounted to at least two
billion dollars.
It is apparent that this expansion of 256 per cent in
the liquid savings of individuals has added substantially
to the financial capacity of consumers in the aggregate
to carry debt. In many cases it is probable that con­
sumers hold liquid assets equal to or greater than the
amount of credit they have obtained. Furthermore, the
existence of a large and gradually increasing store of
liquid assets undoubtedly affects favorably the willingness
of lenders to lend and consumers to borrow.
Finally, the terms on which consumer credit is ex­
tended obviously affect the soundness and stability of
the aggregate of outstandings. Lowered down payment-s
and extended repayment periods tend to result in a ris­
ing level of outstandings through stimulation of the use
of credit and because the proportion of purchase price
financed is larger and the amount of the monthly repay­
ment is smaller. On the other hand, the rise in credit will
tend to be checked after most of the outstanding con­
tracts are on liberalized terms and the initial stimulus to
credit buying given by lowered requirements has passed.
Furthermore, easier credit terms are likely to attract
persons who could not meet the higher payment require­
ments. lo the extent that these poorer risks are not
eliminated in the credit investigation, outstanding in­
debtedness will rest upon a weaker base. In the event of
a moderate downturn in employment and income, higher
delinquencies and losses probably will occur, and lenders
may become less willing to extend new credit.
Both down payment requirements and repayment
periods have eased gradually during most of the postwar
period and apparently weakened significantly further
after final expiration of Regulation W on June 30, 1949.
Since the latter part of 1948, minimum down payment
requirements on most new model automobiles appear to
have dropped from 33-1/3 per cent to about 25 per cent
of purchase price, and maximum repayment periods ap­
parently have lengthened from 18 to 30 and even 36
months. Instalment credit terms on other durable goods
also have been eased significantly, judging by current
advertising of retail dealers. Of course, terms vary sub­
stantially from one area to another and from dealer to
dealer, but the easing in credit terms unquestionably has
been widespread.
In conclusion, it is apparent that the rising level of
consumer credit is becoming gradually more vulnerable
from the standpoint of a downturn in income and em­
ployment. Credit currently does not appear to be inordi­
nately high relative to the over-all financial position of
consumers, but the diversity between the trend of credit
and such measures as income has been widening steadily.
Furthermore, the continuing upward movement in credit
outstandings is based primarily upon the more volatile
instalment credit, granted on liberal down payment and
maturity terms. Although it does not seem likely that
consumer credit will turn downward in the near future,
the importance of consumers durable goods in the current
boom makes consumer credit developments an important
factor in appraising the business situation.




? i: r

SEVENTH FEDERAL

iowa

V;

RESERVE DISTRICT

♦