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BUSINESS CONDITIONS
A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO
New Capital Needed in Soil Improvements
Korea Plus One Year
The Stockpile—Umbrella for a Rainy Day
Quick Write-Offs Aid Expansion
The Trend of Business
Ill III
JULY 1951
New Capital Needed in Soil Improvements
Some Investment Justified Even During Inflation
•
A practical way to increase farm production.
•
The investment may reach $40 per acre, but it
usually pays well.
0
A soil improvement program provides a sound
base for credit.
Nearly a fifth of the nation’s cropland lies within
Seventh District states. Included is a lion’s share of the
best land available. The growing demand for farm prod
ucts dictates that this natural resource be used in ways
which will assure a continuing record production.
Some farmers have successfully stepped up the pro
ductivity of their land by making additional investments
in soil improvements. Much more land would respond
favorabfy to such action, with beneficial results to farm
ers and society generally. But in an economy plagued by
inflation it must be recognized that new capital invest
ments give an additional push to the already strong up
ward pressure on prices. Nevertheless, increased produc
tion is needed. The immediate problem is to achieve it
with the least inflation possible.
There is a longer-run consideration also. The United
States population now exceeds 152 million, nearly onefourth more than in 1930. The increase in the past decade
has been especially rapid, nearly two million a year.
Thanks to the improved technology which helped to in
crease farm production by nearly two-fifths since 1930
there is little immediate concern about meeting domestic
needs for food and fiber. It is apparent, however, that
greater future demands will result from increasing popu
lation and rising levels of living in both the United States
and the world generally. If wise management of soil re
sources is to be achieved, it will be necessary to invest
in practices that will: (1) minimize erosion; (2) keep
the soil in good physical and biological condition; and
(3) provide adequate plant food elements.
Needed Improvements Will Vary
Specific measures needed, as well as costs and size of
investments, will vary from farm to farm and by areas
depending upon soil type, topography, and related fac
tors. Most of the level to gently rolling land in the Dis
trict would benefit greatly from applications of lime
stone and fertilizer and the use of proper crop rotations.
However, the more rolling and hilly areas will require
more intensive soil management practices such as con
touring, strip-cropping, terraces, waterways, dams, and
THIS MONTH’S COVER
Blast Furnaces at Gary Works
(Courtesy of Carnegie-Illinois Steel Corporation)
structures of various kinds. In addition, these practices
should be supplemented by those beneficial to the more
level sods.
On farms requiring dams, tiling, and other structures,
the cash outlay may be exceptionally high. Contouring
and strip-cropping, however, require little or no cash
outlay, but some farmers contend that these practices
increase operating costs in excess of benefits. Detailed
studies, however, do not support this view. In general,
contouring and strip-cropping require little or no change
in acres of cash crops. On the other hand, measures such
as shifting part of the land from grain to hay and pas
ture decrease grain acreage and necessitate expenditures
for seed, fertilizer, lime, and for livestock, fencing, and
buildings. By and large, improving the soil on most farms
increases the capacity for production of roughage-con
suming livestock. Benefits derived, therefore, may depend
largely upon the degree of efficiency with which livestock
is handled. Reduced gram acreage, however, does not
necessarily result in a permanent reduction in grain pro
duction since yields per acre increase in response to the
improved soil management.
The Investment Pays
It is not possible to indicate the over-all amount of
new capital investment needed to bring land already in
farms to an optimum state of productivity. In most areas,
however, it runs into substantial sums. The capital out
lay required for a group of Northeastern Illinois farms
in 1945-47, for example, was $7,242 per farm or $34 per
(Continued on Inside Back Cover)
NET INCOMES COMPARED
~ Dollars
Per Acre
Dollars
Per Acre
MC LEAN COUNTY, ILLINOIS FARMS
-
■ High Soil
Hi Improvement
Y////A Low Soil
Y/////A Improvement
- 24
■
-
;6.54'
1936
^ HUI
9.961/7.60'
23.94N9.77
5 Yr. Av.
1936-40
5 Yr. Av.
27.5l|22.64
I7.54rl4.08'
1945
10 Yr. Av.
1936 - 45
Sources: University of Illinois and U.S. Soil Conservation Service.
Page 2
20
20
Korea Plus One Year
•
Heavy private buying dominated the past year,
driving prices to new highs.
Rising defense outlays a prime factor in the
outlook.
•
Record peacetime production dampened infla
tionary upsurge.
Higher taxes and effective credit control essen
tial.
Since early March the American economy has been
marking time, catching its breath from the second postKorea buying wave, and pointing toward a renewal of
inflationary pressures. From outward appearances, busi
ness activity has
passed a peak — CONSUMERS' PRICES
many prices have (1935-39 * 100)------- -------------------been trending
downward and out
put of certain
classes of consumer
goods has been cur
tailed for lack of
SINCE MARCH, LEVELING.
demand; Seldom
before, however,
1
has the handwrit
I '
ing on the wall
stood out more clearly. The problem is not one of busi
ness recession. On the contrary, business and consumer
income are likely to be boosted to new highs by the
end of the year as defense spending rises sharply from
present levels. Each new month is
bringing additional cutbacks in the RETAIL SALES
use of materials for the production of
civilian goods so that the rearmament
program may proceed unimpeded.
family car and the household’s major appliances. As
prices rose rapidly in response to this unprecedented
demand, Congress took steps to control inflation and
lay the groundwork for a mighty rearmament effort.
On September 7, 1950, President Truman signed the
Defense Production Act and thereby acquired the right
to fix prices and wages, allocate scarce materials, en
courage industrial expansion and control certain types
of credit.
In a series of executive orders the President delegated
his new powers to various Government agencies old and
new. “Alphabet soup” returned to Washington with the
creation of the ODM, OPS, DPA, and NPA (in place of
the OWM, OPA, and WPB of World War II fame). Staff
ing these agencies immediately became one of the im
portant problems of the rearmament program. Clerical
workers have not been in abundant supply, and business
men and educators have been less willing to leave their
jobs to accept key positions than they were in 1941.
Making Way for Defense Production
Even before the Korean episode
American business was operating at
peak rates. Over 61 million persons
were employed, and industrial produc
tion was at a peace time peak. In
The Immediate Impact
fact, resources were so fully employed
that prices had been edging upward
On June 25, 1950, the Red hordes
for some months. Nevertheless, the
CONSUMERS BOUGHT IN SURGES...
crossed the 38th parallel. Within a
surge of private spending and ordering
matter of days American contingents
during the summer and fall of 1950
_L
had been committed to action. Soon Seotonolly Adjusted.
pushed industrial output up an im
it became apparent that partial mo
pressive 10 per cent by the end of the
bilization had become the order of the day. Military year. As defense contractors began to call for scarce ma
units in the United States were alerted for overseas duty, terials, it became obvious that a system of priorities
reservists were called back, and the President made an would be necessary. The newly formed National Produc
initial request for an additional 17 billion dollars for the tion Authority (NPA) responded with the “Do” desig
armed services.
nation for orders
After a week or so of stunned surprise following the connected with the MANUFACTURERS' UNFILLED ORDERS
outbreak of hostilities many American businessmen and rearmament effort.
consumers decided “this is it.” They reacted vigorously
By November,
to the emergency by buying heavily of the items which the North Korean
they expected would be in short supply. Business firms aggression was
stocked up on metals and metal products in anticipation crushed, and the
of price rises or in an attempt to continue operations campaign appeared
longer than the next fellow. Housewives raided retailers’ to be in the mop... BUSINESS BACKLOGS
inventories of coffee, soap, sugar, nylons, white goods, p i n g - u p stages.
ROSE STEADILY.
and other items which help make life pleasant, while Buyers relaxed and
their husbands began to question the adequacy of the the atmosphere of
1951
Page 3
urgency surrounding the mobilization effort temporarily
abated. Then suddenly, the entry of the Chinese Com
munists into the conflict created “an entirely new war.”
The reverberations resulting from this new develop
ment surpassed in some respects those which occurred
in July. Some Congressmen called for full mobilization.
The President
NONAGRICULTURAL EMPLOYMENT
asked for an addi
tional 11 billion
dollars for defense
and declared the
existence of a Na
tional Emergency.
Toward the end of
December consum
TWO MILLION MORE
TOOK JOBS IN ONE YEAR.
ers responded to
the new crisis by
1990
■ 991
I I I
-4-1—i
embarking upon a
second buying
spree. Wholesale prices which had begun to level off
started upward once again. In January, price and wage
controls were imposed, and the Government tightened its
control of strategic materials by restricting the amounts
that could be used in some types of finished goods.
Inflation Halted In the Spring
INDUSTRIAL
The wave of spending was checked by a combination
of factors. Individual and business taxes were raised and
an excess profits tax was enacted in the fall of 1950. As
a result, Government revenues increased faster than ex
penditures and a record Treasury surplus of nearly seven
billion dollars was
achieved in the first COMMERCIAL BANK LOANS
quarter. Restric
tions placed upon
consumer credit
and mortgage lend
ing on new homes
began to have an
important effect
BORROWINGS FROM BANKS
early in 1951. Price
ROSE BY A RECORD AMOUNT.
and allocation con
1990
■ 991
i__ !_i
trols tended to re
1-1—.
d u c e speculation
and alleviated the wage-price spiral. Reports from the
battle field grew more encouraging. Most important,
however, were the enormous quantities of finished goods
which greeted shoppers when they sallied forth to “beat
the hoarders.” The record of the June 1950-March 1951
period is a tribute to the productivity of American busi
ness and the adaptability of manage
PRODUCTION
ment in dealing with problems of ma
terial shortages.
At the time of the declaration of
DURABLE GOODS LED
the National Emergency in December
THE RISE IN OUTPUT.
Defense Dollars Begin to Flow
1950 few observers would have pre
dicted an abatement of inflationary
The general outline of the rearm
Durable
pressures by the second quarter of the
Manufactures
ament program was set forth in the
new year. Nevertheless, in March,
April 1 report of Charles E. Wilson,
wholesale prices reached a peak. (Cer
Director of Defense Mobilization.
tain spot commodity prices had been
Total
These basic goals presumably will not
moving downward even earlier.) Why
be changed significantly, barring seri
did the upward surge of prices halt
ous deterioration of the international
at a time when the principal long-run
situation. By mid-1953 we are to have
inflationary force, defense spending,
J__ L_!
, I ,
(1) plenty of modern equipment for
was only beginning to be felt?
our forces and those of our allies, (2)
In the nine months following the
outbreak of the Korean war total spending reached un “capacity to produce” 50,000 planes, 35,000 tanks, and
precedented levels. Government outlays for defense more large amounts of other defense items per year, and (3)
than doubled. Personal consumption expenditures rose an industrial plant capable of producing 15 per cent more
10 per cent. Housing activity and business capital ex goods. Within two years “our readiness to enter upon
penditures set new records. Business inventories rose total mobilization should be sufficient; and production,
over 20 per cent in dollar volume. This spending was in addition to meeting current military needs, should be
made possible by adequate to support a civilian economy at or above prepeak corporate and Korea levels.”
BUSINESS INVENTORIES
individual income,
Defense spend Billion
WHOLESALE PRICES
~
supplemented by a ing is now at a rate
record increase in of over 30 billion
borrowings and dollars per year,
some liquidation of double the figure
near-cash assets. In for last June. By
view of the heavy the end of the year
demand, it would these outlays are
ROSE STEADILY,
ROSE RAPIDLYTHEN HALTED ?
DESPITE HEAVY DEMAND.
not have been sur expected to have
prising if prices had risen to a rate of
risen even more. 50 billion dollars Seasonally Adjusted.'
Saosonolly Adjusted.
Page 4
per year. A peak of about 70 billion should be reached
in late 52. Currently, we are devoting 10 per cent of our
total output to defense; at the highest point now fore
seen, this proportion will reach 20 per cent.
The production task ahead is less burdensome than
that of the last war, in both absolute and relative terms.
In 1943 and 1944,
war connected RESIDENTIAL CONSTRUCTION
spending totaled Oollori
about 90 billion 1,100
dollars at a price
level well below '■°°°
that of today. Mili- 900
tary purchases ac
CREDIT RESTRICTIONS
counted for 45 per 800
BR/N6 DROP IN ACTIVITY.
cent of the total
national product in
those war
years. Seosonolly Adjusted.
,
M
any important
programs will be on a smaller scale than they were then:
(1) no great shipbuilding program—naval or merchant
—is planned, (2) munitions plants left over from World
War II are being reactivated, (3) fewer military posts
and air bases will be constructed, and (4) no totally new
industries such as synthetic rubber or atomic energy
will have to be built up. To meet the needs of the
armed forces, procurement agencies are able to call upon
a vastly expanded industrial plant and a larger, more
efficient work force.
Since total output will continue to rise, particularly
as new plants are put into operation, a large volume of
goods will continue to be available for nonessential
civilian purposes. Manufacturers of consumers durables
will receive sufficient raw materials to produce more
units than ever before except for top periods in recent
years. The auto industry, for example, will be allowed
enough steel to produce 2.4 million cars in the last half
of 1951. Pre-World War II output averaged less than
3.5 million cars per year. Nevertheless, the reduction in
the supply of durables from recent levels will pose a
significant inflationary problem in view of high and
rising individual income.
Price Controls
Under Fire
restriction of nondefense Government spending can do
the job of holding prices down. Memories of the immense
problems created by the direct controls of World War II
and after, are still fresh in the minds of those responsible
for production.
. While the effectiveness of credit, wage, material, and
price controls has been varyingly assessed, it is un
likely as a practical matter that nondefense spending
can be reduced sufficiently or that a pay-as-you-go
tax plan will be enacted. Inflationary pressures are very
likely to reassert themselves later this year as the arms
and capital expansion programs take an increasing volume
of total output. These expenditures place additional
purchasing power in the hands of consumers and business
firms at the same time that the supply of finished civilian
goods is reduced.
Arms production is already shoving consumer durable
goods aside in significant proportions. Military equip
ment requires much larger proportions of certain types of
materials, particularly metals, than is indicated by an
over-all comparison with total output. Under the Con
trolled Materials Plan which becomes effective July 1
additional amounts of strategic materials will be allocated
to essential uses.
NATIONAL DEFENSE
Current regulations
Billion
Dollar*
permit consumer
RATE OF SPENDING
goods fabricators to
TO RISE RAPIDLY.
use only 70 per
cent of the steel, 65
per
cent of the cop
ANNUAL RATES
| Actual
per, and 55 per
cent of the alumi
num in the third
quarter of 1951
that they used in
the average of the
first two quarters
in 1950. Residential
End of
construction is also
being reduced sub
stantially as a result of direct and over-all credit con
trols. Meanwhile, consumer income continues to rise.
BUSINESS CAPITAL EXPENDITURES*
A Look Ahead
Estimated
The absence of
price rises in recent
months coupled
with the slowness
of defense produc
tion to get under
way has encour
aged certain
spokesmen for in
dustry and agricul
ture to urge that
price and wage controls be scrapped. They believe that
the enormous productivity of American business together
with strong monetary controls, heavy taxation, and the
In the coming year, total spending is almost certain
to exceed that of any previous 12 month period. Govern
ment expenditures, dominated by the defense effort, will
increase steadily, and can be plotted with reasonable
accuracy barring a significant change in the international
picture. Business outlays for plant and equipment will
be at record levels, but the rise from the current rate
will be restrained by Government regulations forbidding
less essential projects which require substantial quantities
of strategic materials. The build-up of business inventories
will be smaller than in the past 12 months, and may even
give way to some liquidation, as a result of material allo
cations and cutbacks in civilian production. Consumer
spending, by far the largest component of total demand,
Page 5
is less predictable. Personal spending programs are more
indefinite than those of business and Government.
Personal income is now at a rate almost 15 per cent
above that of last June. A further substantial rise can
be anticipated as
additional persons FEDERAL CASH INCOME AND OUTGO
are employed,
longer hours are
worked, and wage
rates tend upward.
Receipts
If the increased
income earned by
consumers is not
Expenditures
taxed away or
saved, it is obvious
SURPLUS BEHIND that a serious gap
DEFICIT AHEAD.
will exist between
the power to pur Estimated for Last Three Quarters of 1951.
chase and the sup Change In To* Rates.
ply of goods.
In these circum PERSONAL INCOME
stances, strong up
ward pressure on
prices will result in
the absence of ade
quate counter mea
sures. Higher taxes
TOO MUCH
and vigorous credit
PURCHASING POWER ? restraints are an
essential part of
this program. The Seasonally Adjusted Annual Ratos.
greatest present
danger stems from the tendency to take a complacent
attitude toward the future during the present transitory
period of stable prices. In approaching the problems of
the second post-Korea year, however, the nation may
be heartened by the achievements of the past 12 months.
Significant increases in production were realized, the
price upsurge was curbed, and substantial progress was
made toward strengthening the armed forces.
Deposit Ownership Shifts Reflect Post-Korea Business Expansion
Demand deposits of individuals and businesses in
Seventh District banks rose by more than one billion
dollars in the 12 months ended January 31, 1951. This
was the largest dollar gain in any postwar year and
brought the total to a new peak of 13.7 billion. The
District growth in privately owned demand deposits
was 8.6 per cent, moderately more than the 7 per cent
gain experienced by banks in the nation as a whole. In
contrast to the smaller 1949 growth, which largely re
flected bank purchases of Government securities, the
1950 rise resulted primarily from the unprecedented postKorea expansion in bank loans.
At the end of January every type of privately held
deposit exceeded year-ago levels, according to the latest
annual estimates of deposit ownership made by the
Federal Reserve Bank of Chicago. Accounts of business
firms, however, made larger relative gains (9.5 per cent)
than did deposits of individuals (7.8 per cent). The
survey also indicates that larger banks—where business
deposits comprise a much greater portion of the total—
reported heavier gains than did smaller banks. This rel
ative shift from individual to business ownership during
1950 continued the trend of the past four years. This was
true both for Seventh District banks and for the nation
as a whole.
Although smaller than the relative gain in business
deposits, the expansion in personal deposits was far
greater than that of the previous year. This reflects the
sharp growth in personal incomes in 1950, which was
only partly absorbed by increased consumer expenditures
and additions to individual holdings of interest-bearing
liquid assets.
Among nonfinancial businesses, “manufacturing and
Page 6
mining” accounts experienced the largest percentage gain
-—over 12 per cent. Since these accounts constitute
more than one-fourth of District banks’ total private de
posits, their growth contributed significantly to District
deposit expansion. The 1950 increase was the largest gain
for manufacturing and mining firms in any postwar year.
As might be expected, these accounts are concentrated
in big banks, particularly in Chicago and Detroit, but
banks of all sizes throughout the District reported sizable
percentage gains in them. The rise in manufacturing and
mining deposits reflects increased profits and substantial
new borrowing and security financing on the part of these
businesses, together with a tendency to hold larger work
ing balances in the face of rising costs and the probability
of further expansion in defense operations.
Deposit accounts of retail and wholesale trade estab
lishments rose by less than five per cent in 1950, con
siderably less than the average growth in the deposits
of all businesses. The relative gain was somewhat larger
at the bigger banks in the District, but only in the city
of Detroit was it important. The gain in trade deposits
was greater than in the “recession” year of 1949. It
was less than might have been expected, however, in
the light of the heavy expansion of retail and wholesale
sales in 1950. Particularly after Korea, many trade firms
used their higher inflows of cash to finance additions
to inventory rather than to build up bank balances.
A detailed report of the 1951 deposit ownership
survey is being prepared by the Federal Reserve
Bank of Chicago. Copies will be available upon
request to the Research Department.
The Stockpile—Umbrella for a Rainy Day
But It Is Hard to Forecast the Weather
•
U. S. dependent on imports for many critical
materials.
•
Major stockpiling problems — where to buy,
when to sell.
•
Stockpile increase tenfold since 1946.
Scattered throughout the United States are great
caches of vital raw materials. Aluminum, cobalt, copper,
manganese, and mica are to be found here. These, plus
over 60 others, are the American stockpile, a vast hoard
of strategic and critical materials valued at nearly three
billion dollars. The outbreak of hostilities in Korea a
year ago underscored the nation’s need for such reserves
of materials vital to defense.
One of the most startling features of the past twelve
months was the phenomenal 47 per cent rise in basic
commodity prices. This rise occurred between June 1950
and February 1951 when several of these commodities
were being stockpiled. This price advance and the de
velopment of scarcities resulted in criticism of the stock
piling program in general. A look at the history, objec
tives, and problems of the program is needed in order
to evaluate these criticisms, however, since most of the
Munitions Board’s policies can be explained only in the
light of these factors.
Stockpiling the Result of Past Shortages
The United States is almost completely dependent
upon imports for many of the most vital raw materials.
For example, imports account for 100 per cent of the
tin and chromite, about 95 per cent of the nickel and
cobalt, and over 90 per cent of the manganese consumed
by American industry. The points of origin of most of
these minerals are such distant spots as the Belgian
Congo, India, South Africa, the Philippines, and Indo
nesia. A steady stream of these imports is necessary if
American industry is to function and defense production
is not to be hampered by shortages. For example, metals
vital to the production of a J-34 jet engine include alum
inum, chrome, cobalt, columbium, copper, manganese,
molybdenum, nickel, and tungston. Each is classified as
strategic or critical and currently is being stockpiled.
Most of the supply lines over which these minerals
travel have been difficult to maintain during hostilities in
the past and would be again in the future. Recognition
of this vulnerability occurred during World War I as a
result of upset production schedules and delayed pro
curement of armaments. World War II shortages of rub
ber and other important materials, however, brought
about more vigorous attempts to build up a stockpile of
potentially scarce, vital goods.
To prevent a recurrence of the shortages of World
War I, a list of 42 materials was drawn up by the Army
General Staff in 1921. It included materials which the
Staff felt would be hard to obtain during subsequent
periods of emergency. Only 13 of the items on this list
appear on the current one. Uranium, which appeared
on the former, is not included today.
As the outlook in Europe darkened toward the end
of the 1930’s, the Army and Navy Munitions Board in
creased pressure for some kind of accumulation of
vital imported raw materials. The Stockpiling Act of
1939 was the result. This legislation authorized 100 mil
lion dollars for stockpiling purposes.
As World War II approached, larger appropriations
were made and procurement activities were broadened.
However, the amount of stockpiling which actually oc
curred under this law was relatively small. The urgency
of the situation was not sufficiently comprehended and
the authorities carried on only halfhearted efforts to
build a stock of materials. In 1940, the Reconstruction
Finance Corporation was given authority to “produce,
acquire and transport materials for defense;......... ”
1946 Act Sets Current Policies
The most important stockpile legislation is the Stra
tegic and Critical Materials Act of 1946. This Act rep
resented the nation’s first wholehearted effort to stock
pile. It removed the limit on the amount of funds which
could be appropriated by Congress for stockpiling pur
poses and presented more specifically and clearly than
before the need for this type of activity. To be eligible
for hoarding under this Act, materials have to fulfill
four criteria. They must be “essential for the common
defense, insufficiently available in the United States,
capable of being stockpiled, (and) .... must eliminate
or reduce a dangerous and costly dependence on some
foreign nation.” In addition, the Act of 1946 provided
for research to discover substitute materials and to de
velop new sources of supply.
The Munitions Board is the central staff agency of
the stockpiling program and is in charge of coordinating
the activities of all the other participating agencies. In
addition, it represents the National Defense Establish
ment in policy making. The Bureau of Federal Supply
is the procurement agency, making the actual expend
itures authorized by the Munitions Board. The Eco
nomic Cooperation Administration lends funds where
there is a possibility of developing new sources of stockpilable materials. The Department of State assists in
technical matters and the Department of Commerce
provides information as to current and expected demand
Page 7
for strategic and critical materials. The Department of
the Interior helps to set goals, provides statistics, and
carries on research to develop substitutes for critical ma
terials. The Department of Agriculture supplies statis
tics and helps procure materials in exchange for agricul
tural surpluses shipped abroad.
Based on 1950 prices, the value of the completed
stockpile is to be almost nine billion dollars. This com
pares with an objective of 4.7 billion dollars in 1946.
Stocks on hand, valued at December 1950 prices, have
risen from 237 million dollars in 1946 to almost 3
billion at present, a little over one-third of the total goal.
Stockpiling Policy
From time to time since the Stockpiling Act of 1946,
the Munitions Board has announced policies which, in
retrospect, help to explain why the stockpile has lagged
the objective considerably. In the first place, the Board
tries to acquire materials at current market prices rather
than to bid strongly for them. This tendency to sub
ordinate procurement to market conditions has limited
the possibilities of obtaining supplies by bringing mar
ginal producers into production. In the slight recession
of 1949, however, purchases were made where it appeared
that substantial surpluses existed. Second, a “Buy Amer
ican wherever possible” provision of the Act has tended
to tie the hands of Board officials, since often it would
have been easier and cheaper to buy in world markets.
Third, the general policy of affecting the market as little
as possible has tended to prevent aggressive buying in
periods of high business activity. Finally, the Board has
tried to make its purchases in an orderly manner.
The policy of the Munitions Board is to change ob
jectives for individual commodities as conditions change,
removing some items from the list, adding others. For
example, optical glass has been deleted recently while
chemical grade chromite and asbestos have been added.
One of the chief aims is to maintain a balanced stockpile.
For example, cobalt for special grades of steel is useless
if manganese for basic steel is not also available.
Stockpiles Face Important Problems
Policy problems confronting stockpile authorities have
grown in number and complexity. With strengthening
demand following the outbreak of hostilities in Korea, it
became more difficult to acquire strategic and critical
materials without competing with domestic users and af
fecting seriously demand and prices in world markets.
This situation was intensified by the tremendous volume
of private scare buying and speculation which occurred
both at home and abroad. Some European countries have
been critical of recent stockpile decisions, claiming that
the United States is trying so hard to become self-suffi
cient that the rest of the world is being deprived of its
rightful share of certain commodities. That this criticism
does not appear justified is substantiated by the fact
that, after allowance for price increases, imports of many
critical materials have declined.
Page 8
Despite recent growth, the total stockpile is not sig
nificantly closer to its objective than it was three or four
years ago, even though at the end of 1950 an average of
over 40 million dollars per month were being spent to
build it up. This apparent contradiction is caused by the
fact that since 1940, the goal has been raised several
times until it is now three times what it was five years ago.
Speculation in many metals is based in part upon the
assumption that since the stockpile needs materials it
will pay high prices for them. This feeling is not so
strong as it was before March 1951, however. In that
month, without warning, stockpiling officials withdrew
from the tin market. Tin prices promptly fell 30 per cent.
None of the problems facing stockpile authorities is
more knotty than that of deciding how and when to
dispose of stockpiled items as individual objectives are
attained. Several materials are no longer being stock
piled because substitutes or new sources of supply have
reduced the dependence of the U.S. on imports, or be
cause stockpile objectives for particular commodities
have been attained. As more of these individual goals
are reached, disposal of materials will tend to become
the chief problem of stockpiling officials. This will be
especially important in periods when business is operat
ing below capacity and prices are declining.
All in all, the stockpiling program is making a vital
contribution to the defense effort. Policies of the Muni
tions Board may have been, in retrospect, something short
of perfect, but the idea of stockpiling is a good one. It
is generally recognized that the accumulation of materials
for a stockpile has the same inflationary effects on busi
ness conditions as the accumulation of private inven
tories; the release of materials, the same deflationary
effect. Although this will be a continuing problem in the
management of a stockpile, it should not divert attention
from the development of an adequate inventory of vital
materials designed to make a National emergency less
acute should it occur and which may even be an im
portant factor in preventing it.
THE STOCKPILE GROWS
" |_____ • Total Objectives at End of Year
EBB
Stocks on Hand at End of Year
-(Valued at December 1950 Prices)
1946
1947
Source*. Stockpile Report to the Congress, Januory 1951.
1950
Quick Write-Offs Aid Expansion
Bulk of Permits to Basic Industries
#
New defense-connected facilities to be depreci
ated over five year period.
•
More than six billion dollars of projects already
approved.
0
Program criticized for reducing Government
revenues.
A substantial portion of the cost of the great expan
sion plans now under way in most major industries will
be written off for tax purposes within five years after
completion. Acceleration of depreciation encouraged the
construction of new facilities by private firms during
World Wars I and II. Now, this device is expected to
help achieve the Government’s goal of sufficient capacity
in 1953 to carry the heavy burden of rearmament plus
near-record civilian consumption.
Who Gets the Certificates?
Quick write-offs are attractive to most business firms
in a period of high earnings and high corporate tax rates
if it is expected that rates will be lowered in the future.
Only those new projects which are approved by the De
fense Production Administration (DPA) qualify for this
privilege. Officials state that certificates of necessity are
restricted to new facilities which will aid the mobilization
effort directly or indirectly.
Only in a few special cases will industry be permitted
to write-off the entire cost of a new facility within five
years. The remainder must be depreciated over the
probable life assumed for a similar facility under normal
conditions. The percentage allowed under certificates is
sued so far varies between 40 and 100 per cent with the
average about 70 per cent. In the case of specialized
machine tools for the production of war materials a 100
per cent write-off may be permitted while a utility or
paper mill may be allowed only 50 per cent.
Plant and equipment specifically intended for the
manufacture of planes, ordnance, or other military goods
should obviously be amortized over a period approximat
ing the duration of the emergency. However, current
policy calls for the expansion of basic industry which pro
duces materials or services used in final products for both
war and peace.
Through June 8, 1,766 investment projects totaling
6.2 billion dollars were approved for accelerated depreci
ation out of 17.5 billion of applications. Only about 10
per cent of the approvals are for the production of finished
goods including military supplies. Since steps have been
taken by the National Production Authority to forbid
the construction of nonessential projects, any licensed
project would appear to have some claim to considera
tion for rapid amortization. This fact increases the prob
lems of officials who determine which applications merit
approval. Standards used by DPA officials in granting
certificates to particular projects include the following:
(1) the degree of urgency, (2) expected usefulness after
the emergency has passed, and (3) incentive needed to
assure that the investment will be undertaken. The main
advantage of the program to a firm is, of course, the an
ticipation of tax savings, but there are other benefits.
Possession of a certificate of necessity facilitates the
process of obtaining a loan from a Government agency
or a private financial institution since it is evidence of
the essential nature of the project involved. In addition,
the five year period during which a firm is permitted to
“recover the cost” of new facilities suggests that use may
be made of term loans from commercial banks in this
connection.
Basic industries such as iron and steel, nonferrous
metals, chemicals, petroleum refining, and transportation
have received a lion’s share of the certificates of neces
sity issued so far. Of these groups, iron and steel alone
accounts for 37 per cent of the total. However, the steel
firms put their bids in early and received prompt at
tention. At the end of January, steel firms accounted for
over 80 per cent of the total. Certificates have now been
granted for most of the iron and steel and petroleum
refining expansion originally contemplated.
In recent weeks a large portion of the certificates
have gone to railroad firms for equipment. Future in
creases in the total of certificates granted will probably
center in the chemical, aircraft, and ordnance categories.
The Program Has Critics
Rapid amortization has been the center of a heated
controversy. The program and the method of its ad
ministration have been attacked vigorously for reducing
Government revenues, for contributing to inflationary
pressures, and for aiding big business. W. H. Harrison,
former DPA administrator, has defended the program by
stating that “emergency amortization is one of the sound
est instrumentalities of Government to encourage expan
sion of industrial strength for national security.” Other
Government officials and some private individuals are
not so sure. Few question the fact that quick write-offs
have played a part in encouraging private industry to
undertake additional expansion programs. However, sev
eral Congressional committees have called upon the
administrators of the program to account for their ac
tions.
The matter of small business not receiving its share
of the authorizations appears to be an invalid criticism
since the type of expansion which the Government seeks
Page 9
to encourage is usually undertaken only by large firms.
The important questions are (1) would not a substantial
portion of the desired expansion have been undertaken
without accelerated depreciation and the possible result
ant loss of Government revenue and (2) are these pro
grams overambitious during a period in which inflation
ary pressures are almost certain to mount? Those who
have been responsible for the administration of the pro
gram reply that the type of expansion covered by cer
tificates involves only the most essential type of facil
ity, and that the decision as to whether a special in
centive is necessary must be a matter of judgment.
Secretary of the Interior Chapman is one of those
who take a dim view of allowing accelerated depreciation
on most types of industrial expansion. The Interior De
partment’s Defense Power Administration recommends
action on applications for electric power projects. In most
cases, only SO per cent, five year write-offs are proposed
but Chapman thinks this is too liberal. He believes most
of the projects would be undertaken in the absence of
special incentives and that accelerated depreciation should
be strictly reserved for defense facilities which will have
little or no usefulness in the post-emergency period. Util
ity executives contend that they need rapid amortiza
tion to compensate for high current costs, restrictions
which prevent the most modern type of equipment from
being installed, and the greater difficulty of financing
expansion this year.
Accelerated Depreciation in World War II
Under the Revenue Act of 1940, defense-connected
facilities could be written off within five years or in a
shorter period depending upon the duration of the emer
gency. The method of granting certificates of necessity
was similar to that now in use. In fact, the regulations
governing the administration of the present program are
merely an amended version of those in effect during
World War II.
Of the 23 billion dollars worth of defense plants built
during the 1940-45 period, 17 billion were Government
owned. Only four billion dollars worth of private projects
were granted certificates permitting accelerated depreci
ation and almost all of these were instituted prior to the
end of 1942.
The dollar value of facilities for which certificates have
been granted during the past seven months already ex
ceeds substantially the total approved in the five years
of the World War II emergency. This volume may be
expected to grow considerably since the Government
plans to leave most of the emergency expansion in the
hands of industry and private financial institutions. Busi
ness is more willing to undertake this task than it was
during World War II because (1) there is more con
fidence in post-emergency demand and business is in a
stronger financial position, (2) a larger share of the ex
pansion is for basic capacity which can be used to satisfy
civilian requirements, (3) proposed facilities are being
planned and located with less haste, and (4) business
managers prefer to see the new industrial plants in private
Page 10
hands. There is good reason to believe that if industry did
not proceed with the expansion now contemplated that
the Government would build the facilities itself. Under
these circumstances it is possible that most of the new
private capital expenditures would be undertaken even
in the absence of special inducements such as rapid
amortization.
The most serious objections to the program are those
which relate to the inflation problem ahead. Accelerated
depreciation will cut Government revenues substantially
(perhaps by over 500 million dollars per year). In addi
tion, the expansion plans now in the planning stage will
reduce the materials available for the production of
finished goods. If these supplies were used in the output
of armaments or consumer goods, the inflation threat
which will accompany the step-up in military ex
penditures as the year progresses could be moderated.
Effect on Taxes and Profits
The immediate effect of faster amortization of new
fixed assets will be to decrease a firm’s profits and taxes,
and to increase the cash at the disposal of its manage
ment. The process is especially advantageous to a firm
with an unfavorable excess profits tax base because of
low earnings in the 1946-1949 period or a small invest
ment. If the assets covered prove to be of use in making
income for business after the five-year period has elapsed,
the process will begin to work in reverse since no more
depreciation can be taken after the original cost has been
“recovered.”
In general, rapid amortization will reduce profits and
taxes in the early years of an asset’s life and increase
them in later years. The main impact of the new program
upon the financial position of business will be that addi
tional cash represented by tax savings will find its way,
temporarily at least, into business coffers. Since few
firms keep separate depreciation reserve funds in cash
or securities, the money is available for general business
uses.
For many firms the availability of this cash will ob
viate the need for additional outside financing. Others
may employ the money to repay debts, increase wages
and salaries or dividends, or to build up a cash reserve.
The pressure for additional payments to employees and
stockholders should not be particularly strong since
profits will be lowered.
Depreciation is not a large item compared to other
corporate expenses. For all manufacturing firms in 1950,
depreciation and depletion amounted to only a little over
two per cent of sales. Even in the case of such
heavy manufacturing industries such as steel, depreci
ation is not likely to be much above five per cent of sales.
However, the importance of depreciation lies not in its
magnitude compared with other expenses, but in the
fact that it represents funds retained in the business
rather than money paid out. The more valid comparison
is with profits. Some firms have obtained certificates for
new projects which will result in additional depreciation
expense equal to 1950 profits.
NEW CAPITAL NEEDED IN SOIL IMPROVEMENTS
{Continued from Inside Front Cover)
acre. Two-thirds of the per acre costs were for lime,
phosphate, fertilizer, and water disposal while the re
mainder was for buildings, equipment, machinery, and
livestock to utilize the increased production of roughage.
The additional yearly income of $8.27 per acre was suffi
cient, however, to recover the investment in four years.
Ten years of records on McLean County, Illinois,
farms indicate that benefits from a good soil manage
ment program increase from year to year. Farms on
similar soil types were studied by University and Soil
Conservation Service specialists. These were divided into
two groups according to the amounts spent for soil im
provements. In 1936 when the study was getting under
way, net income for both groups of farms was about the
same. However, the 1936-40 average income per acre for
the group with the greater investment in soil improve
ments was $2.36 per acre higher; for the 10 year average
(1936-45) it was $3.46 higher (see accompanying chart).
Studies in Wisconsin indicate that measures to retard
soil erosion need not be expensive or time consuming.
For example, costs of various types of terraces ranged
from about four to eight dollars per acre. The hours of
labor per 1,000 feet of terrace ranged from about four
to fourteen (see accompanying table). Crop yields were
from 10 to 15 per cent higher on terraced than on unter
raced land. Assuming no yield advantage for the
first year, terraces more than paid for themselves in
three years.
Since the evidence indicates that investments in im
proved soil management practices are profitable, why are
such practices not adopted more rapidly? Some farmers
feel that making additional investment in their land
would retard present debt retirement schedules. Others
may be reluctant to encumber land owned clear of debt.
The changes frequently would reduce income temporarily.
This complicates the financial problem and increases the
reluctance to make the investment even though longerrun income prospects would be greatly improved. For
tunately, on most farms in the Seventh District soil in
vestments can be started modestly, progressing on a field
by field basis if necessary until the entire farm is cov
ered. If desired, livestock can also be expanded gradually
as funds and skills in handling are required.
TERRACE CONSTRUCTION COSTS
139 WISCONSIN FARMS, 1949-50
Regular Terraces
Item
Number of farms.........
Lineal feet per farm.. .
Hours per 1,000 feet . .
Costs per 100 feet....
Costs per acre...............
Hired
Farm
Public
Tractor1
Equipment and Plow
95
4,210
3.1
$1.36
$4.54
18
2,076
9.6
$1.45
$3.80
Diversion Terraces
Whirl
wind
Plow
8
4,535
5.5
$2.08
$7.87
Hired
Farm
Public
Tractor1
Equipment and Plow
13
1,042
6.3
$2.38
—
5
705
13.9
$2.27
'Farm tractor costs estimated at $1.50 per hour.
SOURCE: U. S. Soil Conservation Service and the Wisconsin Agricultural
Experiment Station.
Financing Soil Improvements
Normally, few farmers possess sufficient funds to in
stall a complete soil improvement program at one time,
and unless soil conditions are extremely serious they
usually should not attempt to do so. Careful appraisal of
the farm needs, deciding on the over-all program, and
following through with its gradual development as time
and capital resources permit probably is the best pro
cedure on most farms.
Many plans have been suggested as a basis for finan
cing soil improvements. It is generally proposed that
loans be based on the amount needed to carry on the
work outlined in a complete soil improvement porgram,
and disbursements made over a period of several years
as individual jobs are undertaken. Repayments are com
monly scheduled in accordance with the anticipated in
crease in income resulting from the investment made. The
real estate normally serves as security for the soil im
provement loan leaving the farmer’s machinery, feed,
and other capital free for other operating credit needs.
Some lenders hesitate to make a formal commitment
for a complete program extending over several years.
Likewise, some farmers are not willing to commit them
selves to a complete program for the whole farm. In
these instances a series of more limited agreements in
volving specified jobs and relatively short-term loans
may be worked out satisfactorily. The lender and bor
rower should have a complete plan made, however, and
consistently work toward this longer term goal.
It should be emphasized that many needed soil im
provements in the Seventh District states can be made
with relatively short-term loans. A typical example would
be a loan to purchase fertilizer needed to obtain maximum
production from high yielding varieties of hybrid corn.
Practices of this type give prompt financial returns and
should be encouraged in the present situation to provide
needed increases in production. This, in no way, belittles
the importance of measures providing slower financial
returns and which frequently are of importance in the
long run. Practices providing prompt returns, however,
will help provide capital needed for improvements.
Some lenders emphasize that properly planned and
serviced soil improvement loans are a type of farm mort
gage financing that adds to the real value of the security
while the principal indebtedness is being reduced. This
type of financing overcomes one of the major weaknesses
of conventional mortgage credit in which the lender
has no control over the use or maintenance of the land
which provides the security for the loan.
A large amount of additional capital could be in
vested profitably in soil improvements in the Seventh
District states. Banks and other institutions not now
making such loans might investigate local needs and
consider the development of workable procedures for
financing this kind of capital investment. The effective
use of credit for this purpose should work to the advan
tage of both borrower, lender, and the community, and
it would assist in the maintenance of highly productive
soil resources on a permanent basis.
Page 11
The Trend of Business
War Orders Begin to Take Hold
The nation’s productive machine is swinging into the
expanding rearmament effort with remarkable smooth
ness. Substantial restrictions in the use of strategic ma
terials in the July-September quarter have been an
nounced, but the immediate effect upon manufacturers
will be softened by lagging consumer demand and bulging
inventories. Some layoffs have occurred in Seventh Dis
trict plants but steadily growing defense activity should
gather up any slack which may develop. Apparently,
1951 will not see a serious “conversion recession” or “in
ventory slump” as was predicted in many quarters early
this year.
Contracts awarded by procurement agencies con
tinue to flow to plants in this area. Although total busi
ness loans of District banks have been relatively steady
since early March, loans to defense contractors recently
have been moving upward at a rapidly accelerating rate.
There has also been a sharp upswing in applications for
V-loan guarantees.
By far the largest number of defense contracts are
for everyday goods which can be produced without re
vamping production lines. The big items, however, are
the military hard goods—tanks, planes, vehicles, and ord
nance. Automobile firms have a seven billion dollar back
log of orders for goods of this type. Most of this material
will be produced in plants located in Michigan, Indiana,
and Illinois. These contracts usually require a lead time
of 12 months or more, even if an existing plant is used.
New plant construction will employ a larger share
of available materials in the months ahead. Contract
awards for new facSAVINGS AND LOAN ASSOCIATIONS*
tories in the Sev
Dollars
enth District, re
NET SAVINGS INFLOW
ported by F. W.
Y//A 1950
Dodge, total 158
951
million dollars dur
ing the first four
months of this year
compared with 67
million in the com
parable period of
last year.
Some important
defense plants
will be built from
scratch, particular
# Insured Associations, Seventh District States.
ly for the manufac
ture of jet engines. Among these are large factories to
be built by Buick (Chicago area), Chrysler (Detroit
area), and Packard (Utica, Michigan). These three alone
will involve the expenditure of over 100 million dollars.
Total production of civilian durable goods remains
at high levels despite reductions in the output of some
Page 12
items. Television sets are being turned out at a rate twothirds below that of last fall. Most of the automobile
companies laid off workers either indefinitely or for peri
ods of a week or more as a result of parts shortages or
slower sales. Manufacturers of refrigerators, stoves, and
washing machines have also reduced output substantially.
Output of steel, the most basic raw material, sets
new records almost weekly. In June, the United States
Steel Company plant at Gary scheduled production at
107 per cent of rated capacity. However, the current rate
of output is threatened by a serious shortage of heavy
melting scrap.
The tight labor market in District centers contin
ues. Unemployment claims in Illinois are at their lowest
level since 1946. Indications are, however, that the heavi
est demand for defense workers will not occur until the
first quarter of 1952.
Inventories in the hands of retailers are still high
relative to current sales, but anxiety over this problem
has relaxed somewhat. Nevertheless, the Chicago Associ
ation of Purchasing Agents reports a distinct slackening
in forward buying and ordering which will probably con
tinue as long as retail sales remain at present levels. The
absence of price cutting activity in District cities, fol
lowing the Supreme Court decision which emasculated
existing price-fixing laws, may indicate that the inventory
burden is not as serious as had been supposed. The prob
lem of excess television stocks has been alleviated to some
extent for trade firms by manufacturers’ price cuts, in
troduction of new models, special sales promotions, and,
in certain cases, auction sales.
Savings ate on the rise once again as incomes edge
upward and consumer buying remains at a moderate
level. The net in
flow of funds to MANUFACTURING BUILDING AWARDS*
District savings Million
and loan associa
tions and bank sav
ings accounts in
April compared fa
vorably with a year
1950
ago despite the in
fluence of the large
rebates on GI life
insurance granted
last year. May and
June witnessed
similar accumula
tionS.* RcCOrd
con- *Source!on F.Area
Approximating
the Seventh District.
'
W. Dodge
Corporation.
sumer income and
liquid asset holdings could easily support a third buying
wave if fears of shortages and price increases are revived.
■
@FedFRASER