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BUSINESS CONDITIONS
A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO
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Recent Money Market Developments
Member Bank Accounts Reflect Treasury Operations
Bank investment and deposit changes in the first three
months of 1946 represented a marked departure from the
familiar pattern which characterized the war period. Ac
counts of weekly reporting member banks showed only a
minor shift from Government war loan accounts to private
deposits during January, while in February this relationship
was actually reversed, and in March both classes of deposits
were reduced. Government security holdings expanded to
a peak of 49.7 billion dollars on February 7 and were main
tained at high levels until the March redemptions.
The failure of demand deposits adjusted to expand after
the Victory Loan Drive is attributable to lower Government
expenditures, withdrawals for income tax payments, and
heavy purchases of Government securities by the public,
particularly the restricted issues. Proceeds from the redemp
tion of securities held by nonhank investors were also used
to purchase outstanding Governments rather than to expand
deposits. The strong demand for Governments which devel
oped early in the year reflected both uncertainty as to the
future of interest rates and the prospect, in view of the
Treasury’s large cash balance, that no issues for new money
would be forthcoming in the near future.
While required reserves remained relatively stable, mem
ber banks gained reserves through the return flow of gold to
the LInited States and through a 650 million-dollar reduc
tion in currency in circulation during the first three months
of the year. These factors, however, were far outweighed
by the temporary growth of Treasury deposits at the Reserve
Banks during the latter part of March and by a large net
reduction in Reserve Bank credit. As a result, reserve bal
ances and excess reserves declined more than 500 million
dollars for the period as a whole.
The 900 million-dollar reduction in Reserve Bank credit
between January 2 and March 27 reflected heavy demands
by the banks for certificates which were supplied by the
Reserve Banks. In part, these demands developed as hanks
undertook to replace securities redeemed or scheduled for
redemption in cash. Certificates held by reporting member
banks rose 934 million dollars from December 26 through
February 20 hut declined subsequently as a result of cash
redemptions of certificates in March and sales of certificates
as tax payments and war loan withdrawals tightened the
reserve positions of these hanks. Because of sustained de
mand for certificates by non-reporting banks and others, how
ever, Reserve Bank holdings did not reverse their downward
trend until after March 20. The net reduction in certificates
held by the Reserve Banks amounted to more than 2 billion
dollars during the first three months of the year.
Meanwhile, System holdings of Treasury bills rose 1
billion dollars to a record high of 13.7 billions on March 27.
Bill holdings of reporting banks in New York declined to
111 million dollars on March 27, the lowest level since early
in 1939. Discounts and advances by the Reserve Banks
also showed sizable increases.
Total member bank reserve balances were not greatly
affected by the March cash redemptions. Since the largest
proportion of the redeemed securities was held by commer
cial banks, the effect of cash payment of these securities was
largely to reduce both war loan deposits and earning assets.
Member bank reserve positions were temporarily eased as
a result of the cash redemptions of certificates on April 1
and May 1. The Treasury redeemed in cash 2 billion dollars
of certificates maturing on April 1, and reduced its balance
with the Reserve Banks by about 1 billion dollars. Part of
these funds were absorbed through redemption of maturing
certificates held by Reserve Banks and the remainder went
into bank reserves. Member banks used a part of these
funds to retire Federal Reserve credit outstanding, princi
pally through repurchases of Treasury bills. Member bank
reserves were expanded through the cash redemption opera
tions on May 1, reductions in Treasury and nonmember
balances and sales of bills to the System offsetting the
effects of the decline in Reserve Bank credit which resulted
from the redemption of over 350 million of certificates held
by the Reserve Banks.
Certificates held by the weekly reporting member banks
declined 1.3 billion dollars from March 27 through May 1,
while those held by the Reserve Banks dropped an addi
tional 800 million dollars. Reporting banks continued to
purchase Government securities in the market, and increased
their holdings by about 400 million during this period.
GOVERNMENT SECURITIES AND DEPOSITS
OF WEEKLY REPORTING MEMBER BANKS
BILLIONS
OF
DOLLARS
(ADJUSTED)
Confusion Rules Dairy Situation
Complexities Continue to Puzzle the Industry
The current dairy situation continues to present one of
the thorniest problems in national food administration.
Shifts in the prewar pattern of milk u,ses enforced by regu
lations and rationing have created major problems of
readjustment as the controls relaxed. One outstanding
feature of these readjustments has been the decline in
butter production. In the face of what has been character
ized as unprecedented demand for butter, the total produc
tion during 1946 has been running 25 to 30 per cent below
the low level of production prevailing in 1945.
Creameries have been forced to close, and the complaint
of those associated with the butter industry is that this
unnatural development is due to errors of price administra
tion. Specifically it is contended that the ceilings on butter
are too low and make it impossible for butter producers
to obtain the supplies of butterfat which the market would
absorb if ceiling prices on butter were eliminated, or raised
relative to the prices currently being paid for other dairy
products. It is charged that the absence of price ceilings
on cream for fluid sale and for use in ice cream and other
food products has resulted in prices on cream being high
enough to divert cream away from butter production.
WAR NEEDS FORCED SHIFTS AND CONTROLS
The wartime requirements for food necessitated sub
stantial changes in the utilization of milk so extreme that
the “normal” pattern was materially disrupted. The needs
of the military forces and of lend-lease aid to the Allies had
to be met with products which could be processed so as to
keep for a long time and to economize on shipping space.
Another consideration making for shifts in the dairy in
dustry was the fact that with the tremendously stepped up
demand for foods it was deemed sound policy to encourage
the maximum use of all the nutrients contained in whole
milk. The consequence of these two considerations was a
very material increase in the production of such foods as
cheese and dried and evaporated milk.
When price controls were instituted, ceilings were put
on some dairy products such as butter, cheese, fluid whole
milk, and evaporated and condensed milk; but it was felt at
that time that ceilings on fluid cream would be impractical
of administration. In order to achieve the optimum desired
utilization of milk products the whole list of milk and dairv
products were, during 1943 and 1944, put under restrictive
regulation of one form or another.
Butter was subjected to set-aside orders for Government
purchase. Similar requirements were made with respect to
cheddar cheese and non-fat dried milk solids. The sale of
fluid cream containing more than 19 per cent butterfat was
prohibited. The use of milk solids in frozen dairy foods
was put under limitation. Production of cheese other than
cheddar was restricted. For fluid milk and cream, sales areas
were established, base periods were assigned, and quotas
were set up limiting sales. Following the end of the war
in August practically all of these controls were terminated
or suspended. With the removal of these restrictions milk
was free to move more easily into the different products
and uses in line with the existing price relationships, some
of which remained under price control.
To stimulate additional production of milk, higher re
turns to producers were thought necessary. In lieu of price
ceiling increases, subsidies were paid on butter and cheese.
A “dairy production payments program” was instituted,
payable directly to eligible farmers to cover increased labor,
feed, and other costs. The payments varied by regions and
throughout the seasons, the latter provision being designed
to encourage the production of milk during the fall and
winter months when it is normally lowest. The butter and
cheese subsidies have been eliminated and price ceilings
raised to compensate, but the dairy payments program is
scheduled to continue through the current and coming
seasons.
Beginning in early 1943 a program of subsidies on fluid
milk was instituted for milk distributors operating in 13
important fluid milk markets. The rates ranged generally
from 20 to 40 cents per cwt., determined largely by the
extent to which returns to milk producers would otherwise
have been reduced. The object of this program was to
permit milk distributors to pay higher prices to producers
without requiring higher ceilings or higher prices to con
sumers to be established by the OPA. This program also
was a recognition of the increasing farm labor and other
costs in producing milk and of the competitively attractive
alternative lines of farm production.
The importance of the subsidies paid on milk and dairy
products is indicated by the fact that in 1945 such subsidies
constituted nearly one-sixth of the total returns to producers
on the milk and butterfat sold. The dairy production pay
ments program, payments made directly to farmers, alone
accounted for most of these subsidies, amounting to nearly
14 per cent of the total returns to farmers.
PRODUCTION SHIFTS
The total production of milk on the nation’s farms ex
panded substantially during the war years. During the five
prewar years the average production was 105 billion pounds.
For each of the three years, 1942-44, production was 118 to
119 billion pounds. Last year all records were broken with
an output of over 122 billion pounds. It is expected that
1946 production will show a very material decline below
this figure, variously estimated at 3 to 7 or 8 per cent. With
rising labor wages paid to farm hands and with increasing
Page 1
scarcities of feed, some farmers are reported to be reducing
their dairy herds, either in whole or in part.
.............. ..
A study made in the spring of 1942 indicates that families
with intermediate incomes consume about 50 per cent more
dairy products per person than do families with low in
comes. But the differences in consumption are much
greater for some products than for others. The intermediate
income families appear to spend about six times as much for
cream as do the low income families, four to five times as
much for ice cream, twice as much for cheese, and 50 per
cent more for butter and fluid milk.
The combination of Government limitations on product
use, price and subsidy programs, and the changing demand
resulted in expanded production of milk and in marked
shifts in the utilization of milk in different products. In
the five prewar years, 1936-40, 31 per cent of the total farm
production of milk was consumed in fluid milk or cream.
For 1945 over 38 per cent of milk production was consumed
in this manner. In the prewar years only 5 per cent of the
milk went into the production of American cheese, whereas
for the last year over 7 per cent was utilized for cheese.
Evaporated milk absorbed a little over 4 per cent in the
years before the war, while last year it accounted for nearly
7 per cent of the total. The proportion utilized for ice
cream production increased from 3.2 per cent before the
war to 4 per cent of the total milk produced in 1945.
Creamery butter utilized nearly one-third of the total
farm milk production in the five prewar years, while cur
rently only about one-fifth of the total milk produced is
going into creamery butter. An examination of the produc
tion trends during the war reveals that butter was the only
dairy product to decline during the war years.
The production of creamery butter totaled 1,872 million
pounds in 1941. For last year, production is estimated to
have been 1,370 million pounds. After deducting Govern
ment requirements, the per capita consumption by the
civilian population was about 14 pounds in 1941 as against
8 pounds last year. The American Butter Institute estimates
that only 900 million pounds will be produced in 1946 if
the present trends in total milk production and utilization
continue, and that after allowing for Government require
ments and the increase in population, the civilian per
capita consumption will be about 6 pounds.
These figures do not include the civilian consumption of
farm-churned butter amounting to about 3 pounds per
capita. Consideration of table fat consumption should also
include mention of oleomargarine. In prewar years the aver
age consumption was just over 2 pounds per person.
Currently the rate is over 4 pounds.
Creamery butter production in 1945 was more than 20
per cent below the 1936-40 average. American cheese out
put last year was more than 60 per cent above the prewar
average, and output of other types of cheese was nearly 50
per cent above prewar. In the case of evaporated milk, 1945
production was more than three-fourths above prewar. The
output of ice cream was nearly doubled. While still a
relatively small factor in the dairy products picture, dried
whole milk was expanded more than ten fold during the
war. The consumption of fluid milk and cream expanded
Page 2
by 50 per cent.
ARE PRICES OUT OF LINE?
With the end of most of the limitations, regulations, and
rationing during the latter part of 1945, milk has been
shifting again into uses according to relative prices. There
have been large increases in the use of milk in the form of
fluid milk, cream, and ice cream. During the last quarter
of 1945 uses of milk for ice cream and fluid cream were
more than 40 per cent above the last quarter of 1944, and
the consumption of fluid milk was up by 6 per cent. These
increases were made at the expense of butter, cheese, and
evaporated milk, consumption of which had declined by
19, 5, and 19 per cent respectively. These very substantial
shifts fell with terrific impact upon the processing and
distributing industries which normally manufactured or
distributed butter, evaporated milk, and cheese. Representa
tives of these industries have repeatedly urged price adjust
ments upward which would permit them to obtain a larger
proportional share of the total milk supply to manufacture
their products.
One of the charges that has been made with regard to
the price administration of dairy products is that because
of the price ceiling on butter this product is suffering a
relative price disadvantage. It is difficult to support this
contention oh the basis of wholesale market prices. The
wholesale prices of milk and other dairy products, on the
basis of representative market quotations, are currently 55
per cent above the 1936-40 level. This measurement is
derived by weighting the various products according to
proportionate production of each. On such a basis the prices
of both butter and cheese are in relatively favorable posi
tions to what they were in the prewar years. Evaporated
milk and fluid milk and cream appear to be in a relatively
disadvantageous position. The Chicago wholesale price of
92-score butter during 1945 and currently is 57 per cent
above the prewar average. The wholesale price of American
twins, Wisconsin cheese, is 90 per cent above prewar.
Evaporated milk (the wholesale price of manufacturers) is
only 44 per cent above prewar, while the wholesale price
of 40 per cent cream at New York is up 49 per cent, and
the wholesale price of fluid whole milk in principal cities
is 48 per cent above the prewar averages. From this it would
appear that if the five prewar years be taken as a basis for
normal relationships between the prices of the various dairy
products, American cheese is currently in the most ad
vantaged position, butter is only very slightly above the
relative level for all dairy products taken together, while
evaporated milk and fluid milk and cream are 4 to 7 per cent
below the current level for dairy products as a whole.
In spite of the apparently greater relative increase in the
price of butter than in the price for cream, the volume of
cream utilized for creamery butter manufacture has de
clined while the volume used for fluid consumption has
been increasing materially. A partial explanation of this
shift may lie in the fact that the actual value of butterfat
in cream sold at wholesale in the principal cream markets
has risen more than the price received by farmers for
butterfat sold. In other words, current margins between
these two prices are larger than normal. While this might
tend to encourage the utilization of more cream for fluid
consumption and less for manufacturing butter, the extent
of the increase in the differential appears inadequate to
explain the shifts in utilization that have taken place as
to the two uses. In other words, a readjustment of butter
prices that would re-establish the differentials prevailing
before the war would not appear sufficient to divert enough
cream to the making of butter to re-establish the normal
proportionate relationships prevailing before the war.
OTHER FACTORS THAN PRICES IMPORTANT
Perhaps a partial explanation lies in the fact that larger
incomes are in the hands of civilian consumers. It has
already been shown from the figures cited on consumption
by different income classes that as incomes rise, consumers
tend to expand their consumption of fluid cream, ice cream,
and cheese much more than they do their consumption of
butter and fluid milk. Such indications, however, cannot
possibly be twisted to justify an actual reduction in butter
consumption. But the operation of these tendencies as to
incomes would help to explain the increased consumption
of fluid cream and ice cream, both of which were rather
drastically curtailed during the latter part of the war years.
In this sense it would appear unnatural to expect the same
utilization of milk into these products during a high income
period that prevailed during a more “normal” period when
average incomes were lower. It would appear that such a
“normal” utilization would require relatively higher prices
for cream relative to butter than prevail at the present time.
Another partial explanation of the existing situation may
lie in the fact that farmers, in order to satisfy the wartime
demands for dried non-fat milk solids, shifted from the sale
of farm-separated cream to the sale of whole milk. This is
a shift which many farmers were desirous of making in
more normal times because it is commonly believed among
dairy farmers that a whole-milk market outlet is more prof
itable than the sale of cream alone. As a result of this shift
more cream was available upon which a choice could be
made between manufacture into butter, use in other manu
factured dairy products, or sale as fluid cream. While not
all of such cream was of a quality to move readily as fluid
cream, much of it found ready markets in many areas,
especially in view of the “thirst” for cream, resulting from
wartime restrictions, to which reference has already been
made. When in addition to this factor it is remembered
that there was a wartime growth of population in urban
centers and that to some extent such centers of population
reached out farther and farther for fluid milk supplies, it
is not surprising that the shift away from farm separation
of cream to the sale of whole milk has put the butter
manufacturing industry to some extent in a position of
disadvantage.
During 1945 there was a decrease of 3 per cent in the
number of milk cows on farms in the nation. According to
current indications this decrease has continued during 1946.
This decrease in numbers has tended to curtail milk pro
duction in recent months. However, the decreases in dairy
cows have been relatively much greater in the west north
central states in which milk is sold primarily for manu
facture into butter. This has tended to decrease butter
production relative to the production of other dairy products.
The areas reporting greatest decreases in milk cows also
reported the greatest increases in hog numbers, thus indicat
ing the increasing competition of hogs for the scarce feed
and expensive labor on the farms in these areas. Labor
requirements for dairy herds are large relative to some other
farm enterprises, particularly hogs. Farm wage rates have
increased relatively more in recent years in the west north
central states than in any other region.
The problem of restoring "normal” relationships in the
dairy industry is like many other problems of adjusting to
peacetime conditions. Public officials are apparently caught
up on the horns of the dilemma of continuing to fight
inflation on the one hand and to permit free economic
interplay on the other. A large segment of the dairy in
dustry asks the removal of all controls and ceilings to permit
“supply and demand” to establish the relationships between
different dairy products as to utilization and price. Most
dairy farmers want all subsidies and price ceilings removed.
The enterprises associated with the manufacturing and
distribution of some products, particularly butter, ask for
the removal of price ceilings or a higher ceiling for butter.
Defenders of price control as a weapon against inflation
contend, upon the other hand, that given the present level
of consumer demand the removal of all controls would
result in a dangerous increase in the total cost of food to
the consumer. It is further argued that to permit substantial
price increases at this time would be unfair to those con
sumers who have gone through the war period without the
relative increase in incomes enjoyed by some of the people.
This is an argument against inflation, and it can with equal
force be said that someone is always “unfairly” treated
whenever the price of any commodity rises.
At the present time dairy farmers are reported to be dis
couraged with the price prospects for the coming year. The
current Government program for dealing with the dairy
situation, which has been announced but not yet imple
mented, calls for relatively larger subsidy payments under
the dairy payments program and for a reinstatement of the
limitations on the uses of milk in ice cream and on fluid
cream, with an outright prohibition of the sale of whipping
cream. It is also proposed to establish for the first time
ceiling prices on the sale of commercially separated cream
and on the resale of farm-separated cream.
It appears that the price of butter is not greatly out of
line with other dairy products. An increase in the price of
butter might temporarily divert some milk and cream to
butter manufacture, but it is probable that the net result
would be to boost the prices for dairy products generally,
without much permanent increase in the proportion of milk
and cream going into butter. While such a change would
doubtless encourage dairy farmers to remain in maximum
production, it would be in conflict with the determination
to hold food prices in check, which seems to continue as
official policy.
Seventh District Coal Crisis
Bituminous Strike Causes Temporary Economic Paralysis
Lack of coal, attributable to one of the most far-reaching
strikes in the nation’s history, in May paralyzed much of
the economic life of the Seventh Federal Reserve District,
already severely hit since V-J Day hy continual work stop
pages and related production delays. In contrast to most
other Districts which economically are able to make more
extensive use of fuels other than bituminous coal, the
Seventh District, comprising most of Illinois, Indiana,
Michigan, and Wisconsin and all of Iowa, depends almost
entirely upon coal for industrial and domestic fuel uses.
With 15 per cent of the nation’s population, the Seventh
District consumes more than 25 per cent of the bituminous
coal used in the nation, but produces only 5 per cent. Coal
is not only the District’s most important source of power
but also a key raw material for many phases of industrial
production, notably steel and chemicals.
The primary effects of the coal shortage began to appear
shortly after the outbreak of the United Mine Workers
(A.F.L.) strike on April 1 when bituminous coal produc
tion in the nation dropped to about five per cent of its
pre-strike rate. The situation became acute in this District
following the strike on April 30 of the independent Progres
sive Mine Workers who accounted for the remaining coal
production, of vital importance to the Seventh District.
Almost immediate effects were drastically curtailed opera
tions by steel plants, railroads, and to a somewhat lesser
extent by utilities. Illustrative of the basic dependency of
the District upon coal and of industries upon each other,
secondary effects of the coal crisis have permeated virtually
all phases of the District’s economic life.
The short-run outlook for Seventh District industry and
commerce continues to be pessimistic in contrast to previous
expectations because, although coal production was tem
porarily resumed by union authorization on May 10, con
sumption of this coal has been necessarily limited to uses
essential to public health and safety. Consequently, non
utility industrial and commercial coal inventories continue
to be gravely depleted where they have not already been
exhausted. When full coal production is resumed, moreover,
from one to two weeks at least will be required before the
newly mined coal will reach many primary consumers.
Although the Seventh Federal Reserve District produces
comparatively little coal, about 45 per cent of its coal require
ments are mined within the five District states, principally
in the downstate areas of Illinois and Indiana which lie in
the Eighth Federal Reserve District and which form the
principal center of strength of the Progressive Mine
Workers Union. Most of the remaining 55 per cent of the
coal consumed in the District is received from the more
distant Appalachian fields.
During the peak of wartime production in 1944, more
than 160 million tons of bituminous coal and lignite were
Page 4
consumed by all users in the Seventh District states. In
dustrial firms are by far the most important consumers of
soft coal in this District, accounting for approximately 75
per cent of total consumption. Railroads require more than
one-fourth and utilities bum somewhat less than a sixth of
the industrial coal consumed, with the remaining coal
tonnage largely used by manufacturing and commercial
establishments. Although coal requirements for industrial
production since V-J Day have been somewhat less than
during the war, the necessary volume of tonnage is still
well above prewar requirements.
Soft coal is the predominate fuel used for residential
heating in the Seventh District. More than 75 per cent of
the District’s dwellings are heated by bituminous coal or
coke, as compared with only 40 per cent in the nation.
Although production of bituminous coal increased sub
stantially during 1941-45, consumption also expanded at
least to the same extent. Despite wartime conservation
measures and the decline of some soft coal requirements
following V-J Day, a continuing high level of consump
tion prevented any substantial stock-piling of coal. Imme
diate pre-strike inventories, consequently, on the average
were not only seasonally low but as limited as at any time
during the war emergency. Moreover, the situation was
aggravated by uneven distribution of existing supplies.
In the Seventh District, as elsewhere, the coal strike had
its most immediate and sharpest effects upon prime users
of coal, resulting in loss of employment for at least 50,000
workers making basic iron and steel products and for thou
sands of others in railroads and coal by-product industries,
in addition to more than 20,000 coal miners. As the strike
continued, the number of workers adversely affected
mounted at an increasing rate, so that after six weeks it is
estimated that for varying' periods of time the employment
of more than half of all manufacturing workers and proba
bly at least a fifth of non-manufacturing workers in the
District had been completely or partially interrupted be
cause of fuel and power shortages and the related trans
portation embargo.
Within the Seventh District, the Chicago industrial area
has been most severely hit by the coal shortage because of
a greater-than-average dependency upon coal, more depleted
pre-strike inventories, and near “hand-to-mouth” reliance
upon downstate Illinois-Indiana coal supplies for major
utilities. Dim-out restrictions upon the use of power limited
electric consumption by industrial and commercial firms to
24 hours per week. All other District industrial areas were
affected by coal and related material shortages, but power
restrictions generally were voluntary and less severe than
in Chicago. In almost all instances, however, more drastic
conservation measures were about to be undertaken when
the strike “truce” became effective.
Federal Aid for Public Airports
500 Million Dollars of Grants Authorized for Seven-Year Program
The Federal Airport Act, approved by President Truman
on May 13, 1946, establishes a Federal policy toward the
financing of terminal facilities for commercial and private
flying which will keep ownership and operation of air fields
by the Federal Government at a minimum hut will offer
substantial inducements to states and municipalities to
provide these facilities. In its broad outline the policy con
tained in this Act is a logical outgrowth of the Federal
interest and contribution to developments in airport finance
and ownership during the past two decades. Twenty years
ago the Air Commerce Act of 1926 excluded ownership,
operation, and maintenance of airports from an authoriza
tion to the Secretary of Commerce to establish and operate
air navigation facilities. The policy of leaving airport owner
ship and operation in private hands or to state or municipal
authorities was amended by the Civil Aeronautics Act of
1938 by permitting the Administrator of Civil Aeronautics
to establish, construct, or operate airports but prohibiting the
Administrator from acquiring any airport by purchase or
condemnation. Under this authority the Civil Aeronautics
Authority leased and developed the C.A.A. Intermediate
fields as essential facilities for air commerce.
The Federal Airport Act is designed to promote the de
velopment of a nationwide system of airports capable of
serving the needs of civil aviation by encouraging state and
local governments to acquire or construct new ports or to
enlarge and improve those they already own. Federal funds
will be available on a matching basis for investment in
facilities that fit into the National Airport Plan to be de
veloped by the Civil Aeronautics Administration. Authori
zation for appropriations aggregating 500 million dollars
over a seven-year period are provided. After allowance for
the Administrator’s planning program and administration
costs, 118.8 million dollars is set aside as a discretionary
grant fund. The remaining 356.3 million dollars is allocated
among the states by a statutory formula based on area and
population. The total seven-year allocation to the Seventh
District states under the formula is 45.8 million dollars;
the Illinois share is 14.1 million dollars; Indiana, 6.8 million
TABLE 1
AIRPORT OWNERSHIP IN THE UNITED STATES
1927-45
Number of Airports
Type of Owner
1927 1932 1937 1942 1945
Municipalities ..................
414
717
990 1,129
979
Commercial ......................
409
872
778 1,069
883
CAA Intermediate..........
134
352
283
273
242
Military, Private, & Misc.
79
101
158
338
982
Total .......................... 1,036 2,042 2,209 2,809 3,086
SOURCE: Public Aids to Domestic Transportation,
79th Congress, 1st Session), p. 485.
(H. D. No. 159,
dollars; Iowa, 6.8 million dollars; Michigan, 10.6 million
dollars; and Wisconsin, 7.6 million dollars. The amount to
be spent in any one of these states may be increased by
grants to the extent that the Administrator deems a larger
expenditure in that state is essential to the national airport
plan and if matching funds are locally available.
AIRPORT DEVELOPMENT
In the past twenty years the interest of several Federal
agencies in aviation development has been a major factor
in airport expansion, but financial aid has been a by
product or incidental to other purposes. Shortly after World
War I, when airmail service was initiated, the Post Office
Department was active in promoting airport development.
The Army in these early years also stimulated interest in
civil aviation. Federal financial assistance for civil airports,
however, began with the emergency relief construction
programs of the early and middle 1930’s. The Civil Works
Administration, the Federal Emergency Relief Administra
tion, and the Public Works Administration spent approxi
mately 32.5 million dollars for airport construction. The
larger and better coordinated program of the Works Projects
Administration involved expenditures of 331 million dollars
up to the end of 1942.
None of these programs, however, bore the necessary
relationship to a balanced and integrated plan of airport
development calculated to cover aviation needs of the
country. The need for military airport facilities at the
beginning of World War II led to another era of substantial
Federal expenditure. Here, again, the emphasis was on
military needs and not on those of civil aviation; many of
the fields built for wartime needs are of scant importance in
peacetime. The Civil Aeronautics Administration, under
whose direction the construction of national defense airports
was carried out during the defense and war years, spent
331 million dollars for these facilities up to March 1, 1945.
Except for regular Army or Navy airports, intermediate
emergency landing fields leased and operated by the Civil
Aeronautics Administration, the Washington National Air
port, and a small number of landing areas owned by such
Federal agencies as the Park Service and Forest Service, the
Federal Government neither owns nor operates airports.
Virtually all of the larger civil airports are owned by cities
or counties or their instrumentalities; they are usually
publicly operated, though private operation in whole or in
part is a common practice. A large number of airfields
suitable for private planes are owned and operated com
mercially or simply as private ports by one or a small group
of plane owners. The character of airport ownership during
the past twenty years is indicated in Table 1.
Exclusive of expenditures made directly by the War and
Page 5
Navy Departments, the Federal Government has invested
approximately 700 million dollars in airports up to the
present time. Nearly half of this total was allocated to large
airports used for commercial air transport. Up to 1941 the
states made capital outlays for airports of nearly 13 million
dollars and the localities of over 150 million dollars. At
the end of 1945 state and local investment probably totals
well over 300 million dollars, of which from two-thirds to
three-fourths has been for the larger air terminals. Omitting
the exclusively military, private, and commercial ports from
consideration, the present airport system involves a gross
investment of over one billion dollars. On account of the
fact that military needs have dictated much of the Federal
construction, that unemployment relief was a major purpose
of Federal grants in the 1930’s, and that the rapid techno
logical changes in aircraft have altered terminal require
ments, the billion-dollar investment overstates the reproduc
tion cost of publicly owned airports suitable for civil aviation.
ACT REQUIRES NATIONAL AIRPORT PLAN
The Federal Airport Act charges the Administrator of
Civil Aeronautics with the responsibility of formulating and
annually revising a national plan for airport development.
The plan must specify the general location of airports and
the type of development suitable to each location. The facili
ties thus provided are reasonably to anticipate the needs of
civil aviation including both air commerce and private fly
ing. In the preparation of the plan, the Administrator is to
consider technological changes and developments in aviation
and to consult with the state authorities concerned with
aviation, the Civil Aeronautics Board, the Federal Com
munications Commission, and the military services. While
the primary objective is to provide for civil aviation, national
defense considerations and aviation programs of the military
services are to be taken into account. The initial costs of
planning and research are to be met by an immediate appro
priation of 3 million dollars to the Administrator and by
succeeding appropriations of 3.5 million dollars or 5 per cent
of the annual grants for airport acquisition and construc
tion whichever is larger. This amount will cover administra
tive, planning, and research expenses of the Administrator.
The planning of a national airport system and the adminis
tration of Federal aid, therefore, visualizes the expenditure
of approximately 28 million dollars.
GRANTS TO STATES AND LOCAL GOVERNMENTS
Federal grants for airport construction are available only
to public agencies; specifically, to states, counties, cities,
villages, and other local.governments, including such specialpurpose units as airport authorities and governmental in
strumentalities. A limited number of Federal agencies also
may qualify. No provision is made for assistance to com
mercial or private ports, and a public agency must hold title
to the site or give the Administrator sufficient assurance
that such title will be acquired. The Act, however, contains
no restrictions on the leasing of public ports to private
operators; presumably, if a municipality so desired it could
Page 6
obtain Federal funds to acquire a site, construct an airport,
and lease the port to a private operator if other conditions
were complied with.
Other conditions under which Federal funds are available
relate to the project itself and to the operation of the field
after the project has been completed. Federal monies are
restricted to outlays necessary to development in conform
ance with plans developed from standards set by the Civil
Aeronautics Administrator. These standards include such
matters as site location, airport layout, grading, drainage,
paving, lighting, and safety of approaches. Under these
conditions a grant agreement can be entered into between
the municipality and the Administrator. The Administrator,
however, also is required to receive assurances in writing
that the following conditions will be satisfied when the
airport is placed in operation:
(1) Facilities will be available for public use on fair and
reasonable terms and without unjust discrimination,
(2) The port and its facilities will be suitably operated
and properly maintained,
(3) Aerial approaches to the port will be cleared or pro
tected by mitigating existing hazards and by pre
vention of future hazards through zoning,
(4) Facilities are to be available for use of military and
naval aircraft at all times without charge unless such
use is substantial, in which case a reasonable propor
tion of the cost of operation and maintenance, based
upon use, may be charged,
(5) Space in airport buildings required by Federal
authorities for air traffic and control, weather report
ing, and communications activities related to traffic
control shall be available without cost except for
light, heat, and similar facilities, and
(6) Financial accounts and records relating to the project
shall be kept in accordance with the accounting
system prescribed by the Administrator, and annual
statements and special reports on operations shall be
available to the Administrator.
Under these conditions the participating local government
may receive a grant of up to 50 per cent of the cost of
airport development undertaken subsequent to the enact
ment of the Federal Airport Act provided that the total of
such grants including administrative costs may not exceed
100 million dollars in any one year. The total expenditure
may include original construction, improvement, repair of
the airport itself and the administration buildings, the re
moval or marking of hazards, the making of surveys and
plans, and the acquisition of sites or rights to air space. The
construction is specifically excluded.
The precise proportion of sharing depends upon the type
of airport. The various classifications contemplated by the
Act are shown in Table 2. For Class III and small airports,
50 per cent of the allowable costs is to be granted. For the
larger airports the proportion may be as much as 50 per cent
or it may be less, at the Administrator’s discretion. The
proportion may be increased up to as much as 25 per cent of
the total cost in states—typically in the West—where there
are large holdings of public lands or non-taxable Indian
lands. In addition there is a restriction on aids for the por
tion of airport costs for acquisition of site and interests in
air space. 1 he Federal share of these costs for smaller ports
is 25 per cent, and, in the case of larger ports, may be less
than 25 per cent, also at the discretion of the Administrator.
GRANTS FOLLOW FEDERAL AID PATTERN
The grant policy incorporated in the Airport Aid Act
resembles with only two important differences the pattern
of Federal aid to states for highway construction. The
amounts available for expenditure are to be fixed by annual
lump-sum appropriations of the Congress. (The Act itself
appropriates no funds but merely provides a parliamentary
authorization with specified limits for subsequent annual
appropriations.) Three-fourths of these annual amounts,
after the deduction of planning and administrative costs,
are apportioned among the states by a statutory formula
giving equal weight to population and area. At least 50
per cent matching is required from states and localities
except in states where large areas of public lands are
located, this modification is adapted from highway aid
precedents. The section which permits the Civil Aeronautics
Administrator to apportion 25 per cent of the annual grant
to airports most urgently needed, regardless of their geo
graphical location, does not affect matching requirements,
but it does permit a different distribution among the states
than would obtain if the entire fund were apportioned
according to formula. This discretionary power was not
provided for in the Federal Aid Ffighway Act which appor
tions the entire Federal grant by statutory formula.
To the extent that the 25 per cent discretionary allotment
is apportioned to Class IV and V airports, each specific
grant is subject to approval by the Congress. While the
Act does not so require, it is likely that a large portion of
the discretionary fund wall be allotted to the larger airports.
Indeed, one of the earlier versions of the Airport Aid Act
specifically earmarked 35 per cent of total grants for the
development of Class IV and V airports. Affording a Federal
agency some range of discretion in allocation of grants is
now a fairly common feature of the Federal grant policy; it
permits greater flexibility in the over-all program than can
TABLE 2
CLASSIFICATION OF AIRPORTS
Class
Aircraft
Capacity
i
Privateowner
smaller
type
®;Place aircraft—adequate for aircraft up to
4,000 lb. gross weight; adapted to needs of small
communities & auxiliary airports in metropolitan
areas; landing strips 1,800 to 2,700 ft. in length.
IT
Larger
privateowner and
smaller
transport
Up to 20 place; adequate for aircraft to 15,000 lb.
gross weight; for communities of 5,000 to 25 000
population ; runways 2,600 to 3,500 ft. in length.
nr
Present-day
twin-engine
transport
Up to 30 place; adequate for aircraft up to 50,000
lb. gross weight; cities of 25,000 to 250.000 popu
lation; runways 3,500 to 4,500 ft. in length.
IV
and
V
Largest in
use and
planned for
immediate
future
30 place and larger; adequate for aircraft of
more than 50,000 lb. gross weight; major metro
politan centers and air terminals ; Class IV run
ways 4,500 to 5,500 ft. in length; Class V
runways 5,500 ft. in length and over.
SOURCE: Civil Aeronautics Administration, Civil Aeronautics Jour
nal, August 15, 1944, p. 100.
be attained by a complete reliance on a rigid formula.
The aid bill enacted by the House prohibited Federal aid
for site acquisition. This restriction was removed in the
Conference measure and, as enacted, Federal funds are
available for any expenditure excepting hangars.
The other feature that distinguishes grant policy under
the Federal Airport Act from the majority of Federal aid
programs is the provision that the Civil Aeronautics Admin
istrator may deal directly with municipalities and local
governments instead of channeling all funds through a state
agency. The precedents for this policy are limited. While
Federal aid for highways often has ultimately been disbursed
for local roads, funds have been channeled through state
highway departments. During the I930’s, the "Federal
Government through the WPA and PWA entered into
direct loan and grant negotiations with local governments,
but this practice has not been incorporated into the typical,
permanent grant-in-aid program. This particular feature of
the Airport Act was vigorously contested in the Congress.
The original House bill permitted the Federal Government
to deal directly with the local units, while the Senate bill
required all funds to be channeled through some state
authority. The final compromise permits direct dealing
between the Administrator and the localities excepting
where a state forbids it by statutory enactment. The issue
involves a deep-seated difference of opinion as to the proper
intergovernmental relationships. The states, through the
Council of State Governments, took the position that the
Federal Government should at all times effect such policies
as concern local units, with the states as intermediaries. The
Conference of Mayors, on the other hand, contended that
airport construction was a vital and direct concern of the
cities, and, that since the states had evidenced little or no
interest in such construction, a direct Federal-municipal
relationship was preferable.
States have had only a casual interest in promoting and
developing civil aviation and that their expenditures for
terminal facilities have been a small fraction of those of
municipalities or the Federal Government. Recently, how
ever, state aviation departments and aeronautical commis
sions have been created in the majority of the states, and it
is possible that state funds for airports will be forthcoming
in the future. The cities and other local units of govern
ment, because of their limited revenue sources, are typically
less able to provide funds for airports than the states with
their relatively well-developed revenue systems. The greater
part of large municipal expenditures for airports have come
from bond issues serviced from property tax levies and from
charges and rentals paid by users of such facilities. The
states generally have not yet demonstrated their willingness
or interest in making the financial contribution required
for airport development. While a majority are now fumishing technical and advisory assistance to municipal authorities
for airport location, planning, and design, local governments
still have the financial burdens of airport construction and
improvement. The awakened interest of the states in aero
nautics, however, may well make their contribution a sub
stantial element in the matching of some 475 million
dollars of Federal grants during the next seven years.
Page 7
Illinois State Surplus and Debt — III
Prospective Use of State Credit
The likelihood that Illinois will use its credit during the
early postwar years now appears to depend upon policies
adopted with regard to veterans’ compensation and upon
expenditures for airports, super-highways, and housing. A
cash bonus is almost certain to entail borrowing; the expan
sion and modernization of the highway system, airport de
velopment, and public housing may lead to direct or indirect
borrowing by the State, but there is a greater probability
that pay-as-you-go financing or private and municipal credit
will be employed.
Airports—Illinois recently has manifested an interest in
aeronautics by creating a separate code department to pro
mote and foster the development of civil aviation. The Post
War Public Works Act appropriated 2.5 million dollars in
the current biennium for a statewide system of airports to
be developed cooperatively with the Federal Government
and the municipalities. These funds may be used for air
port plans and specifications, for acquisition of land and air
rights, and for construction, improvement, repair, and even
maintenance of airports or landing areas and their related
facilities. It is doubtful, however, that the State will need
to use its credit on even a modest scale to aid directly or
indirectly in the acquisition of land and the construction of
airports. To date, the major governmental outlays for air
ports have come from the Federal and local governments.
The Federal Airport Act, authorizing 500 million dollars in
matching Federal aid for airport construction and expansion
over a seven-year period, may well affect the State’s policy.
That Act provides that Federal aid may go directly to local
communities unless the state prohibits its political subdi
visions from making applications for Federal funds without
first channeling them through a state agency or department.
It does not necessarily follow that if Illinois were to require
this procedure (it does not now do so), the State would
incur a financial obligation to match Federal funds. It seems
more likely, however, that the State will ultimately assume
more direct responsibility for airport financing if the State
Department of Aeronautics exercises such authority than if
funds are granted directly to participating localities.
Highways—No proposals are current to use State credit
directly for highway construction. Some of the counties and
cities, however, have evidenced an intention to use their
shares of the State motor fuel tax to service bond issues for
highway construction.1 In Cook County, for example, con
sideration is being given by County and Chicago officials to
issues of this type for super-highways totaling 90 million
dollars. Large balances in State highway funds, substantial
Federal grants-in-aid, and increases in current revenues from
highway-user taxes are sufficient to finance an extensive
State highway program without resort to borrowing. Further
more, the developmental era for public roads, during which
loans were the only practicable source of funds, is nearly
Page 8
over. Capital outlays for replacement, modernization, and
repair are being met by a well-developed system of highwayuser taxes which are or can be made sufficiently productive
to cover all reasonable demands for highway facilities.
Housing—The prospect of large-scale State borrowing for
housing, even indirectly through the medium of public cor
porations or trusts, presently seems remote. While the de
mand for housing indicates a very large investment in that
field in the postwar years, both local and private capital
appear to be available in sufficient amounts to absorb avail
able material and labor resources. The State’s housing pro
gram, moreover, is primarily directed at encouraging and
facilitating private investment in housing facilities. The
State Housing Board operates through the local Housing
Authority or Land Clearance Commission to assist local
communities with their housing programs and plans. Major
emphasis is placed on slum clearance and site acquisition.
Although the Board has a 10 million-dollar appropriation
for grants to local agencies, it is expected that this sum will
be in large measure a revolving fund to facilitate the tem
porary financing of the cost of sites. Such sites may then be
sold or leased to private limited-dividend housing corpora
tions, insurance companies, or local housing authorities that
will refinance site costs and undertake major construction
outlays.
Veterans’ Bonus—Proposals for a cash bonus to veterans
of World War II are receiving serious consideration. The
64th General Assembly created the Illinois Veterans’ Com
pensation Commission, composed of fifteen members, to
study plans of other states, consult with veterans’ groups,
and develop a plan of compensation and financing suitable
to Illinois. The recommendations of this Commission sub
mitted to the Governor on May 15, 1946, include the use
of the State’s credit to finance the compensation payments.
The Governor called the General Assembly into special ses
sion on May 24. Any action by the General Assembly in
volving a State bond issue must be approved by the electorate
at a general election. A proposal can first be submitted to
the voters in November 1946 and next in November 1948.
The referendum must include a financial plan covering in
terest charges and amortization of the debt.
The Commission report recommends payments of $10 per
month for service in the United States and $15 per month
for service overseas. A minimum payment of $50 for sixty
days’ service and a flat amount of $900 to the next of kin
of military personnel who have lost their lives in the service
are also provided. The total cost is estimated at 385 million
dollars, including approximately 25 million dollars for ad
ministrative expenses. The number of veterans eligible for
benefits is estimated at 916,000. On the basis of these totals,
the average actual payment to veterans would be about $400,
and the average cost of administration approximately $20.
The bonus, if financed entirely by borrowing, would in
crease the State’s outstanding debt to nearly four and onehalf times its present level. The relative significance of the
magnitude of such an issue is evident from the fact that a
385 million-dollar loan would be equivalent to one-fourth
of the net long-term debt now outstanding for all of the
forty-eight states.
Following World War I, seventeen states issued bonds
aggregating 337 million dollars for veterans’ cash bonuses.
One of these states and two others incurred indebtedness
totaling 107 million dollars to establish loan funds for financ
ing veterans’ purchases of homes and farms. Three states
financed cash bonuses out of current tax receipts and some
short-term borrowing. In six states projected bond issues
were either rejected by referendum or the courts and, in one
instance, by a governor’s veto. Nearly all bonus proposals
were first considered at legislative sessions in 1919, 1920, or
1921. Due to constitutional, referendum, and other com
plications, however, some bonuses were not paid until sev
eral years later, e.g., New York in 1924 and Pennsylvania
in 1934.
The states paying cash bonuses were concentrated in the
East (Maine, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island, and Vermont), the
Middle West (Illinois, Iowa, Kansas, Michigan, Missouri,
Minnesota, North Dakota, Ohio, South Dakota, and Wis
consin), and the Pacific Coast (Oregon and Washington).
In the Seventh District, Illinois issued bonds aggregating
55 million dollars; Iowa, 22 million dollars; and Michigan,
25 million dollars. The bonus proposal in Indiana was
vetoed by the Governor, and in Wisconsin tax collections
totaling over 22 million dollars were used for a cash bonus
and educational aids.12
World War II bonuses have already been authorized in
Massachusetts, New Hampshire, Rhode Island, and Ver
mont. New York initiated a bonus plan by enacting a law
in March 1946 authorizing a 400 million-dollar bond issue.
The measure must be re-enacted by the 1947 legislature
before it is submitted to a vote of the people in the fall of
1947. The New Hampshire bonus, authorized in 1943, pro
vides payments of $10 per month of service with a maximum
of $100. It is estimated to cost 5 million dollars. A poll tax
for a two-year period provides a portion of the revenue; the
balance is to be financed by a 3.6 million-dollar bond issue.
The Vermont bonus is similar except that it affords a maxi
mum of $120. The cost is estimated at between 3.5 and 4.0
million dollars and will be paid from a treasury surplus. The
Massachusetts plan, enacted in 1945, provides a flat $100
payment which will aggregate between 60 and 70 million
dollars, and is to be financed on a current and short-term
loan basis by the enactment of additional taxes on liquor,
cigarettes, and corporations. A liberalization of the Massa
chusetts payments is now being considered by the General
Court; it is proposed that veterans with overseas service re
ceive an additional $200 and those with service in the United
States an additional $100. The Rhode Island bonus is a
flat sum of $200 to each veteran and merchant seaman.
Two bond issues are to be submitted to the voters in
November: one for veterans of 19.5 million dollars and
one for merchant seamen of .5 million dollars.
The New York bonus provides $50 for less than sixty
days’ service, $150 for more than sixty days in the United
States, and $250 for service abroad. It is estimated that
1,700,000 persons will qualify for benefits, with 3 per cent
in the first category, 22 per cent in the second, and 75 per
cent in the third.
In addition to these five states in which bonus proposals
have been crystallized and received legislative approval, sev
eral states have set aside treasury surpluses for veterans’
benefits, e. g., Michigan and Wisconsin have postwar funds
earmarked for veterans of 50 million dollars and 7 million
dollars respectively. In some states such reserves no doubt
will be used for cash bonuses with or without supplementary
borrowing.
The specific bonus plans for World War II veterans follow
rather closely the precedents established after World War I
in scale of benefits, timing, and financial arrangements, thus
indicating that the pattern and scope of payments is likely
to compare with that following the first World War after
allowance is made for a threefold increase in number of
eligibles.
1Such issues, however, will carry the pledge of property tax revenues if
other sources of income are inadequate. The probability that some future
General Assembly will decrease city or county shares of highway-user
taxes may be remote, despite the fact that during the 1930’s the emergency
relief bonds were serviced by such a diversion. Short of a constitutional
amendment, there seems to be no way in which these revenues can be
irrevocably pledged to the localities. The 61st General Assembly (1939)
in Senate Bill 184 directed certain State officials to issue notes, payable
from Cook County’s and the City of Chicago’s share of the motor fuel
tax funds accruing after June 30, 1939, and before June 30, 1959. The
proceeds of these notes were to be used for highway and street improve
ments by Chicago and by Cook County in the proportion that their allot
ments of fuel tax revenues were encumbered. In the suit testing the
constitutionality of this act, it was contended that the notes were not
in the nature of anticipation warrants but rather that they were obliga
tions secured by a pledge of motor fuel taxes, which in reality were
service charges or tolls for the use of the highways and that these earn
ings could be earmarked for debt service without infringing on any con
stitutional restriction. The act stated: “Said notes are issued under the
provision of this Act and do not constitute an indebtedness of the state
or of the county or municipality within any constitutional limitation.”
Rejecting this contention and holding the act unconstitutional in People
vs. Barrett, 373 III. 393, April 10, 1940, the court said:
The special fund doctrine, which, in cases of water and electric light
utilities and bridge tolls, constitute an exception to the debt-limitation
provision, is based on the theory that an obligation incurred in the ac
quisition, construction or extension of income-bearing property and payable
solely from the income of that property, is not a debt of the State or
municipality. Such doctrine does not, in our opinion, extend to obliga
tions payable from taxes, which, in whatever form the legislature may
collect them, are State revenues. As we have seen, the limitation by the
constitution of this State upon the creation of debts by the State, includes
not only debts payable from a tax on property but also debts payable
from other sources of revenue.*
“. . . . the General Assembly may transfer motor fuel tax funds from
one use to another, where that fund has not already been pledged to the
payment of bonds theretofore issued in accordance with the provisions of
the constitution. Such funds are revenues of the State, and the General
Assembly, subject to that limitation, is empowered to subdivide them into
any funds it sees fit, or remove them from one fund to another.
.... By attempting to control the maintenance of the tax rate on
gasoline, and, by its obligation under the act, to attempt to maintain the
amount and proportion of the tax raised which shall be paid to the city
for whose benefit the notes are issued, the legislature has thus attempted to
make the State responsible for the payment of those notes and they
become, therefore, the debts of the State. We are of the opinion that
Senate Bill No. 184 creates a debt against the State contrary to constitu
tional limitations.
“. . . . It is fundamental, under our constitution, that the Legislature
possesses every power not delegated to some other department or to the
federal government, or not denied to it by the Constitution of the state
or of the United States.................. this court Thas] held that the General
Assembly has the undoubted right to repeal all legislative acts which are
not in the nature of a private grant .... [and] that it is not competent
for the legislature to attempt to limit its own legislative powers. Under
section 18 of article 4 of the constitution the pledging of funds for the
payment of bonds and interest is permitted when it is done in the manner
set forth, that is, by the approval of the vote of the people at a general
election. Wanting such vote in this case, the General Assembly is without
power to delegate to the executive department the power, by the issuance
of notes, to pledge the motor fuel tax fund for the retirement of those
notes over a period of years, so as to prevent succeeding General Assem
blies from repealing the Motor Fuel Tax Law entirely, reducing the rate,
or changing the purposes or fund into which it is to be paid................”
2Ratchford, B. U., American State Debts, pp. 313-32.
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