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A review by the Federal Reserve B an k of Chicago
Depressed areas—
some lessons from the past
“ Fannie M ae" and credit policy
The Trend of Business
5
12
2-5
Federal Reserve Ba nk o f Chicago
OF
2
X n April and May the upswing in factory
production gained momentum to an extent
which had not generally been anticipated
earlier. By the end of March there was little
doubt that the economy had “bottomed out,”
but most observers had believed that recovery
would come slowly. Now it appears that the
uptrend, in its initial stages at least, may
resemble the sharp revival of 1958 rather
than the sluggish improvement from the low
point in 1954.
The recent surge in production and manu
facturers’ new orders is not based primarily
upon an increase in sales of products to
final users. Rather, the acceleration in the
upswing stems largely from the same source
as the 1960 decline in activity—a sharp
change in business inventory policy. Most
business managers apparently have con
cluded that inventory liquidation programs
have been pursued far enough and, in many
cases, that sales prospects justify higher
inventories.
An important sustaining factor in the
economy throughout the recession period has
been Federal expenditures—cash payments to
the public—which have been increasing con
tinuously since the start of 1960. During the
past six months Government spending, led
by defense outlays, has risen at an accelerated
pace and in the first quarter of 1961 was 1.6
billion dollars, or 7 per cent, higher than a
year earlier.
Construction activity in the aggregate was
well maintained during the recession, with a
BUSINESS
higher volume of Government projects
largely offsetting a drop in private spending
concentrated in housing. A large backlog of
contracts for heavy construction, principally
public works and public utilities, is likely to
bring a rise in activity in the months ahead.
However, thus far in 1961 the increase in
construction activity has been only slightly
more than seasonal. Nationally there is evi
dence of a pickup in housing starts, but this
has not been apparent in the Midwest.
A vigorous business uptrend cannot be
sustained for long on the basis of buying for
inventory. In the absence of a huge, further
increase in Government spending, not now
in prospect, a substantial and sustained rise
Industrial production rose
in March and April following decline
of about 7 per cent in preceding year
per cent, 1957 = 100
B u sin e ss C o n d itio n s, June 1961
in business activity will depend upon an in
crease in plant and equipment outlays, hous
ing and consumer buying of goods and
services. Attention will be focused on the
latter which accounts for about two-thirds of
total output.
There has been no evidence of a strong
rise in consumer expenditures thus far in
1961. In the first quarter, personal income,
after taxes, was 3 per cent above the yearearlier level, but retail sales were down 1 per
cent. April saw a further rise in income, but
purchases of goods at retail declined slightly
from the March level. In addition to higher
income, a rise in purchases may be aided by
consumers’ holdings of liquid assets which
have risen sharply and by the fact that instal
ment debt has been reduced somewhat.
In d u stria l p rod u ction spurts
In February the Federal Reserve’s index
slipped to 102 per cent of the 1957 average
—the low point for production of factories,
mines and utilities—and was 7 per cent
below the level of the early summer of last
year. With steel and autos leading the way, the
index rose to 105 in April. Order trends sug
gest that the improvement continued in May.
Nearly 60 per cent of the membership
of the National Association of Purchasing
Agents reported an increase in new orders
in April, compared with only 9 per cent who
reported a decline. These figures mark a sub
stantial improvement from the first quarter
and are the most favorable in several years.
In May new orders were rising in a wide
variety of hard goods industries, including
primary metals, electrical components, indus
trial equipment, construction machinery and
household goods.
Along with higher production has come a
steady, if modest, improvement in the job
situation. In the first quarter most firms which
Consum er sp e n d in g on goods
lags relative to income
billion dollars
billion dollars
increased production did so by increasing
the average work week. During April, how
ever, recalls and new hirings of production
workers exceeded new layoffs. This trend
has been noted by local employment offices
in many Midwest centers.
In v e n to r y re v e rs a l
Durable goods manufacturers reduced in
ventories by 400 million dollars in March,
an acceleration of the liquidation of earlier
months. However, the simultaneous move
to increase production indicated that a sub
stantial portion of the March reduction in
inventories was not planned but resulted from
a greater-than-expected rise in shipments.
Early in 1960 many business firms took
steps to halt the rising trend of inventories.
Strikes in steel and copper had been settled
and virtually all types of materials and goods
were readily available. Meanwhile sales fell
short of expectations in a number of lines.
Business inventories were being increased
at an annual rate of 11 billion dollars in the
3
Federal Reserve Ba nk o f Chicago
first quarter of 1960. One year later, in the
first quarter of 1961, inventories were being
liquidated at a rate of 5 billion dollars, for
an over-all swing in total demand from this
source of about 16 billion dollars.
Inventory reductions have been concen
trated in the purchased materials and goodsin-process holdings of durable goods manu
facturing firms. Manufacturers have tended
to maintain their finished goods stocks in
order to compete effectively on rapid de
liveries.
The recent change in inventory policy has
been most significant in the area of “pur
chased materials,” thereby reversing the de
velopment of last year. Although the increase
in consumption of steel since last December
has not been large, steel ingots and castings
were being poured at a rate of over 100 mil
lion tons in May compared with only 65 mil
lion tons in the earlier month. Users of
copper and aluminum also have increased
their purchases of these metals. Prices of steel
scrap and most nonferrous metals have
firmed in recent months.
R e tail sa le s la g
4
Since the second quarter of 1960 sales of
durable goods stores, except for the tempor
ary rise in auto deliveries in the late fall,
have been at depressed levels. For the first
four months of 1961 sales of all hard goods
stores have been 10 per cent below the
previous year. Between February and April
there was a greater-than-seasonal rise in new
car sales, but even in the latter month de
liveries were running 17 per cent below the
year-ago total. Sales of most other hard
goods such as appliances, furniture and tele
vision also have been slow.
In contrast, total sales of soft goods, in
cluding food, clothing, gasoline and the like,
traced a high, stable plateau throughout the
Instalm ent credit buying rose
in March after declining somewhat
from the 1960 peak
billion dollars
entire recession period. In the first four
months of 1961 sales of nondurable goods
stores were 2 per cent above the comparable
period of 1960.
Consumers typically hold back on pur
chases which involve large individual outlays
when they are uncertain about business con
ditions, especially when the purchase would
involve going into debt. Under these condi
tions there is also a tendency to restrict buy
ing of clothing. There is much less tendency
to reduce expenditures on such important
items of daily use as food and gasoline.
In the first quarter of 1961 consumers
spent 54 per cent of their after-tax income
on durable and nondurable goods combined;
a year earlier this proportion was 56 per
cent. But the smaller share of consumer in
come going for goods, as opposed to services
or savings, is a recession development only in
part. There has been a long-run trend away
from goods during the postwar period as
families—at least those with the necessary
purchasing power—have become better sup-
B u sin e ss C o n d itio n s, Ju n e 1961
plied with autos, housefurnishings, clothing
and other items. In the early postwar years
two-thirds of all disposable income was used
to purchase goods. Expenditures for services,
meanwhile, have risen in relative importance.
Personal income dropped less than 1 per
cent during the recent recession, reaching
a low in February. When consumers began
to restrict their purchases of hard goods after
mid-1960, savings, mainly in liquid assets
but also in the form of debt repayment, rose
more rapidly. In the first half of 1960 savings
averaged less than 7 per cent of disposable
income compared to 8 per cent since then.
Virtually all types of savings have gained
from the reduction in consumption spending
relative to income. In addition, short-term
debt has been repaid. In the first quarter of
1961 outstanding instalment debt dropped
by 2.1 billion dollars, a very large decline
for this period of the year. During the same
months new instalment credit extended was
8 per cent below last year.
Now that jobs and income have been rising
and optimism is improving there is a pros
pect of a substantial increase in consumer
spending. Clearly, consumers will be able to
step up their purchases if they become
optimistic as to employment and income
prospects.
Depressed areas—
some lessons from the past
>1 odnv a number of communities in the
United States are confronted with the prob
lem of “substantial and persistent unem
ployment.” They have come to be known
as chronically depressed areas. In the main
these areas are located in the coal mining
regions of West Virginia, Pennsylvania,
eastern Kentucky and southern Illinois; the
iron-range country of northern Minnesota
and upper Michigan; the textile mill centers
of New England; and the automobile manu
facturing centers of Michigan. Since the end
of World War II, the level of unemploy
ment in many of these areas has increased
sharply with each business recession, while
showing little or no improvement with the
return to national prosperity. In other de
pressed areas unemployment has dropped
rapidly during prosperity periods, but has
still remained quite high.
In the course of wide debate, economists
and public policy makers have often over
looked the fact that depressed areas have
be.en a recurring aspect of the economic
development of this country. American his
tory includes many accounts of the rise and
fall of communities and whole regions owing
to changes in technology, exploitation and
exhaustion of natural resources, changes in
demand and the migration of industry to
other parts of the country in response to the
pull of new markets—the same factors cited
as contributing to chronic unemployment in
today’s depressed areas.
5
Federal Reserve Bank o f Chicago
The term “ghost town,” a standard part
of our vocabulary, calls to mind the booming
growth and sudden decline of gold and silver
mining towns like Leadville, Central City and
Cripple Creek, Colorado, and the logging
and lumbering communities in Maine and
the Lake states. Moreover, new depressed
areas will probably continue to crop up in
our changing and dynamic economy. As in
the past they will most likely be characterized
by a high degree of economic specialization,
i.e., with one industry dominating virtually
every phase of economic activity in the area.
N o sim ple solution
6
The causes of chronic unemployment differ
greatly from one depressed area to another.
The experience of the past few years has
shown that a high level of business activity
in the nation as a whole has, at best, done
no more than drain off some of the more
mobile work force in such areas without sig
nificantly bettering the economic outlook
for the depressed community itself. Unem
ployment has continued at relatively high
levels in coal mining regions throughout most
of the postwar period, and in the Detroit
metropolitan area average annual unemploy
ment has not dropped below 7 per cent of the
labor force since the record auto output
in 1955.
Unemployment in the mining regions of
West Virginia, eastern Kentucky and southern
Illinois has resulted from the loss of coal
markets and the increased mechanization of
mining operations to offset the effects of
rising wages and other costs. The immediate
prospects for increased employment in these
regions are not good as alternative economic
activities are quite limited. Moreover, rela
tively high wage rates and a long history
of labor strife tend to discourage new indus
tries from moving in.
Unemployment in the Detroit metropolitan
area, on the other hand, primarily reflects
the automobile industry’s decentralization
to supply rapidly growing markets in the
southwestern and far western states and ex
tensive automation of manufacturing opera
tions to offset rising labor costs. In recent
years the local unemployment problem has
been intensified by the substantial shift in
national defense emphasis from heavy con
ventional weapons to missiles and electronic
equipment. In contrast to the coal mining
regions, the present lack of economic diver
sification in the Detroit area probably is a
less intractable problem in light of the diver
sified labor supply and the many community
and industrial facilities in the area.
One-industry or highly specialized com
munities face drastic readjustment problems
if demand for their product tapers off or
shifts to alternative supply sources due to
changes in technology or relative price con
siderations. While a more diversified com
munity can “roll with the punch,” gradually
absorbing the displaced workers in other in
dustries, this is a slower process in the oneindustry towns. For them the initial problem
is to attract other industries, and this can
only be done by the promise of a better
manufacturing environment than can be
found elsewhere.
There is, of course, an inherent danger
that some attempts at solving the problem
may backfire and only prolong the process
of readjustment as well as contribute to an
inefficient allocation of the nation’s re
sources. The latter could have unfavorable
implications for domestic economic growth
and our competitive position in international
trade. Finally, there is the realization that
the process of readjustment may take a long
time. In this connection it may be noted that
many communities which in the past have
B u sin e ss C o n d itio n s, June 1961
had to adjust to eco
Lake state s lum bering re gio n
nomic change have
and principal sawmill centers, 187 0 -1 9 0 0
never regained their
former stature.
The magnitude and
com plexity of the
problems that chron
ically depressed areas
face in attempting to
reshape their economic
base are aptly illus
tra te d by d ev elo p
ments in the former
logging and sawmill
communities in the
lumbering region of
the Lake states since
the turn of the century.
By the 1890’s, many
com m unities in the
forest areas of Michigan, Minnesota and
10 billion board feet in 1889. In that year
the Lake states accounted for 37 per cent
Wisconsin were confronted with the formid
of the nation’s total lumber output. Com
able task of adjusting to the decline of the
lumbering industry which had dominated
munities like Grand Rapids, Bay City and
Saginaw, Michigan; Minneapolis, Winona
nearly every phase of their economic life.1
and Stillwater, Minnesota; Oshkosh, Chip
The lu m b e rin g e ra
pewa Falls, La Crosse and Eau Claire, Wis
consin; which were strategically located on
After the Civil War the conquest of the
rivers, became booming sawmill centers.
vast pine forests of the Lake states began
in earnest. Lumber production in the region
Satellite industries, such as hardware and
metalworking shops, foundries and machine
grew rapidly from slightly more than 1 bil
lion board feet in 1859 to a peak of nearly
shops as well as the typical assortment
of service and retail trade establishments,
’Material for this article was largely drawn from
sprang up in these communities to supply
the following sources: Franklin H. Smith, A Study
of the Wisconsin Wood-Using Industries (Madison,
the needs of the logging camps and sawmills
1910); Ray H. Whitbeck, The Geography and In
and the people engaged in lumbering. The
dustries of Wisconsin (Madison, 1913); Robert F.
larger communities supported gristmills,
Freis, Empire in Pine—The Story of Lumbering
in Wisconsin 1830-1900 (Madison, 1950); Agnes
bakeries, canneries and meat-processing
M. Larson, History of the White Pine Industry in
plants. But nearly every phase of the eco
Minnesota (Minneapolis, 1949); Vernon Carstennomic life of the lumbering towns in the
sen, Farms or Forests (Madison, 1958); Raleigh
Barlowe, Administration of Tax-Reverted Lands
Lake states was dependent in one way or
in the Lake States (East Lansing, 1951); Maurice
another on the harvest of timber—a fact
E. McGaugh, The Settlement of the Saginaw
that became more and more ominous.
Basin (Chicago, 1950).
7
Federal Reserve Bank o f Chicago
As early as 1866 the Commissioner of
the U. S. General Land Office observed
that the rapid destruction of timber in the
Lake states was “a matter of serious con
cern.” Many people in the logging com
munities, moreover, recognized that the rapid
pace of activity could not go on forever and
that decline was inevitable. In Wisconsin in
1897 it was estimated there was barely
enough timber to sustain the lumber indus
try for another decade at current rates of
production.
The lumbering industry reached a peak in
Michigan during the 1880’s and in the fol
lowing decade Minnesota and Wisconsin
attained their zenith in lumber output. Pri
marily reflecting exhaustion of the white pine
forests, lumber production in the Lake states
plummeted from 8.8 billion board feet in
1899 to 5.5 billion in 1909 and 2.7 billion
in 1919.
As the production of lumber declined,
Lum ber production in the Lake
states reached peak around 1890
D iv e rsifica tio n h e lp s a b s o rb slack
billion board feet
1849
'59
'69
'79
'8 9
'9 9
1909
'19
'29
'39
SO URCE: U. S. Department of Agriculture, Lumber Produc
tion in the United States 1797-1946 (October 1948).
population growth in logging regions leveled
off. The population of the Michigan-Saginaw
basin (an area of roughly 11,000 square
miles surrounding the shores of Saginaw Bay)
which had risen from 173,000 in 1860 to
507,000 in 1880, or nearly threefold, in
creased only 27 per cent during the next two
decades. Ashland County in northern Wis
consin, where population had increased from
1,600 in 1880 to 20,100 in 1890, reported
an increase of only 10 per cent between 1890
and 1910.
During this period a number of sawmill
towns reported substantial population losses.
For example, the population of Au Sable,
Michigan, situated on the shore of Lake
Huron at the mouth of the Au Sable River,
declined from 4,300 in 1890 to less than
700 in 1910. Ashland, Wisconsin, dropped
from 13,100 in 1900 to 11,600 in 1910.
The Wisconsin State Forestry Commission
observed in 1898: “Everybody has seen
settlements very prosperous ten years ago,
which are now abandoned by almost all their
former inhabitants.”
Many other sawmill towns, however, were
quite successful in weathering the decline.
For some, this reflected the fruits of vigorous
campaigns to attract new industries. La
Crosse, Wisconsin, which had begun its
drive to attract new industries as early as
1855, boasted 13 flourishing industries in
1900. Among the more prominent were
brewing, publishing, furniture, agricultural
implements and machine shop products.
Their growth helped materially to offset the
impact of a more than 50 per cent decline
in lumber output on the La Crosse economy
during the 1890’s.
In a number of other communities in
creased production of hardwoods, spruce
B u sin e ss C o n d itio n s, June 1961
and hemlock and the expansion of woodproducts manufacturing helped to absorb
some of the slack caused by the sharp de
cline in the cut of white pine lumber. One
observer described the situation as the “evo
lution of an industry in response to dimin
ishing or changing raw materials.”
Oshkosh and Saginaw became important
manufacturers of lathes, sashes, doors,
blinds, carriages and wagons. During the
1890’s Oshkosh was reported to be the na
tion’s leading producer of these items. In
Grand Rapids the manufacture of chairs,
tables and office equipment was expanded
vigorously, and by the end of the 19th cen
tury that community had become the furni
ture capital of the country. Other communi
ties concentrated on the production of
shingles, barrels and cheese boxes, rail ties,
matches, wood pulp, excelsior, coffins and
boats. A study of Wisconsin industries done
in 1910 noted that almost “every town of
any size in the northern half of Wisconsin
finds its industrial life centered around wood
working.”
F a rm in g, a n a n s w e r ?
Industrial diversification and expansion
of wood products manufacturing are only
part of the story of the vast economic
readjustment that occurred in the lumbering
region of the Lake states. The other part
concerns the intense effort to find more pro
ductive uses for the vast tracts of stump land
that blanketed the area.
There was, however, no clear agreement
on how to go about redeveloping the land.
Conservationists said the land should be
restocked with trees. The railroads, lumber
companies and local businessmen wanted
the land made into farms to encourage agri
cultural settlement.
The state governments seemed to favor
Population profile of Lake states
lumbering region, 1860 -1960
millions
both approaches. In 1895 the Wisconsin
legislature created a state immigration board
to promote settlement of the northern
counties; two years later it established a
state forestry commission “to protect and
utilize” the state’s forest resources. The
forestry commission was highly skeptical of
the agricultural potential of the northern
stump lands. They would produce only
“crippled aspen . . . coarse grass and sweet
fern.” The state college of agriculture, on
the other hand, felt the land could be made
into productive farms and set out to prove it.
With the sharp rise in prices of food and
farm land during World War I and the ac
companying desire to provide farms for re
turning veterans, enthusiasm for conservation
and reforestation was swept aside and the
promoters of agricultural settlement rose to
dominate the picture. In 1919 many believed
the northern stump lands of the Lake states
Federal Reserve Bank o f Chicago
were destined for a prosperous future as a
farming area.
N e w p ro b le m s e m e rg e
10
Less than three years later, however, the
farming experiment was clearly on the verge
of collapse. Among the major contributing
factors were the sharp drop in agricultural
commodity prices following the cessation of
World War I and the loss of local agricultural
markets associated with the steady contrac
tion of logging and sawmill operations. The
price of eggs dropped from a national average
of 42 cents a dozen in 1920 to 24 cents in
1922; during the same period the price of
butter fell from 55 cents a pound to 36 cents.
In 1921 corn sold for an average of 49 cents
a bushel, compared with $1.45 in 1919.
In the face of these developments, the
flow of new settlers into the northern coun
ties dried up, land clearing and farm devel
opment ceased and farm land values dropped
sharply. Tax delinquencies, which had been
a continuing problem in the cutover regions,
soared as farmers, lumber companies and
speculators who had amassed vast tracts
of land for resale at a profit stopped paying
taxes on their nonmarketable stump lands.
In 1921 tax deeds on approximately 1 mil
lion acres of tax-delinquent land in 17
northern Wisconsin counties, having a total
area of roughly 11 million acres, were put
up for sale by the local authorities; in 1928,
3 million acres were auctioned off. By the
late 1920’s many cutover counties in the
Lake states reported that as much as 50 per
cent of their lands were tax delinquent.
Buyer participation in the tax auctions was
poor; speculation in tax certificates was
practically nonexistent. In 1921 roughly 40
per cent of the land offered for taxes in 17
northern Wisconsin counties went unsold
with the tax titles reverting to the counties;
in 1927, 80 per cent of the land offered at
tax auction reverted to the counties.
Despite the unfavorable prospects for agri
culture in the Lake states lumbering region,
farming activity picked up sharply between
1930 and 1935. During this period the num
ber of farms in the region jumped 21 per
cent to more than offset the decline of nearly
9 per cent that occurred during 1925-30.
The number of farms in the nation as a
whole increased approximately 8 per cent
during 1930-35.
In large measure, this resurgence in farm
ing activity across the land reflected the
severe curtailment of employment opportun
ities in the cities during the depression.
Widespread urban unemployment not only
checked the well-established drift of farm
people to the city but also prompted many
hard-pressed urban families to move to the
country and try to make a go of farming.
Moreover, severe drought conditions on the
Great Plains prompted many farmers in that
area to relocate in the cutover region of the
Lake states.
After 1935 the Lake states in cooperation
with the Federal Resettlement Administra
tion worked out procedures for relocating the
isolated inhabitants in the cutover counties
and for retiring marginal farm lands. The
Federal and state governments stepped up
their land purchases for the purpose of creat
ing forest preserves and wild life refuges.
In Wisconsin much of the tax-delinquent
land that had reverted to the counties was
used to establish county forests.
Reflecting the impact of these programs,
approximately 30 million acres in Michigan,
Minnesota and Wisconsin are under public
ownership today—representing about 25 per
cent of the total land area of these states.
Roughly 90 per cent of these public lands is
located in the northern cutover counties.
B u sin e ss C o n d itio n s, June 1961
Tourist expenditures in the Lake
states exceeded $1.5 billion in 1960
billion dollars
1935
1950
I9 6 0
SO U RC ES: Curtis Publishing Co., Recreation and Travel
Report {August I960); National Resources Board, Regional
Planning Surveys (1934 and 1935).
Moreover, the number of farms in the region
has declined nearly 50 per cent since 1935.
Im p a ct o f th e to u rist in d u stry
Aggressive promotion of the long-recog
nized recreational potentialities of the northland lakes, streams and forests has also
figured importantly in the readjustment pro
cess. Since the 1930’s the state legislatures
have appropriated sizable funds to advertise
resorts, camping, hunting and fishing oppor
tunities in the state forests and other tourist
attractions. Railroads and local chambers of
commerce have also joined in the promotion
of the northern vacationland. The construc
tion and improvement of state and Federal
highways have made the area increasingly
accessible.
With the steady rise in national prosperity
and increase in leisure since the end of World
War II, thousands of city dwellers began to
make annual treks to the North Woods to
seek relaxation in such pursuits as camping,
fishing, boating and sightseeing. Total tourist
expenditures for transportation, lodging,
equipment, hunting and fishing licenses, etc.,
in Michigan, Minnesota and Wisconsin have
increased from less than 400 million dollars
in 1935 to 800 million in 1950 and 1.5 billion
in 1960. Today the job of providing goods
and services to the horde of summer vaca
tioners and sportsmen is the principal in
dustry in many northern counties of the Lake
states. To an increasing extent the area is
offering year-round employment as winter
sports grow in popularity. Many believe the
recreation industry will grow twice as fast
as the national economy during the next
decade.
Conclusion
Thus, the experience of economic read
justment to the decline of the lumbering in
dustry in the northern counties of the Lake
states has emphasized that solutions to the
problem of depressed areas are likely to be
complex and extend over a considerable
period of time. At the end of the 19th
century, communities in the region faced
the difficult task of developing new industries
to offset the steady decline in lumber produc
tion. In many respects their situation was
similar to a nation faced with overcoming
recurring deficits in its international trade
attributable to a decline in its primary
exports.
Many northern communities managed to
sustain the equivalent of their former export
earnings by expanding production of doors,
sashes, shingles and other wood products.
In a number of other towns foundries, ma
chine shops and metalworking shops that
had been primarily engaged in supplying the
needs of the logging camps and sawmills
shifted to servicing manufacturers located in
11
Federal Reserve Ba nk o f Chicago
other parts of the country. Promotion of the
recreational opportunities of the northern
lakes, streams and forests provided another
important source of income for many com
munities in the area—the tourist industry.
In those communities where the develop
ment of new export industries did not pro
ceed at a fast enough pace substantial de
population occurred. This, however, helped
to restore equilibrium to the region by re
ducing import demand.
The experience of these communities has
further emphasized that there is always the
risk that some attempts to solve the problem
of depressed areas may not work at all and
may only complicate and delay the adjust
ment process. Witness the collapse of the
campaign to promote farming on the cutover
lands despite vigorous backing from the state
governments, the railroads, lumber com
panies, local businessmen and even “ex
perts” from the agricultural colleges.
In recent years organized efforts have been
made in a number of states to promote new
kinds of economic activity to provide relief
to pockets of prolonged unemployment. Now
these efforts are being bolstered by a nation
wide program of Federal loans and grants to
depressed areas. If the story of economic re
adjustment in the Lake states lumbering re
gion during the last half century is any guide,
success of these efforts will largely depend
upon the extent to which local resources, in
cluding raw materials, plant and labor, can be
channeled into new “export-earning” activ
ities without resulting in what time reveals
to have been an inefficient allocation of re
sources. It is possible that some depressed
communities will find that a significant por
tion of their existing labor force cannot be
absorbed in new lines of activity. Here a
successful readjustment will require substan
tial migration of workers from these com
munities to areas where jobs are available.
"Fannie Mae” and credit policy
12
T h . Federal National Mortgage Associa
tion (FNMA or “Fannie Mae” ) is one of a
number of Federal credit agencies organized
to influence the availability of credit to cer
tain types of borrowers. Each of these
agencies has been created in response to
specific problems. Usually the purpose has
been to increase the flow of credit to certain
users or to reduce its cost. Sometimes it has
been simply to stabilize the flow of the par
ticular kind of credit against increasing cost
and varying availability.
Whatever their form or objectives, the
agencies have appeared from time to time to
be operating somewhat contrary to general
countercyclical policies designed to achieve
growth and stability. This, of course, is not
necessarily inappropriate since, as noted
above, the Government-sponsored institu
tions have been organized in response to
specific problems and their objectives may
have a very high priority. Nevertheless, if the
specialized agencies’ programs can be man
aged in such a way as to fortify or at least
not counteract general economic policy, they
may make a positive contribution to achieve-
B u sin e ss C o n d itio n s, June 1961
ment of the nation’s prime economic goals.
F N M A activitie s
stimulate residential construction and speed
the economy’s recovery from recession.
To accomplish this, FNMA has raised its
buying prices on mortgages several times and
cut in half the amount of FNMA capital
stock which must be bought by institutions
selling mortgages to it. These moves were
for the purpose of encouraging holders of
mortgages to sell at a profit from their exist
ing portfolios and use the proceeds for new
mortgages. FNMA also raised selling prices
on mortgages in its portfolio so as to restrict
sales and, hence, avoid absorbing funds from
lenders that otherwise might find their way
into new mortgage loans and new construc
tion. The price increases, of course, reduced
An important part of FNMA’s responsi
bility has been the operation of a “secondary
market facility” for FHA-insured and VAguaranteed mortgages. The purpose is to pro
vide a greater degree of liquidity to the
market for these mortgages by standing
ready to both buy and sell them. This tends
to increase the liquidity of the portfolios of
financial institutions who are active in the
mortgage markets.
A second major phase of Fannie Mae’s
activity has been the provision of “special
assistance” to types of Government-sup
ported mortgages for
which private financial
facilities are judged in
Functions of the Federal National Mortgage
adequate. These have
been mortgage loans
Association under the Charter Act of 1954
on housing in urban re
newal areas, homes for
S e c o n d a ry m a rk e t o p e ra tio n s
military personnel and
Provides a secondary market for government-supported mortgages.
for the elderly and
Financed by common stock issues to institutions selling mortgages
“specialized” housing
to FNM A, preferred stock issues to the Tre a sury and borrowings
of other types.
from the Treasury and private investors.
The th ird m ajor
function since reor
Sp e cial a ssista n ce functions
ganization in 1954 has
Provides assistance to classes of Government-supported mortgages
been the “liquidation
that are inadequately provided fo r by private financial facilities.
and management” of
Can be employed to bolster activity in mortgage and construction
mortgages acquired in
markets when reduced activity in those markets threatens a high
prior years.
level of national economic activity.
In February the Ad
Financed by borrowings from the Treasury.
ministration indicated
M a n a g e m e n t a n d liq u id a tin g fun ctions
that the resources of
Manages and liquidates the p o rtfolio acquired under contracts
FNMA would be mo
entered into p rio r to November 1, 1954.
bilized in the effort to
Handles mortgages acquired subsequent to that date when specially
reduce mortgage inter
authorized to do so.
est rates. It was hoped
th a t low er in te re st
Financed by borrowings from the Trea sury and private investors.
rates would help to
13
F N M A m o rtg a g e sales exceeded purchases in 1958 and 1961
o p e ra tio n s by type
ion, se m ia n n u a lly
Secondary m a rke t o p e ra tio n s
M a na g em ent and liq u id a tin g fu n c tio n s
million dollars
million dollars
Com bined o p e ra tio n s
m illion dollars
million dollars
the yield that investors could obtain on
mortgages purchased from FNMA.
P u rch ase s a t p a r
In the early postwar years as market in
terest rates rose relative to the maximum
contract rates permitted under the Govern
ment-supported FHA and VA mortgage
programs, the supply of private mortgage
funds seeking investment in FHA and VA
mortgages declined. Normally this would
have caused a reduction in residential financ
ing under the Government-supported pro
grams. However, from the end of 1947
through March 1950, FNMA channeled
funds into the Government-supported pro
grams by purchasing mortgages at par, and
entering into advance commitments to pur
chase at par, mortgages originating under
these programs. During this period, the asso
ciation’s holdings of mortgages increased
from less than 2 million dollars to nearly a
billion dollars. By the end of March 1950,
moreover, undisbursed commitments to pur
B u sin e ss C o n d itio n s, June 1961
chase mortgages stood at almost 1.5 billion
dollars.
In effect, FNMA was “insulating” the
market for Government-supported mortgages
from the impact of rising rates by “pegging”
such mortgages at par, thus holding interest
costs to FHA and VA mortgage borrowers
below market levels. The only effective re
straint on the association’s ability to do this
was its authorization to borrow the funds
needed to finance its mortgage acquisitions,
and this authorization was increased each
time the ceiling was reached.
FN M A borrowing authority
(millions of dollars)
February 1938 -Ju ly 194 8 ............$
July 1948 -July 1949 .....................
July 1 9 4 9 -O ctober 1949 ..............
October 1 9 4 9 -A p ril 195 0 ............
April 1 9 5 0 -Ju ly 195 2 ...................
July 1952 -A ugust 195 4 .................
220
840
1,500
2,500
2,750
3,650
The F N M A C h a rte r A ct
Following adoption of the Charter Act of
1954, FNMA underwent a major reorganiza
tion. However, many observers assert that
FNMA’s activities continue to insulate the
market for Government-supported mortgages
from general credit conditions. They cite the
fact that the association’s net purchases of
mortgages have expanded during periods of
general credit restraint (1955-57 and 1959)
and declined during periods of general credit
ease (1954, 1958 and 1960-61).
However, the insulation FNMA has pro
vided in recent years has been significantly
different from that of the 1948-50 period.
The big difference is that FNMA’s secondary
market operations no longer provide funds
to the mortgage market at effective interest
rates below those at which it obtains them
through borrowing in the market. The asso
ciation is no longer required to make pur
chases at par. Under its secondary market
operations, it must regulate the volume of
purchases and sales and the establishment of
prices and fees so as to prevent “excessive”
use of the facility and make it self-supporting.
Purchases are made within the range of prices
quoted in the market for similar mortgages.
Indeed, during some periods of credit
restraint, and tightness in mortgage markets,
effective interest rates on mortgages pur
chased by FNMA appear to have risen above
those at which new loans were being origi
nated as, for example, in late 1957 and late
1959. This lessened the attractiveness of
FNMA as a source of funds for mortgage
lending and tended to prevent “excessive”
purchases from investors in periods in which
mortgage funds and credit in general were
in short supply.
The association has also related its selling
prices on mortgages to prices in the market.
This reflects the injunction to FNMA to be
self-supporting. In 1958 and 1961, it re
flected in addition the effort to harmonize
FNMA’s activities with prevailing general
stabilization and credit policy.
The low-cost housing program of 1958 and
1959 has been an important activity under
Fannie Mae’s special assistance operations.
The 1958 Act to Stimulate Residential Con
struction authorized a 1 billion dollar pur
chase program for home mortgages of $13,500 or less.
From the inception of the program through
August 28, 1958, FNMA made advance
commitments at par. This gave borrowers
an effective interest cost somewhat under
rates in the private market, especially in the
case of VA loans. Commitments rose rapidly.
By October 1958, purchases and outstanding
commitments had reached the 1 billion dollar
statutory ceiling. Purchases under the pro-
15
Federal Reserve Ba nk o f Chicago
gram reached a peak in the first half of 1959
when business activity was rising rapidly.
However, expenditures for construction pre
sumably preceded Fannie Mae’s disburse
ment of funds by some months and most of
its purchases were completed prior to the
emergence of active credit restraint in the
second half of 1959.
Operations carried on under the manage
ment and liquidating function have also af
fected the availability of funds in mortgage
markets— at times significantly. This was the
case in 1955, for example, when net pur
chases totaling 264 million dollars provided
the market for Government-supported mort
gages with a buffer against general credit
restraint.
Management and liquidating functions
were also a significant factor in 1960. During
the first half of the year, FNMA exchanged
311 million dollars in 4 per cent VA mort
gages for 23 per cent Treasury bonds. These
A
operations were equivalent to mortgage sales
in terms of absorbing funds from the private
mortgage market. The exchanges tended to
cushion the mortgage market against general
credit ease, which was becoming evident in
early 1960.
allocation of this supply among competing
uses is determined largely by the market on
the basis of relative prices or yields. FNMA’s
secondary market operations have been con
ducted within this framework. The associa
tion has not provided funds to the mortgage
market at interest rates below those avail
able in the money and capital markets, and
it has not made a practice of absorbing funds
from the market through mortgage sales at
a loss. The secondary market program has
been consistently self-supporting. However,
FNMA has been able to provide a degree of
insulation to the mortgage market while re
maining self-supporting, largely because of
its credit standing as a Federal agency. While
the association’s debentures are not guaran
teed by the Treasury, they are received by
the market at rates considerably lower than
those available to private borrowers.
The record since 1954 indicates that while
the objectives of FNMA, and other special
ized Federal credit agencies, may occasion
ally be in discord with those of over-all
economic policy, under most circumstances
these agencies should be able to achieve their
specific goals reasonably well without com
ing unduly into conflict with broader eco
nomic objectives.
C o m b in e d o p e ra tio n s: 1 9 5 5 -6 1
16
Since its reorganization in 1954, FNMA
has pursued its program of mortgage acqui
sition and sale with an eye to the require
ments of over-all credit policy. During
periods of over-all credit restraint, there has
been no attempt to “peg” Government-sup
ported mortgages at prices above the market.
And during periods of general credit ease,
sales prices have been raised to levels de
signed to curtail purchases from the FNMA
portfolio by investors.
Moreover, general credit policy is concemed with the total supply of credit. The
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