Full text of Business Conditions (Federal Reserve Bank of Chicago) : March 1948

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BUSINESS CONDITIONS




A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO

International Trade Barriers Lowered
Current Effects Limited by Goods Shortages
Two years of intensive preparation and study, including normal status, these emergency measures must be ter­
six months of continuous international negotiations, cul­ minated. Then the tariff rates and conditions of trade agreed
minated in a General Agreement on Tariffs and Trade upon at Geneva by the 23 countries are designed to permit
signed at Geneva by 23 countries on October 30, 1947. This a more nearly optimum use of the resources of these coun­
agreement included tariff concessions — elimination, reduc­ tries with the people benefiting from more efficient pro­
tion, or agreement not to increase tariff rates or quantity duction and improved distribution of goods and services.
restrictions—on products accounting for approximately twoOf interest in the new agreement are the extensive pre­
thirds of all imports of the negotiating countries and for cautions taken to prevent the development of unforeseen
substantially half of total world imports. Negotiations by hardships for the producers of any product covered by the
the United States were conducted under authority of the agreement. An American sponsored “escape clause” provides
Trade Agreements Act which, if not extended by Congress, that if through unforeseen developments a particular tariff
expires in June of this year. The life of the recently nego­ reduction should increase imports sufficiently to cause or
tiated agreement is three years.
threaten serious injury to domestic producers, the country
In addition to the detailed adjustments negotiated in the granting the concession may withdraw or modify it in whole
tariff schedules for individual commodities, and possibly of or in part. If the concession is in fact modified or withdrawn,
even greater importance, are the General Provisions of the other interested countries may then withdraw or modify
agreement. These provisions incorporate basic rules for the substantially equivalent concessions. In addition to this
conduct of international trade which will eliminate many general safeguard, further precautions were included by
practices that have handicapped international commerce and some countries for specific commodities. These loopholes
will standardize procedure with respect to other restrictive may constitute a serious weakness in the agreement and
practices. These basic rules apply to all trade between the result in the loss of much of the progress made under the
parties to the agreement. Thus, for the first time, a generally agreement toward increasing imports.
accepted code of fair treatment in international commercial
The revised tariffs became effective on January 1, 1948,
relations is established. These general provisions may be for the major countries participating in the agreement.
fully as effective a stimulant to international commerce as Other participating countries must put them into effect as
the reduction made in tariff rates.
soon as they can comply with procedures required by their
Efforts of the United States and a number of other coun­ constitutions or laws, but no later than June 30, 1948.
tries to develop generally acceptable international policies
which will promote greater freedom in the exchange of
CONCESSIONS OBTAINED BY THE UNITED STATES
goods and services at the international level continue. Only
three weeks after conclusion of the session on tariffs and
Concessions were made by other countries on products
trade at Geneva, the United Nations Conference on Trade accounting for a large part of total United States exports
and Employment convened at Havana, Cuba, and at this to those countries and including almost all the important
writing still is in session. Objective of this conference is to United States export products, both agricultural and in­
reach agreement on a proposed charter for an International dustrial. Commodities on which tariff concessions were
Trade Organization, embracing not only the constitution of obtained had 1939 exports valued at 1.4 billion dollars.
Tariff preferences which permitted mutual exchange of
an international agency to deal with trade and employment
problems, but also a detailed code of international conduct products among members of the British Commonwealth at
with respect to commercial policy, employment policy, in­ lower tariffs than applied to products from other sources
ternational investment and economic development, restric­ affected a significant part of United States trade, and had
tive business practices, and inter-governmental commodity long been a handicap to United States exporters. Such
agreements. Any agreement reached on international trade preferences were substantially reduced, and those on a con­
at this conference presumably will include the General siderable list of products which the United States exports
to countries of the Commonwealth were eliminated entirely.
Provisions of the Agreement on Tariffs and Trade.
Present conditions of intense demand and limited supplies Under the terms of the agreement no new preference may
of goods in many countries, resulting from wartime expan­ be created, and no existing preference may be increased on
sion of money supplies and disruptions of production, have any product whether or not listed in the agreement.
Concessions were obtained on farm and industrial prod­
caused a number of governments to adopt emergency con­
trols over exports and imports. Such controls prevent sig­ ucts of interest to all major regions of the United States.
nificant parts of the General Agreement on Tariffs and Among the farm products major concessions were received
Trade from becoming effective immediately.
on fruits and juices—fresh, dried, and canned. Citrus and
As production increases and commerce returns to a more
(Continued on Inside Back Cover)



Michigan State Finance —II
A Review of State Borrowing and Debt Management
The State of Michigan has used its credit in the past
three decades principally to finance veterans’ bonuses after
World Wars I and II and to initiate the program of
state highway construction in the 1920’s. Provisions of the
Michigan constitutions of 1850 and 1908 have made it
difficult for the State to borrow on either a short-term or
long-term basis. Short-term loans to meet deficits in the
revenues are restricted to a total of $250,000 at any one
time, and long-term borrowing except “to repel invasion,
suppress insurrection, defend the state or aid the United
States in time of war” is prohibited.*1 2 3 4
These drastic limitations on the authority of the General
Assembly to incur debt go back to the State’s early ex­
perience with borrowing for internal improvements. Shortly
after admission to the Union the Michigan legislature car­
ried out a mandate of the Constitution of 1835 to encourage
internal improvements within the state by authorizing a
five million dollar loan for a system of state railroads. Since
that Constitution contained no restrictions on borrowing,
an additional million dollars was loaned chiefly for state aid
to private railroads, for the establishment of a state univer­
sity, and the assumption of delinquent local taxes. The
climate of opinion throughout the country led the State to
expect to repay these loans out of the earnings of the enter­
prises—great expectations shattered by the financial crisis
and depression of late 1830’s. The State had realized only

1.4 million of the five million dollar loan placed with the
U. S. Bank of Philadelphia; the remainder was sold to
banks on a partial payment plan. In 1841 no appropriation
was made for interest, and the State declared itself unable
to meet its obligations. At that time the outstanding debt
was 15 times as great as the State’s annual income. During
the next five years, the debt was reduced to manageable
proportions chiefly by the sale of the railroads to private
investors. Responsibility for the principal and unpaid in­
terest on 1.4 million for which full payment had been
received was assumed, but the remaining bonds were paid
at a 60 per cent discount with back interest ignored. By the
end of 1846 the outstanding debt approximated two million
dollars. This was refunded in 1861 and finally liquidated
by 1881.
In their determination to avoid similar abuses in the
future the framers of the Constitution of 1850 not only
virtually prohibited all borrowing by limiting the indebted­
ness to covering deficits in the revenue, but also forbade
the State to engage in internal improvements. Constitutional
amendments have been necessary to enable the State to
assume the now familiar functions of state governments,
namely, the construction and maintenance of highways, the
development of natural resources, and the construction of
airfields. (See Section 14 of footnote 1.)
The Michigan constitutions have been construed to per-

*The sections of Article X of the Michigan Constitution of 1908 affecting the
power of the State to borrow follow:
Sec. 10 “The state may contract debts to meet deficits in revenue, but such
debts shall not in the aggregate at any time exceed $250,000. The state may
also contract debts to repel invasion, suppress insurrection, defend the state
or aid the United States in time of war. The money so raised shall be applied
to the purposes for which it is raised or to the payment of the debts con­
tracted.” [These provisions do not vary from those in the Constitution of
1850 except that the limit for borrowing to meet deficits was $50,000. The
following authorization was added in 1919.] “The state may borrow not to
exceed $50,000,000 for the improvement of highways and pledge its credit
and issue bonds therefor on such terms as shall be provided by law.” [Laws
enacted pursuant to this provision specified that a maximum of five million
dollars, increased to 10 million in 1921, could be borrowed in any one year.
Interest rates could not exceed 6 Vz per cent, and the bond maturities could
not exceed 30 years. All bonds sold, with the exception of seven million,
carried 20-year maturities. The Auditor General was directed to transfer
annually to a sinking fund created for the retirement of such bonds a sum
sufficient to pay interest and to retire the bonds at maturity. In 1926, this
amount was set by the Legislature at $4,082,000.]
Sec. 11 “No scrip, certificate, or other evidence of state indebtedness shall
be issued except for such debts as are expressly authorized in this constitution.
Sec. 12 “The credit of the state shall not be granted to, nor in aid of any
person, association, or corporation.
Sec. IS “The state shall not be interested in the stock of any company,
association, or corporation.
Sec. Ut “The state shall not be a party to, nor be interested in any work
of internal improvement, nor engage in carrying on any such work except:
1. In the development, improvement and control of or aiding in
the development, improvement and control of public roads, har­
bors of refuge, waterways, airways, airports, landing fields and
aeronautical facilities;
2. In the development, improvement and control of or aiding in
the development, improvement and control of rivers, streams,
lakes and water levels, for purposes of drainage, public health,
control of flood waters and soil erosion;
3. In reforestration, protection and improvement of lands in the
state of Michigan;
4. In the expenditure of grants to the state of land or other prop­
erty.” [In the Constitution of 1850 section 4 above was the single

exception to the general exclusion of state participation in in­
ternal improvement projects. An amendment adopted in 1905
permitted expenditures for public wagon roads. This was incor­
porated in the Constitution of 1908, and sub-section 3 was added.
The remaining authorizations were incorporated in amendments
ratified in 1945.]
Sec. 20 (b) “The state shall borrow not to exceed thirty million dollars,
pledge its faith and credit and issue its notes or bonds therefor, for the
purpose of paying to each person who entered into the military, naval or
marine forces of the United States between April sixth, 1917 and November
eleventh, 1918 who was a resident in this state the sum of $15.00 per month
and major fraction thereof of such service, up to and including August first,
1919.” [This amendment was adopted in 1921. The legislature of that year
provided that maturities on bond issues should not exceed 30 years, and
interest paid should not exceed 5% per cent. Bonds issued matured in 20 years
with the exception of five million of bonds originally issued as short-term
notes. A sinking fund was established to which the General Fund was directed
to pay an amount sufficient to pay the interest and retire the principal at
maturity but not less than $500,000 annually.]
Sec. 23 This section, adopted in 1946, authorized the State to issue an
amount not to exceed 270 million dollars of serial bonds or notes for the
purpose of paying a bonus to each resident of Michigan or survivor who
served in the armed forces between September 16, 1940, and June 30, 1946.
Payments are computed at the rate of $10 for each month of domestic service
and $15 for each month of foreign service with a maximum of $500. In the
event that the issue authorized proves to be insufficient the legislature is
directed to meet the deficiency from the General Fund. [The 1947 Legislature
fixed the interest at a rate not to exceed 2% per cent; 200 million dollars
of the issue carrying an average coupon rate of 1.5 per cent was sold in
March 1947, at a yield of 1.473; an additional block of 30 millions with an
average coupon of 1.25 was sold in September 1947. The proceeds of a new
cigarette tax levied during the life of the bonds are earmarked for the
payment of interest and retirement. Should this source be insufficient, pay­
ment will be made from other General Fund revenues.]




THIS MONTH’S COVER
Michigan State Capitol in Lansing

Page 1

mit war loans and amended to authorize bonus issues. There
were war loans for the Civil War, Spanish American War,
and World War I, the latter for 3.5 million dollars. The
proceeds of this loan were used for a variety of purposes—
hospitals, community centers near training camps, roads,
dependents of military personnel, state troops, and the
home guard.
The 50 million dollar loan for highways was also author­
ized by constitutional amendment. A small loan of one
million dollars originally contracted by the State Fair Board
was assumed by the state in 1929. In 1931 the Michigan
voters rejected a constitutional amendment to borrow 38
million dollars for public works and other relief measures.
Since the issuance of the war loan of 1917, Michigan has
been debt free for only a short period prior to the issuance
of the World War II bonus. The State’s net indebtedness
outstanding, as indicated in Table 1, rose sharply in the
early 1920’s as the bonus and highway issues were sold;
by 1925 it was approximately 75 million dollars, one and
one-third times the State’s annual tax income. Within a
decade retirements and the gradual growth in sinking fund
assets reduced the net debt to about 30 million dollars. The
doubling of the State’s tax yield in the same interval re­
duced the relative importance of the debt to about a quarter
of the annual tax income. The World War II bonus issue
of 270 million dollars of which 230 million dollars was out­
standing on December 31, 1947, will make a relative debt
in 1948 comparable to that of 1926-27, approximately 90
per cent of the State’s tax income.
AGENCY BORROWING

Borrowing by state agencies in Michigan and elsewhere
was infrequent and of little importance prior to the in­
centives given public building construction by the Federal
public works programs. Before 1930 such borrowing in
Michigan was limited to the State Fair Board, to a million
dollar dormitory issue by the University of Michigan, and
to a 1.5 million dollar issue by the Board in Control of
Athletics at the University of Michigan. By 1937 statutory
authorization to issue revenue bonds had been extended to
the State Bridge Commission, the State Board of Education,
and the College of Mining and Technology.
The greater portion of agency debt has been incurred for
educational and quasi-educational facilities at institutions
of higher learning. At the end of 1939 the outstanding in­
debtedness for this purpose totaled 11 million dollars. In
order to provide facilities for tremendously increased enroll­
ments some 15 million dollars of bonds and notes was sold
during 1946 and 1947. These issues approximately doubled
the prewar peak in outstanding indebtedness reached in
1939. Postwar expansion programs are still uncompleted,
and during the first six months of the fiscal year 1948 an
additional five million dollars of bonds was sold. The total
outstanding January 1, 1948, was 30 million dollars.
In other District states borrowing by state educational
institutions has been nominal with the exception of Indiana
where there is now an obligation of 14 million dollars,
almost triple the 1945 total. As noted in earlier articles in
Page 2



this series, Seventh District states generally use the legal
device of a separate corporation which borrows the money,
pledging the improved property as security, and then leases
the property to the institution for the duration of the loan.
In Michigan statutory restrictions prohibit the mortgaging
of such property, and the corporation device is not used.
The state agency, however, is authorized to pledge the
revenues from self-liquidating enterprises for the retirement
of any indebtedness incurred. This authority is defined by
the court in Eaves v. State Bridge Commission.2 In this case2
2269 N.W. 388 (1936)

Table 1
STATE OF MICHIGAN
OUTSTANDING INDEBTEDNESS1 1920-47
(In millions of dollars)
Fiscal
Year
End­
Totals
ing
June
Gross Net2
30

Direct Debt
Highway3

Soldiers’ Bonus3

All Other4

Gross

Net

Gross

Net

Gross

Net

In­
direct
Debt5

1920
1921
1922
1923
1924

8.5
13.6
53.6
63.6
73.6

8.0
12.2
50.2
58.5
67.0

5.0
10.1
20.1
30.1
40.1

5.0
9.5
19.0
27.4
37.6

—
30.0
30.0
30.0

_
—
28.3
28.4
26.9

3.5
3.5
3.5
3.5
3.5

3.0
2.7
2.8
2.7
2.6

—
1.0

1925
1926
1927
1928
1929

83.5
83.5
83.5
82.3
83.2

74.5
68.2
66.6
62.6
66.6

50.0
50.0
50.0
50.0
50.0

44.1
42.0
40.7
37.6
35.3

30.0
30.0
30.0
30.0
30.0

28.0
24.0
23.9
23.2
18.9

3.5
3.5
3.5
2.3
3.2

2.4
2.3
2.1
1.8
2.3

1.0
3.6
3.6
3.5
2.5

1930
1931
1932
1933
1934

83.2
83.2
82.7
81.6
81.2

52.0
47.9
43.3
41.7
35.2

50.0
50.0
50.0
50.0
50.0

32.9
30.7
28.4
26.8
23.0

30.0
30.0
29.4
28.3
27.9

17.2
15.4
13.4
13.5
12.0

3.2
3.2
3.2
3.2
3.2

2.0
1.8
1.5
1.3
1.0

2.4
2.8
2.7
2.6
2.6

1935
1936
1937
1938
1939

78.7
77.2
76.2
72.4
72.4

30.6
28.6
26.0
22.1
17.2

48.4
48.4
48.4
47.4
47.4

20.1
18.9
17.9
15.7
11.3

27.0
26.0
25.0
25.0
25.0

9.7
9.2
7.9
6.4
5.9

3.2
2.8
2.8

.8
.5
.2
—
—

2.5
4.4
4.8
8.6
11.3

1940
1941
1942
1943
1944

69.4
64.1
33.7
16.2
7.9

10.4
4.3
1.7
.3
.4

44.4
39.1
32.0
15.2
7.2

6.4
3.7
2.0
.2
.2

25.0
25.0
1.7
1.0
.7

4.1
.6
.2
.1
.2

__

__

—

—

12.1
11.3
10.6
10.0
9.2

1945
1946
1947

.3
.2
200.7

—.1
—.1
200.5

.2
.2
.2

—.1
—.1
—.1

*
*
200.5

200.5

—

—
—

—

—
—

._
—

—

—

—

—*

__
—

—

8.6
23.0
25.8

xThis table does not include in the total direct state indebtedness the
amount due the several state educational trust funds. Michigan, like
Illinois, adopted the policy of diverting proceeds from the sale of Federal
land grants for educational purposes and establishing thereby a non­
maturing debt to the school funds. During 1920-47 the credits to these
funds increased from seven to 8.9 million dollars. On their portion of this
amount, the Agricultural College, the University, and Normal School
Funds receive interest of seven per cent from specific taxes constitu­
tionally earmarked for this purpose; in addition to interest, the Primary
School Fund receives the balance of specific tax collections remaining
after distributions of interest. In the last three years this balance has
averaged 20 million dollars.
2Gross indebtedness less assets held in sinking funds. Assets include cash
held in sinking funds less warrants outstanding against the sinking funds,
cash held by fiscal agents, investments at par value, securities given in
lieu of interest, and loans to other state funds ; principal and interest
due from other funds but not transferred prior to June 30 are not
included.
sDuring 1920-25 includes short-term highway and soldiers' bonus notes
which were later converted to bonds.
includes the 1917 War Loan and the state fair indebtedness assumed in
1929.
includes indebtedness of the Michigan State Fair Board prior to the
assumption of the debt by the State (1924-28) ; indebtedness of the
University of Michigan, Michigan State College, the State Board of Edu­
cation, and the College of Mining and Technology for residence halls,
health service facilities, music buildings, and miscellaneous facilities for
athletic, dramatic, and social activities; and the indebtedness of the State
Bridge Commission (1936-47).
♦Less than $50,000.
SOURCE : Report of the Auditor General and Office of the Auditor-Gen­
eral ; Office of the State Bridge Commission ; Business Offices of Univer­
sity of Michigan, Michigan State College, Central Michigan College of
Education, and Northern Michigan College of Education.

>

the State Bridge Commission issued 2.3 million of bonds
to supplement expenditures by the Federal, State, and
Canadian governments for the construction of the Blue
Water Bridge at Port Huron. The bonds issued were ex­
pressly stated to be payable solely from toll earnings and
not an obligation of the State. The court held that since
neither the State’s revenue nor credit was involved, the
bonds were not within the constitutional prohibition.
Except for the foregoing instances and a loan made by
the Memorial Union at the State College and purchased
by two of the state sinking funds, there has been no other
borrowing by state agencies. At the present time the Inter­
national Bridge Authority is considering the feasibility of
issuing revenue bonds for the construction of a bridge and
necessary appurtenances at Sault Sainte Marie.
Although purchasers of agency issues in Michigan do
not have a lien on the property, most of the bonds sold
contain a pledge by the issuing authority to maintain
charges for the use of the facilities at sufficiently high levels
to meet principal and interest payments. In case of default
the bondholder may ask the court to fix rates, enjoin the
Table 2
APPROPRIATIONS FOR DEBT SERVICE AND
NET EARNINGS OF SINKING FUNDS
FISCAL YEARS 1918-47
(In millions of dollars)
Year

Appropriations for Debt Service
Interest on
Sinking
Total
Outstand­
Fund
ing Debt

Net
Earnings
of
Sinking
Fund

Bonds
Redeemed

1918
1919

,i
.4

.1
.i

.3

1920
1921
1922
1923
1924

.3
1.1
3.7
4.7
4.5

,i
.4
1.8
3.2
3.2

.2
.7
1.9
1.5
1.3

—
*
.2
.1
.2
.1

1925
1926
1927
1928
1929

6.1
10.1
5.2
7.1
10.2

3.8
4.1
4.1
3.8
4.0

2.3
6.0
1.1
3.3
6.2

.2
.2
.5
.8
.8

1930
1931
1932
1933
1934

7.6
7.4
7.5
4.3
8.1

4.0
4.0
4.2
3.9
4.0

3.6
3.4
3.3
.4
4.1

1.0
.9
1.0
.8
2.0

—
.6
1.1
.4

1935
1936
1937
1938
1939

7.5
5.0
4.0
5.3
8.7

3.9
3.7
3.9
3.4

3.6

3.6
1.3
.1
1.9
5.1

1.5
1.6
1.3
2.2
2.5

2.5
1.4
1.0
3.9
*

1940
1941
1942
1943
1944

5.7
6.9
5.8
2.0
.4

3.7
3.4
2.1
1.0
.6

2.0
3.5
3.7
1.0
—.2

2.4
2.4
.3
—.3
*

3.0
5.3
32.0
16.9
8.0

1945
1946
1947

.3
—
—
140.0

.1
—
—
78.2

.2
—
—
61.8

*
—
—
22.7

7.0
*
*

Total

*Less than $50,000.
SOURCE: Office of the Auditor General.




.

_

—
—
—

governing body to stop acts or policies detrimental to opera­
tion, or appoint receivers. In addition to these legal safe­
guards the moral prestige of the borrower is an additional
protection to the investor. Moreover in some instances, par­
ticularly in the construction of dormitories and social centers
at the state colleges of education, state appropriations have
covered up to one-half of the total cost of construction, and
at the State College and University facilities for which
revenue bonds are issued are constructed on sites originally
purchased from state appropriations. This has afforded an
unencumbered equity which serves as a cushion for debt
service requirements.
INDIRECT OBLIGATIONS

As is the case also in the states of Wisconsin and Iowa,
Michigan has had at least an indirect concern in local gov­
ernment borrowing for highways. Though the State is in
no sense legally obligated to contribute to the servicing and
retirement of such issues, it has recognized their existence
in its highway aid program. The Horton Act of 1932 pro­
vides that one-half of the weight tax revenues and $1,225,000
of gasoline tax revenues distributed annually to localities
must be used to retire local highway indebtedness. First
priority is given special assessment instalments due under
the so-called Covert Road Act, second to county road issues,
and third to those of townships. At the beginning of 1933
local Covert Road indebtedness approximated 37.3 million
dollars. During the years 1934-46, 34 million dollars of state
aid was spent for local debt service. In many counties funds
so received are sufficient to meet principal and interest
charges; however, the distribution of highway user revenues
among local governments is not affected by any debts they
may have incurred for highways.

—
—

—

STATE DEBT ADMINISTRATION

_

Except for the recent bonus borrowing Michigan state
debt has been in the form of sinking fund issues instead
of the serial type preferred by other states in the Seventh
District. If sinking fund bonds have any advantages for the
government which issues them, it lies in the flexibility of
the provisions for amortizing principal requirements. How­
ever, this very flexibility is also a disadvantage in that it
exposes the financial plan for redemption to manipulation
and uninformed management. Additions to the sinking fund
may be postponed nominally in the expectation of better
economic conditions when actually uncertain political con­
ditions are a motivating factor. In retrospect it is always
comparatively easy to designate those years in which the
rate of addition to the sinking fund should have been
reduced or accelerated. At the time and in prospect, how­
ever, the decision is not always so simple.
It is necessary to appraise the effect of the correlative
variation in taxes on the economic health of the community
absolutely and relatively for the period in which the debt
is outstanding. The manager of the sinking fund has to
gauge his recommendation to the appropriating authority
in terms of past policy with regard to accumulation as well

—
—

1.2
—
—

84.3

Page 3

as to current and prospective economic conditions. The
appropriating authority must then weigh such recommen­
dations in terms of the current level of taxation and the
present demands for public expenditure against likely
changes in these factors in the future. By relying on good
financial advice the appropriating authority can generally
execute a retirement plan which will be less burdensome
to the taxpayers than the rigid schedule of a straight serial
issue. The advantage may be small in net effect, however,
because of the chance that the calibre of the financial advice
may be poor or that the appropriating authority may be
inclined to be guided by extraneous factors.
There are other considerations adverse to the use of
sinking fund issues. The cost of administration is in excess
of that for the serial types, and the handling of the invest­
ments in the sinking fund affords opportunities for mis­
management. The latter is not a necessary characteristic
but rather a calculated risk that can by proper precautions
be reduced to insignificant proportions. An important con­
sideration affecting the comparative advantages of serial and
sinking fund issues today and probably for some time in
the future is the tax exemption of state and municipal
securities from high Federal individual and corporate in­
come tax rates and the value placed by the market on the
tax exemption reflected in comparative yields on municipal
and Federal bonds.
Michigan’s experience with four sinking fund issues
during the past 25 years is illustrative of both their advan­
tages and disadvantages. An objective appraisal of the
results of legislative and management policy with regard
to the sinking funds is not likely to create any great en­
thusiasm for or against the record. It appears that while the
potentialities of the sinking fund approach were utilized
to a limited extent, the inherent economies of serial issues
for the period 1920-45 could be used to justify the abandon­
ment in 1946 of a sinking fund for the World War II bonus
issue.
The year-to-year appropriation of state tax receipts for
interest on the outstanding debt and for the sinking fund
are set forth in Table 2. It is apparent from the fourth
column of the table that the contribution to the sinking
fund reflected the exercise of some discretion as to the rate
of accumulation, since annual contributions were as much
as six million dollars in 1926 and 1929, five million in 1939,
and as low as $100,000 in 1937, $400,000 in 1933, and
1.3 million dollars in 1936. Most frequently 3.3 to 3.7
million dollars was set aside. The swing in allocations to
the sinking fund from one extreme to the other thus rep­
resented between 5.5 and six million dollars or, translated
to relative terms, from four to 10 per cent of state tax
revenues.
The financial results of the management of the sinking
funds are set forth in Table 3. To retire a debt of 84 million
dollars and make interest payments of 78 million required
tax receipts of 140 million dollars. The net earnings of the
sinking fund amounted to 22.7 million dollars after payment
of administrative costs and the offset of losses on sale or
liquidation of securities. Most of the sinking fund assets
were liquidated in a period of prosperous economic con­
Page 4



ditions when there was a strong demand for municipal
securities, which constituted the bulk of the fund’s port­
folio. Throughout much of the period the State was unable
to purchase at par eligible securities with yields equivalent
to the coupon rate on state issues, and consequently the
use of a sinking fund in preference to a serial issue made
for a higher interest cost—in the neighborhood of 33 mil­
lion dollars.
Data are not available to show the year-to-year changes
in the market value of sinking fund assets, but in the
economic depression of the early 1930’s the impairment of
the fund’s capital must have been serious. Just prior to the
liquidation of the bulk of the sinking fund (1940) 40 per
cent of investments were in Federal securities, 40 per cent
in obligations of local governments, and 20 per cent in state
bonds. In 1937 when the sinking fund assets had a par
value of 50 million dollars, 4.7 million were in default as
to principal or interest.
With a few exceptions the sinking funds appear not to
have been used as an investment pool to purchase securities
of the State or its subdivisions that could not find a private
market. The State College Union bonds appear to be one
of the exceptions. The short-term loans to other state funds
were ineligible for private sale, and if the State may borrow
from itself, these appear to be an appropriate form of in­
vestment. The State of Wisconsin has, as indicated earlier
in this series of articles, used two of its investment funds
for loans to state agencies. The parallel in practice suggests
that inter-agency loans within the whole framework of state
government is not without precedent in this area.
Table 3
MANAGEMENT OF THE SINKING FUNDS
(In millions of dollars)
Item

Grand
Total

Highway
Improve­ Soldiers’
Bonus
ment
1922-47
1919-47

War
Loan
1917-37

State
Fair
1929-37
1.4
1.4

Receipts ...............................
From taxes ...................
From net earnings of
sinking fund ..................
Gross earnings as
follows:
Interest on average daily balance...
Interest on interfund loans ..............
Security investments—interest ...
Security investments—premium1..
Total .....................
Deductions as fol­
lows :
Premiums on investments bought2..
Losses3 ....................
Accrued interest
purchased .............
Total .....................

162.7
140.0

94.4
80.0

61.0
53.4

5.9
5.2

22.7

14.4

7.6

.7

Disbursements ...................
Bond principal ............. .
Interest—gross ..............
Less interest and
premium on original sales .......................
Interest—net ................
Administrative expense .................................
Balance and transfer....

.6

.3

.3

*

*

3.5

3.5

—

—

22.9

13.0

—
9.0

.8

.1

1.7
28.7

.9
17.7

.8
10.1

*
.8

*
.1

4.6
.3

2.6
—

1.8
.3

.1
—

.1

1.1
6.0

.7
3.3

.4
2.5

*
.1

•
.1

162.7
84.3
78.2

94.4
49.8
44.5

61.0
30.0
31.0

5.9
3.5
2.3

1.4
1.0
.4

.3
77.9

.3
44.2

_
31.0

_
2.3

_.4

.1
.4

.1
.3

*
*

*
.1

*
—

1Premium received less discount on security investments sold.
2Premium received less discount on security investments bought.
3Write-off on defaulted investments.
♦Less than $50,000.
SOURCE: Office of the Auditor General.

P

V

Prices, Profits, and the Corporate Security Markets
Lack of Investor Confidence Underlies Current Trends
The sharp break in commodity prices during the past
month with its depressing effect upon common stock prices
is being interpreted widely as confirmation “at last” of the
bearishness which has characterized security market price
movements since the autumn of 1946. Common stock prices
in particular have moved independently of inflationary
general business trends. As a result the “stock market” has
lost a good deal of its standing as a fairly specific means of
forecasting broad changes in business activity, at least in
terms of timing.
Few business analysts have questioned the eventual
downturn implications of the persisting pessimism in the
security markets, hut there has been considerable difference
of opinion as to the immediate prospects for the longheralded “postwar recession” suggested in common stock
price trends. It is still not clear whether recent price declines
actually indicate that the tide of the inflationary battle
finally has turned, but such sharp price breaks as recently
experienced are a definite warning that many types of busi­
ness adjustments are in the offing.
Continuation of price declines in commodity and security
prices under present conditions, however, does not neces­
sarily mean that such other business measures as employ­
ment, income, and expenditures face similar drops. In many
sections of the Seventh District the recent price breaks are
noted as “healthy,” “long overdue,” and “hope for con­
COMMON STOCK AND COMMODITY
PRICE
TRENDS DIVERGE
V-J

DAY

(SEPTEMBER

TO

DATE

1945 -100 )

PRICES ^____

sumers.” To the extent that price and other adjustments are
expected and provided for in business plans, they need not
touch off a deep, downward business spiral, particularly
among the many Midwest industries which still appear to
have strong demand prospects. The possibility that con­
tinued declines in commodity and security prices will have
a cumulative unfavorable effect upon business expectations
generally and induce unwarranted fears and liquidations
nevertheless cannot be minimized.
Lack of investor confidence persists on all sides. Despite
all-time records in—and at least up to now excellent shortrun prospects for—most wholesale and retail sales, earnings,
and dividends, security prices in general have remained
within fairly narrow limits with frequent downward “ad­
justments.” Investors deem the risk of capital losses con­
sequent upon possible declines in earnings as too great to
offset short-run increases in income from higher dividends,
particularly under existing high personal income tax rates.
In spite of the still relatively large volume of funds ac­
cumulated in the past available for investment, it has become
more difficult to raise money in the security markets during
the past year and one-half. Nevertheless, a very large volume
of successful security flotations occurred during the past
year, primarily because of the exceptionally high financial
standing of firms seeking new funds. In addition, firms
requiring financial assistance, generally speaking, were able
to meet their requirements from banks and other lending
institutions when deterred from the security markets.
A “revival” in the security markets cannot be expected
until investors collectively feel that the long-awaited post­
war recession has been experienced. Prospects are clouded
at present by weakness in commodity and security prices,
the abundant supply of securities on the markets, the limited
funds from current incomes available for security invest­
ment, and also the expectation that even continuing full
employment conditions cannot bring higher earnings but
rather only rising labor costs and declining profits.
POSTWAR STOCK PRICE TRENDS

(Cost of Living)

(402 Issue*)

Note: Index data are plotted quarterly through 1947, monthly thereafter;
January and mid-February 1948 wholesale prices and consumer prices and
mid-February 1948 common stocks are estimated.
SOURCES: U. S. Bureau of Labor Statistics, Dow-Jones & Co., and Standard
and Poor’s Corporation.




Common stock prices are generally regarded as being
very sensitive to the numerous economic maladjustments
which build up during periods of prosperity (inflation). As
already noted it is extremely difficult, however, to use this
sensitivity as a barometer in forecasting the exact time at
which prosperity (inflation) will give way to recession
(deflation). For example, in 1929 and 1937, there was little
or no difference in the timing of the downward movements
of common stock prices and prices in general. After World
War I, on the contrary, common stock prices fell sharply
in the fall of 1919 followed some nine months later by
wholesale and retail prices.
Page 5

The current postwar patterns of common stock and other
prices have exhibited unusual variance (see Chart 1). The
months immediately following V-J Day witnessed an ac­
celeration in the upward movement of common stock prices
which began early in 1942. Wholesale and retail prices in
the same period moved up only slightly, the Office of Price
Administration permitting moderate increases in price ceil­
ings in a number of industries to compensate companies for
the added costs of first round wage increases. After breaking
precipitately in September 1946, common stock prices have
since moved sluggishly within a relatively narrow range
approximately 15 per cent below their May-September 1946
plateau. With the end of price control in July-October 1946,
wholesale and retail prices began their second postwar
sharp uphill climb.
In the months immediately following the initial postwar
stock market break there was considerable difference of
opinion among market analysts as to market prospects, some
claiming that a reaction in a bull movement was in progress,
others that a bear movement was being initiated. Subse­
quent events have swung sentiment increasingly in favor
of the latter point of view.
As deflationary forces ultimately become paramount, com­
mon stock prices should fall relatively less than other prices.
Partially offsetting the dampening effect of eventually fall­
ing earnings on common stock prices will be a tendency for
the price-earnings ratio to rise. During 1947 this ratio
averaged 8.4 compared with 16.7 in 1936-39. It should be
noted that the drop of 11 per cent in the Dow-Jones or­
ganized commodity futures index during the first two weeks
in February was accompanied by a much milder reaction—
a little over four per cent—in the Dow-Jones index of
common stock prices.
EARNINGS AND COMMON STOCK PRICES

The period from V-J Day to the late summer of 1946
was characterized by rising common stock prices and falling
corporate earnings. The subsequent period to date has re­
versed this pattern, common stock prices failing and cor­
porate earnings generally rising.
Preliminary estimates covering all private corporations
indicate fourth quarter 1947 profits in excess of the same
quarter in 1946, the previous postwar high.1 Published
reports from a number of individual large corporations in
steel, automobiles, and other industries lend support to
such a record level.
In the months immediately following V-J Day aggregate
corporate profits declined mainly because reconversion and
work stoppages caused partial or complete shutdowns in
many plants, particularly in the heavy producers and con­
sumers durable goods industries. The automobile industry
was particularly hard hit, the profits of 15 large companies,
as computed by the Board of Governors, Federal Reserve
System, dropping from 77 million dollars in the second
quarter of 1945 to a negative 34 million dollars in the first
quarter of 1946. Profits in those industries which had no
reconversion problems and/or in which work stoppages
xThe Economic Report of the President, 1948.

Page 6



CHART

2

COMMON STOCK PRICES FAIL TO MOVE
CONSISTENTLY
WITH
INDUSTRIAL
EARNINGS
(QUARTERLY

PERCENTAGE

CHANGES)

SOURCES: BOARD OF GOVERNORS OF THE FEOERAL RESERVE
ANO DOW-JONES & CO.

SYSTEM

were of brief duration—chemicals and food, for examplemoved counter to the trend.
Relaxation of wage and other wartime controls in the
closing months of 1945 encouraged a widespread belief that
price controls would soon be weakened or abandoned. This
expected sequence played a major role underlying higher
profit expectations and consequent rising common stock
prices in late 1945-early 1946. By the summer of 1946,
however, deflation talk was increasing. Markets for some
products, textiles are an illustration, seemed to be approach­
ing a more “normal” demand-supply relationship. Other
products remained in short supply but were expected to
flood the markets once price control was abandoned, and
(temporarily) higher prices again became the major spur to
production on the part of businessmen. In other words, the
general run of expectations in the summer of 1946 was for
a quick run-up of prices after price decontrol followed by
a probably mild deflation. Earnings would have fallen if
this succession of events had materialized.
Seemingly in corroboration of the recession anticipations
were the following characteristics of the autumn and winter
of 1946-47: stock market break and resultant leveling in
capital flotations, increased concern of businessmen over
trends toward more selective buying on the part of consumers
as prices (temporarily) rose, acceleration of inventory
accumulation, failure of construction to fulfill expectations,
and, during the latter part of the winter, general price
leveling with actual declines in some textile and food lines.
The unexpected renewed strength of prices since mid1947, touched off by crop reduction and realization of the
need for further large-scale foreign aid, upset previous
general expectations and halted, at least temporarily, further
talk of deflation. In retrospect, probably the fundamental
errors in business forecasts of deflation during 1946 and
1947 were (1) an underestimation of the strength of war­
time accumulated inflationary forces both here and abroad,
especially effective purchasing power, and (2) an over-

estimation of the magnitude of postwar domestic productive
capacity and efficiency. In addition it was extremely dif­
ficult to foresee accurately the working out of inflationary
forces in an economy in which wage (cost) and price
controls were relaxed piecemeal and at different times.
There is no reason for expecting greater prescience on this
score from the stock market than from any other economic
market or measure.
DEFLATION LOOMS AHEAD

The renewed upward movement in prices after the middle
of 1947 improved short-run expectations of corporate earn­
ings which were already running at a high rate. The stock
market, however, failed to respond. With the economy
generally free of wartime controls and with prices and
wages moving up fast, the investment community—like
business analysts generally—appears to have become more
and more convinced over time that the inflationary spiral
will end in a sharp deflation similar to that of 1920-21.
The longer-run outlook for earnings appears less favorable
than the short-run outlook and apparently provides little
basis for a sustained up-turn in the market. Even a quick
market up-tum of substantial proportions and volume ap­
pears to be handicapped by uncertainties of the extent and
timing of the “recession” as well as hy the continued relative
scarcity of speculative funds consequent on margin control.2
The importance of the decontrol timetable on the postwar
relationship of earnings and common stock price trends is
illustrated in Chart 2. The variance in quarterly percentage
2The greater speculative activity on the organized commodity markets in
recent months is in part, at least, the result of less stringent margin re­
quirements.

CHART

BUT

S

POSTWAR
DIVIDENDS RISE
LAG
BEHIND EARNINGS
GAINS
(IN BILLIONS OF DOLLARS)

■■ DIVIDENDS
EARNINGS

changes of industrial earnings and common stock prices
was particularly great during the period in which controls
were being relaxed.
Utilities and railroads have long been subject to price
(rate) control. As a result, principally industrial companies
were affected directly by the postwar price decontrol pro­
gram of the Federal Government. Federal wage decontrol,
however, cut across all types of business. The resulting rise
in costs generally has had a particularly adverse effect on
utility and rail earnings. This has in part been responsible
for the somewhat wider postwar departures of actual and
anticipated earnings and somewhat more marked postwar
variations in earnings and common stock price trends in the
industrial than in the utility and railroad fields.
DIVIDEND PATTERNS

Dividend payments of all private corporations reached an
estimated 6.6 billion dollars in 1947. This exceeds the pre­
vious 1929 high of 5.8 billion dollars and is a billion dollars
above the level of the preceding year and two billion dollars
in excess of the wartime average. The rise in dividends,
however, has failed to keep pace with the postwar increase
in earnings (see Chart 3). As a consequence, dividend
payments of all private corporations have fallen from a war­
time level of approximately 45 per cent of earnings to 39
per cent in 1947. A similar trend has characterized large
corporations but at a higher average. The estimated 1947
figures for the large companies in the Federal Reserve Board
sample are: railroads, 47 per cent; industrials, 52 per cent;
electric light and power, 73 per cent; and telephone, 111
per cent.
The greater stability of dividends than earnings results
largely from the conscious effort of many companies to
maintain a regular minimum level of dividend payments.
This practice, although of importance in governing common
stock values over an extended period of time, decreases the
influence of dividend trends on shorter-term movements in
common stock prices. Substantial extra dividend payments
in the last quarter of 1947 had very little buoyant influence
in the stock market. They were overshadowed by already
described general expectations of downward earnings trends.
The outlook for dividend payments is somewhat better
than that for earnings. Any earnings decline will probably
be accompanied by a less than proportionate fall in divi­
dends. This follows not only from the greater stability of
dividends but also from the fact that under more normal
conditions the income tax law provides some pressure for
dividend payments up to 70 per cent of earnings.
CAPITAL FLOTATIONS

1929

1939

1941-45
AVERAGE

1946

1947

FIGURES IN BARS REPRESENT PERCENTAGES OF DIVIDENDS TO EARNINGS.
SOURCES: U.S. DEPARTMENT OF COMMERCE AND ECONOMIC REPORT OF
THE PRESIDENT, 1948




Net proceeds, i.e., gross proceeds less cost of flotation,
from new corporate security issues, after rising from an
end-of-war level of three billion dollars to over 6.7 billion
dollars in 1946, fell in 1947 to a level slightly in excess of
six billion dollars (see Chart 4). These net proceeds include
new money, and funds to retire securities and repay other
debt. The stock market break of September 1946 resulted
Page 7

in the cancellation of previously announced proposed issues
on the part of a number of corporations and undoubtedly
discouraged still other companies from considering similar
projects. The over all volume of new corporate security
issues, however, continued strong for new money during
1947, although dropping sharply for refunding issues.
In general, only corporations with above-average credit
ratings have ventured into the capital markets for new
money in the last year. One indication of this is provided
by the fact that private placements accounted for 34 per cent
of the total in 1947 compared with 20 and 25 per cent,
respectively, in 1945 and 1946.3 Institutional investors, the
recipients of most of the private placements, tend to place
a much higher premium on risk than investors generally.
Of particularly great significance have been postwar
trends in total new money flotations and that part repre­
sented by equity issues. It is here that the postwar financial
needs of corporate business have become increasingly
urgent.
Since V-J Day corporate business has been expanding
its inventories, receivables, and plant and equipment at an
average annual rate of approximately 25 billion dollars,
about five times the corresponding rate for the years 1944
and 1945. The expansion in 1948 will probably be at a
somewhat lower, although still substantial, rate. Present
indications still point to plant and equipment expenditures
roughly equal to the level of 1947. Receivables should
continue to rise as companies increasingly revert toward
their prewar reliance on trade credit facilities. Inventory
accumulation, however, seems likely to be much lower in
1948; pipelines are becoming increasingly filled, and recent
breaks in the commodity markets together with the further
possibility of price declines there and elsewhere discourage
further accumulation. This outlook for 1948 probably will
not be affected materially by a downturn in business unless
such decline strongly affects most major industries relatively
early in the year.
The rapid expansion in fixed assets, inventories, and
receivables created the need for about 50 billion dollars in
funds by corporate business in 1946 and 1947. Perhaps as
much as two-thirds of this need has been provided from
internal sources, i.e., undistributed profits, depreciation al­
lowances, and the drawing down of cash and marketable
securities accumulated during the war.4 These rough meas­
ures indicate a dependence on external funds considerably
in excess of the 7.5 billion dollars of new money securities
which were floated in 1946 and 1947. Sources other than
the capital markets thus have supplied a large part of the
postwar external funds required by corporate business.
During the last two years corporations have spent approxi­
mately 25 billion dollars on new plant and equipment. The
capital markets have supplied about five billion dollars for
this purpose, roughly one-fifth of the total. This explains,
in part at least, the growing demand of business firms for
aPrivate placements represent securities which are sold directly by the
issuer to one or a few buyers. Since the general public is not involved, such
transactions are exempt from the registration requirements of the Securities
and Exchange Commission.
4Since inventory appreciation is a factor in both current fund “needs" and
profits, the estimated residual fund requirements from outside sources is not
overstated to the extent of such inventory appreciation.

Page 8



CHART

4

NEW MONEY CORPORATE FLOTATIONS
REACH POSTWAR HIGH IN 1947
AS REFUNDING ISSUES CONTINUE TO DECLINE
(IN MILLIONS OF DOLLARS)

PURPOSE

OF ISSUE

6000

6000

4000

4000

NEW MONEY
- WORKING CAPITAL I
PLANT ANO
EQUIPMENT 1
2000

2000

REFUNDING

1944

TYPE

OF

1945

1946

1947

SECURITY

6000

6000

wMm
4000

4000

STOCKS
- COMMON
PREFERRED

5

2000

2000

BONDS

1944
SOURCE

SECURITIES

1945

1946

1947

AND EXCHANGE COMMISSION.

long-term funds from banks, insurance companies, and other
lending institutions.
NET WORTH-DEBT TRENDS

Wartime production and expansion required billions of
dollars, most of which were supplied directly or indirectly
by the Federal Government through payments, loans, and
delayed tax collections. As a consequence of this type of
financing, the ratio of net worth to debt fell among corpo­
rations in all size groups. Since corporations in general ex­
panded their assets during the war and since excess profits
taxes prevented a proportionate growth in net worth, new
equity financing has become increasingly imperative as a
means of restoring more balanced net worth-debt relation­
ships. However, of the some 7.5 billion dollars in corporate
new money securities floated during 1946 and 1947 only a
little more than three billion dollars were stock issues, the
remainder being bonds. Since funds from other external
sources represent debt, the above average postwar earnings
have been the major factor in restoring the net worth-debt
ratio to approximately its prewar level.
The continued uncertain outlook for common stock prices
is particularly discouraging to new equity financing. Even
rate reductions in the higher brackets of the personal income
tax structure probably would not materially increase the
flow of funds into equity securities until the price outlook
on existing issues clears. Some refunding will, however,
take place because of the maturing of already existing
securities.

INTERNATIONAL TRADE BARRIERS LOWERED
(Continued from Inside Front Cover)

Also, concessions made by the Linked States on industrial
products may facilitate importation of such products from
countries which are markets for American farm and indus­
trial products. By increasing imports the LInited States can
provide foreign countries with the dollars needed to buy
products we wish to export.
Industrial products normally exported from the United
States which received substantial concessions include auto­
mobiles, aircraft, selected industrial machinery, electrical
machinery and appliances, office machinery and appliances,
agricultural machinery, some metal products, pharmaceu­
ticals, chemicals, paints, cameras and photographic equip­
ment, and a variety of miscellaneous manufactured products.

some dried fruits were among the first products to experience
postwar slumps in prices to levels which cause financial
stress to farmers. Consequently, expanded markets for such
products are particularly important at this time. Tariff re­
ductions by Canada in seasonal duties for fresh fruits aver­
aged about 33 per cent. France conceded to tariff reductions
of from 40 to 70 per cent on canned fruits and juices.
Several countries agreed to keep raw cotton on the free
list for the duration of the agreement. Wheat tariffs were
reduced by 66 and 50 per cent, respectively, by France and
Cuba. Other important importers bound wheat on the free
list. Rice received favorable treatment by Cuba. Soybeans
and soybean cake and meal tariffs were reduced.
CONCESSIONS MADE BY THE UNITED STATES
Tobacco, a farm product which is normally exported in
large volume and which finds many market outlets closed
Concessions were made by the United States on both
or sharply reduced at this time, received concessions.
agricultural and industrial products in exchange for the
hard duties were reduced 59 per cent by France, and concessions granted by other countries. For 1939, duty-free
concessions were obtained from France, the United King­ imports into the United States totaled 1,341 million dollars.
dom, and several other countries on other livestock products, Products accounting for 85 per cent of these duty-free im­
including pork and both condensed and dried milk.
ports were bound on the free list (i.e., this country agreed
Concessions were obtained on some vegetables, including not to apply a tariff for the duration of the agreement).
onions, dried beans, canned asparagus, and quick frozen Seventy per cent of the products whose duty-free status
vegetables from several countries. Seasonal duty reductions was thus bound came from participating countries.
by Canada on fresh vegetables averaged about 25 per cent.
Total dutiable imports into the United States in 1939
Since the concessions granted by each country varied greatly were valued at 907 million dollars. Existing rates of duty
both as to products included and the amount and kind of were bound on products accounting for 20 per cent of total
concession made, detailed coverage has been impossible in dutiable imports, were reduced less than 25 per cent on
the space available here.
products accounting for 10 per cent of dutiable imports,
United States farmers will benefit not only from the con­ were reduced 25 to 35 per cent on products accounting for
cessions gained on agricultural products, but also from the 27 per cent of dutiable imports, and were reduced 35 to 50
concessions received by our export industries which pay, in per cent on products accounting for 43 per cent of dutiable
general, high wages and whose workers constitute an im­ imports. Thus, on the average, duties were lowered about
portant sector of the domestic market for farm products. 25 per cent on commodities accounting for about 35 per cent
of our prewar imports. Of the dutiable commodities on
SELECTED U. S. CONCESSIONS MADE AT
which concessions were made, 85 per cent came from par­
GENEVA OF DIRECT INTEREST TO
ticipating countries.
SEVENTH DISTRICT FARMERS
The most-favored-nation clause, the cornerstone of non­
Beef and veal: Tariff reduced from 60 to 30 per lb.
discrimination in international commercial relations, is in­
Butter: Tariff reduced from 140 to 70 per lb. on imports up to 50 million
lbs. from November 1-March 31 only.
corporated in the agreement. This assures the extension by
Cattle: under 200 lbs., quota increased from 100,000 to 200,000 head ;
200 to 700 lbs., no change in either quota or tariff;
each country to every other nation participating in the
700 lbs. and over, quota increased from 225,000 to 400,000 head. Tariff
agreement of the same tariff treatment.
on all cattle is unchanged at 1%0 per lb. within quotas, 21/># over
the quotas.
The most-favored-nation provisions extend to export taxes
Cheese, cheddar: Tariff reduced from 40 to 3xkf per lb.
Cream, dried: Tariff reduced from 12.30 to 6.20 per lb.
which have in the past largely served as a means of restrict­
Coconut oil: Tariff reduced from 20 to 10 per lb.
Egg products, frozen: Tariff reduced from 110 to 70 per lb.
ing or diverting to particular countries exports of raw ma­
Egg products, dried: Tariff reduced from 270 to 170 per lb.
Milk, condensed and evaporated: Tariff reduced from 1.80 to 10 per lb.
terials. This will benefit the LInited States, for example, by
for unsweetened case goods and from 2.750 to 1.750 per lb. on sweetened
eliminating the discriminatory tax on exports of tin ore and
case goods.
Milk, dried: Tariff reduced from 6^0 to 3.10 per lb. on whole milk and
concentrates from the Malayan LJnion and placing the
from 30 to 1^0 on skimmed milk.
Potatoes, for table use: Within the previously established quota of 1 mil­
United States smelting industry in as favorable a position
lion bu. the tariff was reduced from 600 to 37^0 per cwt. on imports
from December-February. Tariff of 750 is continued for imports in
as
the smelting industry of any other country in obtaining
excess of quota.
Potatoes, certified for seed: Quota increased from 1x/% million bu. to 2%
access to tin supplies in Malaya.
million bu. Tariff not changed.
Concessions made on selected agricultural commodities
Sugar: Tariff reduced from %0 to %0 per lb. on Cuban sugar, from
940 to 690 per cwt. on other sugar.
of
direct interest to Seventh District farmers are reported in
Wheat: Tariff reduced from 420 to 210 per bu. Quota of 800,000 bu. not
changed.
the
accompanying table. While reference in this article is
Wheat flour: Tariff reduced from $1.04 to 520 per cwt. Quota of 4 million
lbs. not changed.
made
primarily to agricultural products, it should be em­
Whiskey: Tariff reduced from $2.50 to $1.50 per gal. proof.
Wool, finer than 44s: Tariff reduced from 340 to 25^0 per lb. clean con­
phasized that the agreement covers a wide range of products
tent. Tariffs on manufactured woolens and worsteds were reduced
and represents the most extensive single document ever
proportionately, but the U.S. reserved the right to raise tariffs if
imports exceed 5 per cent of average domestic production.
drawn for the promotion of international commerce.







SEVENTH FEDERAL

RESERVE DISTRICT