Full text of Business Conditions (Federal Reserve Bank of Chicago) : May 1953

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A review by the Federal Reserve Bank of Chicago

Business
Conditions
1953 May

Contents
Foreign markets important
fo r many Midwest products

Farm loan demand shifts

Financing the family car

Farm financial structure adjusting

More business— more checks

The Trend of Business

2-3

the

rp n n

m a n y m o n t h s pronouncements on the
business outlook have been prefaced by the
proviso— “no change in international tensions.”
Now, only a few short weeks after Georgi
Malenkov grasped the reins of Soviet power,
oil appears to be spreading over the turbulent
waters separating East and West. Conference
tables at Panmunjon are dusted off, Vishinsky
smiles at fellow delegates, Pravda recalls
World War II friendships, and business fore
casts are subject to re-examination.
The possibility that peaceful Russian ges
tures are merely a prelude to a resumption of
the diplomatic or military offensive at a more
opportune time cannot be ignored. For the
time being, however, it must be assumed that
pressures to reduce the arms budget will be
stepped-up and that many consumers, business
men, and lenders will reconsider earlier plans
to enter into new commitments. The more
bearish attitude was reflected in the jolt suf
fered by the stock and commodity markets in
early April.
Would peace in Korea bring an abrupt end
to the unparalleled prosperity of recent years?
Not necessarily. According to the staff of the
Joint Committee on the Economic Report, the
war accounts directly for 4 to 5 billion dol
lars per year, only about 10 per cent of all
national security outlays. Moreover, most of
this expenditure would continue long after a
cease fire. More important, however, is the
fact that the boom following last summer’s
steel strike has been almost entirely a civilian
phenomenon.
The current rate of national security outlays
of about 50 billion dollars per year is little
changed from a year ago. Gradual elimination

F or

2 Business Conditions, May 1953

b u s in e s s

First quarter activity gains

january -m arch percentage change from 1952

of wage, selective credit, and allocation con
trols during this period helped boost civilian
purchases to new highs. According to tabula
tions of expectations made prior to the resump
tion of the truce talks, high-level activity might
have been expected to continue through most
of 1953. The final results of easier interna
tional relations will depend largely upon the
degree to which the following expressions of
bullish sentiment have been modified.
Construction of all types was expected
by the government agencies to exceed
last year by 4 per cent. Thus far, it ap
pears that this forecast was modest. The 7
billion dollar outlay of the first quarter
topped the like period of 1952 by 6 per
cent, and contract awards have been still
more impressive.
Business expenditures on new plant
and equipment have been estimated by

the SEC at 27 billion dollars—a new
record. These projections were higher
than a similar survey made last fall.
Secretary of Commerce W eeks re
ported at the end of March that “every
major industry expects higher sales
volume in 1953 than in 1952.” Appliance
makers look to a sales gain of 20 per cent,
and automobile firms are planning for at
least a 30 per cent boost.
The Federal Reserve Board’s Survey
of Consumer Finances taken in January

and February reveals that individuals
consider themselves to be in better finan
cial shape than last year and expect to
buy more durable goods and houses.
Expectations, of course, are subject to
change, but the available data on the per
formance of the economy in the recent past
indicates a momentum which will not be dissi
pated suddenly. March, usually a dull month
as a result of heavy tax payments, produced
some eye-catching reports of the business
tempo.
Industrial production rose for the
eighth straight month to a level 9 per
cent above the year-ago mark.
Steel output exceeded 10 million tons
for the first time in history. Nevertheless,
some users still seek supplies at premium
prices.
Passenger cars were turned out at a
rate 50 per cent above 1952, and still
greater numbers were scheduled for fol
lowing months.
Department store sales exceeded
year-ago figures by 8 per cent after al
lowance for the different Easter date. The
early weeks of April continued to show
rather good results.
Countering the rosy glow of these data are a
number of disquieting developments which,
even in the absence of adverse psychology re
sulting from international developments, could
cause some edging down in over-all activity in
the coming months. Most of the following

items are of particular interest to Midwesterners.
Cash farm income in 1953 is expected
to be as much as 10 per cent below last
year. In part, the farmer’s loss is the city
dweller’s gain in lower food prices, but
suppliers of farm machinery and ferti
lizer have found that their markets are
showing again the seasonal ups and downs
of prewar years.
Cutbacks in aircraft orders held by
“second-source” contractors in Detroit,
South Bend, and Chicago will tend to
loosen currently tight labor markets. At
the present time, workers released by
affected firms could readily find employ
ment elsewhere, but this situation might
not prevail some months hence.
Consumer durable goods output
probably cannot be maintained at current
levels if involuntary inventory accumula
tions are to be avoided. Passenger cars
are expected to be turned out at an annual
rate of over 7.5 million in the second
quarter; most optimistic estimates of sales
prospects for the year as a whole are not
much above 6 million.

Automobiles lead
recent output upswing
thousand workers

Foreign markets important
for many Midwest products
f o r e ig n
tr a d e
of the United States ex
ceeds that of any other country. Yet, it is a
small part of our domestic production, much
smaller than in the case of other world powers.
In 1952, United States exports totaled only
about 5 per cent of our national income.
Nevertheless, export sales are of importance
to the domestic economy. The Bureau of Labor
Statistics has estimated that in 1949, excluding
employment attributable to agricultural exports
which comprise approximately one-quarter of
our overseas shipments, about 1.7 million per
sons were employed in the production and dis
tribution of goods and services destined for
foreign markets. Since then, the volume of
exports has increased by 14 per cent. Our total
shipments abroad exceed outlays in some im
portant segments of our economy. For exam
ple, in each postwar year except 1950, the value
of U. S. exports has topped outlays for urban
residential construction and has greatly ex
ceeded retail sales of new automobiles.
Although the demand of the rest of the

T h e

A number of major industries
serve large export market
Prod uction
1950

Product line

Exp o rts
as p e r cent
o f p roduction
1950
1951

(m illio n d o lla rs]
Household r e fr ig e ra to rs ..

1,100

C oa l

......................................

4,500

D ie se l

engines

11
*

.................

...................

167

Prim a ry copper .................

532

Tra c to rs

158

1,747

M a chine to o ls

.................................

M o to r trucks and coaches
* N ot available

4 Business Conditions, May 1953

world for U. S. products is a significant factor
in the market outlook for many individual
industries, it is usually given little attention in
appraisals of over-all business prospects. Yet,
any change in the volume of exports can have
the same effect on domestic activity and em
ployment as a change in domestic spending.
Tractor workers in Peoria and Moline, auto
workers in Detroit, and soybean farmers in
Iowa represent a few of the persons in the
Midwest whose employment and income result,
in part, from our export trade.

Industrial Exports
A large share of the United States industrial
exports are produced in Midwest plants and
factories. According to recent estimates, Illi
nois, Indiana, Iowa, Michigan, and Wisconsin
account for over 23 per cent of U. S. nonagricultural sales abroad, exclusive of military aid
shipments.1 In 1952 exports of industrial prod
ucts reached a new high of 11.6 billion dollars
—77 per cent of our total overseas business.
Of these exports, 2 billion were military enditems shipped under mutual security grants to
foreign countries.
On a per capita basis, Michigan, with exports
of 139 dollars per person, stands far ahead of
the other Midwest states. Over two-thirds of
Michigan exports come from the motor vehicle
and equipment industries. As a result of the
large-scale steel production and petroleum re
fining in the Gary-Hammond area, Indiana
ranks second with per capita exports of 95
1 Based on 1951 pattern of exports and 1947
in export industries. The estimates for the
been derived by assuming that District states
in proportion to their relative importance
various industries.

pattern of employment
individual states have
share in U. S. exports
as employers in the

trucks, combined with that of Studebaker in
Indiana, Nash in Wisconsin, Diamond T in
Illinois, and the branch plants and parts manu
facturers throughout the region, generates over
15 per cent of total nonagricultural income in
the five-state area. The employment of nearly
30,000 motor vehicle and equipment workers
in the District can be directly traced to 1952
automotive export sales.
Exports of passenger cars and trucks in 1952
were 30 per cent lower than in the preceding
year. The main cause of this decline was
import restrictions and quotas imposed by a
number of countries to conserve dollars. It is
generally agreed that, despite increased foreign
competition, a large potential overseas market
exists for U. S. cars and trucks.
The primary metals group, the producers and
primary fabricators of steel and other metals—
second in size in this area only to the auto
motive industry—accounts for about 10 per
cent of total wages and salaries received by
workers in the Seventh District. Over one-

dollars. Illinois and Wisconsin follow with 70
and 66 dollars, respectively. Inasmuch as these
figures do not include agricultural products,
Iowa, predominantly a farming state, trails with
exports of only 27 dollars per person.
The Midwest is the leading producer of much
of the machinery, transportation equipment,
and iron and steel products that make up a large
part of U. S. exports. Last year, machinery and
equipment accounted for over 28 per cent of
our nonagricultural foreign sales, exclusive of
military aid shipments, while automotive and
iron and steel products added 10 and 8 per cent,
respectively.
M ajor exporting industries

Close to three-fourths of all motor vehicle
and equipment production in the United States
is located in District states. Concentrated
around the “Motor City” in Michigan, the auto
motive industries pay out over a third of the
wages and salaries received by workers in that
state. The Detroit area output of autos and

Exports from Midwest industries
Over one-half of
U.S. nonagricultural
exports' . . .
per cent of
U.S. exports

are produced by industries
located largely in the M idwest . . .
produced outside District

produced in District

and which provide
about three-fourths
of D istrict wages
and salaries.
per cent of District
wages and salaries
~ H 7 0

pther leading midwest
export products

other leading m
export products
pharmeceuticals
electrical machinery
tractors and
farm equipment
petroleum refining
primary metals
motor vehicles
and equipment12

1 exclusive of military-aid shipments
2 w eighted average

pharmeceuticals
electrical machinery
tractors and
farm equipment
♦-petroleum refining
primary metals

per

cen t

U .S .

production

quarter of total U. S. primary metal output is
in this region, with production concentrated in
the Chicago and Detroit metropolitan areas.
In 1951 foreign sales of these industries totaled
648 million dollars, 7 per cent of U. S. indus
trial merchandise exports.
The bulk of all American-made tractors in
use throughout the world were produced in the
District states. About three-quarters of the
tractor and farm equipment made in the U. S.
is manufactured in this area—the proportion
being even higher for tractors alone. The Dis
trict includes the home office or major plants of
International Harvester and Oliver in Chicago;
Ford and Ferguson in Detroit; J. I. Case in
Racine; Caterpillar, specializing in nonfarm
tractors, in Peoria; Allis-Chalmers in Milwau
kee; and in Moline both John Deere and one
plant of Minneapolis-Moline. About 4 per cent
of total wages and salaries in the District orig
inate in tractor and farm machinery produc
tion. Over 16,000 jobs for Seventh District
farm machinery workers are directly attrib
utable to sales abroad.
In every postwar year foreign sales of tractors
have been important relative to total sales. In
1951 exports of tractors reached 202 million
dollars, over 19 per cent of the value of domes
tic tractor production.

Industrial exports from Midwest states
Pe r cent o f to ta l
Value o f exp orts
produced

1951*

U . S . no n a g ric u l
tu ra l e x p o rts**

(m illion d o lla rs)
Illin o is

...............................

619.3

6.3

Indiana

............................

385.6

3 .9

1owa

...................................

M ichig an
W is c o n sin

To ta l

72.5

0 .7

..........................

915.7

9 .4

........................

232.1

2 .4

2 ,2 2 5.2

22.8

............................

♦Based on 22 major Midwest industries, which account for 59 per
cent of U. S. nonagricultural exports. The products making up the
remaining 41 per cent are produced almost exclusively outside the
District.
** Exclusive of military aid shipments.

6 Business Conditions, May 1953

Exports of the electrical equipment industry
reached 446 million in 1951 and about main
tained this rate in the first three quarters of
1952. About 30 per cent of all workers en
gaged in manufacturing electrical machinery
in the U. S. are employed in the five-state area,
with half of the District output concentrated in
and around Chicago. The major products in
clude communication equipment, appliances,
and industrial apparatus.
Another prime example of a prominent Mid
west industry that serves foreign markets is
that of pharmaceuticals. This District produces
close to 40 per cent of all drugs and medicines
manufactured in the U. S. Leading producers
in the District include Parke, Davis and Com
pany and Upjohn located in Michigan, Eli Lilly
in Indianapolis, and Abbott Laboratories and
Searle located in the Chicago area. During 1951
exports of pharmaceuticals reached a record
281 million dollars, compared with 22 million
in 1939. Although the “dollar shortage” has
held down the total of foreign sales somewhat,
it has been less restrictive in the drug lines due
to the fact that medicinals have usually re
ceived favored treatment at the hands of im
port licensers.
These are but a few of the more important
industrial products of the Midwest which are
exported in substantial volume. Also important
are items such as diesel engines and turbines,
railroad equipment, refrigeration machinery,
photographic equipment, and a raft of fabri
cated metal products and industrial machinery,
as well as a variety of smaller items such as
fountain pens and safety razors.

Agricultural products
Recent events have pointed up the im
portance of agricultural exports to farm pros
perity. Aside from cattle, much of the decline
in prices and rapid accumulation of stocks
under price support programs in the past year
is traceable to a decline in foreign demand.
Exports of agricultural products fell by 15 per

Exports vital to many farm products
Ex p o rts
C ash farm
re c e ip ts 1951

C om m odity

as p e r cent of
p rod uction 1951

(m illion d o lla rs)
W h o le d ry m ilk.....................
Raw cotton
Rice

..........................................

W heat
G ra in

......................................
sorghum s

So yb e a ns
To b a c c o
La rd

............................

.................

2,475

192

1,678

134

...............................

770

.................................

1,187

...........................................

416*

♦W holesale value of production.

cent in 1952, from over 4 billion dollars in 1951
to 3.4 billion last year. Cotton and grains took
the biggest drop— cotton exports declined by
over 20 per cent. This downward trend in farm
exports has continued into 1953, with January
agricultural shipments off 29 per cent from
those of the previous January.
About one-fifth of cash farm receipts orig
inate in the production of cotton, wheat, to
bacco, and soybeans—commodities which
account for about two-thirds of our agricul
tural exports. Although small as a percentage
of total output, corn exports reached 207 mil
lion dollars in 1951 to rank as the fifth largest
farm commodity entering into export trade.
Also, about half of all hogs are produced in the
Midwest. In 1951 shipments of lard outside
the U. S. exceeded 132 million dollars—24 per
cent of the lard produced in that year.
The Midwest is important in the production
of a number of farm commodities exported in

Soybeans
Dry whole milk
Lard
Corn
Wheat

Per cent produced
in District states
61
60
49
40
19

large quantities. It is estimated that about one-

sixth of all agricultural shipments abroad come
from Midwest farms. This proportion is some
what lower than the share of U. S. farm com
modities produced in this area because of the
huge role of cotton and tobacco in the nation’s
export trade.
But the Midwest farmers’ interest in export
demand for U. S. farm products is still sub
stantial. As foreign demand for cotton and
wheat declines, some of the land and resources
now devoted to the production of these com
modities will be shifted into products that com
pete directly with Midwest farm output. So, any
decline in exports of crops grown largely in
other areas will increase the competition in
domestic markets for agricultural commodities
that are now produced mainly on Midwest
farms.
O f interest to Midwest

Thus, even though exports make up only a
small part of total U. S. production, they are
important to many segments of our economy.
They are of particular significance to a number
of individual commodities and the areas in
which these are produced. Seventh District
states account for almost one-fourth of all U. S.
industrial exports and one-sixth of total agri
cultural shipments abroad. Numerous Midwest
centers are dependent on products for which
foreign markets are important. Thus, develop
ments affecting the course of U. S. foreign
trade will have a definite impact on the Mid
west economy.

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printed provided source is credited.

Farm loan
demand shifts
F a r m e r s are adjusting their use of credit to
changes in prices, market prospects, and their
own financial position. This is indicated by the
results of a recent opinion survey of Midwest
country bankers. Although bankers in all Dis
trict states expect more farmers to borrow this
year than in 1952, the total amount of short
term farm loans probably will not exceed that
of a year ago.

Less cattle credit

It is in livestock loans that the most general
change is expected. More than two-thirds of
the country bankers say that farmers will use
less credit to buy livestock this year. Among
the Iowa bankers, four out of five express
this view.
Lower prices for both beef and dairy cattle
are the major reason. With lower values, less
credit is needed to finance the purchase of a
given number of animals. A further factor is
the “profitless feeding” which many Corn Belt
farmers have experienced. This is tempering
the use of credit to finance feeder cattle as both
borrowers and lenders review their situations
in the light of recent developments.
Income of Midwest cattle feeders was cut
sharply in 1952, and the prospect for cattle
now in feedlots is not encouraging in view of
the more than 30 per cent decline in slaughter
steer prices at Chicago in the first three months
of this year. About one-half of the country
bankers report that farmers expect to realize
less than the market value from feed put into
cattle now in feedlots. In the important cattle
feeding areas in Iowa and Illinois this expecta
tion is even more widespread.
The current unfavorable outlook does not
necessarily suggest a reduced volume of cattle
feeding this fall and winter. But with lower
8 Business Conditions, May 1953

prices and some weeding out of marginal feed
ers, there probably will be less credit involved.
Less m achinery credit

With farm income easing down it might
appear that an increased amount of credit
would be used to finance farm machinery pur
chases. But country bankers say this is not the
case. Fully half of them estimate that farmers
will use less credit to buy farm machinery this
year than in 1952.
As with livestock, this view is most general
in Iowa and Illinois where the growth in short
term farm loans has been very rapid in recent
years. Considering the durable nature of farm
machinery and the large volume of purchases
since 1945, many farmers could postpone
additional buying if they should feel a real
squeeze on current income. Only one in six
bankers expect farmers to use more credit to
finance machinery purchases this year than
in 1952.
More general operating credit

But Illinois, Indiana, and Iowa farmers will
use a larger amount of credit this year for
general operating purposes such as planting,
fertilizing, and harvesting crops and covering
other day-to-day farm operating and family
living expenses, according to country bankers
in these states. Michigan and Wisconsin bank
ers, on the other hand, expect little change in
requirements for this type of credit.
What does this mean with regard to District
banks’ short-term lending to agriculture in
1953? Primarily, it reflects the effects of de
clining cattle prices on the demand for credit.
Secondly, it suggests that any belt tightening
that takes place in Midwest agriculture is likely
to show up, at least in part, as a reduction in
machinery purchases and credit extensions for
this purpose. Finally, the indicated increase in
use of credit to finance general farm operations
reflects farmers’ efforts to put “first things
first” in the use of credit as declining prices
reduce their profit margins.

Financing the fam ily c a r
Instalment credit of growing importance
in the demand for automobiles.
c r e d i t for the purchase of cars on
the instalment plan has become a big and
highly competitive business in recent years.
Credit extensions for this purpose amounted to
a record 10 billion dollars last year. This was
two-thirds more than the 1949 volume and
three times that of 1941, the most active pre
war year.
Sales finance companies, the traditional
source of automobile credit, are supplemented
by the growing number of banks which have
entered the instalment credit field during the
past decade. In most communities this means
that there are several sources of credit available
to finance sales of new and used cars. As a
result, funds for such financing have been in
generally ample supply, despite the rapidly
rising needs of borrowers.
Ready availability of instalment credit is

S u p p l y in g

Instalment credit extensions
for purchase of cars have risen
more rapidly than dealers’ sales
m illion dollars

essential to automobile dealers. A large pro
portion of car purchases are financed in part
through the use of credit, and this proportion
has increased substantially over the postwar
period. Credit extensions last year accounted
for 38 per cent of the retail dollar volume of
automobile dealers, as compared with 28 per
cent in 1951 and 22 per cent in 1948. More
over, these figures understate the role played
by credit in automobile financing, since a
sizable portion of dealers’ sales volume con
sists of repair work and sales of parts and
accessories.
The announced intention of the automobile
industry is to increase the output of cars from
4.3 million units in 1952 to over 5.5 million
this year. So far this estimate has been backed
up by production at an annual rate of 6.1
million units in the first three months of the
year. If this rate of output is continued and
inventory accumulation is to be avoided,
dealers’ sales will have to expand by about onethird this year. Obviously, this higher volume
of sales would require a very substantial in
crease in the amount of instalment credit ex
tended, even if the proportion of credit buying
does not increase further. In these circum
stances, the question of whether lenders will
supply even larger amounts of funds at the
liberal credit terms currently prevailing be
comes an important factor in the sales pros
pects for new and used automobiles.
Credit buying bulks large

♦revised series

New passenger car sales last year totaled 4.2
million, a decline of about one-sixth from the
5.1 million sold in 1951. Although no total
figure on used car sales is available, new car
dealers sold 7 million used cars in 1951 and
9

6.9 million in 1952, including those which were
wholesaled to used car dealers. Taking into
consideration privately arranged sales and
direct purchases and resales by used car dealers,
a reasonable estimate of the total number of
used cars sold in each year might be in excess
of 8 million units.
Most of these cars were financed in part
through the use of instalment credit. Accord
ing to the Survey of Consumer Finances, 55 per
cent of all consumers who purchased auto
mobiles in 1951 utilized credit (including
single payment loans). It seems clear that this
proportion rose much further last year, perhaps
to 65-70 per cent. The increased importance
of credit buying is evidenced by the fact that
the volume of instalment credit extended on
automobiles increased by one-third from 1951
to 1952, while the number of cars sold declined
5-10 per cent.
The Survey revealed a significant difference
between the frequency with which credit was
used in 1951 for new and used car purchases.
Fewer than half of the new car buyers required
instalment credit to finance their purchase, as
compared with 6 out of 10 used car buyers.
The reasons for this can be found in the differ
ing financial positions of new vs. used car buy
ers. First, 4 out of 5 new car buyers already
had an automobile which they traded in or sold
privately, as against 3 out of 5 of those who
bought used cars. This narrowed considerably
the difference in the average net outlays of the
two groups (see table). Second, over half of
the new car buyers earned an income of $5,000
or more, as compared with only one-fifth of
those who purchased used cars. More than
three-fifths of the used car buyers were in the
$2,000-$5,000 income class.
All Survey findings point to persons of
moderate income as the most frequent users of
credit in financing car purchases. Buyers with
large incomes often have the resources to pur
chase without resorting to the use of instal
ment credit. On the other hand, most of those
with low and irregular incomes are unable to
10 Business Conditions, May 1953

Car buying in 1951

A vera g e
Bu yers

purchase
making

p ric e ...................

tra d e -in s ...................

A verag e net o u tla y s............................
Bu yers using c re d it...............................

N e w ca rs

U se d cars

$2,390

$790

81%
$1,440
47%

59%
$570
60%

obtain credit, both because of their financial
situation and the fact that they usually pur
chase the older used cars which are considered
to be less desirable collateral. Moreover, the
average user of credit has only limited holdings
of liquid assets. In 1951, 6 out of every 10 car
buyers who held less than $500 in liquid assets
early in the year borrowed, while only 1 in 10
of those holding liquid assets of $2000 or more
utilized credit in making their purchase.
These characteristics emphasize the impor
tance of credit terms in bringing credit buyers
into the automobile market. Smaller down
payments and a moderate reduction in the re
quired monthly payment are of considerable
importance, not only in attracting additional
buyers, but also in making it possible for credit
users generally to buy more expensive cars.
Prior to the ending of Regulation W last
spring, borrowers were required to pay onethird down and the balance in 18 months.
Since then credit terms have been markedly
liberalized. Although terms vary from one
lender to another and among localities, new
cars commonly are being financed at one-fourth
down and 24 to 30 months to pay. Used car
terms have continued somewhat more restric
tive, with one-third down and 18 to 24 months
to pay usually required. The relaxation in
terms which has taken place undoubtedly was
the major factor leading to the sharp rise in the
number of cars bought on credit last year.
Competition among lenders

Instalment credit is extended to car buyers

in one of two ways. Most commonly, financing
is arranged through the dealer, who subse
quently sells the credit contract to an institu
tional holder. A second and growing method
of financing involves direct negotiation between
the borrower and a lending institution for a
loan secured by and for the purpose of purchas
ing a car.
A variety of lenders extend automobile in
stalment credit. These include industrial banks
and loan companies, credit unions, and auto
mobile dealers themselves, who may hold and
service some or all of the credit paper they
originate. The lion’s share of the business,
however, is done by sales finance companies
and commercial banks. At the end of 1952
sales finance companies held about half and
commercial banks 44 per cent of the 6.8 billion
dollars in automobile instalment credit out
standing.
The most striking development which has
occurred in automobile instalment financing
during the past two decades has been the growth
in commercial bank activity in this field. In
1939 bank holdings of car loans amounted to
only 44 per cent of the holdings of sales finance
companies. By 1941 this proportion had in
creased to 55 per cent, and in the postwar
period automobile instalment loans of banks
have been roughly equal to those of sales finance
companies.
The greater importance of banks in the auto
mobile instalment loan field since the war re
flects both the growing number of banks which
engage in this type of lending as well as efforts
on the part of some to increase their volume of
business. Most banks now do some instalment
lending, and many have set up personal loan
departments and aggressively compete to pur
chase instalment paper from automobile dealers.
There are several reasons for the increased in
terest of bankers in the instalment credit busi
ness. First, it serves as an additional outlet for
funds in the bank’s own community. Second,
when run as a specialized operation and on a
volume basis, automobile instalment lending

has proved more profitable than many other
types of bank loans and investments.
Finance com pany financing

Sales finance companies have been specialists
in automobile instalment financing for many
years. The bulk of the business is done by sev
eral very large national companies, but hun
dreds of smaller firms operate successfully on a
regional or local basis. In recent years the
losses experienced on instalment credit have
been relatively low, and sales finance companies
have realized very favorable profits. In 1951,
for example, a sample of companies reporting
to the First National Bank of Chicago showed
net profits after taxes averaging 15 per cent of
net worth and net losses equal to less than onehalf per cent of the instalment credits fully
paid down or otherwise liquidated during the
year.
The funds with which sales finance companies
operate come from several sources and are
relatively flexible in amount. Long-term capital
is supplied through investments of stockholders,
including retained earnings, and also through
the sale of junior debenture bonds, principally

Automobile loans at commercial
banks and sales finance
companies up sharply

to insurance companies. The major portion
of sales finance company funds, however, are
obtained on a short-term basis, in the form of
borrowings from banks and also from the sale
of three-to-nine month commercial paper in
the open market. As of mid-1952, the sources
from which investible funds had been obtained
by companies in the First National Bank sam
ple were as follows:
Bank loans ..............................
Commercial p a p e r....................
Unearned income and loss
reserves ................................
Long-term d e b t ........................
Net w o r t h ................................

56%
10
7
11
16

Total reso u rces.........................100
Operating so heavily on the basis of short
term borrowings, the possibility that sales
finance companies might not be able to obtain
sufficient funds to meet the potential demands
of automobile credit buyers cannot be over
looked. No serious difficulties appear to have
been experienced in providing for the rapid
rise in instalment borrowing to date, however,
and there would seem to be little reason for
expecting sales finance companies to come into
disfavor with lenders so long as currently high
credit ratings are maintained.
One result of the competition among com
mercial banks and sales finance companies in
making automobile instalment loans has been
a general decline in interest rates charged.
Whereas a 6 per cent rate per year on the
original amount borrowed appears to have been
customary before the war, loans at AVi and
5 per cent are now generally available. In some
areas, where competition has been especially
vigorous, interest rates have fallen as low as
3V2 per cent.
Prospects a re for continued growth

The volume of automobile instalment credit
extended, of course, is closely related to total
sales of automobiles. Since dealers’ sales are
12 Business Conditions, May 1953

currently running well above a year ago and
manufacturers plan to better last year’s output
by about a third, the demand for instalment
credit is certain to continue high in the months
ahead. Moreover, it seems likely that dealers,
hard-pressed to sell the large volume of new
cars produced and used cars traded in, will
exert strong pressure on lenders to ease credit
terms further.
There seems little doubt that the funds
needed to finance those credit buyers who meet
reasonable risk standards will be forthcoming.
Commercial banks can shift a somewhat larger
proportion of their resources into this growing
field of credit if they so desire, and at least the
larger sales finance companies clearly have not
exhausted their ability to borrow.
But whether credit terms will be allowed to
ease further is another matter. Lenders are
subjected to two opposing forces in this respect.
On the side of more liberal terms is the desire
to meet competition and maintain or increase
the share of available business obtained. On
the side of greater caution is the possibility
that delinquencies and repossessions will rise,
which would both cut down on profits and tend
to engender customer ill will.
Delinquencies have been relatively low in
the postwar years of good business, high in
come, and full employment. Moreover, there
appears to have been little increase in delin
quencies in the face of the rise in borrowing
during the past year. Banks reporting monthly
to the American Bankers Association indicate
that delinquencies of 30 days or more at the
end of February were only slightly higher than
in early 1952 and fully a third lower than at
the beginning of 1950. At the same time, how
ever, lenders generally are aware that they are
vulnerable to any downturn in business activity
and employment which might develop. There
fore, it seems probable that most lenders will
exercise caution in their selection of risks and
will generally hold the line on credit terms,
particularly since the demands for instalment
credit will be large in any event.

Farm financial structure adjusting
Debt situation still healthy, but its complexion
may be blemished by lower farm income.
F a r m p r o d u c t p r i c e s declined 9 per cent over
the past year. In view of the possibility of some
further decline by year-end, a look at the farm
debt situation may not be amiss.

Asset-debt ratio favorable

On the surface, at least, the situation looks
highly encouraging. Estimates for January 1
show the value of all agricultural assets to be
12 times the total farm debt (excluding CCC
loans). But is this a pertinent comparison?
The current value of farm land, livestock, ma
chinery, etc. still reflects to some extent the re
cent exceptionally favorable history of farm
earnings.
If valued at 1940 prices, total farm assets—
physical plus financial—amount to 5Vi times
total farm debt. This is exactly the same ratio
as existed in 1940. Thus, even at a much lower
level of prices, the over-all debt situation still
looks encouraging if judged in relation to the
value of farm assets.
More liquid assets

The internal structure of agricultural assets
and debts has changed significantly. Non-real
estate assets have increased in relative im
portance. Even after eliminating the effects of
price changes, livestock, machinery, stored
crops, and household furnishings increased 50
per cent during the past 13 years. Financial
assets increased 500 per cent.
On the debt side, real estate indebtedness
now is practically the same as in 1940. But
non-real estate debt has increased about 300
per cent.
Consequently, the present balance sheet
shows more liquid assets and more short-term
debt. Aside from the cushion of liquid assets,

some of the short-term debt can be converted
into longer-term real estate debt if the need
arises, so there seems to be no cause for alarm
in these changes. Interest charges might be a
source of concern, but they constituted only 3
per cent of total production expenses last year.
Real estate debt to increase

If the farmer’s “terms of trade” deteriorate
further—if his products exchange in the mar
ket place for less nonfarm products — will
agriculture’s present asset-debt structure be
maintained? The currently favorable debt pic
ture was made possible by the favorable farm
income situation that has existed since 1942.
Real estate debt was held down—in spite of the

Farm assets much larger than debts
Real estate is valued at its 1940 fig
ure; other physical assets at their
1940 prices. On the debt side, CCC
loans are excluded as they are non
recourse loans.
billion d o lla rs

a sse ts

1940

1942

1944

1946

194 8

1 95 0

1952

increase in the price of land—because owners
were able to quickly repay real estate loans out
of current net income.
But with lower farm product prices it is
expected that this year (barring intensified
military activity) cash farm receipts will be
down possibly 10 per cent from 1952 and net
income will drop to its 1944 level. In the next
few years, if net income continues its decline,
we must expect less prompt repayment of debt
acquired in land transfers. This would mean
a rise in real estate debt. Conversion of some
short-term debt to real estate debt would rein
force this trend. In addition, farm mortgage
loans will probably come into greater use for
the provision of operating and improvement
capital. Thus, real estate debt is expected to
return to a “more normal” relationship to land
values.
Short-term debt

What is the outlook for short-term agricul
tural debt? Exclusive of CCC loans, it has
risen from 3 billion dollars in 1940 to an esti
mated 8 billion this year. But none of the
increase occurred until 1946 when prices shot
upward following decontrol and farm ma
chinery and consumer durable goods supplies
increased. Since that time the uptrend has
been maintained, with the largest increases
occurring in 1950 and 1951 as prices spurted
following the outbreak of Korean hostilities.
However, prices rose from 1940 to 1946,
whereas short-term debt did not. Production
expenses doubled during this period; but net
income tripled, and there was much internal
financing of production expenditures. Since
1947 net farm income has been trending down
ward, while production expenses have con
tinued to rise. Hence, more external financing
has been necessary. Thus the volume of nonreal estate debt also seems to be associated
with the size of net income compared with
production expenses.
Production expenditures in 1952 were 3 Vi
times their 1940 amount. Of course, this rise
14 Business Conditions, May 1953

Net income declines from 1947 peak;
production expenses continue rise

is a compound of increases in both prices and
quantities of purchased goods and services.
During this period, prices paid by farmers rose
2% times, so most of the increase in expenses
is traceable to higher prices. But it appears
that the annual quantity of productive inputs
bought by farmers increased by about 50 per
cent from 1940 to 1952. This development has
helped increase the efficiency of agriculture,
but it also has sharply increased farm capital
requirements. Furthermore, the higher the
production expenses, the more the farmer
stands to lose in case of crop failure or sharp
decline in the price of his output.
Historically, when cash farm receipts drop,
production expenses have dropped by a much
smaller proportion. This happens because non
farm prices tend to be much less flexible than
farm product prices and agriculture maintains
its rate of output even in the face of falling
cash receipts. Therefore net income drops, and
the ratio of production expenses to net income
rises.
Of course, agriculture does buy some things
from itself: for example, in recent years live
stock, feed, and seed have accounted for about
one-third of total farm production expenses.

In this respect, Midwest farmers are fortunate.
With our livestock-feeding economy, our pur
chases from agriculture are a higher proportion
of total production expenses than is the case for
specialized cash crop areas where purchases are
more heavily loaded with industrial products.
Hence, production expenses are more flexible
in the Midwest than elsewhere.
In any case, we can expect production ex
penses to remain high in relation to cash farm
receipts. If net income drops, production
expenditures will be financed less from income
and more from credit. This will tend to increase
the volume of short-term farm debt. The cattle
feeding area may provide an exception because
of the sharp decline in the price of feeder cattle
during the past year and the importance of
feeder cattle purchases in total cash outlays of
these farmers.
Asset values to decline

What would be the effect of declining farm
income on the values of agricultural assets?
Obviously, asset values would drop. The values
of physical assets depend directly on farm
product prices and net income from farming,
so physical assets would decline in value. Also,
lower net incomes would hinder the accumula
tion of financial assets.
Assuming that the farmer’s “terms of trade”
deteriorate further, the outlook for agriculture’s
asset-debt structure looks like this: the value
of assets will decline, real estate debt will rise,
non-real estate debt also may rise, and owners’
equities will drop. But widespread debt distress
is not in the picture. Although continued ad
justments are in store for agriculture, its finan
cial structure would crumble only with a gen
eral business recession that sharply shrank
consumer incomes and the domestic market
for farm products.

between growth in population and farm output.
Partially as a result of the decline in the
number of workers in agriculture, farm output
increased an average of only 1 per cent per
year from 1942 to 1952. On the other hand,
the average population increase was 1% per
cent per year during this period.
Agricultural prosperity during the past
decade was founded primarily on high-level
domestic economic activity and large exports.
Nevertheless, the increase in population relative
to farm output was a contributing factor. If
it continues in the years ahead, it will tend to
mitigate any worsening of the farmer’s “terms
of trade.” However, too much support should
not be expected from this source. During the
past several years the growth in farm output
slipped below the population increase, but that
did not prevent the present agricultural reces
sion. Last year’s decline in farm exports more
than offset the gap.
In any case the Malthusian Devil—the pres
sure of the population on the land—is no
threat in this country. If necessary, farm out
put can be continually expanded to accommo
date a population increase even greater than
our present rate.

Farm output up less than
population; farm workers decline
per cent ot 1946

Long-term factors

Will agricultural net income fall in the com
ing years? Part of the answer—possibly only
a minor portion— depends on the relation

More business— more checks
S i n c e m o r e t h a n 90 p e r c e n t of all monetary
transactions are made by check, the total dollar
amount of checks drawn against deposit ac
counts—bank debits—reflects changes in over
all business activity. Most checks are used to
pay for goods or current services. Debits are
not a perfect index of current business activity,
however, since some checks are drawn in order
to transfer funds or for capital transactions,
such as buying securities. On the other hand,
debits have the advantage of being promptly
available and are the only comprehensive
measure of business for small areas.
Business activity, as measured by bank debits,
in almost all of the 32 major urban areas in the
District was at a higher level during the first
quarter of this year than in the same period a
year ago. The performance in Michigan cen
ters was especially noteworthy. The 10 urban
areas in that state ranked among the first 16
in the District. Michigan, therefore, contrib
uted heavily to the increase of 11 per cent for
all areas combined.
The major reason for the large increases in
Michigan areas is the record peacetime employ
ment now prevailing there in contrast to the
“allocation” unemployment of a year ago.
Moreover, with prices relatively stable, the rise
in debits indicates an increase in the physical
volume of business. In contrast, the drop in
Sioux City stemmed largely from a decline in
the price of cattle received in that market.
The revised monthly debits series inaugu
rated in March by the Federal Reserve Bank of
Chicago is a much-improved indicator of busi
ness trends. Debits to time and Federal Gov
ernment deposits are now excluded as they are
not related to current local activity. Separate
series are compiled for each of the urban areas
shown in the chart. These series, which are
available from the Bank on request, include
integrated outlying communities as well as the
central city itself.

16 Business Conditions, May 1953

Urban areas in Michigan spark first
quarter advances from year-ago levels

Full text of Business Conditions (Federal Reserve Bank of Chicago) : May 1953

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