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A review by the Federal Reserve B an k of Chicago Business Conditions 1962 N ovem ber Contents The trend of business 2 Trends in banking and finance 6 What's behind the rise in checking account activity? 9 The new farm act— a stimulus to livestock production 14 Federal Reserve Bank of Chicago OF 13etw een the second and third quarters of 1962 total business activity rose less than 1 per cent. This rate of increase was below the trend for the entire postwar period and was insufficient to absorb appreciable amounts of unused labor and industrial facilities. More over, within the quarter, industrial production and employment were stable while personal income rose somewhat and retail sales de clined slightly. Preliminary information for October suggests a continuance of this plateau. The loss of business momentum in the third quarter, coupled with weakness in barometers which have tended to decline in advance of slumps in over-all activity in the past, has led many observers to conclude that a downtrend in the economy soon will begin if, in fact, it has not already begun. A “standard fore cast,” widely repeated, suggests that business will show no further rise this year, will decline slightly in the first half of 1963 and will revive in the second half. A different view, probably not as widely held, is that business activity probably will continue to rise gradually fol lowing the current period of sideways move ment, without showing any significant over all decline. In view of the uncertainties in the current picture and the fact that past attempts at this sort of prognostication have not been notably successful any very precise forecast invites skepticism. If the months ahead should prove to be like the recent past, as is implied in the latter view noted above, there would be mixed trends in individual sectors with some types BUSINESS of employment, output and sales rising while other types declined. Conditions would re main highly competitive with price cuts at wholesale equaling or exceeding price in creases. The consumer price index, however, might show some further slight rise. An ever present “uncertainty” in the busi ness outlook during the postwar period has been the state of cold war tensions. Economic projections typically are drawn up with ex plicit or implicit assumptions that no sudden change in military outlay plans will occur and that there will be no new crises which might influence private spending plans. Unfortu- Both business inventories and over-all production rose less in third quarter than in earlier months billion dollars Business Conditions, November 1962 nately, there have been a number of periods since 1945 when these assumptions proved to be invalid. The recent intensification of the Cuban threat may prove to be such an in stance with consequences which could alter substantially the course of business activity. Military outlays may be accelerated im mediately or in the future. Wholesale prices may strengthen and business firms may decide to build inventories or increase capital ex penditures. The effect on consumer purchases is unpredictable. The outbreak of open hos tilities in Korea in 1950, for example, touched off waves of “scare” buying. However, in sub sequent crises such as the U-2 incident in 1960 and the Berlin pressure in 1961, indi viduals apparently reacted by holding back purchases of goods. In v e n to ry rise h alte d One of the most noteworthy developments of the third quarter was the ending in August of the rise of business inventories which had been under way for 13 months. From July 1961 to July 1962 business inventories rose continuously at an average rate of 400 million dollars per month. Preliminary data for Au gust show a decline of about 300 million dol lars, largely, but not entirely, because of a re duction in dealers’ stocks of autos. This was an unusual development. In the past, business inventories typically have continued to in crease as output and sales rose and for several months after these measures began to decline. Business firms have little incentive to in crease inventories of purchased materials when goods are available from suppliers on short notice and prices are soft. The tendency to buy on a hand-to-mouth basis helps ex plain the lack of vigor in the economy in recent months. It also suggests that inven tories are not likely to decline substantially in the months ahead provided that the level of sales to consumers is maintained. Total business inventories were 1.48 times monthly sales at the end of August, somewhat below the level of a year earlier. The inven tory-sales ratio was 1.53 before the general business decline in 1960 and 1.61 before the recession in 1957. In durable goods manu facturing, the most volatile business segment, the inventory-sales ratio was even lower at the end of August relative to the earlier dates. A poll of the membership of the Purchasing Agents Association of Chicago indicates that the proportion of firms reporting higher in ventories rose between August and September while the proportion reporting lower inven tories declined. However, the number report ing declines continued to exceed those with increases and this relationship was expected to continue in the fourth quarter. Steel output re v iv e s Among those firms which have reduced inventories in recent months, steel producers and their customers have been most impor tant. For several months the Department of Commerce has been publishing a new series on inventories of steel held by manufacturers, steel warehouses and steel producers. In the January-April period inventories of finished steel rose by 3.7 million tons, or 19 per cent. From May through August these stocks were reduced by 3.2 million tons. Further liquida tion in September and early October probably brought the total steel inventory figure below the moderate level prevailing at the start of 1962. New orders for steel have increased appre ciably in most categories from the summer low but failed to show further gains in the early autumn as purchasers remained very cau tious. Competition among steel firms has in tensified. Delivery schedules for most types of steel are said to be two to three weeks com- Federal Reserve Bank of Chicago pared with four to six weeks considered “nor mal” in the past, and a number of steel price cuts have been announced. In October steel ingot output moved up to an annual rate of 91 million tons, the highest since early May. The rise in Chicago and Detroit has been somewhat more vigorous than in the nation. Industry experts, however, have lowered their estimates of output for 1962 to about 98 million tons, almost the same as in 1960 and 1961. This projection suggests steel output would rise only slightly from the current level during the remainder of the year. A uto ou tpu t a t h ig h level 4 Short-run changes in retail sales and indus trial production are often influenced heavily by developments in the auto industry because of its size and volatility. Unfortunately, it sometimes is difficult to separate seasonal movements in this industry from basic under lying trends. This problem was evident in the third quarter of 1962. During August there was a rare coincidence of model changeovers, with all producers shutting down assembly plants at about the same time. During the two weeks ending August 25 only a few thousand cars were assembled. For the month as a whole production totaled less than 200,000 units compared with almost 600,000 in July, a much sharper decline than is usual between these months. The August production cutback permitted a reduction in new car inventories of roughly one-third to the comfortable level of 655,000 on September 1. This development made the clean-up of 1962 model cars one of the smoothest in many years. Contrary to the ex perience of other recent years, most dealers made profits on these sales, and used car prices remained strong reflecting the moderate number of vehicles coming to dealers as trade-ins from new car customers. Paradoxically, the healthy inventory situ ation in the auto industry was responsible for the slide in retail sales from a record 19.7 billion dollars, seasonally adjusted in July to 19.4 billion dollars in September. Between these months sales of auto dealers declined over 400 million dollars while sales of all other types of retail outlets rose more than 100 million dollars. The view that the lack of pressure of heavy inventories in the hands of auto dealers de pressed total retail sales received support in early October when ample supplies of new models were available. Deliveries to custom ers of domestically produced new cars were at a daily rate of over 26,000 during the first 20 days of October, a level which has been exceeded only a few times in the history of the industry and far above the October level of any previous year. Prospects now appear good that 6.8 mil lion new cars, including about 350,000 im ports, will be sold in the United States in 1962. This would be 15 per cent more than last year and the largest total for any year other than 1955. Production of new cars for the fourth quar ter of 1962 has been estimated by industry sources at over 1.9 million units, somewhat above the high level of last year, and second only to the fourth quarter of 1955. However, auto manufacturers are taking a conservative approach, with suppliers of materials and parts working on short lead times. Auto firms have increased the length of their workweeks in preference to adding addi tional workers. Under present auto industry wage contract arrangements, it is often cheap er to pay overtime rates than to incur the supplementary unemployment compensation costs which must be paid if added workers are released after a short period of employ- Business Conditions, November 1962 Fourth quarter auto production and sales expected to exceed last year's high level thousands of passenger cars ment. A rise in the average transportation equipment industry workweek to 42.4 hours in September (a ten-year high) helped boost the length of average workweek for all manu facturing from 40.2 to 40.4 hours, seasonally adjusted. By late October auto assemblies had risen to an annual rate of almost 8.5 million, the highest since December 1961. If retail sales continue strong, this rate of output will be maintained or increased, orders to suppliers will be stepped up and additional full-time workers may be recalled. C onstruction re m a in s stro n g In September new construction activity was at a record seasonally adjusted annual rate of 63 billion dollars. This was 7 per cent above the year-ago level, duplicating the year-toyear gain for the first eight months. Activity in all major segments of construction—hous ing, other private building and public works— was maintained or strengthened in the third quarter. For the January-August period total con struction contracts tabulated by F. W. Dodge were 12 per cent above last year’s record level for the nation but only 6 per cent higher in the Midwest. The year-to-year gain in con struction contracts in August was only 3 per cent, but August 1961 had been a very high month. Nationally all major sectors of the con struction industry have shown strength this year. This is also the case in the Midwest except for public utilities. For the first eight months of 1962, contracts for large residential structures, apartment buildings and dormi tories showed the largest gain—42 per cent for the nation and 34 per cent for the Mid west. One of the most vigorous construction categories, nationally, has been the manufac turing component which during the eightmonth period was 24 per cent higher than in 1961. The Midwest, however, showed a gain of only 8 per cent. Two widely used estimates of construction activity for 1963 have been published in re cent weeks. Based on plans now under way, the editors of Engineering News Record ex pect a rise in heavy construction contracts, paced by public works, of 9 per cent over 1962. F. W. Dodge Corporation characterizes the outlook for construction in 1963 as “good” with total construction contracts expected to rise 5 per cent. Contracts for residential con struction, however, are expected to decline slightly. Total construction contracts have in creased each year since 1946. 5 Federal Reserve Bank of Chicago in banking and finance strong demand for short-term credit by business firms generally has accompanied periods of strong and rising business activity. Therefore, most analysts are puzzled by the upsurge in business borrowing during the third quarter in the face of other evidence that business activity rose very little, if any, after July. Is the recent rise of loans another temporary spurt such as occurred last De cember and again in February and March, or does it signal better business news ahead? After a sluggish showing in July, in part seasonal, business loans at large banks in ma jor cities across the country rose 1.1 billion dollars, or more than 4 per cent in August and September. This was a larger increase than in the similar periods of other recent years (see chart). strengthening of the stock market in the months ahead. Bank loans to durable goods firms during August and September rose more than in the similar periods of earlier years. As in the case of public utilities, some of this increase in bank borrowing may have reflected a tem porary deferral of long-term financing in the capital market. Part of it also reflected bor rowing for corporate tax payments due Sep tember 15. However, there is no apparent reason why tax borrowing should have been especially large since corporations increased their holdings of short-term securities sub stantially in July and August. This largely reflected temporary investment of funds ear marked for tax payments. Use of bank credit by other commercial and Sources o f lo a n d e m a n d 6 The strongest demand for business loans during August and September, relative to the experience of earlier years, came from public utilities and durable goods maunfacturers (see table). Public utilities typically boost their bank borrowing during the summer months, but this year’s rise was exceptionally strong. On the other hand, the volume of public util ity security flotations in the capital market during this period was relatively light. To some extent public utilities may have resorted to interim financing from commercial banks in anticipation of further improvement in borrowing conditions in the bond market or Late summer rise in loans to businesses has been stronger than in other recent years a u g -s e p t per cent chonge weekly reporting banks in major U. S. cities Business Conditions, November 1962 industrial firms was moderate during Au gust and September. Loans to food proces sors and commodity dealers—usually large seasonal borrowers— were the lowest in re cent years. Borrowings by fi nance companies also reflect the demand for credit by businesses and consumers, mainly to finance sales of con sumer durable goods. In August and Septem ber leading banks throughout the nation increased their loans to finance companies 170 million dollars, about half as much as in the same period last year. M a n u fa ctu rin g firms and utilities were strong sources of demand for bank loans Change, July to September1 Business of borrower 1959 1961 1962 (million dollars) Commodity dealers and food processors . . . . Wholesale and retail trade . +433 +567 +316 + 274 + + + 151 + 124 82 91 Manufacturing: Metals and products -1 1 8 -1 0 4 - 59 + 204 O t h e r ................................ + 53 + 177 - 34 + 108 Public u tilitie s........................... + 61 +236 + 99 + 290 C o n struc tio n........................... + 57 + 4 + 26 + 26 All other2 ................................. + 157 - 90 + 80 + 75 . . +727 +882 +579 + 1,101 Total commercial and industrial loans . . . . xAs reported by banks holding about 70 per cent of business loans of all commercial banks. ■Includes loans of smaller banks not classified by business category. C o m m e rcia l p a p e r up The relatively small rise in bank loans to finance companies, despite the higher level of automobile sales than in the corresponding year-ago period reflects the fact that finance companies obtained a greater share of their increased cash requirements by selling notes directly to investors. Interest rates on directly placed finance paper with maturities from three to six months have averaged more than a full per cent below the commercial bank prime lending rate—a strong incentive to use this type of financing. Mostly as a result of borrowings by large finance companies, the volume of all com mercial paper outstanding rose 700 million dollars in July and August. For the first nine months of 1962 this type of paper increased 1958 2 billion dollars—the largest increase for any similar period on record. Some commercial paper, of course, is purchased by banks so that not all of it represents a net addition to total business credit. The recent strengthening in business de mand for short-term credit has occurred de spite the fact that corporate cash flow from depreciation and retained earnings is at a rec ord level. Although corporate security issues for new capital are down somewhat from last year, internally generated funds appear to have risen at a faster pace than cash require ments for inventories and capital expendi tures. In these circumstances, it is unusual for bank loans to be showing greater than sea sonal gains. Banks in the Seventh Federal Reserve Dis trict did not participate in the recent strength 7 Federal Reserve Bank of Chicago in business loan demand to the extent they did earlier in the year. They accounted for only about 10 per cent of the loan expansion re ported by the nation’s leading banks during August and September compared with about 18 per cent in the previous six-month period. Moreover, reports from District banks for the first half of October indicated no relative strengthening of loan demand in the Midwest. C o m p e titio n fo r m o r tg a g e s With funds more than ample to meet busi ness and consumer loan demand, commercial banks have stepped up their mortgage lending activities. The need to cover considerably higher costs on time deposits doubtless was a contributing factor. During the first nine months of 1962, large banks in major cities increased their real estate loans by 1.5 billion dollars—more than four times as much as in the same period a year ago. Seventh District banks reported roughly parallel gains in mort gage lending activity. Increased activity in the mortgage market by banks and other lenders has brought a gradual liberalization of mortgage terms in recent months. Moreover, nominal interest rates on conventional mortgages are reported to have declined by as much as a half per centage point since the first of the year. The foregoing has occurred against a back ground of strong mortgage demand. The monthly volume of nonfarm mortgages, after allowing for seasonal adjustment, reached a new record high by midyear. Recordings of $20,000 or less in June totaled 2.9 billion dollars or 12 per cent above the year-earlier period. This largely reflects the strong show ing of residential construction activity. H ig h e r rate s on fo r e ig n d e p o sits 8 In mid-October, the President signed a bill exempting commercial bank time deposits owned by foreign governments, central banks and international agencies from the interest rate ceilings prescribed in Regulation Q. The exemption will apply for a period of three years. The new law is intended to permit domestic commercial banks to offer higher interest rates on short-term time deposits of official foreign agencies. This should make it more attractive for foreign governments to retain a greater proportion of their monetary reserves in the form of United States bank deposits as op posed to converting them into gold. Thus, the new authorization might help to lessen the drain on the Treasury’s gold stock. Action offering higher interest rates on offi cial foreign time deposits will probably be undertaken by only a few of the very large banks in the country. As of the first part of M o r tg a g e lending by banks has risen sharply in 1962 Business Conditions, November 1962 October 1962, large banks in New York, San Francisco and Chicago held almost 95 per cent of the official foreign time deposits, which totaled 2.1 billion dollars. Large banks in New York accounted for nearly three-fourths of the total. These foreign balances, more over, constituted roughly 18 per cent of their total time deposits. The corresponding ratio for large Chicago banks was less than 1 per cent. R e serve re q u ire m e n ts reduced The Board of Governors of the Federal Reserve System has reduced required reserves against savings and time deposits from 5 to 4 per cent. These reductions became effective October 25 at Reserve City banks and No vember 1 at all other member banks. As amended, the Federal Reserve Act pro vides that reserve requirements on time de posits be set within a range of 3 to 6 per cent. The 5 per cent requirement had been in ef fect since June 1954, when it was reduced from 6 per cent. Reserve requirements against time deposits are uniform for all member banks. Member bank required reserves were re duced roughly 750 million dollars by the Board’s action. For Seventh District member banks the reduction amounted to 130 mil lion dollars, of which about 60 per cent was at Country banks. This reduction in reserve requirements was timed to supply part of the heavy seasonal reserve needs that typically occur in the last two months of the year. The Board’s action, therefore, reduces to some extent the amount of reserves that would have been supplied through purchases of securities in the open market. This, in turn, lessens the possibility of intensifying downward pressures on short term interest rates which might have an ad verse effect on our balance of payments by accelerating the outflow of short-term capital. W h a t’s behind the rise in checking account activity? I-rfast year, individuals and businesses wrote more than 13 billion checks having a total value of about 3,500 billion dollars. However, the aggregate size of the 60 million demand deposit accounts against which these checks were drawn was much smaller—just under 110 billion dollars. The average account, therefore, was “spent” or “turned over” about 32 times during the year. The number of checks written and the aver age rate of turnover of demand deposits have been increasing for many years. Presumably the number of checks will continue to grow as income and spending rise, but the probable trend of deposit turnover is less clear. Since turnover rate has an important bearing on the appropriate size of the money supply (largely demand deposits), it has been a mat ter of widespread interest and study. Deposit turnover rates vary greatly. The Federal Reserve Bank of Chicago accounts of some businesses and individuals are used more intensively than others. The same is true of individual banks and groups of banks in different areas. Bankers are interested in turnover since it is an important characteristic of their busi ness. Other businessmen, public officials and economists have sought to find information in the turnover of demand deposits that would help to indicate changes in business activity or serve as guides to appropriate shifts in monetary policy. This article describes varia tions in turnover of demand deposits among individual banks and groups of banks in the Seventh Federal Reserve District. It also at tempts to explain the causes of these differ ences to the extent they can be inferred from information now available from Midwest banks. Service ch arge s, b a la n c e s a n d tu rn ove r 10 The growth in the number of demand de posit accounts during recent years has been largely in the personal sector. Although about nine of every ten new checking accounts ac quired by banks from 1957 through 1961 were personal accounts, the proportion of the total dollar volume of deposits held by indi viduals changed little during this period. Many of these new accounts were of the “special checking” type with small average balances. Businesses and nonprofit organizations ac counted for the remainder of the increase in demand deposit accounts. The number of farmers’ accounts actually dropped, reflecting the decline in the farm population. The number of checks written has risen faster than the number of accounts. Some indication of this growth is provided by the rise in checks collected through the 12 Fed eral Reserve Banks. During the past five years, this number has increased at an annual rate of 5 per cent and it is possible that checks collected through other channels such as local clearing houses and correspondent banks may have increased even more rapidly. Banks recoup the cost of providing check ing service by investing a portion of the de posit balances and by levying service charges, typically tailored to the number of transac tions in the account. While this requires analy sis of individual accounts, the task is much less time-consuming now that bank book keeping operations increasingly are being per formed on automated equipment. The more general use of individual account analysis, plus the rapid growth of special checking accounts, has resulted in a steady rise in service charges. For all insured com mercial banks in the United States, these amounted to 0.43 of 1 per cent of total de mand deposit balances in 1961, while ten years earlier, the ratio was only about half as large. Service charges, of course, were a larger percentage of the balances of the specific ac counts on which they were collected. Deposit totals include accounts with large “idle” bal ances or with very little activity which usually are not assessed service charges. G ro w th in d e p o sit tu rn o v e r As both the number and the dollar volume of checks have risen, the average balance per account has declined. The result, as noted above, has been a more intensive use of de posits— an upward trend in turnover. While this has been apparent at nearly all banks, turnover has risen much more at some banks than at others. At one Chicago bank, for ex ample, demand deposits turned over 63 times in 1961, compared with 41 in 1956— an in crease of more than 50 per cent. On the other hand, a bank located only a few blocks down the street reported a turnover of 21 times in 1961, up only slightly from the rate five years earlier. Business Conditions, November 1962 Dem and deposit turnover at Seventh District banks per cent of banks per cent of bonks 50 1956 30 . to ta l d e p o s its $ 5 0 m illio n and over At half of the large banks in p—j the Midwest, demand deposits were "s p e n t" (turned over) 26 o r more times in 1961. Five years e a rlie r less than 20 per -h h l - $ 5 -4 9 cent of the banks had a turn over rate this high. m illio n Increases in turnover among medium-size banks also have been widespread. In 1961 the most prevalent rate was around 18, which compares with a rate of about 15 in 1956. For small banks the most com mon rate of turnover was about 12 in both 1956 and 1961. How ever, in 1961 over half the banks of this size had higher rates of turnover compared with only 40 per cent in 1956. 5-7 8-10 11-13 14-16 17-19 20-22 23-25 26 S over turnover rate The turnover rate of a bank’s demand de posits depends on a variety of factors, only a few of which are controllable by the bank. Re quirements as to minimum or average bal ances and service charges in lieu of balances influence turnover. But apart from these, a bank has no direct control over the intensity with which deposits are used. Depositors can write checks as they see fit, as long as they maintain a balance sufficient to cover the checks when presented for payment. However, some types of accounts are likely to have higher turnover than others and banks can exercise discretion in the types of business they solicit. Among nonfinancial business firms, deposits of wholesale and retail trade establishments, for example, typically have a high turnover. But accounts with the highest turnover rates usually are those of financial firms—dealers in U. S. Government securi- 11 Federal Reserve Bank of Chicago ties, investment banks and brokerage houses. Bank size is one characteristic which is related to rate of deposit turnover (see chart). Large banks usually have a higher turnover of demand deposits than small banks. This is because of differences in the kinds of deposi tors. The large banks typically have a higher proportion of business accounts which, on the average, turn over much more rapidly than deposits of individuals. The smaller banks, on the other hand, hold a higher percentage of personal and other nonbusiness accounts which turn over less rapidly. However, a num ber of small- or medium-size banks located at or near major Midwest livestock markets have high rates of turnover. Velocity is typ ically very high for livestock dealer accounts, and this type of account tends to be concen trated in a few banks. In 1961, the average rate of turnover for these “stockyard” banks was 61, or about twice the rate for all other Midwest banks located in urban areas. O w n e r s h ip a n d t u r n o v e r r a te s Knowledge of the relationship between ownership of deposits and their rates of turn over is still fragmentary. Some evidence is pro vided by information collected in the Federal Reserve System’s deposit ownership surveys prior to 1956.1 An analysis of 100 Seventh District banks in 1953 and 1954 showed that demand de posits of business establishments had an an'The amount of balances by type of owner can be estimated for many individual banks. Since some of the same banks also report the total monthly volume of checks charged to demand deposits and the month-end balances, it has been possible to fit these data together and estimate rates of turnover of deposits for broad ownership categories. Specifi cally, turnover rates were derived for business and personal deposits which, when multiplied by the proportions of such deposits in the individual banks, produced estimated total turnover rates which ap proximated most closely the actual total turnover rates for the banks. nual turnover rate of 29 and personal accounts a rate of 3. The “business” category included manufacturing and mining, public utilities, construction, wholesale and retail trade, other nonfinancial business and financial business. “Personal” accounts included in addition to farmers and other persons the relatively minor amounts of balances held by nonprofit organi zations, trust funds and foreigners. The analysis also indicated there were wide differences in turnover within as well as be tween these broad categories of business and personal deposits. For example, among banks with a high proportion of nonbusiness ac counts, banks in small rural communities with predominantly agricultural customers had a smaller turnover of demand deposits than those located in urban areas. The low rates of turnover found to be characteristic of rural banks in the periods studied may reflect the presence of large “idle” balances. This could result from the infrequent receipt of income— at time of crop harvest or livestock sales— and the maintenance of large balances to cov er withdrawals for current expenditures over relatively long periods of time. Another study, in which turnover of indi vidual accounts in a medium-size bank in a M o re B a n k in g D ata The third and fourth of a series of supple ments to Banking and Monetary Statistics (1943) are now available. Section 1, " Banks and the Monetary System," and Section 14, "G old" contain a variety of statistical series, together with explanatory information. The cost of each is 35 cents. These supplements and the original volume may be obtained from: Division of Admin istrative Services, Board of Governors of the Federal Reserve System, Washington 25, D. C. Business Conditions, November 1962 Dem and deposit turnover has risen faster at Chicago banks with large proportions of business accounts annual rate of turnover annual rote of turnover quarterly N o te: Banks in Group I reported 75 per cent or more of demand deposits owned by business firms in 1953-54; Group II, 25 to 74 per cent; Group III, less than 25 per cent. city of about 28,000 population was analyzed for a three-year period beginning in October 1953, showed similar results. For this bank the average annual rate of turnover of busi ness deposits was 26 as opposed to 3.5 for “regular” checking accounts of individuals. The turnover of personal accounts at this bank also was analyzed by size of balance. This, plus fragments of evidence from other studies— including analysis of special check ing accounts in 14 banks in several large Mid west cities in 1957 and about 1,500 individual accounts as well as the aggregates of special checking accounts in two large Chicago banks for one month in 1961— all indicate that the rate of turnover of personal accounts is re lated to the size of account. In general, the largest personal accounts showed the lowest turnover rates and the smallest accounts the highest. While the general tendency is for small personal accounts to turn over at a rate sev eral times that for large personal accounts, there is considerable variation in turnover among regular checking accounts in each size class. Special (no minimum balance) check ing accounts, on the other hand, almost in variably turn over very rapidly. Demand de posit accounts of banks’ trust funds and ac counts of nonprofit organizations consistently have low rates of turnover. In the business sector, certain types of de positors invariably had higher rates of turn over than others. For example, currency ex changes—firms engaged primarily in cashing checks and selling money orders in Chicago— consistently show a very rapid turnover. Rates of 100 to 200 times a year are not uncommon. In general, industries with low profit margins and rapid turnover of inventory—such as stock dealers and retail trade establishments —tend to have high rates of demand deposit velocity. Business accounts of individuals or firms dealing in personal services—medicine, law, accounting and the like—consistently re port lower rates, 20 to 30 times a year. In some cases this may be because personal funds which tend to turn over quite slowly are commingled with business funds. T urnover in C h ic a g o b a n k s Some banks have experienced a much faster rise than others in turnover of demand de posits. The reason for this is difficult to pin down, but just as differences in ownership of deposits account for a large part of variations in level of turnover at banks, so ownership 13 Federal Reserve Bank of Chicago may provide a clue to the faster rise in turn over at some banks. This hypothesis was tested by comparing the rise in turnover rates at three groups of Chicago banks quarterly since 1953 (see chart). Banks in Group I had a preponderance of business accounts in 1953-54 while those in Group III had a preponderance of personal accounts. Banks in Group II were between the other two in proportions of business and personal deposits. Between 1953 and 1961, the rate of deposit turnover of Group I banks increased roughly twice as fast as for Group III. This suggests, but does not necessarily prove, that turnover of business accounts has increased more than personal accounts. It may be that Group I banks, which in clude several of the largest in the Midwest, have different types of business accounts— for example, relatively more deposits of finan cial firms such as brokerage houses and deal ers in securities than do the smaller banks— and that turnover of these accounts has been rising at a faster rate. The latter would ex plain why banks in New York City, with their heavy concentration of accounts of some kinds of financial firms, have shown a much more rapid rise in turnover than banks in other cities during the postwar period. It may also indicate that very large nonfinancial firms— typically the customers of large banks—have responded to the postwar rise in interest rates by minimizing their demand deposit balances to a greater extent than smaller businesses. Because most demand deposit turnover in formation is available on a regular basis only in aggregative form, there is a temptation to attribute to it a homogeneity that it does not possess. The velocity of demand deposits clearly is subject to many influences which affect some kinds of depositors more than others. More complete information by owner ship category on such aspects of turnover as cyclical behavior and the impact of time de posit interest rate changes, should provide the tools for a more effective monetary policy as well as more efficient commercial bank opera tions. Fortunately, continued progress in the automation of check handling and bookkeep ing operations seems likely to provide valu able by-products in the way of specific infor mation as to how checking accounts are used. The new farm act—a stimulus to livestock production nr JLhe Agricultural Act of 1962 contains many 14 provisions originally proposed by the Admin istration. The most important modifications made by Congress pertain to the feed grain program. Moreover, these changes probably will have their greatest impact on the live stock industry which is concentrated in the Midwest. The law provides temporary one-year pro grams in 1963 for both wheat and feed grains to be superseded by permanent programs in 1964. Business Conditions, November 1962 The 1963 p r o g r a m s Next year’s feed grain program contains two provisions which may tend to boost live stock feeding on farms in the Corn Belt states. First, producers of corn, grain sorghum and barley who elect to participate in the new program will be eligible for loans at 18 cents per bushel below the support level plus a com pensatory payment (similar to that proposed in the well-known “Brannan Plan” of the late Forties) of 18 cents. The introduction of compensatory pay ments to feed grain growers removes the “penalty” connected with feeding or selling corn, grain sorghum and barley eligible for Government support under the 1961 and 1962 programs. (The “penalty” represents the margin by which the loan support price exceeds the market price—for corn about 20 cents a bushel during the past year.) This will have the twofold effect of encouraging more farmers to sign up under the 1963 pro gram to obtain the 18 cent a bushel compenH o g production has risen slowly under 1961-62 feed grain programs pig crop hog-corn price ratio * ‘ The ratio of the price of 100 pounds of hogs to the price of a bushel of corn. satory payment and to feed the grain to live stock rather than place it in storage under Government loan. Second, payments for idling feed grain acre age are to be at a flat rate in 1963 whereas during the past two years farmers received a “premium” for any additional acreage retired above the required 20 per cent minimum. Furthermore, the 18 cent a bushel compensa tory payment will be made only on the plant ed acreage so the total size of this payment will be reduced with each additional acre retired. Thus, although a larger number of farmers sign up for the new program, the number of acres idled on each farm may be smaller. Con sequently the total acreage planted to feed grains in 1963 may be higher than this year. R e strain ts un der p re v io u s p r o g r a m s The feed grain programs of the past two years have tended to restrain livestock pro duction, especially hogs. Since mid-1961, hog numbers on farms have increased at an annual rate of less than 2 per cent. Yet hog prices have remained high relative to corn prices. In earlier years hog-corn price ratios compar able to those currently prevailing (16 to 1 during the past two years) usually have been followed by rapid increases in hog production —at least 8 to 10 per cent from the previous year—and by concommitant declines in hog prices. In part, the slow expansion in hog produc tion during the past two years reflects the fact that farmers participating in the feed grain program had an opportunity to “seal” their corn under Government loan at a price well above prevailing market prices. During the 1961 crop year, the cash price received by farmers averaged about $ 1 per bushel for corn compared with $ 1.20 under Government loan. Very substantial sales of corn by the Com- 15 Federal Reserve Bank of Chicago modify Credit Corporation under the 1961 -62 programs tended to keep market prices for corn well below the loan price level. Hog prices are less favorable relative to corn prices if the higher corn loan price is used—about 13 or 14 to 1. Historically, these lower ratios have been followed by small in creases in hog production of the magnitude of the past two years. While “cheap” corn has been available on the “free” market, the incentive to purchase corn for livestock feeding was limited by the considerable expenses involved in transport ing the corn back to the farm. Lack of ade quate storage space on farms posed a further limitation to greater market purchases of “cheap” corn for livestock feeding. Since most corn is fed to livestock on the farm where it is grown, reduced corn production under the program also inhibited livestock feeding. Fi nally, uncertainty surrounding Government sales of corn and therefore about “free” mar ket prices carried the risk that market prices might rise above the loan level. This would reduce sharply the profitability of livestock feeding operations using purchased grain. Under the 1963 feed grain program this picture will be changed greatly—the feeding “penalty” will be removed, the incentive for idling extra acres will be less and uncertainty about market prices will be reduced. could go as low as 80 cents a bushel. The un limited production and lower prices for feed grains will give farmers considerable incen tive for expanding livestock production in or der to obtain more “attractive” returns for their “cheap” grain. In addition, the permanent wheat program could divert wheat into livestock feeding. Be ginning in 1964 wheat farmers will receive two different prices—a high price for wheat going into domestic food use and for that por tion of exports designated by the Secretary, and a lower price for all remaining wheat pro duction. This lower price will be set by the Secretary after “taking into consideration competitive world prices of wheat, the feeding value of wheat in relation to feed grains and the level at which price support is made avail able for feed grains.” It is possible that sub stantial quantities of wheat might be priced low enough to be used in livestock feeding (92 cents a bushel if corn is 80 cents). These would be in addition to anticipated larger feed grain production. Given this expectation of larger feed sup plies at lower prices under the new farm legis lation, livestock production will probably ex pand substantially and consumers can look forward to increasing supplies of meat and meat products on supermarket counters. The 1964 p r o g r a m s 16 Legislation scheduled to take effect in 1964 will remove all controls on production of feed grains. Price supports on corn will be set between 50 and 90 per cent of parity and at comparable levels on other feed grains. At the beginning of each crop year, the support price for corn will be set at such level “as the Secretary determines will not result in increas ing Commodity Credit Corporation stocks of corn.” With this restriction, the support price Business Conditions is published monthly by the f e d e r a l r e s e r v e b a n k o f C h i c a g o . Sub scriptions are available to the public without charge. For information concerning bulk mail ings to banks, business organizations and edu cational institutions, write: Research Depart ment, Federal Reserve Rank of Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited.
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