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••....? OCTOBER, 1945 , Offi 3 X .-at 044, jap* l‘ KS'.'Xi \n«% \v ^': swsfea a S«K '-.»■£> rtr- MEWif ND A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO ONS Financing Airport Facilities Need for Airport Development and Expansion Urgent The phenomenal technological developments in aircraft, accompanied by the unexampled utilization of airborne equipment during the war for military and transport purposes, have created a vigorous demand for air travel far in excess of prewar levels. At the same time, a man ufacturing capacity has been developed capable of pro ducing aircraft with the characteristics that can satisfy this demand and in quantities far in excess of require ments. Currently, however, the facilities available for civilian air transport are inadequate. This deficiency temporarily extends to a shortage of equipment for pas senger operations, but it will shortly manifest itself pri marily in the inadequacy of terminal facilities for the handling of passengers and cargo. It is of immediate concern, therefore, that consideration be given to the investment of public or private funds in the acquisition and construction of airports. The role of public investment in this field is likely to predominate following the precedents established in con struction of streets and highways and the pervasive trend toward enlarging the scope of public investment. While a few ports are privately owned and some have been successfully operated, the overwhelming majority are owned and managed by some governmental or quasigovernmental body. In its developmental stages the air transport industry had neither the financial resources nor generally recognized prospects to achieve a large private investment in terminal facilities. Moreover, the industry’s initial needs for airports came in a period when private investment was at a low ebb—the thirties—and when public funds to stimulate employment were available for marginal investment under various relief programs of the Federal Government. The trend, therefore, was early established toward public ownership and operation of airports; it seems sufficiently well settled to warrant the assumption that it will be continued. The situation stands in marked contrast with rail transport and in similarity to commercial highway operations. CHARACTER OF FUTURE AIR TRANSPORT The nature of future air operations is still a matter of speculation. Technological changes in aircraft are capa ble of producing new concepts of utilization and economic fitness. To date the airplane has overcome natural land and water barriers to transport by providing a single vehicle which operates over such barriers without any significant differential in cost and without inconvenience to the traveler. In transportation it has surpassed long standing horizons of speed and flexibility, if this were a world in which artificial and cultural barriers to trade and travel had been eliminated, the implications of world wide air transportation would be no less than revolu tionary; in a world of tariffs, passport regulations, and diversity in language and customs, the possibilities are less startling. The speed and adaptability of air transport can accomplish a minor revolution in the United States, however, particularly in long distance travel and in areas where natural barriers have choked off or limited com peting transport facilities, as well as in those regions where rail and highway transport have not been fully developed. Transport between Detroit and Milwaukee or Cleveland, and between New Orleans and Miami are illustrative of the effect of water barriers; the northsouth traffic west of the Missouri River and east of the Cascade Mountains is handicapped by lack of both high way and rail facilities. The character of aircraft ownership and operation is also in an evolutionary stage. The railroad network early developed and is now almost entirely a common carrier operation conducted for the most part by large corporate enterprises. Highway transport, on the other hand, is predominantly individually operated with the personal passenger car, the farm truck, and the fleets of motor equipment owned or directed as adjuncts to other busi ness. In addition, common and contract operators trans port cargo and passengers in large volume. The compa rable pattern for air transport seems to be tending in the direction of the railroad design—primarily a common carrier business. In the immediate future the specialization and invest ment required for air operations are best exploited by for-hire carriers. While all forms of transportation suffer from the diseconomies of one-way revenue move ments and return of empty equipment, the relative cost liness of carriage by air precludes any substantial devel opment in that field of one-way cargo business analogous, for example, to contract highway hauling of live stock. A balanced flow and volume of air traffic is essential. It ordinarily is practicable only if the business unit engaged in air commerce is so constituted as to exploit a broad and diversified traffic base. For the most part, this re quires common carrier organization, even though some large commercial or manufacturing concerns may take to the air on their own account. In the immediate future the investment required to provide appropriate terminal facilities for common carrier agencies of air transport offers the minimum of risk and the greatest promise of return. PORTS FOR METROPOLITAN AREAS The locations at which airport facilities are of great(Continued on Page 7) Export-Import Bank Activities Expanded Greater Lending Power Required for Reconstruction Demands Equipped with newly-acquired lending powers, the Export-Import Bank of Washington now occupies an important place among the agencies which will assist in rebuilding the war-torn world. The 1945 legislation which established the Bank as a permanent Government agency followed Bretton Woods and the Reciprocal Trade Agree ment Act in the effort to restore workable international economic relations and to promote our foreign trade. An adequate and orderly international flow of capital has for many years been hindered by currency instability, political disturbances, and credit risks too great for private capital to assume unassisted. Private capital was unwilling to assume the risks of foreign investment after the default experiences of the twenties, and private banks were unwilling to extend credit to finance the sale of capital goods abroad on a sufficiently long-term basis to compete with foreign exporters. During and prior to the war, these difficulties were accentuated by an elab orate network of trade and exchange restrictions. Bal ances of foreign traders which were blocked in foreign countries constituted a major obstacle to the flow of goods. American traders also complained that they were unable to obtain their share of the growing world demand for durable goods because of the assistance rendered for eign firms by the export credit agencies newly established abroad. Since its establishment in 1934 the Export-Import Bank, although limited in resources and in the scope of its operations, has facilitated the sale of American goods abroad by assuming part of the credit risk involved, and has made a noteworthy contribution to the development of a sound foreign lending policy. One of its major pur poses was and is to establish conditions which will en courage private capital to satisfy international credit requirements. The Export-Import Bank now has a new responsibility. Foreign countries will look to it to supply needed recon struction credits until the International Bank for Recon struction and Development begins to operate. Thus, after eleven years of inconspicuous existence, during which the volume of its loans outstanding has never exceeded 250 million dollars, the Export-Import Bank Any bank which is interested in the financing of export and import trade between the United States and foreign countries, and which may wish to take advantage of the facilities of the Export-Import Bank, can obtain from the Federal Reserve Bank of Chicago a booklet entitled “Gen eral Policy Statement of the Export-Import Bank,” which outlines the Bank’s activities and procedures. The Federal Reserve Bank will also be glad to receive any specific inquiries regarding the operations and procedure of the Export-Import Bank. is suddenly faced with pressing demands for credit from foreign countries in urgent need not only of materials and equipment for reconstruction but even the current necessities of life. To permit extension of the required volume of loans abroad, in July of this year Congress increased the Bank’s maximum lending authority from 700 million dollars to 3.5 billion dollars. Its capitalization was raised from 175 million to 1 billion, all to be subscribed by the Treasury. During the hearings on the Export-Import Bank Act, former Foreign Economic Administrator Leo T. Crowley indicated that this additional 2.8 billion dollars is intended chiefly for reconstruction and rehabilitation loans to lib erated European countries. At that time, it was expected that the new authorization would supply the necessary • capital assistance only for the current fiscal year, and without any allowance for whatever we may do to al leviate Great Britain’s dollar shortage. Although at the time of the passage of the Act it was anticipated that the Bank would take over a share of lend-lease financing, the sudden end of the lend-lease program has placed an additional burden on the Bank which may necessitate some revision in the estimated requirements for the cur rent year. Russia, France, Czechoslovakia, Greece, Yugo slavia, Belgium, the Netherlands, Denmark, Norway, and the Netherlands Indies have been specifically mentioned as probable recipients of dollar credits. China is also expected to receive sizable loans. By removal of the prohibition on loans to foreign governments which were in default on their obligations to the United States Government on April 13, 1934, the Bank may make loans to any country. These loans will be coordinated with the over-all United States foreign investment policy through The National Advisory Coun cil on International Monetary and Financial Problems, which was created by the Bretton Woods Act to co ordinate the policies and operations of our representatives on the International Bank and Fund and of other United States agencies dealing with foreign financial matters. In addition an Advisory Board with the same membership as the National Advisory Council was set up by the Ex port-Import Bank Act of 1945 with the power to make recommendations to the Bank’s Board of Directors on matters of policy and on individual loan transactions. Besides the Chairman of the Export-Import Bank, this Board includes the Secretaries of State, Treasury, and Commerce, and the Chairman of the Board of Gov ernors of the Federal Reserve System. TECHNIQUE AND POLICY The basic principles by which the Bank’s future operPage 1 ations are to be guided, as set forth in a recent policystatement by Wayne C. Taylor, new president of the Bank, are briefly as follows: (1) The Bank undertakes only those loans and guarantees which will promote United States export and import trade, either directly or indirectly. (2) Loans are made generally only for specific purposes. Instead of a lump-sum advance, a line of credit is established against which the borrower draws after submitting evidence satisfactory to the Bank that the purposes set forth in the loan agreement have been carried out. (3) No loan is negotiated unless its repay ment is reasonably certain. (4) In general, credit is extended to foreign firms or governments only to finance the purchase of United States products; i.e., the proceeds of the loans are to be spent in the United States. (5) The Export-Import Bank does not compete with private cap ital. Rather, it is a lender of last resort and only makes loans which involve risks which private institutions are unprepared to assume unassisted. In connection with the principle of non-competition with private capital, the Bank has encouraged commercial banks to advance funds under the Bank’s guaranty or to participate at their own risk with the Bank in the credit arrangements to which it is a party. Under its guaranty the Bank undertakes to reimburse the commercial banks at any time to the extent of their advances. Guaranties of this type are included in the maximum limitation on the Bank’s lending authority. However, to the extent that commercial banks participate with the Bank, the total value of foreign trade financed may exceed the Bank’s authorized lending powers. This factor must be born in mind in judging the adequacy of the Bank’s resources for providing reconstruction credits. Even though the commercial bank may not participate in the loan, the Export-Import Bank prefers that bor rowers make application through their commercial banks as added assurance that no private credit is available to meet their needs. This procedure, of course, is appli cable only to domestic borrowers. The Export-Import Bank normally uses the exporter’s bank as its agent in making disbursements and collections. Among the chief advantages of such cooperation are that commercial banks are able to maintain desirable contacts with for eign traders, and that the highly-developed technical facil ities, trained personnel, and trade data of the commercial banks are made available for the use of the ExportImport Bank—thus reducing the latter’s expenses. In financing development projects, it is generally re quired that the borrower arrange to employ engineers and technicians who are competent to supervise the proper installation and use of the machinery and equip ment which are supplied through the Bank’s credits. This feature, together with careful analyses of the con templated projects and their relation to the over-all eco nomic situation in borrowing countries, is in keeping with the Bank’s policy of making sure that its loans will be productive. The proportion of the credit risk in the case of loans to United States exporters which the Export-Import Page 2 TABLE I ANNUAL ACTIVITIES OF THE EXPORT-IMPORT BANK, 1934-1945 (In millions of dollars) Disbursements Repayments Loans Outstanding1 Year Authorizations 1934 1935 1936 1937 11.5 45.7 55.6 21.3 3.8 10.3 21.1 7.7 3.8 6.0 7.8 7.9 2 4.3 17.6 17.4 1938 1939 1940 1941 74.8 74.7 371.2 182.9 18.6 53.7 95.3 116.8 9.8 14.7 29.5 61.7 26.2 65.2 129.6 182.5 1942 1943 1944 1945 (through Sept. 30) 264.1 63.2 31.1 50.4 55.7 49.6 55.0 32.3 30.1 181.1 204.8 224.5 287.2 38.6 36.2 226.9' xAt close of period. 2Less than $50,000. SOURCE: Annual reports of the Export-Import Bank of Washington. Bank assumes without recourse to the American exporter varies with the individual case. It was the early practice of the Bank to make loans to American exporters only on a full recourse basis. This policy has been modified to a considerable degree. Where exports are financed without recourse, the guarantee of a foreign bank or government under present conditions is nearly always required. Interest rates also vary with the type of credit ex tended. Since the line of credit is drawn upon only as needed, interest charges apply only to the proportion of the commitment actually outstanding. In the past, the rate on stabilization loans was customarily 3.6 per cent, while that for developmental credits, most of which run from 10 to 16 years, was generally 4 per cent. Rates have ranged from 4 to 6 per cent on loans for railway equip ment and heavy machinery. It has been recently reported that the Bank is now considering an average rate of ap proximately 3 per cent on loans to liberated and wardevastated countries. LOANS AND COMMITMENTS, 1934-1945 In the past the activities of the Export-Import Bank have included four major types of financing; namely: (1) short-term loans to all exporters of a given com modity to assist in financing the export of agricultural surpluses; (2) medium-term loans to United States exporters of durable industrial goods on terms which would permit them to compete with foreign exporters; (3) medium-term loans to maintain essential purchases from the United States by certain countries during pe riods when they were temporarily short of dollar ex change ; and (4) long-term loans to foreign governments or their agencies to assist in financing the cost of mate- "» rials and services required in connection with develop ment projects which were expected to strengthen the economic position of the borrower, and, accordingly, the foreign market for American goods. The Bank has done only a negligible amount of import financing. Sufficient private capital has been available to importers, and they have had no problem of exchange shortages. The trend in the volume of the Bank’s business is shown in Table I. From 1934 through 1939 its activities were on a very small scale, only 65 million dollars of loans being outstanding at the close of that period. The general trend in lending operations was upward, how ever, and expanded considerably after 1939 as loans for developmental purposes became the principal field of activity. Commitments made during 1943 and 1944 were relatively small, partly due to the improved exchange position of Latin American countries as a result of war time trade developments. ■ TABLE II LOANS AND COMMITMENTS OF THE EXPORT-IMPORT BANK BY COUNTRIES, CUMULATIVE TO JULY 31, 1945 (In millions of dollars) Country1 Cancella Author tions and Disburse izations Expirations ments Repay ments Latin America: Argentina....... Brazil............. Chile............... Columbia....... Cuba............... Mexico........... All other......... Miscellaneous2 93.5 199.0 45.6 46.7 90.4 66.7 205.4 50.0 93.1 74.9 6.7 .8 26.9 1.4 68.7 .4 96.4 22.5 24.8 46.6 16.8 56.0 3.5 .4 39.3 10.1 12.2 43.0 5.5 12.5 3.5 Total Latin America. . 797.3 272.5 267.0 126.4 59.3 154.9 35.0 16.9 60.7 12.9 5.5 15.1 15.0 21.8 4.5 3.5 9.8 9.4 4.2 1.4 10.9 37.4 118.5 26. 2 13.4 .2 3.5 1.3 13.7 4.1 37.4 70.0 2 3 13.4 .2 .2 1.3 13.7 4.1 50.9 29.5 1.4 1.4 Other countries: Canada........... China............. Finland.......... Italy............... Norway.......... Poland............ Portugal......... Spain.............. Sweden........... Other European... Other NonEuropean. .. 45.0 43.8 1.0 .7 Various countries3.... 74.7 27.1 21.5 21.5 Grand totals.... 1,343.3 438.4 509.2 292.6 Country of borrower or country purchasing goods and services from borrowing U. S. exporter. 2Special credit lines established in favor of banking institutions in countries of the Western Hemisphere to facilitate opening of letters of credit to finance exports from the United States. 3Mostly for T.A.C.A. Airways Agency and Pan American Air ways. Includes revolving credit lines ranging from $2,000, cover ing miscellaneous shipments to various countries. SOURCE: Statement of Loans and Commitments of the ExportImport Bank of Washington. Prior to 1938 the Bank was principally concerned with measures of direct benefit to American exporters. Credits were largely for the export of cotton and tobacco and for heavy machinery and railroad equipment. In 1936 the Bank took over balances due the Reconstruction Finance Corporation and the Farm Credit Administration on credits which had been authorized earlier to finance the purchase by China of cotton, wheat, and flour in this country. These credits, which amounted to about 17 of the 21 million dollars disbursed by the Bank in 1936, can hardly be considered as part of the Bank’s own con tribution to the stimulation of foreign trade. Also in the period prior to 1940, the Export-Import Bank made several commitments to facilitate the release of blocked exchange and to stabilize exchange rates. One commitment was made to help unfreeze almost 28 million dollars of milreis balances due United States exporters by discounting notes of the Bank of Brazil. Actually, only 2 million dollars was disbursed under this arrange ment, partly due to the full recourse requirement against domestic exporters. A special type of monetary transac tion was made in connection with the purchase and coinage of silver bullion for Cuba. A total of 27 million dollars was disbursed for this purpose, all of which was repaid by Cuba promptly on receipt of the pesos. In 1938 the scope and objectives of the Bank’s activi ties were somewhat broadened. A loan was made to the Haitian Government to finance construction projects, chiefly roads and bridges. This credit was followed by a loan of 25 million dollars to the Chinese-owned Uni versal Trading Corporation of New York, ostensibly for the purpose of financing the export of American agri cultural and industrial products, but with rather obvious political implications in view of China’s state of war with Japan. This and subsequent loans made to China were repaid in part by the importation of tin, tungsten, and tung oil for our stock piles. During 1939 the Bank made loans to several central banks of Latin American countries, including another 19 million dollar credit to unfreeze claims of American ex porters in Brazil, this time without recourse. Two loans, totaling approximately 30 million dollars, were extended to the Finnish-American Trading Corporation during the Russo-Finnish controversy. Meanwhile, the original Act underwent a series of amendments. The volume of the Bank’s operations had always been small, but in 1939 a 100 million dollar limit was placed on the amount of loans which could be out standing at any one time. Early in 1940, this maximum was raised to 200 million dollars, with a limit of 20 million dollars on loans to any one country. At the same time, the Bank was prohibited from making loans to governments in default on their obligations to the United States Government on April 13, 1934. By the middle of 1940 this country was acutely aware of the importance of protecting Latin American countries from Axis domination—either political or economic. We were also interested in developing Latin American re sources which were needed for our own defense and Page 3 armament effort. International developments thus pro vided the incentive for further expansion in the resources and scope of operations of the Export-Import Bank. By Presidential request, Congress amended the Bank’s pow ers, specifically authorizing it “to assist in the develop ment of the resources, the stabilization of the economies, and the orderly marketing of the products of the coun tries of the Western Hemisphere.” The law raised the limit on loans outstanding to 700 million dollars. More over, the limit on loans to any one country was removed. With this amendment, the Bank clearly became an instru ment of American foreign policy, and its activities were reoriented accordingly. Throughout the war period the bulk of its business has consisted of Latin American developmental credits, which contributed to the interests of American exporters since the loans could generally only be used to purchase United States goods. Among the developmental projects which have been financed with the aid of the Bank are improved transpor tation facilities, including the Inter-American Highway and other loans for highway construction, and improved railway service. In promoting the development of natural resources, the Export-Import Bank authorized loans to Brazil in connection with steel, iron ore, rubber, and other strategic raw materials production. Credits were also granted to development corporations of Haiti, Ecua dor, and Bolivia, to be used in developing resources and in expanding transportation facilities. Hemisphere sources of supply for our war effort were thus acquired for many commodities which we formerly had to import from the Far East. Numerous commitments were authorized during 1940 and 1941 for assisting Latin American central banks to relieve exchange difficulties which were attributed to unfavorable trade balances. Such credits were made available to Argentina, Uruguay, Peru, Brazil, and Colombia. Because of the improved exchange position accompanying our increased imports from and decreased exports to Latin America during the war, most of these credits were never utilized. Table II shows the geo graphic distribution of the Bank’s operations cumulative through July 1945, when the new legislation became effective. Since that time, negotiations for several new loans have already been made or are in progress. Between July 31 and September 30 new commitments amounted to approximately 140 million dollars. Among the loans recently authorized are credits of 50 million dollars to Norway and 20 million to Denmark, both to be used in the purchase of United States agricultural and manu factured products. Other authorizations have included a 33 million dollar credit to Chile for construction of a steel mill and other developmental projects; a 1 million dollar loan to Ecuador for a program of transportation surveys by United States technicians; a 50 million dollar loan to the Netherlands; and a 38 million dollar loan to Brazil for the construction of coastal vessels. It is also reported that a credit of 250 million dollars has been opened in favor of Greece. The Bank has disbursed Page 4 only 1.7 million to Denmark under these new authoriza tions. Consideration is now being given requests for loans of from 65 to 100 million dollars from the Nether lands Indies, 20 million from Ecuador, 10 million from Colombia, and 550 million from France. The over-all summary of the Bank’s activities from its origin in 1934 through September 30, 1945, is shown in Table III. It will be noted that the total of cancella tions, expirations, and commitments not yet disbursed during this period were substantially greater than the total disbursements which were made. The amount of undisbursed commitments is not necessarily an indica tion of future loans outstanding. Several of the com mitments made for developmental purposes have not been drawn upon at all and were never based on the probable cost of the project involved. Additional cancellations can be expected on at least part of these commitments. PROSPECTS FOR THE FUTURE In the immediate future, the Export-Import Bank will be a major source of the dollars required for reconstruc tion and rehabilitation. However, loans for developmental purposes will continue to be an important part of the Bank’s business. Even after the International Bank be comes operative, the Bank will have a supplementary function to perform. It may be expected to extend stabilization or development loans in cases in which the United States has a special political or economic interest, and which the International Bank or Fund, as the case may be, is not prepared to make. The continuation of the industrial and agricultural development of Latin America may be an important example. There will also be a continuing need for credits to American exporters as long as private banks are unwill ing to finance exports over more than a six-month period. To the extent that the Bank can promote the expansion of our foreign trade, either through its own loans or through the establishment of more stable economic con ditions which will encourage the flow of private capital, its continued existence will be justified. TABLE III GENERAL SUMMARY OF EXPORT-IMPORT BANK ACTIVITIES1 From February 12, 1934 through September 30, 1945 (In millions of dollars) Total commitments......................................................... Total cancellations and expirations................................ Total disbursements....................................................... Total repayments............................................................ Total outstanding loans.................................................. Balance of commitments not yet disbursed.................. Total of outstanding loans and balance of commitments not yet disbursed.................................. 1,483 438 522 295 227 523 750 'Includes activities of the Second Export-Import Bank of Wash ington, D.C., which was incorporated March 12, 1934 and dissolved June 30, 1936, all of its active commitments being assumed by the Export-Import Bank of Washington. SOURCE: Export-Import Bank of Washington. Chicago’s Wartime Economic Changes - II Income Payments, Consumer Expenditures Reach Record Highs From the outbreak of war in Europe in 1939 until the Japanese capitulation six years later, in mid-August 1945, income payments to individuals and consumer expendi tures in the Chicago industrial area1 reached record levels substantially above those in the best peacetime years. Some of the most significant developments were: 1. Income payments to individuals, which include not only wages and salaries but also dividends, interest, rent, and relief payments, more than doubled. Higher taxes and rising living costs, however, were highly important offsets to individual economic gains. 2. Among the income payment components, manufac turing payrolls showed the largest increase, accounting for nearly two-fifths of the total six-year increase in income payments. 3. Consumer expenditures for goods and services in creased substantially, but relatively less than the gain in income payments. Moreover, at least two-thirds of the expansion in the dollar volume of consumer expendi tures represented increases in prices. These conclusions with respect to wartime shifts in the amount of income received and some of the ways in which this income was disbursed represent more of the principal findings of an analysis of the war’s effect upon the people who work, live, and do business in the Chicago industrial area. The results, together with those concern ing population, employment, and industrial production which appeared in the September 1945 issue of Business Conditions, are part of a study of the wartime economic changes in the area and their postwar implications, spon sored by the Federal Reserve Bank of Chicago in co operation with the Chicago Association of Commerce and the Chicago Committee of the C.E.D.2 The magni tude of wartime accumulated savings of individuals in the Chicago industrial area will be presented and discussed in the November 1945 issue of Business Conditions. INDIVIDUAL INCOMES DOUBLE Income payments to individuals in the Chicago indus trial area increased by 105 per cent between 1939 and the end of the Japanese war in mid-August 1945, rising from an annual rate of 3.7 billion dollars to an estimated 7.6 billion dollars. The largest gain was shown by manu facturing payrolls, which increased from 953 million dollars to an estimated 2.5 billion dollars during the war period. This rise in wages and salaries paid by manu1 The Chicago# industrial area includes Cook, Du Page, Kane, Lake, and Will Counties in Illinois, and Lake County in Indiana. 2 Many of the conclusions presented here have been developed from data provided by the U. S. Department of Commerce, U. S. Bureau of the Census, U. S. Bureau of Labor Statistics, Illinois Department of Labor, Indiana Employment Security Division, Illinois Department of Revenue, Indiana Gross Income Tax Division, and other related agencies. facturing establishments in the area constituted about 39 per cent of the total increase in income payments. More than 52 per cent of all wage and salary payments came from manufacturing at the end of the war with Japan, as compared with somewhat less than 40 per cent in 1939. Only one-third of the approximately 1.5 billion dollars increase in manufacturing payrolls was attribut able to the increase in the number of persons employed, while two-thirds resulted from such factors as increased hours, higher straight-time wages, overtime premium pay, the upgrading of workers, and the use of incentive and bonus plans. Industries classified as munitions accounted for approx imately four-fifths of the total increase in wage and salary payments arising from manufacturing. Wage and salary payments by these industries more than trebled, climbing to 1.7 billion dollars at the end of the Japanese war from 508 million dollars in 1939. The largest gain within the munitions group occurred in the payrolls of manufacturers of transportation equipment, including aircraft parts and engines, with a rise of 283 million dollars to a total of 312 million dollars. The next largest TABLE I ANNUAL RATE OF WAGE AND SALARY PAYMENTS SELECTED MUNITIONS AND NON-MUNITIONS INDUS TRIES, CHICAGO INDUSTRIAL AREA, 1939 AND AT END OF JAPANESE WAR (In millions of dollars) MUNITIONS 1939 Transportation equipment................ Iron and steel........................... Electrical machinery..................... Ordnance............................ Non-electrical machinery.............. Chemicals........................... Non-ferrous metals............. End of War 29 212 73 0 89 40 33 312 490 281 190 243 99 86 1939 End of War 129 120 62 22 39 203 169 102 50 63 NON-MUNITIONS Food................................ Printing and publishing............... Textiles and apparel.................. Paper...................................... Lumber and furniture................... SOURCE: Compiled and estimated from data provided by the U. S. Bureau of the Census, Illinois Department of Labor, and Indiana Employment Security Division. Page 5 increases were in the iron and steel, and electrical ma chinery industries, which had payroll gains of 278 and 208 million dollars, respectively. Compared with the more than trebling of wage and salary payments in the munitions group, these payments in non-munitions manufacturing rose slightly more than 61 per cent from 403 million dollars to a rate of 651 million dollars during the war period. The outstanding gains were shown by the food and the printing and publishing industries, which had payroll increases of 74 and 49 million dollars, respectively. eating and drinking store group had the largest gain in retail business between December 1941 and the time of the Jap surrender, with an increase of 73 per cent. Retail sales of apparel establishments showed the next largest gain with an increase of 38 per cent, and food store sales ran a close third with a 37 per cent gain. The largest decline in sales volume among retail busi nesses was experienced by automobile dealers and sellers of construction supplies, with declines of 56 and 48 per cent, respectively. Hardware and farm equipment store sales, which were off four per cent, showed the smallest drop among lines experiencing decreases. TAXES, LIVING COSTS OFFSET GAINS CASH PAYMENT SALES MOUNT The gain of 3.9 billion dollars in annual income pay ments does not accurately indicate comparable economic gains for individual recipients. Income taxes increased significantly over the same period. For example, at the time the Japs sued for peace, the wages of a manufac turing worker with three dependents and a weekly pay of $50 was subject to a 5 per cent withholding for income taxes. Such a worker paid no income tax in 1939. In creases in real income, moreover, were not as great as increases in money income. Since 1939, the cost of living in Chicago for wage earners and lower salaried groups, as defined and reported by the United States Bureau of Labor Statistics, climbed more than 28 per cent. The largest increases occurred in food, which advanced 48 per cent, and in clothing, which rose by 41 per cent. Moreover, average war bond deductions were 10 per cent of earnings. The proportion of retail sales made on credit declined sharply, with stores allowing credit payments experiencing a drop in the percentage of all types of credit sales to 36 per cent of their total volume in 1944 from 54 per cent in 1941. In other words, for these retail stores cash pay ments mounted from less than half to nearly two-thirds of all sales. Charge account sales alone during the same period declined to 23 per cent of total business from 31 per cent, although there was some increase in the dollar amount of charge account sales because of the great increase in total sales. Installment sales accounted for about 13 per cent of total sales in 1944, compared with 23 per cent in 1941. This shrinkage may be attributed primarily to the scarcity of consumers’ durable goods and to the growth of incomes. Wartime regulation of consumer credit by the Federal Reserve System was also a factor. CONSUMER SPENDING EXPANDS Chicago area consumers increased their spending for goods and services by more than 45 per cent during the war years, despite the fact that many types of goods were not obtainable and many service industries operated on a restricted basis. Consumer expenditures rose to an annual rate of 4.7 billion dollars just prior to the end of the war with Japan from 3.2 billion dollars in 1939, the year before the United States undertook its defense program. Because of price increases, however, this rise in spending does not indicate an equivalent rise in the volume of goods and services received by buyers. At least two-thirds of the 1.5 billion dollar spending rise may be attributed to price increases, with the balance representing an actual increase in the quantity of goods and services as well as a shift to higher-priced lines. These statistics, moreover, do not reflect either the deterioration in quality of many kinds of wartime mer chandise or the scaling down of service which occurred in numerous lines during the war period. Sales at retail to Chicagoans and others who shop in Chicago were running at an annual rate of 3.2 billion dollars at the end of the war. At the time of the Pearl Harbor attack, this retail sales rate was 2.6 billion dollars compared with 2.0 billion dollars in 1939. The inclusive Page 6 TABLE II SALES OF SELECTED RETAIL STORES, CHICAGO INDUSTRIAL AREA, PERCENTAGE CHANGES BETWEEN DECEMBER 1941 AND END OF JAPANESE WAR STORES SHOWING INCREASES Per Cent Increase 73 38 37 31 30 17 8 7 Eating and drinking group.............................. STORES SHOWING DECREASES Per Cent Decrease Horae furnishings and furniture...................... Hardware and farm equipment....................... 56 48 34 25 4 SOURCE: Compiled primarily from data provided by the Illinois Department of Revenue. FINANCING AIRPORT FACILITIES (Continued from Inside Front Cover) est importance to the development of commercial air transport and which offer the largest possibilities of self support, are the 140 metropolitan areas in the United States having populations of 50,000 or more. The U. S. Bureau of the Census treats as metropolitan districts all areas in which there are one or more central cities with a population of over 50,000, together with the adjacent and contiguous territory in which the density of popula tion is 150 or more per square mile. Metropolitan areas or districts are not political units, but they reflect the concentration of population within and without the corporate boundaries of a given city or group of cities. The aggregate population of 140 metropolitan districts of the United States was approximately 63,000,000 in 1940, or nearly half the total population of the United States. Even though a substantial proportion of these areas now has airports capable of accommodating trans port aircraft, generally speaking these facilities are pres ently or shortly will be inadequate. Many metropolitan districts require several airports for adequate service to their residents, as they tap such areas as the Chicago metropolitan district with a popula tion of 4,500,000 extending over an area of 1,184 square miles, or the New York-northeastern New Jersey district with its 11,500,000 people in an area of 2,561 square miles. Out of the 140 districts, there are 32 with a popu lation under 100,000, 58 with a population of from 100,000 to 250,000; 28 with a population between 250,000 and 500,000; 11 with a population of from 500,000 to POPULATION AND AREA OF METROPOLITAN DISTRICTS IN SEVENTH FEDERAL RESERVE DISTRICT Metropolitan District Chicago....................................... Detroit........................................ Milwaukee.................................. Indianapolis............................... Omaha-Council Bluffs............... Grand Rapids............................ Flint........................................... Des Moines................................ Davenport-Rock Island-Moiine Peoria.......................................... Saginaw-Bay City..................... South Bend................................ Racine-Kenosha......................... Fort Wayne................................ Lansing....................................... Rockford..................................... Springfield.................................. Sioux City.................................. Terre Haute............................... Madison...................................... Kalamazoo................................. Cedar Rapids............................. Waterloo..................................... Decatur............................... Population Square Miles 4,499,000 2,296,000 790,000 455,000 288,000 210,000 189,000 184,000 175,000 163,000 153,000 147,000 135,000 134,000 110,000 105,000 89,000 88,000 83,000 78,000 77,000 73,000 67,000 66,000 1,184 856 250 316 199 143 145 210 129 109 162 156 189 141 108 144 69 61 105 53 73 239 96 28 SOURCE: U. S. Bureau of the Census, Sixteenth Census of the United States: 1940, Population, Vol. I. 1,000,000; and 11 with a population of over 1,000,000, these latter centering in Baltimore, Boston, Chicago, Cleveland, Detroit, Los Angeles, New York, Philadelphia, Pittsburgh, St. Louis, and San Francisco. The metro politan areas designated by the census, which are wholly or partially within the Seventh District, their size, and 1940 populations are shown in the accompanying table. TERMINAL FACILITIES REQUIRED The facilities which all users of aircraft can economi cally share with one another are the navigational aids including the system of airways, presently operated by the Federal Government, and airports together with their in cidental services (control towers, lighting, snow removal, terminal buildings, etc.) operated in the main by local governments. A metropolitan airport is considerably more than a large area with a pattern of runways and a terminal building. If the advantages of air travel are to be efficiently exploited, the location of the port is ex tremely important. It must be in reasonable proximity to traffic generating centers which can be reached by adequate highway connections. The terminal itself must not only provide landing space and accommodations for passengers and shippers, but it must encompass areas for the location of hangars, shops, and various service estab lishments of the aircraft operators and their suppliers. The investment in such facilities may easily equal that in the port proper. An air terminal is a combination of joint and exclusively used facilities, of private and public accommodations. Over-all plans for the provision of airports and ter minal facilities must take into account the requirements of scheduled passenger and freight operations, the fixed base or contract operator, the private personal plane, and the military services; in a fully developed system of air transportation all of these users will be involved. To a very large extent the ports for private flyers are of a different type and character than those required by large commercial operators. The size of the craft and the nature of use renders the port adaptable to the private flyer unsuitable for commercial operations, and the out lays required for commercial ports are superfluous for private flyers. If the military services in peacetime make occasional use of commercial ports and are based largely at exclusively military fields, the problem is largely one of providing facilities for two categories—the com mercial operators and the private flyers. The needs of the latter can be estimated with far less certainty than those of commercial transport which has now become well established. Though private flying may grow rap idly, the assumption that a personal plane will become anywhere nearly as common as the automobile appears unreasonable unless technological developments are such as to make it capable of providing services that are both in addition to and a substitute for those of the automobile. The outlays'during the next ten years for land acquisi tion and construction of airports designed for commercial operations have been variously estimated; it is hardly Page 7 at the expense of the general taxpayer. An acceptable public policy in this regard might properly be predicated on the assumption that in the long run users of airports should pay costs of operation and amortize capital outlays and interest charges roughly in proportion to the intensity of their use. The strides with which air transport is approaching maturity make clear that the time is not far removed when users of air transport service can fully cover government investments in airports. Up to the present time public aid for airports has been forthcoming largely from the Federal and local govern ments ; the states have made little or no contribution to the industry’s development, although some of them have imposed a tax on aviation fuel and earmarked all or part of the proceeds for aviation development. Until World War II the role of the Federal and local governments in providing facilities was about equal, Federal expendi tures being in the form of grants to local units for the construction of airports and annual outlays for the fur nishing of navigational aids. Localities have been exclu sively concerned with the provision of terminal facilities. There is at present pending in the Congress of the United States a measure which has passed both houses and is in conference committee providing Federal funds on a matching basis for state and local airport development. The Federal Government has financed its aids to the promotion of aviation through appropriations from gen eral funds, although it levies an excise on gasoline which can properly be regarded as a user payment. The locali ties have financed their expenditures on airports largely through bond issues which in turn are serviced by prop erty tax levies and by rentals from users of airports for landing rights and other facilities. While localities are most limited with respect to their financial resources, they have two very effective instru ments over private capital for reducing the cost of air port facilities. They enjoy property tax exemption on their investment in airports—an amount which is roughly equivalent to a low rate of interest on loan capital. Be cause of the high level of personal Federal income taxa tion and the immunity from such taxation that the hold ers of municipal securities obtain, local governments can borrow funds for airport development at from one-half to two-thirds the interest charge of the average corporate borrowing. Thus, by foregoing taxes on a facility which in private hands would be subject to taxation, and by utilizing the extremely favorable market for municipal securities, they can without any direct and obvious cost finance an airport at less than could private capital. In subsequent issues of Business Conditions, the pol icies and plans of the Federal Government with respect to airport construction will be examined with reference to the Federal Airport Aid Bill now before the Congress. The relationship of this Federal program to the airport investments of the municipalities, states, and their instru PUBLIC PARTICIPATION IN AIRPORT FINANCE mentalities will be considered. Particular emphasis will Even though it seems clear that public capital will be be given developments which indicate the practicability largely employed to provide air transport terminal facili of recouping the major part, if not the entire cost, of ties, it does not follow that such capital need be furnished constructing and operating air terminals from their users. likely that the total will be less than a billion dollars and it may be considerably more. If at the end of this period the growth curve for the industry has flattened out, the total investment in terminal facilities might be in the neighborhood of 2 or 3 billion dollars. By way of com parison this is at the most a small fraction of the public and private investment in rail transport (exclusive of rolling stock) or in the highway network. The capacity of the users of a plant purchased by this investment to amortize its cost obviously is affected by the cost and price relationships generally. On the cost side, direct operating expenses are largely linked to technological advances which have come-so rapidly, par ticularly in the last four years, that it is difficult to formulate a reasonable expectation of their ultimate effect upon unit costs. Aircraft have very high rates of obsolescence both in fact and in the accounting practices of the transport companies, and it seems likely that this condition will continue for some time. Technological changes can even directly affect the problem of airport investment, as they may eventually change the character of facilities required for terminal operation. The problem may be treated in more concrete terms if the assumption is made that air tariffs are fixed at a competitive level with rail carriers—in the transportation of persons, for example, the charges for first-class ac commodations. The volume of traffic that will be carried at such rates will then determine within rough limits the capacity of the operators to support airport development. Rates would be held in a competitive relationship until rentals, fees, and other charges for the use of terminal facilities were sufficient to equate the payments of com mercial users and their share of operation and amorti zation costs. Placing the cost of air transport on a competitive basis with rail transport in first-class passenger, first-class mail, express, and certain cargo items adapted to air haulage, will inevitably divert substantial traffic from rail car riers. In addition, however, it will stimulate travel gem erally because of the speed and convenience of trans portation between distant or inaccessible points. Such new demands for service will of necessity involve de creases in expenditures for other goods or services and will rest largely, in the Case of business, upon compara tive costs of alternative arrangements, and, in the case of personal expenditure, upon desirability of less or more transportation relative to other consumption items. Finally, the volume of air travel, as is true of all other transport, depends in large measure upon general eco nomic conditions; given a high level of business activity there will be a much larger volume of transport service demanded. This factor alone will account for a consid erable fluctuation in the volume of air traffic. Page 8 INDUSTRIAL PRODUCTION NATIONAL SUMMARY OF BUSINESS CONDITIONS BY BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM Output and employment at factories producing war products declined further in September but production and incomes in most other sectors of the economy were maintained or increased somewhat. Retail buying in September and the first half of October continued above year ago levels. Industrial production—Industrial production declined eight per cent in September, reflecting mainly the continued rapid liquidation of output for war purposes, and the Board’s seasonally adjusted index was 172 per cent of the 1935-39 average as compared with 187 in August and 210 in July. so 1940 1940 1944 1942 Federal Reserve indexes. Groups are expressed in terms of points in the total index. Monthly figures, latest shown are for July, 1945. INCOME PAYMENTS TO INDIVUDALS BILLIONS OF DOLLARS ANNUAL RATES . SEASONALLY ADJUSTED BILLIONS OF DOLLARS Reduced activity in the machinery and transportation equipment industries continued to account for most of the decline in the total index. Output in these industries during September was about one-fifth below the August average and one-half of the rate at the beginning of the year. Steel production, on the other hand, was five per cent larger in September than in August. In the first three weeks of October, howrever, steel mill operations declined substantially owing largely to a temporary reduction in coal supplies. Output of nonferrous metals, lumber, and stone, clay and glass products decreased somewhat in September. Production of nondurable goods, as a group, showed little change in Sep tember, as further reductions in output of war products in the chemical, petroleum, and rubber products industries were offset by increases in output of most civilian-type products. Output of textile yarns and fabrics, shoes, meats, beverages, cigarettes, and paper products increased. Output of minerals declined in September due mainly to an eight per cent decrease in crude petroleum production. Coal production increased in September but in the first three weeks of October dropped sharply as a result of work interruptions at bituminous coal mines. Contracts awarded for private construction, according to the F. W. Dodge Corporation, increased further in September, reflecting the largest volume of awards for nonresidential building in many years. Private residential awards showed little change and publicly-financed construction declined further. Based on Department of Commerce estimates. Wages and salaries include military pay. Monthly figures raised to annual rates, latest shown are for July, 1945. COST OF LIVING FER CENT 160 ~ 160 150 140 Employment—Employment at factories showed a decline of about 600,000 during the month of September, as compared to a decrease of 1,600,000 workers during August, reflecting a much smaller reduction of munitions employment in September and some increases in other industries. Employment in most nonmanufacturing lines, except Government service, was maintained or increased slightly, after allowing for seasonal changes. Distribution—Department store sales in September showed about the usual sharp seasonal increase and the Board’s adjusted index was 199 per cent of the 1935-39 average. This was at the same high level as the average for the first half of 1945 and was seven per cent above that for September 1944. In the first two weeks of October sales were 11 per cent larger than in the corre sponding period last year. The total volume of railroad revenue freight was maintained in September at the August rate and was only eight per cent lower than last year’s high level. In the early part of October shipments of coal and coke declined sub stantially as a result of the drop in coal production. J942 1943 1944 1945 Bureau of Labor Statistics’ indexes. Last month in each calendar quarter through September, 1940, monthly thereafter. Mid-month figures, latest shown are for August, 1945. Commodity prices—Prices of cotton, grains, and most other farm products increased somewhat from the middle of September to the middle of October, following decreases in the previous six weeks. Prices of most industrial products continued to be maintained at Federal maximum levels. MEMBER BANKS IN LEADING CITIES Bank credit—Rising reserve requirements, resulting from expanded deposits of businesses and individuals, and an increase in currency in circulation accounted for continuing needs for reserve funds by banks between the middle of September and the middle of October. These needs were supplied through decreases in Treasury and nonmember deposits at Federal Reserve Banks. The amount of Reserve Bank credit outstanding showed little change in the period. Money in circulation increased by 175 million dollars during the four weeks ended October 17; this was a smaller growth than has been customary in recent years reflecting in part some currency inflow following the mid-September tax date. Holdings of Government securities and member bank borrowing at the Reserve Banks increased fairly substantially in the latter part of September concurrent with a temporary rise in Treasury deposits, but both were later reduced. This reduction in security holdings was in Treasury bills and accom panied an increase in member bank holdings of bills. 1939 1940 1941 1942 1943 1944 1945 Demand deposits (adjusted) exclude U. S. Govern ment and interbank deposits and collection items. Government securities include direct and guaranteed issues. Wednesday figures, latest shown are for October 17, 1945. At reporting banks in 101 leading cities loans for purchasing and carrying Government securities declined by 550 million dollars during the four weeks ended October 17; commercial loans increased somewhat, and holdings of securities showed little change in the aggregate. Loans on Government securities remained well above amounts outstanding immediately prior to the Seventh War Loan. SEVENTH FEDERAL IOWA RESERVE DISTRICT
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