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A review by the Federal Reserve Bank of Chicago Business Conditions 1951 October Contents E bond sales stimulus 2 Cattle feeding profits cut 4 Census of mortgage lenders 6 Farm machinery outlook good 10 Time deposits 16 The Trend of Business 8-9 E bond sales stimulus New defense bond drive aims at reinforcing a sagging E bond program. Objective—to reduce inflationary pressure and help finance the defense effort. bonds still hold title as the most pop ular type of investment for a majority of Amer ican families. Early this year, the Survey of Consumer Finances asked a sample of spend ing units earning three thousand dollars or more per year what they considered the “wisest thing” to do with current savings. Nearly 50 per cent chose savings bonds and an additional 17 per cent expressed preference for either savings bonds or bank deposits of one type or another; in contrast, common stocks were selected by only 6 per cent, real estate by 17 per cent, and bank deposits alone by 12 per cent of the spend ing units questioned. The popularity of savings bonds had declined significantly since 1949, however, with prefer ences of all income classes shifting more to equi ties and real estate. Nevertheless, almost 6 out of 10 in the three thousand dollar or over in come bracket held some savings bonds, and 26 out of 100 had holdings of five hundred dollars or more at the beginning of 1951. Regardless of preferences, the position of S avings W hat’s happened to savings bonds? The total amount of Series E bonds outstanding has remained virtually un changed during the past year, although redemp tions (at current value) exceeded actual sales each month since April 1950. Reason—accrual of interest on outstanding bonds about equaled the excess of redemptions over sales. 2 Million dollars Billion dollars 33.5 - Business Conditions, October 1951 the savings bond program has been weakening lately. Redemptions of Series E bonds have ex ceeded sales each month since April 1950. For the entire period, the excess of cash redemptions has amounted to 1,230 million dollars, but accrual of interest on outstanding bonds has kept the total indebtedness from falling. In addi tion, the tremendous volume of bonds sold dur ing the war years is approaching maturity. On the basis of the amount of these bonds currently outstanding, about 19 billion dollars worth will come up for repayment or refunding in the next four years. What is the Government doing to meet the difficulties which have arisen? First, an exten sive advertising campaign has been launched in an effort to prop up currently lagging sales and reduce the heavy pre-maturity redemptions. The first formal savings bond drive since be fore the Korean war is now in progress; em phasis is being placed upon stimulating regular and recurring purchases of bonds through Pay roll Savings and the Bond-A-Month Plan. Sec- June 1950 dec 1950 june 1951 dec 1951 ond, the terms of outstanding E bonds have been altered to provide for automatic exten sion of maturing bonds for another 10 years if they are not presented for redemption in cash or in exchange for a new coupon-bearing Series G security. Extended bonds will return IV 2 per cent simple interest for the first IV 2 years and 2.9 per cent compound interest if held until maturity. The major shift in sales-redemption trends has been in large E bonds Billion dotlors ISSUE PRICE 3 r soles redemptions Big bond sales fa ll sharply A significant adverse shift in the sales-redemption pattern of large denomination bonds has been the major area of deterioration in the savings bond program during the past year. Until last summer, sales of 500 dollar and 1,000 dollar bonds typically exceeded redemptions by large margins. Many persons evidently bought their year’s quota every January or July. Since then, however, sales have dropped by a third from the previous year while redemptions have increased by the same proportion. Larger investors, anticipating higher taxes and fearing further inflation, apparently have been shifting to alternative investments which they consider more attractive under the circumstances. In contrast, sales of smaller denomination bonds have lagged moderately behind redemp tions during the entire postwar period. This probably reflects, to some extent, a relatively weak competitive position as a liquid savings media, but also results from the high level of consumer spending for expensive durable goods during the past several years. Since Korea, sales have declined only fractionally from the pre vious year but redemptions have increased by an eighth. Liquidation of holdings to finance the heavy buying of last summer and winter undoubtedly accounts for most of the rise. W hy push savings bond sa le s? It is especially important at this time to main tain general acceptance of savings bonds as an investment media and to restore as much vigor as possible to the program. With the defense effort taking a large and rapidly growing por- July 1948june 1949 july 1949junt 1950 july 1950junel95l July 1948june 1949 julyl949june 1950 July 1950june 1951 tion of the total national output, the supply of civilian goods will be limited to some extent in the months and perhaps years ahead. At the same time, the income of consumers will tend to increase as additional workers are drawn into the labor force for employment in de fense plants and essential civilian activities. To the extent that individual savings can be stim ulated during this period, the inflationary gap between the supply of goods available for con sumption and the supply of active purchasing power seeking goods to buy will be reduced. Since the level of Government expenditures is determined independently of what happens to savings bonds, investment in this media is one of the most deflationary forms which sav ings can take (another is the hoarding of cash). Initially, the effect of any type of savings accu mulation is the same—a reduction of purchas ing power in the hands of consumers. But the use to which savings are put by the institutions receiving them is a different matter. The funds may be invested in Government bonds but, on the other hand, they may be used to finance —continued on page 14 3 Cattle feeding profits cut Feeder cattle costs are high. Beef price ceilings limit profit prospects. But large feed supplies, a late corn crop, and a strong demand for beef encourage large volume of feeding. corn b e l t cattle feed ers have bought or are shopping for cattle. They are in the busi ness of making beef and by the time the New Year arrives the number purchased for fatten ing will probably compare favorably with the large volume of other recent years. This is the current prospect even though feeder cattle prices in August were at a record high for the month. Most animals going into Corn Belt feed lots this fall will involve an investment of 175 to 300 dollars per head, depending on age, weight, and quality. They will be fed for periods rang ing from three months to a year or more, then sold for slaughter. At that time, will they bring enough to repay farmers the purchase price plus a return for feed, labor, and miscellaneous expenses? This is a perennial question for cat tle feeders, never answered with certainty at the start of the feeding season. But judgments must be made, and acted upon. M ost Strong beef dem and indicated Farmers feeding cattle this winter assume that the current strong demand for beef will continue. Rising defense spending is expected to maintain a high level of employment and rising income payments through 1952. Under these circumstances consumers are expected to spend freely for meat and probably will pay ceiling prices for beef. Historically, the value of meat at retail has amounted to about six per cent of consumer income after taxes. Beef has accounted for about one-half of the retail value of all meat and generally has benefited more than other meats from rising income. The volume of cattle marketed for slaughter in the year ahead is expected to increase only 4 Business Conditions, October 1951 slightly, even though herds are being built up rapidly. The number on farms by year-end may exceed 90 million head, compared with 84 mil lion on January 1. If the demand for beef con tinues strong and weather conditions permit a continued high level of feed production, the number will be expanded further, possibly to 100 million head or more by 1954 or 1955. This build-up in herds is an important price supporting factor in the current beef situation as about one-sixth of this year’s production is retained for this purpose. If expansion were halted, the volume of slaughter and of beef pro duced would increase sharply. A cattle popula tion of 100 million head would be expected to result in annual marketings for slaughter of about 40 million, compared with 28 to 30 mil lion in recent years. Marketings would surge to even higher levels if feed supplies were to be curtailed sharply, as by a severe drouth. Slaughter steer sales, monthly average at Chicago, 1945-1949 Thouiond* Feeds adequate, not abundant Aside from the prospective demand for beef, feed supplies are probably the most important single factor in the cattle feeding situation. Gen erally speaking, when farmers have large sup plies on hand or in prospect they feed a large number of cattle. Hay production this year is a record high. The harvest of feed grains is less than in four of the last five years but greater than in all but one year prior to 1946. Large cotton and soybean crops will provide abundant supplies of protein feeds. Including the large carry-over from previous years, the feed supply will be adequate. Nevertheless, the trend of feed prices after harvest is likely to be upward, indi cating that farmers who will be buying feed should consider acquiring it this fall. The source of profit “Finishing” or “fattening” cattle for market includes both the addition of weight and im provement in quality. The producer may profit from either or both of these. If weight is added at a cost per pound of gain which is less than the selling price of the finished animal, a profit is realized on the added pounds. Normally this is accomplished only when feeds are cheap relative to cattle prices or when young, light weight cattle are fed. Feed is relatively cheap this year and weight can be added to most cat tle at costs below the prospective selling price. Thus, modest profits from this phase of wellmanaged feeding programs are practically as sured. In general, cost of gain is higher on older and heavier animals and on those nearing top finish. Therefore, with price ceilings in effect, many producers will not feed cattle to a high finish this year but will operate their feeding programs so as to emphasize low cost gains. When the selling price for the finished animal is higher than the price paid for the feeder, a profit is realized on the initial weight of the animal purchased. This is known as “margin.” For the past several years margins have been very favorable on most cattle. This year margins Slaughter steer prices, monthly average at Chicago, 1945-1949 D o llo rs per cw t. 35 r I mor i i I i ju n t I 1 tept I I I dec will be much lower as prices of feeder cattle generally equal or exceed ceiling prices on slaughter stock. The wide margin of the past two years resulted largely from price advances for slaughter cattle during the feeding periods. That could happen this year only if ceilings were lifted and consumer demand would sup port higher prices. Seasonal patterns useful The largest movement of feeder cattle to Corn Belt states normally occurs in October when about one-fourth of the year’s supply is received. September and November are impor tant months also, each accounting for about one-sixth of the annual total. Feeder cattle prices usually decline as ship ments increase, reaching a seasonal low in Octo ber. In years when the demand is exceptionally strong, however, the seasonal decline may be very nominal or not occur at all as happened in 1947 and 1949. In recent weeks prices have continued strong even in the face of larger mar ketings. Feeder steers at Kansas City, the lead ing market, averaged $32.72 per 100 pounds in the second week of September, more than $5.00 above year-ago prices. Feeder calves ranged 5 upward to $43.00 and considerably higher prices have been paid at some country points. While very large shipments late this fall would result in some price reduction, there is little prospect that Corn Belt feeders will be buying cattle in the remainder of 1951 at much less than present prices. The time of sale of slaughter cattle is de termined within rather broad limits at the time decisions are made as to the kind of cattle to buy and the method of feeding. The lower grades usually are marketed in peak volume in December and January, the next higher grade in the spring, and the top grade in the summer. Seasonal differences in volume of marketings result in somewhat corresponding variations in prices. Low grade steers, for example, usually reach their highest price in the spring of the year when marketings are small and slaughter ers must compete with the strong demand for cattle to put on pasture. Prices of good and commercial grades tend to reach a seasonal high in midsummer and the top grades in the fall. Marketing and price patterns in any one year will not correspond exactly with these aver ages, but underlying seasonal trends are useful guides to feeding and marketing decisions. In the last four years margins have averaged much larger for top grade feeder cattle than for the lower grades. Also, the variation in margins has been greater from month to month for the higher grades, reflecting the narrower market for such cattle and the relatively large price reactions to supply changes. With respect to seasonal differences, widest margins for year ling steers and steer calves have been realized for the top grades when fed for sale in the fall or early winter, for the middle grade when sales were made in the summer or early fall, and for the lower grades when sales were made in the spring or early summer. This indicates that feed ing programs designed to finish cattle for mar ket when prices are at their usual seasonal high generally yield the highest margins. —continued on page 15 6 Business Conditions, October 1951 Census of mort gage lenders Registration statement required by Regulation X reveals numbers and importance of active mortgage lenders in the Seventh District. N early 6,000 in stitu tio n s and individuals are active in real estate mortgage lending in the Seventh District. As of the middle of this year, they held over 6.2 billion dollars in mortgages for their own investment portfolios, and serv iced an additional 1.4 billion dollars worth for others. By far the most important type of mort gage held by these lenders, accounting for 45 per cent of the total, is the noninsured or con ventional loan on residential dwellings. Savings and loan associations lead the lender groups in mortgage holdings, but banks (including trust departments) and insurance companies are not far behind. Together, these three types of in stitutions hold 91 per cent of the total mortgage loans of active lenders in this District. These high-light findings are derived from a preliminary tabulation of data contained in registration statements filed under Regulation X by firms and individuals engaged in real es tate mortgage lending in the Seventh District. Registration was required of all lenders in the District who extended real estate credit (1) three or more times, or (2) in an amount exceeding 50,000 dollars during 1950 or 1951. Many rela tively inactive mortgage lenders consequently have been excluded from the tabulation. The registration data does not represent total mortgage indebtedness on property located within the District. Part of the mortgage hold ings of District lenders may have been acquired in other areas of the country, and conversely, lenders outside the District undoubtedly hold a substantial amount of mortgage debt on prop erties located here. What the registration does provide are the number and total mortgage holdings of active lenders in the Seventh Dis trict as of the end of May 1951. Residential loans bulk large insured by the FHA and guaranteed by the Vet erans’ Administration have been increasing rap idly in importance during the postwar era of liberal financing terms, however, and now total nearly 2.4 billion dollars for District lenders. Pattern of holdings v arie s w idely As might be expected, mortgage loans on residential properties predominate in the in vestment portfolios of District lenders. These account for 83 per cent of total holdings, as compared with 6 per cent for loans on farms, and 11 per cent for all other nonresidential prop erties. The great importance of residential loans is partly a result of the postwar boom in home building, since a substantial majority of the more than five million dwelling units started in the nation since the war undoubtedly required financing. In addition, farmers and industrial and commercial concerns have other sources of funds to turn to for financing, and such in come-producing properties generally can be expected to pay for themselves more quickly than owner-occupied homes. Of the residential mortgage holdings, non insured conventional loans continue to be most important, amounting to 2.8 billion dollars or more than half of all home loans. Mortgages Sharp differences in the relative importance of the several types of mortgage holdings are evident among major classes of District lenders. Savings and loan associations, on the one hand, specialize in making home mortgage loans. Resi dential loans, therefore, account for more than 98 per cent of their total holdings, and the great bulk of these loans are of the noninsured conventional type. Associations have generally avoided making FHA loans in large volume, although they have been a major competitor for VA guaranteed loans in the postwar period and currently hold more than any other type of lender in the District. In contrast, insurance companies have en tered the insured mortgage market in a big way. Their holdings of FHA and VA mortgages are nearly triple those of conventional residential loans. Investment operations of these firms fre quently are nationwide, and consequently the —continued on page 13 Mortgage holdings of Seventh District registrants, May 31, 1951 N u m b e r o f reg istran ts W ith m o rtg a g es S a v in g s a n d lo a n a s s o c ia tio n s B an ks a n d trust co m p a n ie s In su ra n c e co m p a n ie s M o rtg a g e c o m p a n ie s, b u ild e rs a n d fin a n c ia l in te rm e d ia rie s1 O th e r le n d e rs 2 T o ta l No ho ld in g s M o rtg a g e h o ld in g s (In m illions) For ow n account S e rv ic in g fo r others 710 1,633 111 0 5 3 $ 2 ,1 3 4 1,914 1,752 $ 1,252 809 4 ,5 1 5 840 527 1,375 243 190 $ 6 ,2 3 3 868 250 $ 1 ,3 9 4 47 226 3 ^Includes mortgage and real estate brokers and agents, developers, contractors, and material and equipment dealers. ^Includes educational and charitable institutions, small loan companies, individual trustees, investors, and other lenders. 7 OF n r e c e n t w ee k s evidence has been accumu lating to support the view that the half-year res pite from inflation is nearing its end. For six months consumers have been digesting the ac quisitions of their winter buying orgy, and busi nessmen have been attempting to work swollen or unbalanced inventories into line. Meanwhile, arms spending has been moving steadily upward —from an annual rate of almost 30 billion in March to about 40 billion now. By mid-’52 de fense outlays are scheduled to reach a 65 bil lion rate. Projected mobilization plans appear to have been firmed by the studied truculence of Red negotiators in recent conferences. Many doubt ers have been convinced that the present arms program represents a minimum contribution to national security. Congress reflected this resolve in its speedy passage of the 60 billion dollar defense appropriation bill which includes a siz able additional allotment for special weapons. In any case, concern over the threat of a recession is disappearing, at least for the time being. Seasonal trends are pushing most business measures upward. In addition, it would appear that the high income and favorable financial position of individuals and business firms will result in a potentially heavy pressure of demand upon shrinking supplies of some products. Re strictions upon the output of new cars and dwellings will release additional consumer cash for other uses. Large stocks of durables now appear less as a burden and more as a bulwark against the inroads of demand in the months ahead. Meanwhile, cracks have been opened in the price and credit control levees. Higher price ceilings requested by the principal automobile I 8 Business Conditions, October 1951 BUSINESS firms indicate a belief that the market will ab sorb projected production schedules. Recently, sales of new passenger cars have been exceeding production. Inventories of car dealers fell 20 per cent between June and September. To the extent that inflationary forces reassert themselves this fall and winter, the course of events is likely to be smoother and saner than in earlier months. Spectacular rises in spot prices for such imported commodities as natural rub ber, wool, and tin are unlikely to be repeated in the months ahead, now that the initial impact of renewed, large-scale Government purchases has been absorbed. General business activity remained at a high level throughout the summer. District business failures in recent months have averaged less than two-thirds of the number recorded last year. Unemployment nationally in August was at the lowest level since 1945. The weak spot in employment in this area has been in the au- Business loans at large banks in the District are rising at a rate close to that of last year Percentage cumulative change, june to September tomobile cities. But even in Michigan unem ployment compensation claims in recent weeks have appeared large only when compared with periods of extreme labor shortages in past years. Personnel managers in the Chicago area report some increase in the number of persons seek ing employment, but many of the applicants are housewives who have entered the job market because of rising family costs. The Purchasing Agents Association of Chi cago in its September report offers a number of clues to the future course of events. Inven tories of most of these firms are stable or show a slight decline. Deliveries are somewhat slower, and more agents report that the “lead-time” on new orders has increased to 90 days or more. Most important, 20 per cent of the agents re port higher prices in August, sharply reversing a four month trend. Sales of some of the “weak sisters,” furniture, TV, and refrigerators, appear to be reviving. This development can be traced to price cuts, easier credit terms, and increased promotional activity, particularly stepped-up advertising campaigns. In addition, it may be that the nation has moved through the period when most of the “antici patory” buying of earlier months would have occurred in the absence of special influences. District department store sales, which fell far Department store sales in the District have been strong but continue to trail behind 1950 P«r cent, 1950 overage weekly sales =100 below the frenzied year-ago levels in midsum mer, have been holding close to the 1950 figures in recent weeks. Retail inventories, seasonally adjusted, have been sliding off since April. Those merchants who estimated fourth quarter sales pessimistically may find that their stocks are inadequate. Allowable metal use in the fourth quarter has been cut back below previous estimates. In the October-December period, civilian durable producers may use only 58 per cent of the steel, 54 per cent of the copper, and 46 per cent of the aluminum which they used in the pre-Korean period. Nevertheless, these reduced allotments would still permit the maintenance of produc tion of appliances and TV at about third quarter levels. W ar work continues to be hampered by shortages of machine tools, special metals, and skilled workers. To speed arms deliveries, a super-priority designation, DX, has been cre ated to take precedence over simple DO orders. Deliveries are being stepped up rapidly on contracts which are small in size or which can be handled without extensive new facilities. But in the case of the largest orders, mass produc tion must wait upon the construction or reha bilitation of needed space. Plants operated by auto firms in the Detroit, Chicago, Indianapo lis, and Kenosha areas will supply a major share of the engines for a greatly expanded air force. However, the heaviest demand for work ers on the part of these plants probably will not occur until early next year. Business loans in District centers rose more rapidly in August and early September than they did in the like period a year ago, despite the fact that some firms were reducing inven tories. About half of the rise is attributed to defense work. Requests for V-loan guarantees on loans to defense contractors have been in creasing in number ever since the program was re-established last October. Currently, applica tions are being filed at a rate more than double that of the first of the year. 9 Farm Machinery Outlook Good Farm mechanization is accelerating. Rising farm income will maintain demand. Priority assistance will help manufacturers—concentrated in Midwest—maintain high level output. T h e farm m achin ery industry has experi enced phenomenal growth during the past 10 years. Manufacture, as well as a large share of the farm market, is concentrated in the Mid west. Therefore, industry sales and financing habits are important to District financial insti tutions. Farm m echanization booms The amount of mechanical power and ma chinery on farms doubled from 1940 to 1949, then increased an additional 12 per cent in 1950. In dollar value, the investment in tools for farm production increased from 3 billion to 14 billion. This startling increase resulted from several factors. Foremost was high farm income which provided the necessary funds. Important also were farm labor shortages, both actual and feared, when the comfortable cushion of labor abundance in rural areas was eliminated by military requirements and industrial job oppor tunities. These factors caused many farmers to draw generously on their newly enlarged in comes to acquire modern production equip ment. The build-up in mechanical power and machinery on farms probably would have been even more rapid except for the ravenous appe tite of war for steel and other metals. Output per man hour in agriculture increased 40 per cent in the past decade, while employ ment declined by one million, and over-all farm production increased by more than 20 per cent. Rapid mechanization was an important factor in these developments. 10 cut into farm machinery production? How much will rising farm income step up demand? Will fears of shortages and higher prices touch off another wave of buying by farmers and distributors, thereby creating artificial shortages? In the current year farm machinery produc tion and shipments are expected to continue at a very high level, despite the increased use of steel for war materials. The industry’s require ments comprise slightly less than four per cent of total steel production. Even smaller shares of other metals are needed. Farmers were requested early this year to increase production to record levels, and a high level of farm output is likely to be re quired for several years. To achieve such goals, production of farm tractors and machinery must be kept at as high a level as possible. The Farm machinery important on District farms Thousands of units U .S . D istrict states P e rc e n t of U .S .t o t a l 4 ,0 6 3 2 ,3 6 0 4 ,2 7 8 1,035 349 939 2 5 .5 14.8 2 1 .9 1,301 472 3 6 .3 2 ,5 4 2 640 2 5 .2 2,171 853 3 9 .3 Prospects for production T ra c to rs M o to r trucks A u to m o b ile s C o m b in e s an d c o rn p icke rs G r a in d rills a n d b in d ers M a n u re s p re a d e rs an d m ilking m ach in es M o w e rs a n d sid ed e liv e ry ra k e s 4 ,0 6 9 1,158 2 8 .5 How far will the expanding defense program Source: Farm Implement News', January 1, 1951, estimates. Business Conditions, October 1951 Department of Agriculture estimates that farm ers need 15 per cent more new farm machinery than they purchased in 1949, and 20 per cent more repair parts, if the present rate of farm production is to be maintained. This would require more steel than is presently allocated for this use. Orders have been issued by the National Production Authority (NPA) to provide farm machinery manufacturers with priority assist ance in obtaining steel and other necessary materials for production. Manufacturers can request steel allocations under the Controlled Materials Plan which is just now getting into gear. NPA, in the interim, authorized steel for farm machinery production during the third quarter of 1951 equal to that used in the same quarter of 1949, an amount slightly less than was used in the first quarter of this year. The supply can be stretched somewhat by using less steel per unit. Employment in the industry, 12 per cent higher than in 1950, is near the all-time peak reached in 1948. More than 190,000 workers are engaged out of a total manufacturing work force of nearly 16 million. Demand should continue strong Farm income, the most important single fac tor affecting demand for farm machinery, will be at near-record levels this year. It is not ex pected to decline in 1952. Any general expec tation that farm machinery may become scarce or may be priced higher could lead farmers to buy heavily in advance of needs and bring about the very scarcities anticipated. It now appears that there will be shortages of some kinds of farm machinery in the year ahead, and manufacturers’ rising costs indicate moderate price advances. 1950 m arket situation Manufacturers’ shipments of farm machin ery and equipment, including attachments and parts, totaled 1,795 million dollars in 1950, slightly below the 1,813 million reported to Farm machinery prices increased less rapidly than farm products P ar can*, 1 9 4 0 * 1 0 0 the Census Bureau for 1949. Illinois was the leading state, providing nearly one-third of the United States total. Other important states were Wisconsin, Iowa, Michigan, and Indiana. These five Midwest ern states accounted for nearly three-fourths of the U. S. total. Export shipments comprised 13 per cent of the 1950 total, slightly less than in the previous year. The value of domestic trade, however, has increased each year since 1943. The de crease in total shipments was due wholly to the decline in exports. Rapid growth of the industry The farm machinery industry has grown rapidly since 1940. Employment has more than doubled since 1943. Sales have increased five times. Production in terms of units of equip ment has tripled—a remarkable achievement, considering that segments of the industry have been subjected to severe labor disputes during the period. In 1950, there were 1,602 manufacturers op erating 1,677 plants. Thirty years ago the five largest companies were reported to be pro ducing 85 to 90 per cent of the industry’s out 11 put. Entrance of new firms and expansion of some of the smaller ones, however, have altered this picture. Nine leading companies (International Har vester, Deere, Allis-Chalmers, Case, Oliver, Minneapolis-Moline, Massey-Harris, Dearborn, and Ferguson) produce about 60 per cent of the industry’s current total. The 220 companies holding membership in the trade association— Farm Equipment Institute—produce about 80 per cent. More than 2,000 varieties of equipment are manufactured: from simple hand sprayers and dusters to hygienic milking machines, corn pickers, combines, electronically controlled in cubators, and a variety of other items, including gasoline and diesel tractor and power units. Some 30,000 retailers of farm machinery and equipment are served through wholesale distributors or manufacturers’ branch houses. These local dealers, in turn, distribute and serv ice the equipment used on the nation’s 5.4 million farms. Local financing preferred Farmers buy machinery from current in comes or with credit provided by the banker, farm implement dealer, and other local sources. Most purchases in recent years have been made from current income. A survey made by the Bureau of Agricultural Economics in 1948 in- Shipments rose sharply B illio n d o llo rs 2 r dicated that commercial banks supplied about one-half the credit used for machinery pur chases in 1947. However, in earlier years, man ufacturers carried substantial amounts of farm and dealer paper. Some larger concerns still maintain credit facilities in the form of a more or less dormant financing subsidiary or other organization for financing dealers and farmers. Nevertheless, the industry for the most part prefers that such financing be done locally, if possible. When necessary, however, it is pre pared to engage in dealer and farmer financing of machinery purchases to support sales vol ume. Sales of farm machinery have historically followed a seasonal pattern. First quarter sales are the year’s lowest. The second and third quarters are usually highest. This seasonal pat tern disappeared in World War II, but has recently returned, intensified in 1950 by the Korean situation. In addition to the over-all seasonal sales pattern, each item has a seasonal pattern of its own. Prior to World War II production and labor requirements were highly seasonal. Most of the industry was not unionized. During the war years, however, the industry was almost com pletely unionized. In most plants production is now organized on a year-round basis. Farm machinery prices, on the average, have risen steadily from 1939 to the present, but the rise has been less than for most other groups of similar items. Farmers have complained about “high prices” when farm product prices have declined. This reflects the fact that prices of farm products usually change more rapidly than prices of industrial products. In periods of rising prices, of course, this is to the ad vantage of farmers. Midwest a good m arket 1940 12 '41 '42 '43 '44 '45 ‘46 '47 Business Conditions, October 1951 '48 '49 '50 The farm machinery industry is concen trated in and around Chicago, Milwaukee, Detroit, and the Quad cities area, including Rock Island, Davenport, Moline, and East District states lead in farm machinery Moline. More than one-third of the farm trac tor and machinery establishments are located in Seventh District states and nearly threefourths of the industry’s workers are employed here. Several factors are responsible for this con centration. Cyrus McCormick, inventor of the reaper, assisted in starting a reaper factory in Chicago in 1847. Later William Deering became an important farm machinery pro ducer in Chicago, and in 1902 these concerns, along with three other smaller companies, merged to form the present International Har vester Corporation. Today International ac counts for about one-third of total farm ma chinery production. Although this company and others have opened branch factories outside the District, the Midwest area continues to be the leading production center. Then, too, District cities are ideally situated with respect to sources of steel and other raw materials. Closely allied is the extensive rail transportation system which radiates from Chicago and provides easy access to both world and domestic markets. Highly important, of course, is the large near-by mar ket provided by farms in the Midwest. The value of implements and machinery on farms in Seventh District states constituted 26 per cent of the nation’s total of 5.1 billion dollars in 1945. Thus, the future of the industry and of Midwest agriculture are closely related. Regulation X continued from page 7 safety, uniformity of building standards, and greater marketability of insured mortgages are attractive to them as “arm’s length” debt hold ers. Moreover, insurance companies are the most important holders of nonresidential mort gages in the District, with farm and other busi ness loans totaling 500 million dollars. The pattern of bank mortgage holdings falls in between those of the other two major types of lenders. Like savings and loan associations, banks lend primarily in their immediate geo graphical area. Unlike associations, however, they have invested more heavily in insured mort gages, FHA and VA loans amounting to half of their residential portfolio. This may be ac counted for in part by the generally stricter down payment and maturity requirements on conventional loans required by banking laws, and also to the greater safety and liquidity of the insured mortgage investment. In addition, banks hold nearly as large a proportion of farm and other nonresidential mortgage loans as do insurance companies, and are much more ac tive in the servicing of loans for others than either of the other major types of lenders. Mortgage companies, mortgage and real es- Types of moil:gages held vary widely by investor classes Million dollars trust cos. companies and loans investors 13 Conventional mortgages on residential dwellings lead in portfolios of District lenders B illio n d o llo rs tate brokers, and other financial intermediaries in the building and sale of homes are relatively unimportant in this District as holders of mort gage loans, although numerically they are the largest group of registrants. As financial inter mediaries, their more significant activity is in the origination of mortgage loans for resale to other lending institutions. Frequently, such loans are serviced by them for the purchasing institution for a specified fee. Total loans being serviced for others by this group at the end of May was nearly four times the amount held for their own account, and comprised more than three-fifths of all loans being serviced for others by lenders in the Seventh District. E bond sales continued from page 3 expenditures of a more or less nonessential nature by businesses or consumers. If individuals purchase savings bonds, how ever, a direct and certain transfer of purchasing power from the saver to the Government oc curs, just as with the payment of taxes. The investment in savings bonds reduces the need for inflationary sale of bonds to the banking system by the Government, and thus in a very real sense helps both to meet the cost of the 14 Business Conditions, October 1951 defense effort and to combat the inflationary pressures arising from it. Savings bonds are a good buy Apart from patriotic motives, the character istics of savings bonds merit their inclusion as an important part of an individual’s savings program. Over the years they are the safest kind of investment that can be made, since re payment rests upon the unlimited taxing power of the Federal Government and its ability to borrow from the banking system as well. In addition, they may be redeemed quickly and conveniently through any bank or post office, whenever the funds are needed. The return which is paid on savings bonds appears to be reasonable, considering the safety and liquidity of the investment. If held for 10 years, they yield 2.9 per cent, or four dollars for every three invested. There is a penalty in the form of a reduced rate of return for redemption of bonds before maturity, but yield in these cases presumably is secondary to obtaining the funds when needed. Finally, it is easy and convenient to purchase savings bonds. They are sold in denominations Highest redemptions were in bonds recently issued B illio n dollors yeof of Note: partially estimated. issue ranging from 25 dollars, and may be bought as part of a continuing program of savings, through specified and regular deductions by an individual’s employer or by his bank. By far the most important criticism that has been made against savings bonds as an invest ment is that they afford no protection against possible declines in the purchasing power of the dollar. The sharp increase in prices in the past decade gives this argument added force, since the billions of dollars invested during the war years will buy far less now than they would have then. It is commonly stated that real es tate or common stock would have been a much better investment, since the value of these assets tended to increase with the rise in prices. What is frequently overlooked is that the same lack of protection against purchasing power risk applies equally to corporate and municipal bonds, savings deposits, savings and loan association share accounts, life insurance policies, and every other investment which re pays the holder in a fixed number of dollars. Granted there is a need for investment outlets in which people can accumulate funds with safety and in liquid form for use in an emerg ency, for retirement or to finance planned purchases in the future, savings bonds compare favorably with other types of savings media. It must be recognized also that there is a substantial degree of risk in common stock or real estate investment which many people can not or do not wish to assume. This risk is height ened in the case of families of moderate means by inability to diversify investments adequately and frequently by lack of knowledge concerning the workings of the financial markets. Some equities depreciate in value even during periods of inflation and many do not increase propor tionately with the market averages. Moreover, such families probably would rely most heavily on accumulated savings during periods of de clining business activity and increasing unem ployment—the very time when equity invest ments are likely to fall sharply in value. C attle fe e d in g continued from page 6 Feeding heavy cattle is generally considered more risky than feeding the lighter weights. This year, however, the view that prices will not decline in the next three to four months appears to be very firmly held by many farmers. Their interest in heavy cattle, therefore, is heightened. Prospects of a large amount of soft corn and ample supplies of roughage also contribute to the interest in heavy cattle as they can handle such feeds to good advantage. These factors may result in large marketings of shortfed cattle about year-end. C a ttle p u rc h a se s in v o lv e c re d it The investment required to obtain feeder cattle frequently is very substantial relative to a farmer’s total capital or net worth. Credit, therefore, is important to most cattle feeders. The demand on Midwest country banks for “feeder loans” is very active. Credit require ments are increased, of course, by the high price of feeder cattle. A common banking prac tice over the years has been to loan the value of the cattle to farmers who are experienced feeders and have adequate feed on hand to carry through a definite program. Currently, the very large investment required per animal has caused some lenders to restrict loans to less than the acquisition cost of the cattle. In gen eral, however, adequate funds are available to finance cattle feeders this fall, and the over-all outlook appears to warrant both a large volume of feeding and extension of the necessary amount of credit. Business Conditions is published monthly by the FEDERAL reserve bank OF CHICAGO. 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 Bank of Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited. 15 Time deposits Although rising again, they still lag behind other savings. deposits in Mid w estern banks have snapped out of their post-Korean slump. Since the end of March, District time deposits have grown more than 150 million dollars. They not only recouped net withdrawals made during the two big buying waves of July-August 1950 and January 1951, but also recorded the heavi est gain in any comparable period since 1947. Seventh District member banks had a net time deposit gain of 2.6 per cent in the first seven months of 1951, a rate of growth two-thirds greater than the rest of the nation’s banks. Despite this recent revival, commercial bank time deposits are not faring as well as other sav ings media in the current savings boom. Nor have they managed to hold their own over most of the past decade—a period of unprecedented savings accumulation. Although these deposits grew very rapidly during the war—doubled, in fact—this trend was overshadowed by the flood of dollars into savings bonds. Since the end of the war, savings and loan shares and de posits in mutual savings banks have forged steadily ahead, while the total of privately-held time deposits has remained practically stable. In 1940 time deposits constituted 26 per cent of total savings in life insurance, savings bonds, mutual savings bank deposits, time deposits, savings and loan shares, and postal savings. By 1950 this ratio had dropped to 20 per cent. Why have time deposits failed to maintain a stronger relative position? In wartime they gained relative to other private media, but the entire savings scene was dominated by the new savings bonds. In the postwar years, they have lost to every savings outlet—even savings bonds which, in spite of languishing net sales, have continued to grow, largely through the auto matic increase in redemption value of out T im e 16 Business Conditions, October 1951 standings. One reason why mutual savings bank deposits and savings and loan shares have topped time deposits is probably the difference in rates of return. Although commercial banks have been increasing time deposit rates, they have not matched the higher and aggressively advertised yields paid by these other institutions. Maybe a more basic reason lies in the attrac tiveness of savings contracts which include special features in addition to interest return. Savings accumulations in life insurance carry with them guaranteed financial protection against old-age and emergency risks. Savings and loan associations—the postwar leadercombine a high rate of return with borrowing privileges significant in a period of record home buying. The appeal of these more apparent and understandable added values may be dimming the more intangible features of prime liquidity and safety in which time deposits excel. Time deposits, like E bonds, have been almost static since 1946 B illio n do llar*
@FedFRASER