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A review by the Federal Reserve Bank of Chicago

Business
Conditions
1967 October

Contents
Federal funds,
how banks use the market
Shifts in District farming:
Strong rise in grain production

2

11

Federal Reserve Bank of Chicago

Federal funds,
how banks use the market
O
f all the market instruments banks use
to mobilize short-term money, Federal funds
are the shortest and most flexible. A member
bank in the Federal Reserve System with sur­
plus funds in its reserve account can lend
(sell) them to another bank that wants to
borrow (buy) reserves. Unlike most other
loans or asset adjustments, these transactions
affect the cash positions of the participating
banks immediately and are reversed the fol­
lowing business day.
Through these arrangements, a large
amount of reserves is moved about within the
banking system every business day. A se­
lected group of the nation’s major banks
report daily transactions averaging well over
4 billion dollars, and the “Federal funds
rate” is widely used as a barometer of
money market pressures.1 Most of the dollar
amounts traded daily in the Federal funds
market involve very large banks—those with
deposits of more than a half billion dollars.
Some of their operations are undertaken as
accommodations to smaller banks that keep
correspondent balances with them, providing
a channel through which the smaller banks
can gain access to the national money market.
Data reported to the Federal Reserve Bank
of Chicago since last fall record the actual
amounts of Federal funds purchased and sold
daily by each member bank in the Seventh
Federal Reserve District. This information
provides an up-to-date indication of the ex-

2

Transactions reported daily by 46 banks are
published with related reserve position items every
month in the Federal Reserve Bulletin.




tent to which banks of different sizes partici­
pate in this market, the overall effect of their
transactions on the supply and demand for
funds and the pattern of their activities
through a six-month period.
These data confirm that as a source of cash
to meet short-run needs, Federal funds are
still mainly a tool of large banks. The data
show, however, that the market constituted
a very important investment outlet to smaller
banks and that the flow of funds from the
smaller banks was both significantly large
and remarkably stable over the period studied.

Participation
in Federal funds market
drops sharply with bank size*
percent of member banks

Reserve I---------------------------- country banks--------------------------- 1
City banks over 100 50-100
2 5 -5 0
10-25
under 10
deposit size in million dollars

*B a s e d on rep o rts fo r J a n u a r y 5 to Ju n e 2 1 , 1967

Business Conditions, October 1967

There were 995 member banks in the
Seventh District in January 1967. The 26
largest banks in Chicago, Detroit, Milwaukee,
Indianapolis and Des Moines are classified as
Reserve City banks. All others are “country”
banks. In the main, the country banks are

Federal funds is a short term for Federal
Reserve funds— deposits in Federal Reserve
Banks. All member banks maintain such de­
posits, which serve as working balances as
well as legal reserves.
Federal Reserve wire facilities can be used
to transfer funds between two banks that
have balances in Federal Reserve Banks.
Such transfers are made constantly in the
ordinary course of business.
Federal funds transactions are one-day
loans of these balances, or claims to them,
at specified rates of interest, that result in
immediate adjustments in the cash positions
of the banks involved.
The transactions can be negotiated directly
between the participating banks, or through
brokers. The seller instructs its Federal Re­
serve Bank to transfer the funds to the buyer
on the day the loan is made, and the buyer
repays the following business day by instruct­
ing the Federal Reserve to transfer the funds
back to the seller.
Although Federal funds transactions are
mainly unsecured overnight interbank loans,
individual contracts can take other forms and
occasionally involve nonbank participants.
But all such transactions are basically the
same: they permit a bank to acquire or dis­
pose of immediately available funds.
A t the close of each reserve period (a
period in which average reserves must at
least equal the percentage of average deposits
required by law) all Seventh District member




smaller, although there are 33 with deposits
in excess of 100 million dollars.
A total of 450 banks reported at least one
transaction in Federal funds during the 12
biweekly country bank reserve periods in the
first half of 1967. Included were all the Re-

banks report their Federal funds purchases
and sales to the Federal Reserve Bank of
Chicago. These reports supplied the statistical
evidence used in this article. The banks report
their transactions according to the following
instructions for the preparation of official
reports of condition:
Include as Federal funds sold (bought)
. . . all transactions involving the disposition
(acquisition) of immediately available
funds for one business day only, at a speci­
fied rate of interest. . . .
Include all transactions through credits
(debits) to new or existing balances due
from a correspondent bank (due to depos­
itors) when such transactions otherwise
meet the above definition.
Include all sales (purchases) that meet
this definition that are made with other
commercial banks, Government securities
dealers, foreign agencies, and any other
firm, institution or organization. However,
transactions with (borrowings from) a
Government securities dealer which are
secured by Treasury securities or any other
form of security issue should not be classi­
fied as a Federal funds sale (purchase).
Do not include in this item any sales
(purchases) under contracts which are
specifically written to mature in two or
more business days, or require advance
notice to terminate. But all continuing con­
tracts, which are defined as those which
remain in effect for more than one day but
have no specified maturity and do not re­
quire advance notice to terminate, should
be included.
3

Federal Reserve Bank of Chicago

4

serve City banks, all the country banks with
deposits of more than 100 million dollars
and all but 3 percent of country banks with
deposits between 50 and 100 million dollars.
Participation declined with bank size,
especially with respect to the purchase of
funds. Among the smallest banks (those with
deposits of 10 million dollars or less) only 10
percent purchased funds, while 21 percent
reported funds sold during the period. Half
the District’s member banks are in this small­
est size category.
The number of District country banks re­
porting Federal funds transactions this year
is nearly twice the number estimated three
years ago. The entrance of more banks into
the market reflects several factors, including
greater knowledge of the market, its greater
accessibility and greater incentives to use it.
In recent years both rising costs and the
higher interest rates available on all types of
investments have encouraged smaller banks
to move toward more efficient management of
their cash and fuller use of available re­
sources. At the same time, fewer liquid assets
and strong loan demands have increased the
need for a reliable way to obtain short-term
funds. Even more important perhaps is the
increased willingness of some large banks to
buy or sell Federal funds as a service to cor­
respondents and to deal in smaller amounts
than the traditional 1 million dollar minimum
trading unit. A few country banks reported
transactions as small as $25,000.
In addition, small sales have been facil­
itated through the practice of some city
correspondents transferring part of the de­
posit balance of country banks (the part ex­
ceeding the amount required for clearing
operations and as a compensation for corres­
pondent services) to bills payable accounts
on which interest is paid. Although this bookkeeping transfer does not actually increase




the available funds of the “buying” bank, it
has the effect of retaining funds that might
otherwise be drawn away. Such transfers can
be made for nonmember as well as member
banks, but they are not handled through re­
serve accounts held at the Federal Reserve.
They are, nevertheless, considered Federal
funds transactions.
D istrict h as n e t in flo w . . .

During the first half of 1967, Seventh
District member banks bought an average of
850 million dollars a day in the Federal funds
market, while their gross sales averaged 730
million dollars— a net daily average inflow
of 120 million dollars. Eight large city banks
with transactions included in the published
series accounted for 630 million dollars of the
purchases and 220 million of the sales.
The high concentration of purchases and
sales at a few banks is partly a function of the
size of these banks. (They account for more
than a third of the deposits of all member
banks in the District.) But it also reflects the
role these banks play as intermediaries in the

Daily average transactions
in Federal funds,
January 5 to June 21, 1967
S e ven th D istrict
m em b er b a n ks

T o tal
b anks

Pu rch ase s

(n u m b e r)

S a le s

N et
p u rc h a se s

(m illio n d o lla rs )

R e se rve C it y b a n k s
La rg e st C h ic a g o
A ll o th er

5

5 4 5 .0

1 80 .7

3 6 4 .3

21

2 6 2 .3

1 68 .9

9 3 .4

- 9 4 .8

C o u n try b a n k s b y d e p o sit size
(m illio n d o lla rs )
O v e r 100

33

15.6

1 10 .4

5 0-100

73

18.0

111.2

- 9 3 .2

117

6.1

8 4.8

- 7 8 .7

25-50
10-25

2 47

2 .4

5 7 .6

- 5 5 .2

U nd er 10

4 99

2.1

18.4

- 1 6 .3

995

8 5 1 .5

7 3 2 .0

1 19 .5

A ll b a n k s

Business Conditions, October 1967

Large city banks
had net purchases of funds
throughout first half of 1967 . . .
m illion dollars

Sales by country banks of all sizes, on the
other hand, were substantially greater than
purchases, with a daily net of 338 million
dollars of funds supplied to the market during
the six-month period. A considerable portion
of these funds probably was sold to pur­
chasers elsewhere in the District. Unlike the
giant money market banks, individual country
banks do not normally operate on both sides
of the market at the same time. Some, how­
ever, are purchasers or sellers at any time,
depending on their needs.
. . . alth o u g h m ost b a n k s sell

million dollars

* D a ily a v e r a g e s fo r tw o -w e e k p erio d s.

Federal funds market— acting as both buyers
and sellers on any given day but with a net
position for the reserve week that is pre­
sumably in accord with their own needs.
On an average day between January and
June, the five largest banks in Chicago to­
gether absorbed 364 million dollars through
Federal funds transactions. Other Reserve
City banks were also net buyers of funds. To­
gether, all Reserve City banks accounted for
nearly 95 percent of gross purchases and
about half the total sales. The average net
amount of funds they acquired from the mar­
ket was equal to about a fourth of their aggre­
gate required reserves. The net purchases of
a few banks exceeded their required reserves,
on the average.




While District banks in the aggregate ab­
sorbed more funds from other areas than they
supplied to them, only a small number of
banks used the market as a source of funds.
Of the 424 country banks that reported some
activity in the Federal funds market, less
than half indicated they had acquired funds
through this channel. Most of those that ac­
quired Federal funds reported purchases on
less than ten days out of the 168 days studied
—including Saturdays, Sundays and holidays
on which transactions remained outstanding
from the previous business day. Nevertheless,
19 country banks were in the market exclu­
sively as buyers, and 11 of them were banks
with total deposits of less than 10 million
dollars.
Except for the large city banks, most par­
ticipants sold funds much more frequently
than they bought them, with most of the
sellers in the market at least a fourth of the
time. Sixty country banks reported sales on
more than 150 days.
As might be expected, the aggregate dollar
amount of transactions by small banks did not
add greatly to the overall activity. Banks with
deposits less than 50 million dollars—85
percent of the District’s member banks—
accounted for only 22 percent of the funds

5

Federal Reserve Bank of Chicago

Frequency of transactions
in Federal funds market,
January 5 to June 21, 1967*
S e ven th

La rg e s t

O th e r

D istrict

C h ic a g o

R e se rve

m em b er b a n k s

b anks

C o u n try b a n k s by d ep o sit size
(m illio n d o lla rs )

C it y b a n k s

O v e r 50

1 0 -5 0

U n d er 10

(n u m b e r o f b a nks)
T o tal m em b er b a n k s

5

106

21

364

4 99

B a n k s re p o rtin g p u rc h a se s on
No d a y s

0

0

41

252

4 49

1-10 d a y s

0

0

29

67

32

11 -25 d a y s

0

5

18

29

9

26-1 0 0 d a y s

0

4

11

15

5

101-150 d a y s

0

1

4

0

2

O v e r 150 d a y s

5

11

3

1

2

B a n k s rep o rtin g sa le s on
No d a y s

0

0

3

142

3 94

1-10 d a y s

0

0

3

17

16

11-25 d a y s

0

0

6

16

9

26-1 0 0 d a y s

0

10

42

107

40

101-150 d a y s

1

6

39

54

2.1

O v e r 150 d a y s

4

5

13

28

19

* A to ta l o f 168 d a y s , in clu d in g S a tu r d a y s , S u n d a y s an d h o lid a y s on
w h ich tra n s a c tio n s w e re o u ts ta n d in g .

Range of individual bank transactions
in Federal funds, January 5 to June 21, 1967
S e ven th D istrict
m em b er b a n k s

D a ily a v e r a g e *
S in g le d a y
la rg e s t am o u n t am o u n ts p u rch ase d
Pu rch ase d

Sold

Lo w e st

H ig h est

S in g le d a y
am o u n ts sold
Lo w est

H ig h est

(th o u sa n d d o lla rs )
R e se rve C ity B a n k s
La rg e st C h ic a g o
A ll o th e r

2 1 6 ,5 0 8

65,981

100

4 9 5 ,8 0 0

150

3 8 4 ,6 0 0

7 8 ,0 0 9

2 4 ,3 1 6

70

1 2 0 ,0 0 0

100

7 5 ,0 0 0

C o u n try b a n k s b y d e p o sit size
(m illio n d o lla rs )
O v e r 100

7,531

2 0 ,8 3 6

100

2 0 ,8 0 0

100

6 0 ,0 0 0

50-100

4 ,6 2 0

6 ,4 1 4

50

1 2,2 0 0

100

2 2 ,3 0 0

25-50

792

5 ,0 6 3

30

7 ,5 0 0

50

13,0 0 0

10-25

379

2,511

100

2 ,6 0 0

100

4 ,5 0 0

U n d er 10

282

1 ,32 4

50

1 ,50 0

25

1 ,800

* A v e ra g e o f 168 d a y s in clu d in g S a tu r d a y s , S u n d a y s a n d h o lid a y s
on w h ich tra n s a c tio n s w e re o u ts ta n d in g .




sold and an insignificant share of
funds purchased.
Small banks that were active,
however, occasionally reported
large transactions relative to their
size. Purchases as large as 1.5
million dollars on a single day
were recorded for banks with de­
posits less than 10 million dollars,
and while most small banks that
bought funds did so infrequently,
a few reported purchases nearly
every day of the period. In a few
cases, the daily average amount
acquired was equal to nearly twice
the bank’s required reserves.
There were 22 banks with aver­
age daily sales of funds in the first
or second quarter greater than 10
percent of their total deposits at
the close of last year. Most of
these had less than 10 million
dollars in deposits. In a few cases,
up to a fifth of deposit funds were
invested in overnight loans to
other banks.
For the most part, banks with
relatively heavy sales were in the
market almost continuously, often
selling the same amount day after
day for extended periods. For
these banks, the market is not
merely an adjustment mechanism
through which to offset tempor­
ary imbalances between available
funds and customer credit needs
but an alternative to investments
in securities or loans.
Why do banks invest such sub­
stantial sums for only one day at a
time, when they could buy securi­
ties with equivalent yields? Not all
bank managers are motivated the

Business Conditions, October 1967

same, of course, but two factors of consider­
able importance earlier this year were the
pattern of interest rates and the relatively low
level of bank liquidity.
Because of the strong demand for Federal
funds by large city banks, the interest rate
remained high relative to the yield on Treas­
ury bills and other short-term Government
securities. On only 12 of 120 business days
covered did the three-month bill yield exceed
the effective Federal funds rate.2 Moreover,
earnings on Federal funds in 1966 had been
very high. The effective rate averaged 5.11
percent for the year compared with a market
yield of 4.85 percent on three-month bills.
Although the differential is smaller when
calculated on the basis of investment yield on
bills, costs for buying and selling bills are
greater than for Federal funds and liquidation
of bills before maturity involves some risk
of loss due to price declines. Federal funds
loans are second only to cash in providing

Rates paid for Federal funds
exceeded yields on 3-month bills
from mid-1966 to mid-1967
percent

1966




1967

liquidity; they can be renewed or not every
day as the seller chooses.
S ta b ility o v e r tim e

The positions of Seventh District banks as
buyers and sellers in the market remained
quite stable throughout the first half of the
year. Country banks supplied funds in each
of the 12 biweekly reserve periods, and the
amount supplied by the smaller banks gradu­
ally rose. Fluctuations in net sales were
greater for the larger country banks, reflecting
the activity of the few fairly large country
banks that occasionally buy or sell substantial
amounts of funds.
The number of banks participating in the
market at any one time was also stable.
Among the large country banks—nearly all
of which sold funds sometime during the sixmonth period—more than three-fourths re­
ported transactions during every two-week
reserve period. Even among the smallest
banks, where only a fifth were in the market
at all, at least 60 percent of the “active” banks
were in the market every reporting period
and at least a third reported sales every day.
The pattern of activity was not as regular
for large city banks. While the amounts pur­
chased varied greatly from day to day and
week to week, the large banks as a group
absorbed funds throughout the six months.
While nearly half of them were net sellers,
sales were persistently smaller in amount
than purchases, reflecting heavy demands for
funds by the largest banks.
Whether the 1967 experience is typical of
longer periods cannot be determined on the
basis of these data alone. But comparison of
the activities of large banks with information
available from the national series on Federal
T he rate paid on the largest volume of trans­
actions reported by the Federal Reserve Bank of
New York.

7

Federal Reserve Bank of Chicago

funds (where the five largest Chicago banks
are shown as a separate category) suggests
that the variation in the net position of these
banks was probably smaller than normal in
the first six months of 1967.
The national series, which goes back to
1959, shows that at times these banks have
been on the sales side of the market for ex­
tended periods. A case in point is the exper­
ience during August and September of this
year, when the large Chicago banks averaged
net sales of 200 million to 300 million dollars
a day. Preliminary tabulations for other
banks during this time indicate increased net
purchases by District Reserve City banks
other than the big five and a sharp reduction
in the net amount of funds sold by larger
country banks. This was also a period when
yields on short-term Governments moved
above the Federal funds rate.
S h o rt-ru n v a ria tio n in s a le s

The amount of funds sold by country
banks on a single day varied from a minimum
of 225 million dollars to a maximum of 500
million. It is often assumed that the impact
of country bank sales on the market is

affected by the timing of their Federal funds
transactions—that heavier sales late in the
two-week period contribute to the ease in
overall reserve availability that often develops
toward the close of the period.
However, the daily sales figures for Seventh
District banks do not indicate that reserve
surpluses were regularly channeled into the
Federal funds market at any particular time
during the two-week period. In the first
quarter of 1967, 48 percent of country bank
sales were made in the first week of the
average period and 52 percent were made in
the second, with the distribution remarkably
even within these periods.
Nevertheless, the volume of sales appears
to drop sharply around the end of each
month. This may be associated with the
monthly pattern of float that tends to reduce
the deposits of country banks toward the end
of the month, when the amount of uncol­
lected items is low. In the short run, country
bank sales do not appear to be influenced
significantly by the attractiveness of the Fed­
eral funds rate relative to the yield on Treas­
ury bills. Recent experience clearly shows,
however, that the larger banks reduce their

Percent of banks buying or selling Federal funds
in periods of various lengths, January 5 to June 21, 1967
Seventh District
member banks

During
6-month
period

Bonks buying Federal funds_________________
During an y
two-week period
On any d ay
Minimum M aximum Minimum M aximum
(percent of banks)

_________________ Banks selling Federal funds
During
During any
6-month
two-week period
On any day
period
Minimum M aximum Minimum M aximum
(percent o f banks)

R e se rve C ity b an ks
La rg e st C h ic a g o 100
A ll o th e r

100

100

100

100

100

100

100

100

60

100

62

90

52

81

100

67

90

33

76

C o u n try b a n k s b y d e p o sit size
(m illio n d o lla rs )
O v e r 100

73

24

42

6

27

100

85

97

33

82

50-100

59

18

27

3

18

97

78

86

37

68

25-50

44

9

25

1

13

79

59

71

24

59

10-25

24

4

10

0

4

53

33

41

13

32

U n d er 10

10

2

4

1

3

21

13

16

8

13




Business Conditions, October 1967

Distribution of Federal funds sold
by District country member banks
in an average reserve period*
A v e ra g e p ro p o rtio n sold on e ach b u sin ess d a y
B u si­
ness

A ll
co u n try

O v e r 100 50-1 0 0 2 5-50 10-25 U n d er 10

day

C o u n try b a n k s b y d e p o sit size
(m illio n d o lla rs )

b a n ks

(p e rcen t)
1

9 .7

8 .0

9.1

8 .7

8 .9

2

10.5

10.2

10.4

10.7

10.0

3

10.5

9.3

9 .8

9.8

9 .8

9 .8

4

8 .6

10.3

9 .9

9 .8

10.4

9 .6

5

9 .0

9 .5

9 .2

9.8

9 .6

(F irs t w k .)

(4 8 .3 )

(4 7 .3 ) (4 7 .4 ) (4 8 .2 )

(4 8 .7 )

8.8
.

10.4

9.3
(4 7 .9 )

6

9 .5

9 .4

10.2

9 .8

10.2

9 .7

7

9 .6

10.2

10.8

10.9

11.8

10.3

8

11.5

11.1

10.6

10.3

10.3

11.0

9

10.9

11.9

11.0

10.5

10.4

11.1

9.1

9.8

9 .6

10.0

1 00 .0 1 00.0

1 00.0

1 00.0

10

10.3

Total

10.3

1 00 .0

1 00.0

* B a s e d on b u sin e ss d a y tra n s a c tio n s o n ly , b eg in n in g
w ith f ir s t T h u rs d a y a n d e n d in g w ith second W e d n e s d a y
o f tw o - w e e k re se rv e p erio d s in s ix re se rve p erio d s in
f ir s t q u a rte r o f 1967.

sales of funds when the differential is nega­
tive for any sustained period.
D em and fa cto rs fo r city b a n k s

Although aggregate country bank trans­
actions are an important element in the mar­
ket, major shifts in the supply-demand condi­
tions of Federal funds mainly reflect changes
in demand by big city banks. It is not unusual
for buyers among the 46 banks in the national
series to acquire a net of more than 3 billion
dollars a day from the market. Individual
banks may switch from net buyers to net
sellers, and at times a large part of the total
volume of transactions is between reporters
in the 46-bank group. Nevertheless, many
large banks tend to remain on one side of the
market or the other for fairly long times.
Shifts from one side to the other have an
important impact on the flow of funds and on




the structure of rates in the money market.
An individual bank can shift positions in
response to changes in credit demand or de­
posit flows. Or, a change in a bank’s position
in the market can reflect other developments
that have changed its liquidity position, such
as the issuance of a block of CDs.
The large, continuous participants in the
money market have many means available
through which to match their cash inflows
and outflows. Federal funds are clearly well
suited to adjusting for day-to-day fluctuations
in deposits and credits. At the same time,
continuous net purchases can provide a sub­
stantial core of funds over longer periods,
though at varying costs. Or, money expected
to be needed to meet near-term loan demand
can be sold on a day-to-day basis pending
such demand.
The choice at any time is likely to be re­
lated to 1) the cost and availability of other
sources of money and 2) expectations of
future trends both in these elements and in
loan demand. In a period when interest rates
are expected to rise, some banks may prefer
to pin down the funds they think they will
need for sometime in advance. When money
is expected to get cheaper, they may finance
“short” to avoid being committed to un­
necessarily high costs.
On the other hand, uncomfortably low
liquidity can increase a bank’s willingness to
pay a bit more for longer-term funds. Legal
and regulatory barriers can also limit the
alternatives at times. In mid-1966, for ex­
ample, Regulation Q ceilings on time deposit
interest rates effectively barred banks from
bidding for CD money.
The high rates on Federal funds through­
out 1966 and the first half of 1967 reflected
strong demands from major banks that could
be attributed to a combination of factors:
• Early in 1966, heavy customer credit de-

9

Federal Reserve Bank of Chicago

mands combined with the reduced ability
to bid for time deposits (as the rates paid
reached statutory ceilings) to sharpen the
search for other sources of money.
• The ability of banks to gain funds for
new loans by selling assets was severely
limited by the shortage of securities in their
portfolios that were not pledged against pub­
lic deposits.
• Continuous borrowing at the discount
window to satisfy loan demand was not con­
sidered an appropriate use of Federal Re­
serve credit.
Federal funds purchased, like other bor­
rowings but unlike deposits, are subject to
neither regulation of interest rate nor reserve
requirements. By paying high rates on over­
night money, the large banks were able to
draw funds from the rest of the banking sys­
tem. Such transactions do not, of course,
increase the lending capacity of the banking
system as a whole, except to the extent that
large banks maintain a higher proportion of

Country banks
show relative decline
in cash assets over past decade
ra tio o f e x ce ss
percent
0
2

4

6

8

re se rv e s to required re se rv e s
10

percent
0
2

4

6

8

10

ra tio o f balan ces due from other ban ks to total d ep o sits
percent
0
2

4

6

8




10

percent
0
2

4

6

8

10

their resources in loans than do small banks.
Waning credit demands and easier mone­
tary policy in the late fall and winter of 196667 saw little abatement in the demands of
large banks for Federal funds. Rates dropped
sharply but by less than yields on some other
money market instruments. Not until after
midyear—when many big banks had rebuilt
a substantial amount of liquidity, regained
and surpassed their previous peak levels of
outstanding CDs and were receiving net loan
paydowns—did they reduce their purchases
markedly.
Less id le cash

The rate may weaken with lessened de­
mand by large banks, but there appears little
risk that small banks will find their corres­
pondents deaf to offers of overnight money.
In the competitive efforts to increase or just
to retain the deposit balances of other banks,
most large correspondent banks accept the
purchase of excess funds as an important part
of the correspondent service package.
As more and more smaller banks have
sought ways to stay more fully invested, cash
balances held with correspondents have been
pared to the amounts considered necessary to
compensate for services used. While the ab­
solute amount of “due from” balances of
country banks has continued to grow over
the past ten years, it represents a declining
proportion of their deposits. Meanwhile, the
ratio of excess reserves to required reserves
has been reduced nearly two-thirds.
The ability of small banks to acquire
Federal funds in significant amounts is less
certain. Although District reports indicate a
few cases of nearly continuous purchases,
most large banks appear to frown on the
practice of their country correspondent’s bor­
rowing overnight money, except to cover
very short-term needs. Nevertheless, it seems

Business Conditions, October 1967

reasonable to expect that a broadening mar­
ket and continued competition for bankers’
balances will further widen the two-way chan­
nel for funds between large and small banks,
especially in times when monetary conditions
are relatively easy.
A more basic reason for the paucity of the
buying activity of most country banks may
stem from the distribution of credit demands.
Most small banks are probably always in
“surplus” situations, with deposit growth
tending to outpace credit demands in the

areas they serve. But in some cases, such sur­
pluses may result from local bankers failing
to recognize and satisfy credit needs in their
communities.
In any case, recent experience has proved
Federal funds a reliable—though sometimes
costly—source of money for large banks,
even in periods of monetary restraint. Such
purchases have tended to redistribute both
reserves and credit toward the money centers
but in a form that allows quick recall by
individual banks.

Shifts in District farming
Strong rise in grain production
( ^ ) n e of the more significant of many recent
changes in Midwest farms has been the shift
from production of livestock and livestock
products to cash grain farming.
The proportion of cash receipts from crops
marketed in the Seventh Federal Reserve Dis­
tricts states increased from slightly less than
29 percent in 1959 to about 35 percent in
1964, based on the Census of Agriculture.
Although there were fewer farms in 1964
than in 1959, the number of farms on which
grain was a major source of income increased
sharply both in number and as a proportion
of the total of all farm types.
This shift in type of farm was especially
evident in Illinois, Indiana and Iowa—the
Corn Belt states of the District—but it also
occurred in Michigan and Wisconsin. The
proportion of cash grain farms (farms deriv­
ing 50 percent or more of their cash receipts
from the sale of such grains as corn, small
grains and soybeans) increased in Illinois




from 38 percent of all farms in 1959 to 48
percent in 1964, from 20 percent to 28 per­
cent in Indiana and from 18 percent to 24
percent in Iowa.

Rise in crop receipts reflects
shift to cash grain farming
percent of total

Federal Reserve Bank of Chicago

At the same time, dairy farms and meat
animal farms declined in most District states,
both in actual numbers and as a proportion
of all farms. In Wisconsin, the nation’s lead­
ing dairy state, dairy farms declined about 14
percent in number and from about 66 percent
of all farms in 1959 to 62 percent in 1964.
Dairy farms dropped about 20 percent in
Michigan, but because of the equally sharp
decline in other types of farms there, the
proportion of dairy farms remained nearly
the same. Almost all the decline, however,
was confined to farms with small herds—the
number of cows per acre actually increasing
slightly in Michigan and Wisconsin.
Fruit and vegetable farms, although ac­
counting for only a small percentage of all
farms, are important in some specialized
areas, especially along Lake Michigan. These
farms increased somewhat relative to other
types in Michigan and Wisconsin but de­
clined or showed little change in the Corn

Cash grain farm s increase
percent
0

10

20

30

40

Illinois

Indiano

Iowa

I Jpercent of total

Michigan

[percent change, 1959-64

Wisconsin

12

I zm
w




50

Belt states. Poultry farms, also of minor im­
portance compared with all farms, declined
in number in all District states, though they
gained slightly relative to other farms in Illi­
nois and Indiana.
The number of meat animal farms also
dropped sharply during 1959-64— down onefourth or more in each Corn Belt state. Some­
what smaller declines in Michigan and Wis­
consin reflected the more limited farming
alternatives in those states.
Shifts within states were not even, but as
might be expected, came in areas where the
alternatives were presumably profitable.
While hog production declined throughout
most of the District, reflecting in part a cycli­
cal downturn, the greatest declines were in
the heavy corn producing areas. This area
coincides roughly with the greatest concen­
tration of hogs per acre. Hog production
actually increased in some southern counties
of Illinois and Indiana, an area of relatively
light concentration of hog and corn pro­
duction.
Cutbacks in beef production, too, were
confined largely to the heavy corn producing
areas. Although the number of cattle on
farms increased overall in line with the
cyclical upswing in cattle numbers, the num­
ber of steers per acre declined in northern
and west central Illinois and in eastern Iowa.
In the heavy corn producing areas of western
Iowa, the number of steers increased, possibly
reflecting the rapid increase in large feedlots
and the growth of slaughter plant capacities
in nearby areas. Steer numbers also increased
in most counties of Michigan and Wisconsin,
partly reflecting the shift from dairy to beef
production on many small farms.
A variety of forces contributed to these
developments, especially to the shift from
the production of livestock to cash grain
farming. Greater possibilities for mechani-

Business Conditions, October 1967

Livestock production has declined
in heavy corn producing areas

percent of crop acres planted to corn in 1964
/e s s

than 2 0

2 0 -3 9

40-49
5 0 an d o v e r
------decline in number of steers per 1,000 acres, 1959-64
------ decline of 50 or more hogs per 1,000 acres, 1959-64




13

Federal Reserve Bank of Chicago

zation of grain farms than other farms have
undoubtedly influenced the trend. Such field
operations as planting, cultivation and har­
vesting have been increasingly mechanized,
allowing crop farmers to do a given amount
of work in less time. This, in turn, has often
allowed them either to handle more acreage,
intensify production or seek part-time em­
ployment off the farm—an opportunity not
usually open to livestock producers.
Also, the development and adoption of
other technological innovations have made
the highly productive land in the Midwest
more suited for intensive cropping. In past
years, accepted cropping practices called for
rotating row crops, such as corn and soy­
beans, with small grains and hay. These prac­
tices often encouraged a supplemental live­
stock program to make use of crops that
could not otherwise be easily marketed. But
in recent years special management practices,
such as contour plowing and cultivation, have
been used to control erosion. New hybrids
have been developed that are resistant to

Crop production per acre
shows sharp gain




Output per manhour
increased rapidly
for feed grains

diseases and insects. New chemicals for weed
and insect control have also aided in main­
taining yields. Chemical fertilizers have been
made available at a cost much less than the
“cost” of growing legumes or producing ferti­
lizer as a by-product of livestock production.
Primarily as a result of these developments,
crop farmers have generally increased pro­
duction more than livestock producers, rela­
tive to the land, labor and capital required.
Crop production per acre, for example, rose
about 14 percent during 1959-64. Corn
production in the Midwest showed an even
more dramatic rise—nearly 18 percent. Al­
though the measure is not entirely compar­
able, livestock production per breeding unit
increased only 8 percent.
The rapidly expanding productivity per
worker on grain farms partly reflects in­
creases in mechanization and per-acre yields.
Production per man rose 80 percent for feed
grains, compared with 50 percent for dairying
and 23 percent on meat animal farms.
Returns on the capital of cash grain pro-

Business Conditions, October 1967

Cash grain farm s experience
steady rise in returns on capital
percent

percent

percent

+2 T hog fatten in gf | L b e e f ra isin g

0i

ii

1-

r

1

■
I
1959

I960

percent

1959

percent

I960

1961

(962

1963

1964

1959

I960

1961

1962

1963

1964

N o te: B ase d on resu lts o f o p e ra tio n o f ty p ic a l or "re p r e s e n ta tiv e " f a rm s ; la b o r w a s c h a rg e d a t a v e ra g e
a n n u a l fa rm w a g e ra te .

ducers in the Midwest also increased steadily
throughout the period.While increased pro­
duction and labor efficiency were partly re­
sponsible for the improved incomes of grain
producers, Government price and income
programs also helped boost the returns. Pay­
ments to crop producers in District states rose
rapidly from 85 million dollars before the
Agricultural Act of 1961 to 523 million in
1964. Where Government payments were
equal to about 4 percent of cash receipts




from the sale of crops in 1960, they had risen
to 18 percent in 1964.
Reflecting the general improvement in the
incomes of grain producers, returns averaged
more than for other major types of farms.
This undoubtedly encouraged farmers to shift
away from lower income enterprises wher­
ever possible. Returns to capital on repre­
sentative cash grain farms in the Corn Belt,
for example, averaged 5.1 percent during
1959-64, while Grade A dairy farms in Wis-

15

Federal Reserve Bank of Chicago

consin returned only 2.8 percent, hog fattening-beef raising farms returned less than 1
percent and hog-beef fattening farms about
4.3 percent.
It is hard to say whether District farmers
will continue to reorganize their operations
in the direction they did in the early 1960s.
Returns to livestock feeders and dairymen
have improved markedly in the last two years.
If it continues, this improvement would, of
course, tend to moderate the extent of a
further shift toward more extensive cash grain

farming. The improvement in returns on live­
stock may have been only temporary, how­
ever, reflecting the very high prices of live­
stock in 1965 and 1966.
In any event, most of the other underlying
factors contributing to the trend toward cash
grain operations—such as the relative gains
in production and labor efficiency and more
opportunities for off-farm employment—are
still present. This trend is likely to be ex­
tended further in areas more advantageously
suited for crop production.

BUSINESS CO N DITIO N S is published monthly by the Federal Reserve Bank of Chicago.
Dorothy M. Nichols w a s p rim a rily responsible for the article "Fe d e ral funds, how banks
use the m arket" and Roby L. Sloan fo r "Sh ifts in District fa rm in g ."
Subscriptions to Business Conditions are a v a ila b le to the public w ithout charge. A rticles m ay
be reprinted, provided the source is credited.
PUBLICATIONS AVAILABLE
*Modern Money Mechanics: A w orkbook on deposits, currency
and bank reserves—w ith T-account descriptions of the m onetary
expansion process and the factors affecting mem ber bank re­
serves (1961, 32 pp).
*The Two Faces of Debt: A booklet describing the role of debt
in our economy and the distribution of debt am ong m ajor groups
of debtors and creditors (1963, 20 pp).
C o m m ercial Banking: Structure, Competition and Performance
Includes four articles published in itia lly in Business Conditions
(1967, 32 pp).
Abstracts of Doctoral Dissertations (Septem ber 1967).
Businesses View Banking Services: A survey of C ed ar Rapids,
Io w a, by Lynn A . Stiles (M arch 1967).
Customers View Bank Markets and Services: A survey of Elkhart,
In d ian a, by G eorge G . K aufm an (M arch 1967).
Business Firms and Households View Commercial Banks: A
survey of A ppleton, W isconsin, by G eorge G . K aufm an (September
1967).
* A v a ila b le in b ulk q u a n titie s fo r cla ssro o m in stru ctio n .

16




Address requests to:
Research Departm ent
Federal Reserve Bank of Chicago
Chicago, Illinois 60690


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102