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A review by the

F e d e r a l R e s e rv e B a n k o f C h ic a g o

The trend of business

2

1966 farm loan survey—
Fewer but larger borrowers
use more credit

5

U. S. wealth abroad

12

Federal Reserve Bank of Chicago

T HE
T h e momentum of the business uptrend
was reasserted during the summer months,
after leveling or declining trends in output,
employment and retail sales through much of
the first half of the year. By August, all major
measures of activity, including industrial pro­
duction, pointed up again. The economy had
weathered the most drastic inventory adjust­
ment in history faster and with adverse side
effects less pervasive than many observers
believed possible at the start of the year.
Most manufacturers are now operating
with appreciable margins of unused capacity
as a result of both reduced production and the
startup of new facilities. The transition from
full-scale operations requiring extensive over­
time has been particularly evident in Midwest
industries producing durable goods. Labor
markets in most centers, nevertheless, remain
fairly tight, and prices appear to be rising
faster than in the first half of the year.
Nationally, unemployment was only 3.9
percent of the labor force in July, and except
for automotive centers, even lower rates pre­
vailed in most of the Midwest. Barring major
strikes, employment in the auto industry can

OF

BUSINESS

be expected to rise in the fall as high produc­
tion schedules for 1968 models are achieved.
Executives of most banks and other finan­
cial institutions favored the Administration’s
original request last January for a 6 -percent
surcharge on individual and corporate in­
come taxes. On the other hand, many busi­
nessmen, disturbed by lowered profit margins
and eroding backlogs of orders, remained
skeptical that higher taxes are necessary or
desirable. Mounting evidence of the revival of
orders, employment, income and retail sales
in the weeks after the August 3 recommenda­
tion for a 10 -percent tax surcharge convinced
many doubters that additional fiscal restraint
is needed.
Monetary and fiscal stimulus

Sharp increases in Government spending
and rapid growth in bank deposits and other
liquid assets had been widely expected to re­
verse the persistent decline in industrial pro­
duction evident in the first half of 1967. The
main questions concerned the timing and
magnitude of the recovery.
Experience indicated that the drop in con-

BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. George W. Cloos was primarily
responsible for the article "The trend of business," Roby L. Sloan for "1966 farm loan survey" and Joseph G. Kvasnicka
for "U . S. wealth abroad."
Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mail­
ings, address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois 60690.
Articles may be reprinted provided source is credited.




Business Conditions, September 1967

struction activity and the leveling of retail
sales in the second half of 1966, as well as
the peaking of plant and equipment expendi­
tures and inventory investment in the fourth
quarter of the year, could be expected to lead
to a general downturn. But this was without
figuring on the powerful stimulus in the sec­
ond quarter of a Federal deficit at the an­
nual rate of 13 billion dollars (national in­
come basis) and growth of bank credit at the
annual rate of 12 percent. The virtues and
efficiency of attempts to “fine tune” the econ­
omy can be argued, but there is little doubt of
the eventual effect when the volume is turned
up enough.
Industrial production declined 2.3 percent
between December and June, and output of
durable goods was off 3.5 percent. Total out­
put of goods and services (after adjustment
for higher prices) was virtually unchanged in
the first quarter. Nonfarm wage and salary
employment declined 170,000 from March to
May—less than three-tenths of 1 percent.
The slide was more significant for manu­
facturing employment, extending from Janu­
ary to May and amounting to almost 2 per­
cent. Until June, total retail sales failed to rise
appreciably from the 1966 peak.
Despite gains in final sales, the economy
was sluggish throughout most of the first half
of 1967.
There was danger for a time of a cumula­
tive decline in activity that could have been
labeled, in retrospect, a recession. But sta­
tistics clearly differentiate this period from
clear-cut recessions of the past. During the
mild decline of 1960-61, industrial produc­
tion dropped 7 percent, nonfarm employment
declined 2.1 percent and unemployment rose
to more than 7 percent of the labor force.
Total business inventories declined by
more than 400 million dollars in June—the
first month-to-month drop since 1961. At



book value, inventories totaled 137 billion
dollars and equaled 1.55 times sales for the
month. This stock-sales ratio was down from
a peak of 1.59 in February but remained well
above the 1.47 level of a year earlier, which
was near the average for recent years.
Although the actual reduction in inven­
tories in June made headlines, the major im­
pact of the inventory adjustment had been
absorbed months before. When inventories
are rising, the amount of the increase is added
to final sales to boost total demand for goods
and services. Any slowdown in the rate of
inventory buildup reduces total demand by a
like amount, unless the reduction in the rate
of increase is offset by higher final sales.
Inventories rose at an annual rate of 18.5
billion dollars in the fourth quarter of 1966—
far faster than in any previous period except
Business sales reached a new high
in July as inventories declined
billion

d ollars

1966

1967

3

Federal Reserve Bank of Chicago

4

certain quarters early in the Korean War.
This sharp rise in inventory accumulation
resulted in part from the failure of sales to
match expectations. Production cutbacks
were required, especially in iron and steel,
nonferrous metals, textiles, motor vehicles,
household appliances, television and some
types of production equipment.
The annual rate of inventory accumulation
slowed to 7.1 billion dollars in the first
quarter. As a result, inventory accumulation
contributed 11.4 billion dollars less to total
demand—and therefore total output—in the
first quarter than in the fourth. The largest
previous quarter-to-quarter reduction in the
rate of increase of inventories was 8.7 billion
in the third quarter of 1959, a development
attributed to a long steel strike.
Current indications are that inventories did
not change appreciably during the second
quarter as a whole. If so, the rate and output
was 7 billion dollars less than it would have
been if inventory accumulation had continued
at the same rate as in the first quarter. The
negative impact of the inventory adjustment
on total output was nevertheless reduced sub­
stantially from the first quarter to the second.
Largely offsetting the drag of reduced in­
ventory accumulation in the first half of 1967
were final sales to Government, consumers
and business, which rose at an annual rate of
15 billion dollars. This increase approached
the peak rates of 1965 and 1966.
Total business inventories declined in June
—the first such movement since 1961—and
are expected to shrink on balance in the third
quarter, but the drag on total activity will
almost certainly be smaller than in earlier
months when inventories were still rising but
at a decelerated rate. Inventory accumulation
is expected to resume by the fourth quarter.
If so, it will contribute to total demand for
goods and services instead of subtracting




from it. The expected reversal of the inven­
tory cycle provides a major reason for in­
creasingly ebullient forecasts of total activity
for the rest of the year.
Surveys of purchasing agents indicate that
many companies intend to curtail inven­
tories further. Such intentions may be modi­
fied, however, if sales increase more than ex­
pected or if currently short lead times on new
orders begin to lengthen. The Chicago Pur­
chasing Agents Association reports that 74
percent of its members were ordering princi­
pal materials on the basis of lead times of
60 days or less in July, compared with only
40 percent a year earlier.
Some industries—particularly autos, house­
hold appliances and television— may have
lost sales recently because of excessive inven­
tory reductions in the first half of the year.
Dealers had only a 47-day supply of new cars
at the end of July, compared with a 61-day
supply a year earlier, and some models were
almost sold out while production lines were
being changed over for 1968 models.
O th e r plus facto rs

New orders for machinery and equipment
declined from an annual rate of more than 59
billion dollars in the third quarter of 1966 to
52.4 billion in the first quarter of 1967. The
decline was due partly to the suspension of
the investment tax credit in October. Ship­
ments have been fairly well maintained, with
the result that order backlogs declined.
Orders for machinery and equipment rose
in May and June—partly because of the
restoration of the tax credit—to levels in
excess of current shipments. Spending on pro­
ducer durable equipment will probably be
contributing to growth in total activity again
soon. In contrast to 1966, equipment pro­
ducers, except producers of commercial air­
craft, electrical generating equipment and

Business Conditions, September 1967

some industrial machinery, have the resources
to increase output. But any rise in equipment
spending is likely to be moderate.
With mortgage funds flowing freely again,
the decline in construction has been reversed.
Construction was at an annual rate of 75 bil­
lion dollars in June, exceeding the year-earlier
level but still remaining below the highs of
early 1966. Construction contracts reported
by F. W. Dodge were at a record high in June,
indicating a further rise in activity.
In the Midwest, contracts in June were 30
percent higher than 1966, compared with a
12 percent gain for the country as a whole.
Apartment buildings led the surge, which in­
cluded all major construction categories.
Probably the most significant recent devel­
opment has been the accelerated rise in per­
sonal income. After a relatively slow pickup
in the spring, personal income increased at an
annual rate of 9 percent in both June and
July. The rise was caused mainly by increases

in total wage and salary disbursements, re­
flecting renewed growth in employment. In
July, personal income was up 7.3 percent
from a year before. Despite some growth in
retail sales in June and July and some in­
crease in the use of credit, consumers are
saving a larger share of their incomes than in
1966, putting themselves in a position to in­
crease spending from recent levels.
In summary, total private expenditures are
again in a strong uptrend. Public spending on
both defense and civilian programs continues
to rise and currently exceeds estimates made
at the start of the year. Heavy demand, with
upward cost pressures and limited labor re­
sources, suggests that the rise in the general
price level may accelerate.
In this environment, fiscal policies de­
signed to bolster a faltering private economy
in late 1966 and the early part of 1967 can
appropriately be shifted toward restraint of
inflationary excesses.

1966 farm loan survey*
Fewer but larger borrowers use more credit
Indebtedness per farm borrower at banks
in the Seventh Federal Reserve District nearly
tripled during the past decade. And while the
number of farm customers of banks declined
sharply, the total amount of bank credit out­
standing to farmers more than doubled.
These are some of the findings of a recent
survey of agricultural loans held by commer­
cial banks in mid-1966 and a similar study
conducted ten years earlier. These changes in
agricultural credit are further reflections of
*See Business Conditions, May and August 1967
for other articles on the 1966 farm loan survey.




the trends toward larger but fewer farms,
greater investment in capital equipment and
mounting outlays for operating expenses.
Two out of every three farmers in the
Seventh District had bank credit outstanding
in mid-1966. It is probable that the number
of farmers using bank credit sometime during
the year was actually somewhat higher. This
could be particularly true for livestock
feeders, who typically borrow large amounts
in the fall to purchase feeder cattle. Some
livestock feeders were probably not using
credit when the survey was made at midyear.

Federal Reserve Bank of Chicago

Bank debts of farm borrowers averaged
around $5,924, compared with $2,125 in
mid-1956. Most of the increase was the result
of larger average loans, which rose from
$1,581 to $3,486. But the average number
of notes outstanding also rose from about one
and a half to two per borrower.
Probably even more indicative of the
greater use of credit is the increased propor­
tion of borrowers with large bank debts. In
mid-1966, about a third of the farm borrowers
had outstanding loans totaling $5,000 or
more, compared with about a tenth in 1956.
Similarly, borrowers indebted to banks for
more than $10,000 but less than $25,000
were three times as numerous in mid-1966 as
in 1956, and 13 times as many farmers owed
$25,000 or more than was the case ten years
before. The number of borrowers with bank
indebtedness of no more than $2,000 drop­
ped about half since 1956.
As a result of the sharp increase in the
amount of indebtedness per borrower, those
owing at least $10,000, while representing
less than a fifth of the borrowers, accounted
for around two-thirds of the debt outstanding
at mid-1966. Farmers owing $25,000 or
more represented only about 4 percent of the
borrowers, but they owed more than a fourth
of total bank debt outstanding.
Farms m o re specialized

6

Along with the increase in size of farms
during the past decade has come the trend to
greater specialization—a trend reflected in
the credit extended by commercial banks. The
number of general farms—those with no
single source of income accounting for as
much as half the gross—declined relative to
other types, while farms producing cash
grains and meat animals increased, both in
number and relative to the total.
Because banks often lack detailed infor­




mation on their farm borrowers, it is likely
that they reported a higher proportion of
their farm customers as general farmers than
was actually the case. Most other types of
farms, such as fruit, vegetable and dairy
farms, also declined since 1956. This reduc­
tion probably reflects the strong rise in wage
rates and the difficulty in obtaining the large
amounts of labor required to operate them.
Returns on these farms, especially dairy
farms, have been poor in recent years.
Because of these developments, the char­
acter of the farm loan portfolio has changed
at many banks. Specialization itself often
leads to greater use of machinery and equip­
ment and the need for larger amounts of
financing. Moreover, because of the more
erratic seasonal flows of income and expendi­
tures, cash grain and meat animal farms
typically use larger amounts of credit than
general farms and dairies. The average debt
outstanding for meat animal farms was
$9,030, and the average for cash grain farms
was $5,593, compared with about $5,100
for general and dairy farms.
Partially reflecting these changes, loans to
meat animal farmers more than doubled since
1956, and those to cash grain operators
nearly tripled. By contrast, credit extended to
dairy farmers was up only a third, and loans
to general farms rose about two-thirds.
M o re o w n e r-o p e ra to rs

Tenant farmers borrowing from District
banks declined sharply both in number and
relative to the total, while the proportion of
farm borrowers owning all or part of the land
they operate increased. Although comparable
data are not available from the 1956 survey,
farm borrowers owning only part of the land
they worked probably increased most rapidly.
The decline in the number of farms has
been confined to smaller units, many of

Business Conditions, September 1967

which were not producing satisfactory in­
comes for their operators. Many tenant oper­
ations fall into this category. Where the
tenure was known, tenant borrowers repre­
sented nearly two-thirds of the borrowers
with net worth under $5,000, reflecting the
high concentration of tenants in groups with
lower net worth.
Tenants had an average bank debt of
around $4,537, compared with $6,534 for
operators that owned at least part of their
land and $7,249 for landlords. This differ­
ence in average indebtedness can be attri­
buted partly to the generally smaller farm
operations of tenant farmers. Tenants also
typically need less credit than other operators
and landlords, who often need credit for land
purchases and farm improvements that ten­
ants do not usually make. In mid-1966, loans
to buy or improve real estate accounted for
about 30 percent of landlords’ debt outstand­
ing and about 23 percent of owner-operators’
outstanding indebtedness. Such debts repre­
sented only 2 percent of the total tenant debt.
(A tenant farmer will occasionally own land
he does not operate and use it as collateral
for a loan.) Also, some tenant farmers prob­
ably obtain some credit from their landlords,
although this practice is probably less pre­
valent than it once was.
M o re p a r t-tim e o p e ra to rs

Additional evidence that many farms are
too small to provide adequate incomes is the
sizable proportion of farm borrowers that
work part time at other jobs. In contrast to
the trend toward a smaller total number of
farmers, part-time farm operators—those
that receive a third or more of their gross
income from off-farm activities—increased
more than a third.
This trend has been possible in part be­
cause of the development of larger capacity



equipment and other labor saving innovations
that allow farmers to do a given amount of
work in less time. Moreover, booming activity
in other sectors of the economy since World
War II has created a large number of rela­
tively high paying jobs, encouraging more
farmers to seek off-farm work.
While the number of part-time operators
rose sharply during the past decade, these
operators did not obtain bank credit in pro­
portion to their increased number. The aver­
age amount per borrower outstanding to parttime operators amounted to only about threefifths of the average debt of other operators.
As a result, part-time operators, while ac­
counting for about 20 percent of all farmers
(where the status of the borrower was
known), represented about 14 percent of the
bank debt of farmers. This is not surprising,
since agricultural activity on many of the
farms operated by part-time farmers is lim­
ited and, because of this, less credit is re­
quired. Also, the flow of income from non­
farm activities provides a source of funds
not available to full-time farmers.
B o rro w ers o ld e r

The average age of farm operators in­
creased during the decade, reflecting the high
rate of migration of young adults to urban
areas. Farm operators of middle age or older
now outnumber young operators.
Borrowers under 35 years of age declined
about a fourth since 1956 while those over
45 declined only about 8 percent. As with
most occupations, the older the worker the
less likely he is to change his type of work.
Movements from farm to city are closely tied
to job openings in the urban areas, with the
demand for workers in such areas playing an
important part in the shrinking number of
farm operators.
Banks and other financial institutions are

7

Federal Reserve Bank of Chicago

sometimes criticized
for not extending credit
to young farm opera­
tors. But the survey
data in d icate th a t
young farmers are re­
ceiving credit accom­
modation about in line
with their relative im­
portance as a propor­
tion of all farmers, al­
though their needs for
credit may, of course,
be relatively greater
than the needs of older
farmers.
Data from the Cen­
sus of Agriculture in­
dicate that farm opera­
tors under the age of
35 account for about
14 percent of all farm­
ers. Bankers reporting
in the farm loan survey
at midyear indicated,
however, that (where
the age was known)
about 18 percent of
their borrowers were
under age 35. More­
over, the proportion of
bank borrowers be­
tween 35 and 44 years
was also greater than
indicated by the Cen­
sus of Agriculture—
about 28 percent com­
pared with about 23
percent.
While the average
amount of indebted­
ness of operators under
age 35 was smaller



Farm borrow ers at commercial banks in the Seventh District,
June 30, 1956 and 1966*
Outstanding debt to banks
Number of

Average
Total

borrowers
Classification

1956

1966

1956

per borrower
1966

(thousand dollars)

A ll borrowers .......... 445,304

368,779

946,267

40,936
48,234

1956

1966

(dollars)

2,184,674

2,125

5,924

34,340

11,183

249

273

55,537

33,716

680

699

119,226

86,678

1,383

1,362

Debt to reporting banks
Under $ 5 0 0 .............. 138,069
$500-999.................

81,670

$1,000-1,999...........

86,223

$2,000-4,999...........

88,861

63,620
90,464

276,396

282,51 1

3,110

3,123

$5,000-9,999...........

36,956

61,023

248,124

6,714

$10,000-24,000____
$25 ,000-49,000....

12,521

50,727

174,495

420,999
777,956

6,899
15,336

875

11,459

30,093

380,589

13,937
34,374

$50,000-99,999. . . .
$100,000 and over. .

130

2,060

8,057

130,430

62,123

63,328

—

257

—

60,612

—

236,026

33,212

Type of farm
Meat animal..............

49,149

61,575

166,352

556,026

3,385

9,030

D airy.........................

97,206

51,413

196,782

263,557

2,024

5,126
11,916

Poultry......................

2,694

2,222

10,953

26,478

4,065

Cash grain................

69,156

77,633

151,790

434,201

2,195

Fruit...........................
Other major product .

7,561

G en eral.................... 200,125
Not reported............

1,870
4,108

19,704

f

14,317
17,620

5,593
7,658

2,606

4,289

126,359

382,609

648,103

1,912

5,129

19,412

43,599

18,077

224,371

931

5,146

273,147

183,477
45,954

644,258

1,157,917
341,284

2,359

Tenure
Full owner.................
Part owner...............

6,311
7,427

Tenant.......................

131,156

368,438

1,621

4,537

21,648

81,207
16,782

212,573

Landlord...................

72,655

121,748

3,356

7,249

Not reported............

19,200

41,316

15,562

195,287

810

4,723

Part-time farm status (individuals only)
Part-time farmer.......

47,908
Not part-time farmer. 380,642
Not reported............
16,601

65,793

81,373

3,924

851,140

258,169
1,569,768

1,699

240,979

2,236

6,514

59,263

12,536

272,617

755

4,600

A ge (individuals)
Under 3 5 ..............
35-44

81,931

60,509

152,680

311,883

1,864

5,154

154,305

89,501

320,888

585,821

2,080

6,545

45-54.....................
55-64.......................

97,625
189,544

< 56,641

19,371

41,420

65 and over.............
Not reported

6,307

615,724
452,896

20,340

-

280,750

2,389

109,324
18,585

197,052

<

4,957
5,375

959

4,757

Business Conditions, September 1967

Outstanding debt to banks
Number of

Average

borrowers
Classification

1956

Total

1966

1956

per borrower
1966

(thousand dollars)

1956

1966

(dollars)

Net worth
Under $5,000...........
$5,000-9,999...........
$10,000-24,999____
$25,000-49,999.
$ 5 0 ,0 0 0 - 9 9 ,9 9 9 ...
$100,000-199,999. .
$200,000 and over. .
Not reported............

155,977
170,100
91,987
7,361

<
|

10,787
27,293

23,348

174,643

99,037

|

336,376

91,123
54,371

76,403
407,299
508,593

342,059

451,627

24,539

347,042

6,769

174,123

19,877

54,860

18,006

1,121
1,978
3,719
10,213

2,164
2,799
4,113
5,581
8,306
14,143
25,722

196,240

906

3,577
1,374

Assets
Under $5,000...........

n.a.

4,104

n.a.

5,641

n.a.

$5,000-9,999...........

n.a.

9,173

n.a.

14,553

n.a.

1,586

$10,000-24,999____

n.a.
n.a.

72,617
93,333

n.a.
n.a.

185,714
426,227

n.a.
n.a.

2,557
4,567

82,892
36,962

n.a.

545,242

n.a.

6,578

n.a.

480,953

n.a.

13,012

$25,000-49,999____
$50,000-99,999 . . . .

n.a.

$100,000-199,999 .

n.a.

$200,000-499,999 .
$500,000 and over. .

n.a.

12,758
1,821

n.a.

239,705

n.a.

n.a.

n.a.

92,033

n.a.

18,789
50,551

Not reported............

n.a.

55,1 19

n.a.

194,606

n.a.

3,531

n.a.

93,787

n.a.

n.a.

266,270

n.a.

2,339
3,135

Annual farm sales
Under $5,000...........

n.a.

$5,000-9,999

n.a.

40,091
84,922

$10,000-19,999. . . .

n.a.

119,917

n.a.

653,084

n.a.

5,446

$20,000-39,999. . . .
$40,000 and over. . .

n.a.

57,396

n.a.

601,554

n.a.

10,481

n.a.

15,190

n.a.

341,399

n.a.

22,475

Not reported............

n.a.

51,263

n.a.

228,581

n.a.

4,459

1,899

f
5,959
[ 21,643

7,968

269,221

Status
Individual..................
Partnership................
Corporation..............

428,550
153

[306,772
\

2,644
100

932,512
1,219

[ 1,827,937
\

57,220
26,901

Line of credit established with borrower
Y es............................
N o.............................

n.a.
n.a.

39,560

n.a.

381,554

—

9,640

329,219

n.a.

1,803,120

—

5,477

*The above data were obtained by expanding information reported by a stratified
sample of banks to previously reported loan totals for all commercial banks in the District.
The reliability of the estimates is lower for the subcategories of loans than for the totals,
n.a. Not available.
’Corporations were included in 1966, but excluded in 1956.
Partnerships were included in 1956 but excluded in 1966.




than for operators 35
to 54, it was about in
line with the indebted­
ness of farmers over
55 years. This might
indicate that the prob­
lems of many young
operators in the Mid­
west that are often as­
cribed to lack of avail­
able credit may actu­
ally be due to other
limitations, such as
size of operation.
The equity position
of farm borrowers is
one of the more impor­
tant factors influencing
the extension of credit.
Since 1956, there has
been a substantial up­
ward shift in the net
worth of farmers bor­
rowing from banks.
The shift is prob­
ably due primarily to
the large number of
operators leaving small
farms, but it also prob­
ably reflects the finan­
cial progress many
borrowers have made.
Where their financial
positions were known,
around 2 percent of
the borrowers in 1956
had a net w orth of
$100,000 or more. In
1966, these borrowers
made up about 10 per­
cent of the total. Sim­
ilarly, the proportion
of b orrow ers in the

Federal Reserve Bank of Chicago

$25,000 to $100,000 category increased
from about a fourth of the total in 1956 to
more than half in 1966. On the other hand,
farmers with net worth of less than $25,000
accounted for around three-fourths of all
farm borrowers in 1956, roughly twice the
proportion of borrowers in 1966.
Borrowers with relatively large net worth
also accounted for a large share of farmers’
total bank indebtedness. Farmers with net
worth of more than $25,000, while represent­
ing around half of the bank borrowers, had
about three-fourths of the bank credit out­
standing to farmers in mid-1966. Moreover,
farmers with net worth of more than

Larger farm operators more likely
to be bank borrowers and account
for greater portion of loan volume
percent of total

annual farm
sales

0

5

20

10

— I--------- 1
------

T

30

35

all operators (census)*
under $ 5 ,0 0 0

bank borrow ers
d o llar am ount of loans

$5,000 - $9,99 91

$2Q,000-$3S599'

$ 4 0 ,0 0 0 8 over

10



40

— I---------1
--------------1

"

Data from 1964 Census
of A griculture

$ 100,000 accounted for about a fourth of the
credit but only 10 percent of the borrowers.
Farmers’ equity is usually, though not
necessarily, associated with the capacity of
the farm unit to generate income. Although
information on the volume of sales of farm
products was not obtained in the 1956 sur­
vey, census data indicate that the proportion
of farms in the Seventh District selling less
than $10,000 in farm commodities dropped
sharply over the past decade, while the pro­
portion selling more than $10,000 increased
sharply.
Banks have probably experienced a similar
pattern with their farm customers. In mid1966, farmers selling more than $10,000 of
farm products represented about three-fifths
of the borrowers. And these borrowers, in
turn, accounted for more than four-fifths of
the outstanding debt.
Net worth and volume of farm sales are, of
course, important considerations to bankers
extending credit. Farmers that have accumu­
lated substantial amounts of equity and have
the income capacity to repay loans usually
have no difficulty in obtaining credit, and on
fairly favorable terms.
Borrowers with small equities and a small
volume of sales have less capacity to carry
debt. The 1964 Census of Agriculture found
that around 40 percent of the farmers in the
states of the Seventh District had farm sales
of less than $5,000, while this category ac­
counted for only about 13 percent of the
borrowers at District banks.
Moreover, loans to these borrowers are
usually smaller, reflecting the smaller size of
their operations and the greater risk in loan­
ing to farmers with small equities. The aver­
age indebtedness of borrowers with farm
sales less than $5,000 was around $2,339,
compared with the average of $5,924 for all
farm borrowers. Similarly, the average debt

Business Conditions, September 1967

outstanding to farmers with net worth less
than $5,000 was about a third the average
debt of all borrowers. Nevertheless, the debt
levels for these borrowers were relatively
high. Indebtedness of the group was about 83
percent of its equity, compared with 14 per­
cent for all farm borrowers at District banks.
Partly as a result of the greater risk and the
higher costs per dollar of handling small
loans, interest rates for these borrowers were
higher. Interest rates for borrowers with net
worth less than $5,000 averaged 7 percent,
compared with 6.3 percent for all borrowers.
C red it lines

The survey in mid-1966 showed that a
number of bankers have established lines of
credit for their farm borrowers; that is, they
had agreed to provide credit as needed, up to
some specified amount. Although data on
lines of credit were not obtained in the 1956
survey, the practice has probably become
more common in recent years, reflecting the
rapid rise in farm credit needs.
About 10 percent of the borrowers in mid1966 had established lines of credit, and
these accounted for nearly a fifth of the total
debt outstanding. These borrowers tended to
be large operators. Around two-thirds of the
total amount of lines of credit were to farm
borrowers with $50,000 or more net worth
and to borrowers with farm sales of $20,000
or more. Moreover, the bulk of the credit
lines were extended to meat animal or cash
grain farmers—farmers with large credit re­
quirements during certain seasons.
C red it needs to in crease fu rth e r

The trend toward greater use of borrowed
capital by farmers will undoubtedly continue.
To gain the economies made possible by con­
tinuing progress in mechanization, farmers




can be expected to expand their businesses
further, both through more intensive and
specialized use of current land and equip­
ment and through absorption of small farms
into larger units. They are expected also to
increase further their use of the purchased
materials and services essential to efficient
farm production.
Many farmers will not be able to adapt to
these trends and will leave farming. But those
that are successful in combining their man­
agerial capabilities with technological inno­
vations are likely to require substantially
larger amounts of borrowed funds.
Serving the future credit needs of agricul­
ture would seem to present no insurmount­
able problems. The use of large amounts of
credit by alert managers of efficient farms
should continue to be profitable for bor­
rowers and lenders alike. There may be some
question, however, about which of the va­
riety of lenders now serving agriculture are
most likely to provide the growth in credit
services.
Rural banks are unusually well suited to
provide much of this credit because of their
proximity to farms and the need by lenders
for detailed knowledge of the character and
needs of the farm business. Banks can also
provide farmers many related financial ser­
vices. Commercial banks appear capable of
providing the various types of credit required
by farmers—with the possible exception of
some long-term real estate mortgage credit
and some marginal high-risk credit.
This assumes, of course, the individual
banks are operated efficiently and competi­
tively and that the banking system as a whole
provides an effective and adaptive mechanism
through which funds flow in and out of areas
in response to changing needs, availability
and interest rates.
1
1

Federal Reserve Bank of Chicago

U. S. wealth abroad
F o r e i g n claim s of the U n ited States
amounted to more than 106 billion dollars at
the end of 1965, while foreigners held claims
of 59 billion dollars here. The difference—
our net foreign investment—was therefore
about 47 billion dollars.1
Although this sum represented only a
fraction of our total national wealth—less
than 3 percent—it is nevertheless significant
when viewed against the background of the
U. S. position in world trade and finance. As
such, it reflects the net contribution the
United States has made to world economic
growth over the past several decades as a net
supplier of international investment funds.
From the viewpoint of the United States,
the significance of the sum is twofold: 1)
because of the net foreign exchange earnings
and income generated by U. S. assets abroad,
it represents an important positive factor in
the U. S. balance of payments; 2) but because
of the strain net capital outflow has placed on
the balance of payments, its growth has been
a matter of deep concern.
The United States was a net debtor to the
rest of the world until World War I. In the
early stages of its industrial development, this
country depended heavily on foreign capital
and in building up industries “mortgaged”
part of its wealth to foreigners. In 1900, for
example, when the total wealth of the United
States, including land and reproducible assets,
was an estimated 88 billion dollars, net liabili­
ties to foreigners were 2.5 billion.
On the eve of World War I, total foreign

12

3
These figures must be interpreted with some cau­
tion because of technical and conceptual difficulties
in arriving at an accurate total.




investment in the United States amounted to
7.2 billion dollars—nearly twice the 3.7
billion Americans had invested abroad. But
demands of war financing led to a sharp re­
duction of foreign-owned assets in this coun­
try and an increase in foreign indebtedness
to the United States. By the end of 1919,
U. S. net claims on foreigners amounted to
3.7 billion dollars.
These claim s co n tin u ed to in crease
throughout the Twenties. By the end of 1930,
U. S. investment abroad was 17.2 billion

In ternatio nal balance sheet
of the United States, 1950 and 1965
1950

1965

(million dollars)
U. S. assets abroad

Private assets
Direct investment................................ 11,788

49,217

Foreign corporate stocks....................

1,175

5,048

Foreign bonds....................................

3,158

10,176

Banking claims...................................

1,276

12,045

Other assets.......................................

1,607

4,456

Government credits and claim s*. . . 12,535

25,123

Total............................................... 31,539

106,065

Foreign assets in U. S.

Long-term
Direct investment................................

3,391

8,812

Corporate stocks................................

2,925

14,598

Corporate, state and municipal bonds
Other long term.................................

181

916

1,500

2,082
18,162

Short-term
Private obligations.............................

6,477

Government obligation s ..................

3,161

14,362

Total...............................................

17,635

58,932

‘ Includes holdings of foreign convertible currencies and
IMF's gold tranche position but excludes U. S. gold stock
and over 20 billion dollars of World W a r I debt.
SOURCE: U. S. Department of Commerce.

Business Conditions, September 1967

dollars, while foreign investment
Value of U. S. d irect investment abroad
in this country was about half that
by area and industry, year-end 1965
— 8.4 billion.
Latin
American investment abroad
Industry
Canada America Europe Africa
Asia Oceania
declined throughout the depressed
(million dollars)
Thirties and stood at only 12.2
Manufacturing____
6,855
2,741
7,570
292
673
950
billion dollars by the end of 1940.
Mining and
smelting.............
1,755
1,114
55
361
37
162
At the same time—particularly in
Petroleum..............
3,320
3,034
3,429
1,020 2,384
499
the late Thirties—foreign claims
Public utilities........
486
596
60
*
61
2
on the United States increased
T ra d e....................
881
1,034
1,716
114
253
103
sharply as foreign capital sought
O ther....................
1,875
852
1,065
117
203
95
haven here. By the end of 1940,
Total.................. 15,172
9,371 13,894
1,904 3,611 1,811
these claims had increased to 13.5
Hess than 0.5 million dollars.
billion dollars.2
SOURCE: U. S. Department of Commerce.
F oreign investment in the
United States still exceeded U. S.
investment abroad by about 800
For example, establishment of the European
million dollars at the end of World War II.
Common Market as a large unified market
But the situation changed drastically in the
area, with the new opportunities it offered for
next five years, largely as a result of capital
profit through application of large-scale pro­
outflow through U. S. aid to the war devas­
duction and marketing techniques, signifi­
tated countries. By the end of 1965 the United
cantly influenced the flow of direct investment
States had provided more than 32 billion
to Europe.4
dollars in loans and credits to other countries
The differential in profit rates—revealed
and international organizations.3 This was in
by McGraw-Hill as the next most important
addition to 48.2 billion of foreign grants for
consideration of businessmen—was also im­
nonmilitary purposes between mid-1945 and
portant to the surge of investments abroad.
the end of 1965 that did not appear on the
Returns on both portfolio investments and
international balance sheet.
direct investments have generally been higher
With reconstruction abroad well under way
abroad than in the United States. This dif­
in the Fifties, the outflow of capital through
ferential helps explain why U. S. net foreign
U. S. Government aid programs subsided.
investment has grown so much faster than
But the favorable investment climate result­
net domestic investment—why the foreign net
ing from vigorous reconstruction abroad
began to attract large amounts of private U. S.
“
These increases were accompanied by large
capital, particularly in the late Fifties and
transfers o f gold from abroad. Between 1935 and
1940, the gold holding of the United States rose
early Sixties.
The surge in fo re ig n in v es tm e n t

Surveys conducted by McGraw-Hill show
desires to open new markets and protect ex­
isting markets as the main reasons for Ameri­
can businessmen deciding to invest abroad.



from 10 billion dollars to almost 22 billion.
3Military assistance during this period amounted
to 36.1 billion dollars. Thus the total net foreign
grants amounted to more than 84 billion dollars.
‘Direct investment means acquisition of assets
and equities in businesses abroad in which U. S.
investors have an important voice in the manage­
ment.

13

Federal Reserve Bank of Chicago

14

worth of the United States increased almost
3.5 times between 1950 and 1965 while net
domestic assets (the domestic net worth)
only about doubled.
Traditionally, U. S. direct investment
abroad has taken the form of new production
facilities or expanded facilities established
through local partnerships, rather than ac­
quisition of existing foreign companies. In
1964, for example, net acquisition of foreign
enterprises by U. S. companies amounted to
only 328 million dollars— less than 9 percent
of the total direct investment undertaken
abroad that year. In 1965, the figure was 279
million dollars—about 5.7 percent.
American investment abroad has generally
benefited the areas where it was undertaken.
Among other things, it has almost always:
• Helped raise local incomes by providing
new employment opportunities
• Improved local standards of living by
introducing new products
• Provided additional tax revenues for
local government
• Introduced new technology in industry
and new skills into the labor force
• Introduced new competition into local
markets, encouraging local business to
become more efficient
• Increased foreign exchange earnings of
the host countries through increases in
their exports
Economic criteria alone are not always
appropriate in evaluating overall impact,
however. Social, and especially political, fac­
tors are also traditionally important consider­
ations in countries determining the desir­
ability of foreign investment. Just as many
Americans complained about the inflow of
European capital at the turn of the century,
some countries complain about the inflow of
American capital 60-odd years later.
The arguments are often distorted with




Foreign direct investment in the
United States reached almost
9 billion dollars in 1965
billion
9

r

8

-

7

dollars
,

x

,

-

_______

6

5

4

3

W ///////A
2

1937

1950

I9 6 0

1965

SOURCE: U. S. Department of Commerce.

exaggerations sometimes serving the purposes
of special interests. Many complaints, for
example, have been raised against the size of
the U. S. investment in Europe and the im­
plied American domination of European in­
dustry. Although the U. S. share in some
foreign industries is more than half—as in the
case of carbon black in England and account­
ing machines in France—the overall, long­
term investment position favored Europeans
until very recently.
Until 1964, European long-term invest­
ment in the United States exceeded our long­
term investment in Europe— and that had
been the case for decades.
Only in 1965 did Americans finally catch
up. And even then, U. S. investment in
Europe exceeded European investment here

Business Conditions, September 1967

by only about 800 million dollars.
Only a small part of the foreign assets in
the United States at the end of 1965 was
represented by direct investment. Unlike
U. S. investors abroad, foreign investors here
have shown a strong preference for corporate
stocks and, more important, for such short­
term investments as bank deposits and U. S.
Government securities.
The preference of foreigners for portfolio
investment has long been evident. Before
1914, foreign long-term investment in the
United States was concentrated in bonds,
particularly railroad bonds. The acquisition
of U. S. corporate stocks by foreigners in­
creased rapidly after World War I and soon
exceeded bond holdings, particularly as the
market value of stocks soared in the Twenties.
During the depressed Thirties and war-

U. S. assets make a positive
contribution to the country's
balance of payments
billion

dollars




affected Forties, the value of foreign port­
folio investment in the United States re­
mained fairly stable.
A sharp increase began in the Fifties and
has steadily continued. As major European
countries relaxed restrictions on purchases of
foreign securities, the purchase of U. S. se­
curities was taken up again. This—with the
continued rise in market values—quadrupled
the value of foreign holdings of U. S. corpo­
rate stocks in the Fifties. Even though there
was some net liquidation of stocks held by
foreigners, between 1964 and 1966, the total
value of foreign holdings has continued to
rise as the market value of the remaining
holdings climbed.
Also in 1965, a new type of American se­
curity appeared on the international market
and became available to foreign investors. In
response to Department of Commerce guide­
lines aiming for U. S. corporations to reduce
the outflow of funds from the United States
and encouraging them to finance their direct
overseas investment by borrowing abroad,
several companies established special domes­
tic financial subsidiaries.
These subsidiaries began borrowing abroad
through issues of special debentures and
bonds to obtain funds needed to finance
foreign investment by parent companies.
Competitive yields of these securities, and in
many instances their convertible feature,
made them highly attractive to foreign in­
vestors. That year, 191 million dollars of
these securities were purchased abroad, and
almost 600 million were purchased in 1966.
Short-term claims of foreigners at the end
of 1966 amounted to about 30 billion dol­
lars. The preference of foreign investors for
short-term, liquid-dollar assets stems largely
from the position of the U. S. dollar in inter­
national finance. Since World War II, the
dollar has served as one of the two most im-

15

Federal Reserve Bank of Chicago

portant reserve currencies and is used widely
as an international means of payment.
To the extent that short-term claims on the
United States are held by foreign official in­
stitutions, they represent an important source
of international reserves.
And to the extent that these short-term
claims are held by private individuals and cor­
porations abroad, they constitute an impor­
tant source of international liquidity for trade
and investment. It has been estimated that
more than a third of the world’s trade in 1966
— 192 billion dollars as measured by world
imports—was settled in dollars. Foreign
banks and individuals participating in such
transactions find it convenient to maintain
dollar balances to facilitate payments. The
availability of large amounts of short-term
financial instruments in the U. S. money
market and the development of the Euro­
dollar market abroad have greatly facilitated
profitable investment of these balances.
The b alan ce o f p ay m e n ts

16

The large amounts of foreign short-term
investment in the United States attest to the
confidence of most foreign investors in the
soundness of the dollar. But the rate at which
this investment increased since the early
Fifties has been a concern to governments
and individuals here and abroad.
As a banker to the world, the United States
must stand ready to discharge these liabilities
on short notice by exchanging them for other
internationally acceptable assets. The contin­
uation of the dollar as a reserve currency—
indeed the continuation of the international
monetary system in its current form—de­
pends largely on the ability of the United
States to fulfill this responsibility.
Gold has traditionally been the major
internationally acceptable asset for use in
discharging obligations of this kind. But while




U. S. short-term obligations increased be­
tween 1950 and 1965, the U. S. gold stock
slipped from 22.8 billion dollars to 13.8
billion. Allowed to continue, this develop­
ment could impair the ability to maintain the
gold-convertibility of the dollar.5
For that reason, the U. S. Government has
taken steps to reduce the deficit in the balance
of payments and thereby the rate at which
foreigners have accumulated short-term dol­
lar assets.6 Several of the steps were designed
to reduce the outflow of dollars resulting
from the acquisition of foreign assets by
Americans. In addition to asking corpora­
tions to restrain their foreign investment, the
Government asked commercial banks to re­
duce their lending abroad.
Assets abroad have made a significant
positive contribution to the country’s balance
of payments. Through an increasing inflow of
repatriated earnings and other related in­
comes and through exports in the form of un­
finished goods from parent companies in the
United States to affiliates abroad, foreign in­
vestments have boosted U. S. earnings of
foreign exchange and thus improved the bal­
ance of payments. In recent years, these
positive contributions have more than offset
the negative effect of the outflow of invest­
ment dollars. Given, however, the need for a
prompt and substantial reduction of the U. S.
balance of payment deficit, restraint on for­
eign investment is necessary, even if it results
in forfeiture of some long-term benefits.
6
The U. S. Government is formally committed to
convert into gold or convertible currencies only the
dollars held by foreign official institutions.
T h e “liquidity” deficit in the U . S. balance of
payments is computed by adding the increases in
short-term dollar assets held by foreigners (liabili­
ties), the decline in the U. S. holding of gold, and
the decline in the International Monetary Fund
position. Thus, the increase in foreign short-term
investment in the United States constitutes a part
of the balance of payments deficit.

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