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M m ke’ in ceUthe G reat D epression, w .th
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e

FEDERAL RESERVE BANK OF RICHM OND



N O V E M B E R 1964

FARM REAL ESTATE V A LU E S
Farm real estate values, w idely viewed as a baro­
meter of the economic health of agriculture, are cur­
rently at the highest level in history. U . S. D epart­
ment of A griculture data for the second quarter of
1964 show a continuation of a rising trend in these
values which has proceeded, with only minor inter­
ruptions, since 1933. The increase since late 1953,
am ounting to more than 60% , has come about despite
a continued downtrend in both farm income and farm
commodity prices.
The paragraphs that follow
analyze the behavior of farmland values over the
past several years, with special emphasis on Fifth
D istrict states.
F arm real estate values, defined in official sta­
tistics as the combined value of both farm land and
buildings, comprise roughly two thirds of the m arket
value of all farm assets. Changes in these values are
of interest not only to prospective purchasers and
sellers of farm land but also to farm -m ortgage lenders.
N atio n al and D istrict V a lu e s T he to tal m ark et
value of all U nited States farm real estate as of
M arch 1, 1964 w as estim ated by the Department of
A griculture at $150.8 billion, an increase of $20.8
billion or 16% since 1960. For Fifth D istrict states,
the comparable figure w as $8.6 billion, or approxi­
m ately 6% of the national total. The increase in the
D istrict total between 1960 and 1964 also amounted
to 16% , or $1.2 billion. The Ju ly index of average
values per acre shows a 2% rise in the D istrict in

1915

http://fraser.stlouisfed.org/ buildings
’ Farm land and
Federal Reserve Bank of St. Louis

1925

1935

a s of M arch 1 of y e a r indicated.

the second quarter of 1964 and a 3% gain for the
nation. In both the D istrict and the nation, the index
in Ju ly w as 6% above a year ago.
District values per acre averaged $192 in March,
five times as high as in 1940 and two and one-fourth
times the 1950 value. B y comparison, the national
average in M arch w as $137 per acre, four and onethird times the 1940 level and slightly more than
double the 1950 figure. W ithin the District, average
per-acre values in M arch ranged from a low of $86
in W est V irgin ia to a high of $365 in M aryland.
The average was $234 in North Carolina and $164
and $163, respectively, in V irgin ia and South Caro­
lina. The location factor and the large potential de­
mand for nonfarm uses account for the high land
values in M aryland, which ranks fifth among the 48
states for which data are published.
The average value of land and buildings per Fifth
D istrict farm in M arch w as slightly more than
$23,700. V alues per farm ranged from $14,250 in
W est V irgin ia—the lowest in the country—to around
$57,000 in M aryland. R eal estate values per farm in
other D istrict states w ere: North Carolina, $21,000;
South Carolina, $22,500; and V irgin ia, $25,750.
District values per farm averaged nearly three and
one-third times the 1950 level, although changes over
this period varied substantially from state to state.
In W est V irgin ia, for exam ple, per-farm values were
only around two and one-third times the 1950

1945

1955

'

CHANGE IN AVERAGE VALUE OF FARM REAL ESTATE PER ACRE
Fifth District, by Counties, 1950-1959

MCNONGAtl

»ETZEL

M
ARFORO

LOUDOUN

UN90LI

8AO
3XN
T
CABELL

ABMRE
L E AL

CAROLINE

GRCENBRi
LOGAN

A H ST
M ER

PRINCE
EOW
ARO

CARROLL

MECKLENBURG

CASWELL

FORSTT>
GUILFORD
CALDWELL

OOWELL

RTEO
U ff R
M D
i

RANOOuPH

CATAW A
Q

WILSON
BEAUFORT

'NCOLN

GREENE

iSARRUS

GASTON

CCO
NfC
CMESTCRFjd.0

ANOERSO*
»UR£NS

COLUM
BUS

ORANGEBURG

% Increase

% Increase
Maryland
Virginia
West Virginia
North Carolina
South Carolina

120.6
71.3
27.3
96.1
101.1

Fifth District
United States

□

150 or more

n

100 to 149.9

□

50 to 99.9

□
I

* Independent Cities.
Source:

U. S. Bureau of the Census.




Less than 50

1

Decrease

Income Per C a p ita ($)

VALU E O F FARMLAND AN D PER CAPITA PERSON AL IN CO M E
OF FARM AND NO N FARM POPULATIONS
United States, 1940-1963

V a lu e Per A cre ($)

’’’Farm lan d and buildings, M arch 1 of follow ing y ea r.
**F ro m farm a n d nonfarm sources.
Source:

U . S. Departm ent of Agriculture.

average, while M arylan d’s values per farm averaged
more than four times their 1950 level. V alues per
farm have increased at a considerably faster rate than
per-acre values because of the steady increase in the
average size of farms.
A verage real estate values per farm often conceal
large variations in average values of different sizes,
types, and economic classes of farms. The 1959
census revealed, for instance, that real estate values
for all commercial farms in M aryland averaged about
$47,100 but ranged from around $19,400 for farms
with sales under $2,500 to a high of $178,400 for
farms w ith sales totaling $40,000 and over.
Historical Trends T h e ch art on p age 2 show s a
close sim ilarity between the movement of Fifth Dis­
trict and national per-acre values since yearly data
first became available. D uring much of this period,
the price of farm land followed the movement of farm
commodity prices and farm income. Over the past
decade, however, land prices have continued upward
despite downtrends in both farm commodity prices
and income.
The start of W orld W ar II set off a long upward
movement in the price of farmland. Farm real
estate values more than doubled by early 1949, re­
sponding in part to an even sharper increase in farm
income. They then fell off slightly, largely because
of a drop in farm prices and income accom panying
a downturn in overall economic activity.
The 1949 decline was of short duration, however.
4



W ith the outbreak of w ar in K orea in Jun e 1950,
values of farm land turned upw ard again, rising by
M arch 1953 to a new high almost 30% above the
pre-Korean level and nearly 175% higher than at the
beginning of W orld W ar II. T hey receded some­
what from this high level in late 1953, but the decline
totaled less than 2% . Prices of farm commodities,
which had turned down after reaching an all-tim e
high in February 1951, dropped more than one fifth
between that time and late 1953.
E arly in 1954, values of farm land turned upward
again despite continued declines in farm product
prices and farm income. The upw ard movement in
farm real estate prices has continued since, with only
a brief interruption in the fall of 1960. T his inter­
ruption, incidentally, did not apply to D istrict values.
Net farm income and farm product prices fell through
the m id-Fifties, and while they have since moved up
again, they have not regained their previous peaks.
Factors Raising Land V alues A num b er of fac­
tors help to explain the unusual behavior of the
m arket values of farm land since early 1954. Despite
the downtrend in farm income, farm ers themselves
have helped to bid up the price of land. A n estimated
two thirds of all farm real estate purchases in the
nation in 1963 were made by farm ers.
One of the strongest factors forcing prices upward
has been farm ers’ demand for land to enlarge their
farms in an effort to utilize m achinery and equip­
ment more efficiently and to cut costs of production

>

per unit of output. F arm census tallies show, for
instance, that the number of Fifth D istrict farm s 500
acres and larger in 1959 was 25% greater than in
1945. Much of the farm enlargement has come about
through purchases of parcels and tracts of land that
w ere split from sellers’ farm s rather than through
purchases of complete farm units. Prices in the socalled “parcel m arket” have averaged higher than
prices paid for single farms and tend to set the level
of prices for all farmland.
A n important factor in Fifth D istrict farm ers’ de­
mand for additional land in recent years has been
the cuts in acreage allotments of tobacco, cotton, and
peanuts. These reductions provide additional in­
centive to farm ers to purchase land since they can
increase the size of their allotments only by acquiring
land that carries an allotment.
A closely related factor is the capitalization of
acreage allotments into land values. A cooperative
study made in four specialized tobacco counties by
the V irg in ia and North C arolina A gricultural E xperi­
ment Stations showed, for example, that the market
value of one allotted acre of flue-cured tobacco (w ith ­
out associated land or buildings) ranged from $1,673
to as high as $2,500 in 1957. Y et census data re­
veal that the average value of all farm land and build­
ings in these same counties in 1959 ranged from $119
to $448 per acre. V alues of farmland in rural coun­
ties, as the map on page 3 indicates, have been
strongly influenced by the large acreages planted to
high-value crops such as tobacco and peanuts.

rounding metropolitan centers. Throughout much of
the District, farm land has been, and is being, sought
for such nonagricultural purposes as industrial de­
velopment, interstate highw ays, recreation facilities,
airports, timber and pulp production, and motel
sites. One mile of interstate highw ay, for exam ple,
requires nearly 40 acres, and a single interchange
takes another 10 acres. Construction of the runw ays
and service area for Dulles International A irport, lo­
cated in Loudoun and F airfax Counties, V irgin ia, re­
quired 10,000 acres, and the 17-mile access road to
W ashington, D. C., took another 915 acres.
The limited number of farms for sale, in combina­
tion w ith the grow ing demand for farmland, has been
one of the prime factors exerting upw ard pressure
on the land m arket in recent years. Since 1950, the
rate at which farm s in both the D istrict and the na­
tion have changed ownership has been significantly
below that of the T hirties and Forties. Farm s in
the D istrict are currently changing hands at an
annual rate of only 40 per 1,000, up slightly from
1963’s all-tim e low transfer rate of 38 per 1,000.
V oluntary sales, which have trended downward
during this 15-year period, are now being made at
the rate of about 20 per 1,000 farms but range from
a low of 15 per 1,000 in North Carolina to a high
of 37 per 1,000 in M aryland. Foreclosures have
remained at nominal le v e ls; however, adm inistrators’
and executors’ sales, and sales resulting from in­
heritance and gifts and other miscellaneous methods
of transfer have followed a slight upward trend.

O ther C o n trib u tin g F acto rs D em and for p arttime farms and rural residences has also contributed
to the strength in farm real estate values. This is
evidenced by the nearly 50% increase between 1950
and 1959 in the number of part-tim e farms in the
D istrict. Part-tim e farms in 1959 comprised 30% of
all D istrict farms against only about 13% in 1950.
A n additional 15% of all D istrict farms in 1959 were
operated on a part-retirem ent basis by farm ers 65
years old and over.
R u ral land values have also been strongly in­
fluenced by the purchase of land for nonfarm uses.
Indeed, the rise in the price of farmland, noted in the
accom panying chart, has followed the per capita in­
come of the nonfarm population more closely than
that of the farm population since the m id-Forties.
M arket values of farmland in metropolitan counties
in 1959 averaged significantly higher than those in
ru ral counties, and as noted in the map, have tended
to show a bigger increase since 1950. Nonfarm de­
mand for land is not confined, however, to areas sur­

F arm R eal E sta te D ebt T h e u p w ard tren d in the
m arket values of farm land since 1950 has been ac­
companied by an even greater increase in farm real
estate debt. W ith the increase in the level of farmm ortgage debt, the debt-to-value ratio has also risen,
although it is still below that of the T hirties and
early Forties. From a balance sheet viewpoint,
farm ers’ equity in their farms has risen despite the
rise in indebtedness. Fifth D istrict full-ow ner
operators of m ortgaged farms in 1961, according to
a special census report, had an average farm-mortgage debt of $6,014 compared with an indebtedness
of $2,457 in 1950. Full owners had an average
equity, however, of $14,512 in their farms, up 118%
or $7,852 from their equity in 1950. Over the same
period, the equity in m ortgaged farm real estate
owned by part-ow ner operators increased even more,
from $6,291 to $15,265 or by 143% , although average
debt of part owners also rose faster, from $2,289 to
$5,932. A ctually, 68% of Fifth District farm land and
buildings, by value, was free of debt in 1961.




5

STANDARD

METROPOLITAN

The emergence of numerous urban centers em ­

A R EA D EFIN ITIO N

TATISTICAL

AREAS

P O PU LATIO N

A R EA D EFIN ITIO N

PO PU LA TIO N

bracing large suburban populations that are not,
for administrative purposes, part of the central
H U N TIN G TO N -A SH LA N D , W . V A .-

cities has created problems for the economic statis­

254.780

defined by its corporate limits, as the basic unit.

Huntington City

31,283

Outside Central City

C arroll and H ow ard

C ab ell and W ay n e Counties in

acteristics of some suburban areas, however, have

787,999

Baltim ore, Anne Arundel,

139,870

C hanges in the population density and the char­

939,024

O utside C entral City

83,627

1,727,023

Baltim ore City

A shland City

tician. Traditional local-area statistics take the city,

BALTIM ORE, MD.

K Y .-O H IO

Law rence County in O hio

Counties

W . V a .; Boyd County in Ky.;
W A SH IN G T O N , D. C. -MD.-VA.
W ashington, D. C.

caused city limits to be less meaningful for purposes
CH A R LESTO N , W . V A .

of economic analysis.

To provide a more rational

basis for compiling local-area statistics, the Bureau

252,925

Charleston City

O utside C entral City

85,796

O utside C entral City

C ounties in M d.; A le x a n d ria ,

K a n a w h a County

Except in N e w England, where the city and town
are administratively more important, the county is
the basic unit in the S M S A .

Defining individual

standard areas involves criteria relating to popula­
tion and to the degree of social and economic in­
tegration between the central county and the sur­
rounding area.

Each S M S A must include at least

one city having 50,000 or more inhabitants or two

F a irfa x and Falls Church Cities
and Arlington and Fa irfa x

LYN CH BU RG, V A .

110,701

Lynchburg City
Outside C entral City

C ounties in V a.

54,790
55,911

RICH M O N D, V A .

C am p bell and Am herst Counties

The county must

meet several

requirements respecting population

density

the

and

percentage

workers in the labor force.

of

nonagricultural

An outlying county is

considered part of the S M S A if at least 1 5 % of its
residents work in the central county or if residents

436,044

Richmond C ity

RO A N O K E, VA.

158,803

Roanoke City

97,110

O utside C entral City

219,958

O utside C entral City

216,086

61,693

H anover, Henrico
and Chesterfield Counties
N EW PO RT N EW S-H AM PTO N , V A .

Roanoke County

Hampton City
W IN STO N -SALEM , N. C.

189,428

N ew port N ew s City

W inston-Salem City

111,135

O utside Central Cities

O utside C entral City

224,503
89,258
113,662
21,583

York County

78,293

Forsyth County
N O RFO LK-PO RTSM O U TH , V A .

cities with contiguous boundaries and a combined
population of at least 50,000.

763,956
1,237,941

Montgomery and Prince G eorg es

167,129

of the Budget has developed the concept of the
Standard Metropolitan Statistical Area (SMSA).

2,001,897

Norfolk City

578,507
304,869

A SH EVILLE, N. C.

130,074

A sheville City

60,192

Portsmouth City

114,773

O utside C entral C ity

69,882

O utside Central Cities

158,865

C h e sap e ake and V irgin ia Beach

Buncombe County

Cities
G R EEN SB O R O -H IG H

PO IN T,

N. C.

Greensboro C ity

246,520
DURHAM, N. C.

119,574

111,995

High Point City

62,063

Durham City

78,302

O utside Central Cities

64,883

O utside Central City

33,693

Durham County

G u ilford County

of the central county make up at least 2 5 % of
G R EEN V ILLE, S. C .

its working force.

G reen ville C ity

The Fifth District includes

17 of the country's

219 Standard Metropolitan Statistical Areas.

Also

located in the District are the central city of an
S M S A much of which lies in the Fourth District and
one outlying county of an S M S A most of which is
in the Sixth

District.

The

S M S A 's

in the

Fifth

District vary in population from 110,701 to over
2 million and in area from 255 to over 2,000
square miles.




O utside Central City

R A LEIG H , N. C.

255,806

C harlotte C ity

C O LU M B IA , S. C.

316,781
201,564

A U G U STA , G A .-S. C.
Augusta City
Outside Central City
Richmond County in G a .;
Aiken County in S. C.

75,151

W ake County

CH ARLO TTE, N. C.

Mecklenburg and Union

93,931

O utside C entral City

189,618

G reen ville and Pickens Counties

O utside Central City

169,082

Raleigh City

66,188

Colum bia City
O utside Central City

115,217

97,433
163,395

Lexington and Richland

Counties

Counties

216,639

CH A R LESTO N , S. C.

70,626
146,013

260,828

•
•
£

1,000-4,999
5,000-9,999
10,000 and over

I
I Less than 100
I------1 100-499
I------1 500-999

Charleston City
O utside Central City
Berkeley and Charleston
Counties

254,578
65,925
188,653

FEDERAL
One of the most important money m arket develop­
ments in the postwar period has been the growth of
trading in Federal funds, or deposit balances held
with Federal Reserve Banks. The intricacies of this
m arket are fam iliar only to those who use it in the
course of conducting their business. To others, even
its general outline and purpose m ay be somewhat ob­
scure. The following article describes this important
m arket and attempts to delineate its role in the
country’s financial structure.
W h a t are F ed e ral F u n d s? A rriv in g at a w o rk ab le
definition is not easy because there are a number of
rather closely related transactions involving the use of
im m ediately available funds which might conceivably
be classified as Federal funds transactions.
A fter several years of intensive study, the Federal
Reserve System brought out a “New Series on F ed­
eral Funds” in its A ugust 1964 Bulletin. In this
series, which w ill be published regu larly in the
Bulletin and made available each week in a new
statistical release (H .5 ), a useful distinction has been
made between interbank Federal funds transactions
and related transactions w ith Government securities
dealers. T his article w ill deal only with interbank
transactions.
For present purposes, a Federal funds transaction
is defined as any transaction between banks involv­
ing the purchase (borrow ing) or sale (len din g) of
member bank deposits at Federal Reserve Banks for
one business day at a specified rate of interest. A
supply of Federal funds arises because some member
banks have reserves on a given day in excess of re­
serve requirements. Demand arises because other
member banks on the same day run reserve deficits.
Since excess reserves yield no income, bankers try
to convert them into earning assets. T his m ay be
done in a variety of w ays, but if the excess is e x ­
pected to be only tem porary, a practical approach is
to sell Federal funds. If the bank then suddenly
loses reserves, it m ay reverse its operation and enter
the m arket as a buyer.
Thus, the Federal funds m arket affords the banker
a maxim um degree of flexibility in ad ju stin g his re­
serve position so as to come out with a minimum of
excess reserves over the course of the reserve averag­
ing period—one week for reserve city banks and
two weeks for country banks.
8




FUNDS
P a rtic ip a n ts in the M a rk e t H isto ric a lly , m ost of
the trading in Federal funds has been conducted by
relatively large member banks. T his is natural since
participation in the m arket requires a very close and
almost constant scrutiny of the 1 ank’s money position,
and only the larger banks have found it economical
to employ full-tim e money position managers.
Another factor has been the m arket practice of trad ­
ing funds only in very large blocks, typically in units
of $1 million. In recent years, trading in sm aller
units has become increasingly common as sm aller
banks have become more active in the m arket. Their
greater participation has been due, in part, to the
increasing cost of holding idle funds as interest rates
have risen. Also important has been the grow ing
readiness of large banks to trade funds in sm aller
blocks as an accommodation to their correspondents.
L o catio n of the M a rk e t In a sense, the F ed eral
funds m arket is nationwide inasmuch as excess re­
serves m ay arise anyw here in the country. Since
funds in even multiples of $1,000 m ay be transferred
instantaneously and without cost over the Federal
R eserve’s w ire transfer facilities, any member bank
is potentially a part of a nationwide network.
Although funds m ay originate anyw here and be
dispatched anyw here, the focal point of the market
is New Y ork City. Because of its prominence as a
commercial, industrial, and financial center, a sys­
tem of communications has developed which makes
it convenient to channel a m ajo rity of transactions
through New Y ork. In the first place, the money
m arket banks in New Y ork are generally net buyers
of Federal funds and out-of-town banks have come
to look on New Y ork as a place where funds can
readily be sold. Second, these New Y ork banks
serve as correspondents for banks all over the country
and are therefore in a position to know where Fed­
eral funds can be located and where they are needed.
Third, some of these banks stand ready to accom­
modate their out-of-town correspondents by absorbing
or supplying funds regardless of their own reserve
positions. Fourth, two stock exchange firm s and one
large bank in New Y ork C ity serve as brokers, re­
ceiving reports on sources of and demand for funds
and bringing buyers and sellers together.
D evelopm ent of the M a rk et T h e p ractice of
trading in balances at the Federal R eserve originated
in the early 1920’s in New Y ork C ity. Local markets

also developed in other financial centers, but trading
between Federal Reserve D istricts remained quite
sm all. F ederal funds trading of all types died out
almost completely in the 1930’s and remained dull in
the 1940’s when the Federal Reserve System helped
finance the w ar by standing ready to buy Government
securities at fixed prices. Banks preferred to make
reserve adjustm ents in this period by purchasing and
selling Government securities, since Federal Reserve
practices elim inated the risk of m arket loss.
It was not until the resumption of flexible mone­
ta ry policy in the early 1950’s that the m arket in
Federal funds began to revive. W ith the unpegging
of bond prices and increased borrowing from the
F ederal Reserve, banks began to seek alternative
means of ad justin g reserve positions. The secular
rise in interest rates also encouraged them to manage
their reserve positions more carefully.
A lthough the basic function of the m arket has not
changed much since the 1920’s, the breadth of the
m arket has expanded greatly. T his has been largely
due to the rise of accommodating banks and their
practice of trading in relatively small blocks of funds.
Types of Transactions F ed eral funds tra n s a c ­
tions are of three basic types. The most common
is the so-called “straigh t” transaction which involves
a purchase and sale of Federal funds on an unse­
cured, overnight basis. Closely akin to the “straigh t”
transaction is that in which the overnight borrower
(b u y er) of Federal funds pledges appropriate col­
lateral to secure the loan.
Repurchase agreements are sometimes, though not
frequently, used in interbank transactions. A s a rule
banks dislike the extra bookkeeping, trouble and e x ­
pense that is involved. U nder the terms of the re­
purchase contract, the borrowing bank obtains Fed­
eral funds by selling securities to the lending bank.
The borrower then repays the “loan” the following
day by repurchasing the securities generally at the
same price plus interest at a rate specified in the
contract. Some repurchase agreements are made
for more than one business day, but these are gen­
erally made with Government securities dealers and
are therefore outside the scope of this article.
M arket Mechanics T h e m ech an ics of m ark et
transactions vary, of course, with the type of transac­
tion and the location of the buyers and sellers. Since
“straigh t” transactions constitute the bulk of trad ­
ing, the mechanics of this type operation are of
p rim ary interest.
T rad in g between banks in New Y ork C ity is cus­
tom arily accomplished by a simultaneous exchange of



checks. The selling bank gives the buying bank a
check drawn on its balance at the Federal Reserve
and receives in exchange a check which the buying
bank w rites on itself. The draft on the Federal
R eserve B ank is paid im m ediately, but the check
which the buying bank w rites on itself is collected
through the clearing house and is not paid until the
following day. Thus, the buying bank has use of
the selling bank’s excess reserves for one day and for
this pays the agreed rate on Federal funds. The in­
terest on the loan is norm ally included in the clearing
house check which the buyer gives the seller.
E xchange of checks is confined largely to New
Y ork City. Procedures differ somewhat in other
areas, but in general, trading within a single Federal
Reserve D istrict m ay be described as follows. A fter
arran gin g the terms of the transaction by phone, the
seller notifies the Federal Reserve Bank to transfer
the agreed-upon amount from his account to that of
the buyer. The notification m ay be made by letter,
by w ire, or by telephone followed by w ritten confir­
mation. The following day the procedure is re­
versed. The interest on the loan m ay be paid with
the principal in the return transfer, or it m ay be re­
mitted separately either by debiting or crediting a
correspondent balance, or if no correspondent rela­
tionship exists, by cashier’s check.
W hen the transaction is between banks in dif­
ferent Federal Reserve D istricts, the actual transfer
is made over the leased-w ire facilities which connect
all Federal Reserve Banks and branches. A fter a r ­
ranging the details of the transaction by telegraph or
long-distance telephone, the selling bank orders the
Federal R eserve Bank in its D istrict to debit its re­
serve account and to w ire instructions to the b uyer’s
Federal Reserve B ank to credit a like amount to its
account. Repaym ent is made the following day by
reversing the procedure. N orm ally, the interest on
the loan is not included in the return w ire because
the Federal Reserve levies a charge on w ires involv­
ing amounts not in multiples of $1,000. Interest,
therefore, is generally paid by separate check or by
debiting or crediting a correspondent balance.
These procedures apply also to secured transac­
tions, w ith only one additional step. The borrowing
(b u yin g) bank offers collateral by pledging securities
wrhich w ill be held in custody for the account of the
selling bank until the transaction is reversed.
Importance of the Federal Funds M arket T he
F ederal funds m arket is important to bankers because
of its prominent role in the process of reserve ad ju st­
ment. A s already mentioned, member banks try to
hit their required reserve targets as accurately as
9

possible because deficiencies m ay be charged at the
discount rate plus 2% and the existence of excess
reserves means loss of income.
The F ederal funds m arket, of course, is not the
only means of reserve adjustm ent. A bank needing
additional reserves m ay sell T reasury bills or other
marketable paper, borrow from the Federal Reserve,
call a loan with a Government securities dealer, or
raise dealer loan rates to encourage the dealers to
refinance elsewhere. To a large extent a bank’s
choice depends on relative costs and also on the length
of time the additional reserves w ill be needed. If
funds are needed for only a very brief time, the bank
m ay buy F ederal funds or borrow from the Federal
Reserve to avoid the cost involved in selling short­
term assets one day and buying them back the next.
The F ederal funds m arket is also important to
the m onetary authorities because it speeds up the
transm ission of changes in monetary policy. T his is
true because the shifting of reserves from banks with
excesses to those with deficits perm its banks in the
aggregate to stay more fully invested. In other
words, a given volume of banking business can be
conducted with a sm aller volume of excess reserves.
T his m inim izing of excess reserves results in less
slippage between a change in m onetary policy and
the resulting response.

10



The m arket also supplies useful information to
policy-m akers, as it is h ighly sensitive to changes in
the demand for and supply of funds. The Federal
Reserve personnel who m anage the System ’s Open
M arket account watch closely the rate and the volume
of transactions because these are excellent barometers
of ease and tightness in the central money market.
R ate D eterm in atio n A s w ith other free m arket
rates, the rate on Federal funds depends on supply
and demand conditions in the m arket. It is difficult,
if not impossible, however, to identify these factors
rigorously. A useful approach centers about the con­
cept of the “basic reserve position,” which takes into
account both the volume and distribution of reserves
in the banking system. W eek ly data on the basic
reserve positions of the large money m arket banks
are now published in the Federal Reserve Bulletin.
The basic reserve position is defined as excess re­
serves minus the sum of borrowings from the Federal
Reserve and net Federal funds purchases. A s a rule,
changes in the basic reserve deficit of these banks has
tended to v ary directly w ith the Federal funds rate.
The chart on this page shows clearly that during the
period 1959 through 1961 Federal funds rates usually
rose and fell with the size of the basic reserve deficit
of the large city banks.

THE FIFTH DISTRICT
Business activity in the Fifth D istrict appears to
be advancing norm ally for the fall season. Farm ing
m ay turn out to be the exception, however, as harvest­
ing activity in parts of North and South Carolina has
been severely curtailed by heavy rains, and some crop
dam age seems inevitable. The m anufacturing sector
has displayed seasonal strength, with no signs of any
slowdown except in transportation equipment, re­
cently affected by strikes in the automobile industry.
Seasonally adjusted department store sales receded
somewhat in both September and October after reach­
ing an all-tim e high in A ugust. The further reduc­
tion of personal income tax liabilities in 1965 may,
however, bode well for near-term retail prospects.
A recent U. S. T reasu ry release estim ates that these
tax liabilities in F ifth D istrict states w ill be nearly
$800 million lower than in 1963.
The Statistical Record T h e la te st sta tis tic s re ­
flect widespread strength in Fifth D istrict business,
and more recent business news contains no hint of
a change. Bank debits rose sharply again in Septem ­
ber, to a level ju st under the Ju ly record. New highs
were reached in the District of Columbia and in South
Carolina. For the D istrict as a whole over the first
nine months of this year, bank debits w ere 10%
higher than in the comparable period of 1963.
Seasonally adjusted nonfarm employment has risen
in every month since A pril and has set consecutive
new records since June. The September rise, how­
ever, was too small to be significant. Slight gains in
durable goods manufacturing, mining, construction,
transportation and related industries, financial enter­
prises, and government were nearly matched by small
declines in nondurable goods, trade, and services.
Unemployment in the D istrict labor force declined
further in A ugust, and rates of insured unem ploy­
ment continued to improve in September and October.
Seasonally adjusted factory man-hours fell off
sligh tly in September after rising in A ugust to the
highest level since last December. M ainly because
of risin g productivity, man-hours in recent years have
increased more slowly than some other manufacturing
indicators. T his trend appears to be continuing, and
the slight decline in September does not seem large



enough to suggest any curtailm ent of output. In the
durable goods sector, gains in transportation equip­
ment and p rim ary metals more than offset sm all de­
clines elsewhere. Among nondurables, man-hours
rose in food, apparel, paper, and chemicals but re­
ceded in textiles, tobacco, and printing.
Slow er G rowth in Construction L o c a lly , as n a ­
tionally, question m arks are appearing in the con­
struction picture. Seasonally adjusted construction
employment in the D istrict remained virtu ally un­
changed from February through June, rose in Ju ly
to an all-tim e high, dropped 1% in A ugust and in­
creased slightly again in September. B uilding per­
mits rose less than seasonally in September, rem ain­
ing below the September 1963 level. Despite wide
fluctuations, building perm its issued thus far in 1964
have averaged w ell above those of any previous year.
But the cum ulative year-to-year gain, as high as 40%
back in M arch, had dropped to 22% by September.
The same general pattern is apparent in D istrict
construction contract aw ards. A f t e r advancing
b riskly last year and early this year, aw ards settled
into a pattern of fluctuation around an all-tim e high
average. On a cum ulative basis, they were one-third
ahead of last year in M arch and A pril but the m argin
over 1963 has since declined to about one sixth. The
recent behavior of construction employment, building
perm its, and contract aw ards m ay indicate a leveling
out in construction activity.
G rowth in Chemicals To m eet ra p id ly g ro w in g
demand, the chemical industry has steadily expanded
capacity and is becoming increasingly important in
the Fifth D istrict economy. In 1962, the most recent
year with broad statistical coverage, D istrict chemical
plants w ere credited with $2.1 billion of value added
by manufacture. T his w as more than one eighth of
the national total for chemicals and allied products
and almost one sixth of all value added by m anu­
facture in the District. V alue added per employee in
the production of chemicals was over $21,000 in 1962
compared with around $8,700 for all other D istrict
m anufacturing industries.
The data also show rapid grow th in physical out­
put. V alue added by chemical plants almost doubled
11

EMPLOYMENT
CH EM ICALS

M A C H IN ERY
% of Total Mfg.
25

% of Total Mfg.
251-------------------

20-

W. V a .

N. C.

*1953 d ata a re for nonelectrical m achinery only.
Source: U. S. Department of Labor and State Departm ents of Labor.

in the District between 1952 and 1962, and since
wholesale prices of chemicals and allied products rose
less than 3% , most of the gain represented increased
physical volume. V alue added in this industry na­
tionally rose 88% during this ten-year period, a
somewhat sm aller gain than occurred in the District.
In chemicals, w age and salary paym ents account
for about 30% of value added compared to over 50%
for m anufacturing industries generally. Chemical
w orkers in the D istrict now number about 115,000,
nearly one tenth of all m anufacturing employment.
R ising productivity has opened a wide gap between
grow th rates in output and employment. Despite the
sizable increase in output over the past decade, em­
ployment has risen only 13%. Employment in­
creases in other m anufacturing industries have gen­
erally been well below this figure. A s a result, the
chemical industry has become relatively more im ­
portant as a source of jobs in the District, as the
left-hand chart on this page, shows. In all D istrict
states except V irgin ia, employment in chemicals last
year w as a larger fraction of total factory employ­
ment than it w as a decade earlier. The decline in
the Old Dominion was largely due to the decreasing
demand for rayon.
M a ch in ery L a rg e in v estm en ts in n ew p lan t and
equipment have brought new business to m achinery
m anufacturers.
T extile firm s account for a good
share of the local demand, and growth in textile m a­
chinery production w7 evident at the 23rd Southern
as
T extile Exposition held in Greenville, South Caro­
12



lina during the week of October 12. N early 500
firms put their latest equipment on display. Ten
years ago there were less than half as m any exhibi­
tors, with only one fourth listing Fifth District
addresses then compared w ith nearly two fifths now.
For the m achinery industry generally, M aryland
held undisputed first place among D istrict states
until recently. Current statistics, however, show
about 39,000 m achinery industry employees in North
Carolina against 29,000 in M aryland. The righthand chart on this page shows how the industry has
progressed in relative importance during the past
decade. V irgin ia and the C arolinas account for
most of the gain.
D istrict m achinery m akers now provide nearly
116.000 jobs. Some 20,000 of these are in V irginia,
18.000 in South Carolina, and 10,000 in W est V ir­
ginia. Growth during the current business upswing
has been p articularly fast in South Carolina, wrhere
only 5,300 on average w ere employed in nonelectrical
m achinery in 1961 versus 10,000 now, and where
electrical m achinery and equipment w orkers, not re­
ported separately in 1961, now number between 7,000
and 8,000. M achinery employment has gained
rapidly in V irgin ia also.

PH O TO

CREDIT

C over—Southern States C ooperative, Inc.

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