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, , , h „v e m oved steadily u p w a r d of Fifth District < °'m la "d ^ n o r in terru p tion s. M m ke’ in ceUthe G reat D epression, w .th s 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.