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Btu/im M Kevieu/ MONTHLY IN THI S FEDERAL RESERVE BANK of CLEVELAND ISSUE Production Changes and Farm Finance. . . . 3 Terms of Bank Loans to Business........... . . . 7 Notes on Federal Reserve Publications. . . 1 3 /iuyctet, t $ 5 $ . . 14 Production Changes and Farm Finance land as their primary factor of production; in techniques land is in relatively fixed supply. Thus, the of agricultural production has accelerated during the past decade and has accounted foracreage used in the production process has changed little during the past ten years; the very large increases in farm output. Further supply of land cannot be changed as readily expansion in farm mechanization, the use of by the operation of the market mechanism as more efficient plant and animal strains, and the supply of the other factors of production, substantial increases in the usage of commer namely, labor, capital and management. Since cial fertilizers — all have been accomplished through application of capital to farm enter the supply of land is limited, there had to be a contraction in the number of farms to en prises in unprecedentedly large amounts. In able the more efficient farmers to expand the effect, there has been a substitution of capital size of their plants. The total number of com for labor and land; correspondingly, the re mercial farms dropped from 3.5 million in quirements for financing farm operations 1949 to 3.1 million in 1954, or nearly 10 per have grown apace. A broad review of such de cent in five years, and there is ample evidence velopments is in order at this time. that the downward trend is continuing. The impact of technical change upon agri Capital investment in today’s farming cultural output is shown by the chart on the operations is much greater than it was ten cover. Output per man-hour has steadily risen years ago. A limited supply of land, together in the past 10 years and in 1957 was 35 per with an increasing demand derived from cost cent higher than in 1948. Coupled with the advantages resulting from larger scale opera increase in output per man-hour recorded during the past decade was a decrease of 26 tions, has caused land prices to rise steadily. This influence is largely responsible for land percent in the total labor force of agriculture, prices currently being at an all-time high. and the downward trend continues. The gain achieved in agricultural output becomes even The average amount of capital invested in the land, livestock, and equipment required more impressive when it is realized that one to operate a farm in 1957 was $27,000 as com fourth fewer farm workers now provide the pared with $15,900 in 1948.(1) If the level of food and fiber requirements of 18 percent investment in the farm operation continues to more people. increase at the same rate in the next ten years Farm Enlargement Requires Capital as in the past decade, the average farmer will have $45,000 invested in his business. The growth in agricultural productivity What have been the capital requirements has been joined with an increase in the size of of farmers in the Fourth Federal Reserve Dis commercial family-operated farms. The in trict? Several different types of farm opera crease in size of farm has been stimulated by tions comprise Fourth District agriculture. cost economies which arise with larger, more Classified by type of farm they are dairy, feed efficient production units. grain and livestock, tobacco, and general. Efficient farmers have been able to expand With the exception of tobacco farms, data their acreages, but only at a high cost which ( i ) This amounts to a 70 percent increase, accruing over the has required a large capital investment. same interval of time during which the general price level rose about 15 percent. Farmers are faced with the problem of using h e c o n tin u o u s r e v o lu t io n T 3 specifically relating to the capital require ments of farmers of this District are unavail able. Consequently, to answer the question about Fourth District farming, it is necessary to observe the capital requirements of farms in the United States, as shown by available data which are classified by type of farm and area location, and which are indicative of the agriculture of the Fourth District. Acreage, total farm capital, and net farm income have been used as the criteria for comparison purposes. Thus, dairy farms lo cated in Central Northeastern United States, New York, New Hampshire, and Pennsyl vania may be taken as representative of the Fourth District dairy industry. The feed grain and livestock producing areas of the District may be represented by the hog farms in the Central Com Belt, namely, Illinois, Iowa, and Minnesota. Data for the burley tobacco area of this District are directly avail able in terms of the Central Kentucky tobacco area located in the Bluegrass Region. From these data it would appear that dur ing the past ten years the requirements for agricultural capital in this District have been well above the national average, except in the case of tobacco farms where the investment fell temporarily below the national average for a period prior to last year. The capital invested in farms by type of enterprise is shown in an accompanying chart. In 1957, hog farmers had nearly $47,000 invested in their operations, while dairy farmers had an average investment of $32,000. The average investment of tobacco farmers was close to $26,000. These figures represent increases over the 1948 level amounting to 40 percent for hog farms, 52 percent for dairy farms, and 35 percent for tobacco farms. Capital Substitutes for Labor Needs for labor-saving devices and for large quantities of other input factors such as fertilizers, in order to enable more inten sive use of a given acreage, have also played a very important role in increasing the in vestment requirements of present-day farm ers, and it seems reasonable to assume that 4 AVERAGE CAPITAL INVESTMENT PER FARM such input factors will continue to have an expansive influence on capital investment in the future. Among the important labor-saving innova tions which have registered an especially large expansion in usage are tractors, trucks, corn pickers, hay balers, and field-forage har vesters. On a 1947-1949 base, the number of corn pickers on farms in the United States has tripled, while the number of hay balers and field-forage harvesters has quintupled since the base period. Other labor-saving de vices which are becoming standard on many farms are materials-handling equipment, and herbicides to eliminate the need for cultiva tion of crops. A comparison of the average investment in labor-saving devices by all types of farms in the United States with investment by the types of farms representative of Fourth Dis trict agriculture reveals that the average capi tal investment in machinery for the represen tative farms is much greater than for all farms in the nation at large. A final chart shows that investment in farm machinery by dairy and tobacco farmers more than doubled during the ten-year period from 1948-1957, while the hog farmer has increased his al ready large capital investment by nearly 80 percent. The especially rapid rise in invest ment by dairy farmers has been caused by expanded use of hay balers, field-forage har vesters, and conversion to bulk tank methods of handling milk. Substantial increases in machinery investment by tobacco farmers is apparently associated with the conversion from horsepower to mechanical power. Hay balers have also found increased usage on these farms. Although the percentage change of investment in machinery and equipment has not been as great on the hog type farms, the average dollar volume of investment is greater than for either the dairy or tobacco farms. INVESTMENT IN MACHINERY. PER FARM "Land-Saving" Practices Even though most of the innovations adopted by farmers are of the labor-saving kind, recognition should also be given to the substitution of capital for land. Illustrations of “ land-saving” practices are land leveling, terracing, drainage, sod waterways, etc. The substitution of capital for land also takes place through the use of technological ad vances directed toward more intensified activity. The development and widespread usage of certified seeds, of hormone fortified feeds, and of fertilizers have enabled farmers to produce a larger volume of output on a given acreage, while at the same time increas ing the quality of product. Such applications of improved farming practices and technologi cal advances also have required new invest ments of capital, although frequently the amounts are not as large as in the case of machinery and equipment purchases. Farmers' Financial Needs The chief revolutionary force behind the change which is occurring in the financial needs of farmers is the increased use of ma chinery and equipment. In financing the pur chase of such equipment, loan officers of banks have placed greater emphasis than previously on loans carrying an intermediate maturity. They have found that loans with maturities of 2-3 years generally permit the borrower to retire the loan from the increased income de rived from the use of the equipment. One factor which is important in determin ing the magnitude of capital requirements is found to stem from the relative degree of ‘ ‘ divisibility ’ ’ of capital. For example, hybrid seed or upgrading of livestock can be gradu ally introduced on an individual farm while a combine, corn picker, or equipment for bulk handling of milk calls for an immediate and complete change. To make this change re quires a substantial investment. It would not be uncommon for a farmer to invest $5,000 or more when making the conversion from can to a bulk method of handling milk. Changing habits of the farmer’s customers have also caused changes in credit needs. Changes in human consumption patterns, such as increased consumption of meats and livestock products at the expense of cereals and other starchy foods, have required farmers to adjust their production programs. Most of the farmers who have made these types of adjustments have had to employ new capital. Problems associated with a dynamic and competitive market have further increased the need for intermediate-term credit. In 1948, supermarkets accounted for 28 percent 5 of the nation’s grocery business. Since then, the supermarket business has boomed. In 1957, supermarkets had increased their share of the total grocery business to over 60 per cent. It is not unnatural for chain stores and the processors servicing them to demand a steady supply of a product possessing uniform quality. Such factors have caused farmers to look for a means of providing processors and retail stores an adequate supply of a high quality product while reducing operating costs at the same time. To alleviate the supply and quality prob lems associated with the marketing of farm products, some farmers are considering the advantages afforded them by vertical integra tion or production on a contract basis. The integration of farm activity with another phase of the production or marketing process has generally required the investment of sub stantial amounts of capital, for along with integration and contract farming has gone product specialization. Banks Provide Additional Capital Evidence that commercial banks have pro vided a substantial amount of the additional capital required by agriculture over the past ten years can be found in the growth of loans outstanding to farmers. Total Dollar Volume o f Loans Outstanding to Farmers at All Insured Banks, Decem ber 31 1957 1948 Million Dollars United States Fourth District $2,846 179 $5,020 286 Farm Loans for Intermediate-Term Purposes Outstanding, June 30, 1956 As a Percent o f United States Fourth District Loans Secured by Farm Real Estate Non-RealEstate Loans 20% 13 38.4% 52.2 % change + 7 6 .3 + 60.0 The total dollar volume of loans (farm-realestate-secured and non-real-estate loans) out standing to farmers in the nation rose 76 per cent in the ten years ended December 31, 1957. During the same period the average in vestment per farm rose 69 percent. Over the past ten years the total dollar amount of loans outstanding to farmers in 6 the Fourth District increased 60 percent. Data relative to the average investment per farm in the Fourth District are not available, but some indication of the change which may have occurred in the capital investment can be gained from the data available on the hog, dairy, and tobacco farms previously discussed. The increase in capital invested in these three types of farms in the ten-year period was 35 percent for the tobacco farms, 40 percent for the hog farms and 52 percent for the dairy farms. The proportionate increase in invest ment was somewhat less for these farms than for the average of all farms in the nation, even though the rate of investment in ma chinery rose at a more rapid rate than for the nation as a whole. A substantial portion of the credit pro vided by banks in recent years has been for intermediate-term investments, as already noted. Some indication of the extent to which banks have provided intermediate-term credit is afforded by data available from the Agri cultural Loan Survey conducted by the Fed eral Reserve System as of June 30, 1956. The proportion of farm loans outstanding for intermediate-term investments (e.g., for machinery and equipment or for improve ment of land or buildings) represented a much greater portion of the non-real-estate loans in the Fourth District than for the nation at large. The greater proportion of bank credit being used for intermediate-term purposes in the Fourth District is probably due in part to a sharper increase in machinery investment than occurred nationally, as shown in the final chart. Terms of Bank Loans to Business Fourth District M em b er Banks t h e p e r i o d between October 1955 and October 1957, the average interest rate paid by business borrowers to Fourth District member banks increased by one fifth. This was the principal outcome of an unre lenting pressure upon the available supply of funds during a period of monetary restraint. Analysis of the upward movement in interest rates during this period, as well as changes in other conditions of bank lending to business— security requirements, maturities, and aver age loan size—is the subject of this article. u r in g D Conditions of Borrowing — A Package Each bank loan is a package deal with rate, maturity, and security specified in the loan contract. Therefore, the allocation of bank credit during a period of large loan demand and monetary restraint could be accomplished by the commercial banks through the instru mentality of reduced maturities, increased security requirements, or higher interest rates. Higher interest charges, however, stand out as the principal change in the conditions of bank lending to business which actually occurred between 1955 and 1957. One fifth of the total amount of business loans outstanding at the time of the 1955 Sur vey were unsecured loans, scheduled to ma ture in one year or less, and carrying interest charges below 4 percent. (See Table 1.) The most typical package of terms in 1957, accounting for about one fourth of the total N OTE: This is the third of a series of articles on the results of two Surveys of bank lending to business conducted by the Federal Reserve System in 1955 and 1957. See also, “ Re sults of the 1957 Business Loan Survey, General Summary, Fourth District,” Monthly Business Review, June 1958, and “ Business Borrowers at Fourth District Banks,” July 1958 issue. amount outstanding, also included a maturity of one year or less and no security, but car ried an interest rate which was generally be tween 4 percent and 5 percent. When the conditions of bank lending to business are viewed separately, the interest charged remains the dominant factor. Nearly half of the dollar volume of business loans outstanding in 1955 carried rates below 4 percent in contrast to a similar share carrying rates between 4 percent and 5 percent in Table 1 TERMS OF BORROWING, 1955 AND 1957 Fourth D istrict Member Banks Interest Rate Total Loans of One Year or Less Secured 1 Unsecured Loans Longer Than One Year Secured Unsecured Percent of Total Amount Outstanding— October 5, 1955 Under 4% 4% - 5% 5% - 6% 6% & over All Rates 47.5% 25.2 17.2 10.1 6.1 % 20.2% 7.2 6.5 4.2 5.3 4.1 2.4 6.7 % 14.5% 7.4 4.1 7.5 0.2 3.5 0.1 100.0% 22.0% 34.0% 25.0% 19.0% Percent of Total Amount Outstanding— October 16,1957 Under 4% 4% - 5% 5% - 6% 6% & over All Rates 8.0% 0 .3 % 1.4% 45.4 7.6 23.5 33.1 10.3 8.7 13.5 5.0 3.1 100.0% 23.2% 36.7% 0 .8 % 7.5 11.3 5.1 5.5 % 6.8 2.8 0.3 24.7% 15.4% Note: Details m ay not add to totals, due to rounding. 7 Table 2 BUSINESS LOANS OUTSTANDING, BY INTEREST RATE, 1955 AND 1957 Fourth D istrict Member Banks Interest Rate Percent of Total Percent of Total Number Amount Outstanding of Loans Amount Outstanding^1) Number of Loans Under 4% 4% - 5% 5 % -6 % 6 % -8 % 8% & over 3,632 $ 911,746 484,286 12,640 330,971 23,683 31,432 153,640 40,010 13,749 4 .2 % 14.9 27.8 36.9 16.2 47.5% 25.2 17.2 8.0 2.1 A ll Rates 85,036 $1,920,653 100.0% 100.0% Number of Loans Percent Change 1955 to 1957 October 16,1957 October 5 , 19S5 Amount Outstanding 1,181 $ 220,953 1,250,202 8,595 25,681 912,943 296,442 36,800 15,775 73,675 Amount Number of Loans Outstanding 1.3% 9.8 29.2 41.8 17.9 8.0 % 45.4 33.1 10.8 2.7 88,032 $2,754,215 100.0% 100.0% Number of Loans Amount Outstanding - 6 6 .6 % — 32.0 + 8.4 + 1 7 .1 + 1 4 .7 - 75.8% + 15 8.2 + 17 5.8 + 92.9 + 84.1 + 3.5% + 43.4% ^Am ounts in thousands. 1957. Loans with rates between 5 percent and 6 percent nearly doubled in relative impor tance, while the share of loans carrying the highest rates increased by a small margin. The upward movement in interest rates was accompanied by corresponding changes in terms governing security and maturity of loan. However, over-all changes in security and maturity were slight. That is, the share of the amount of loans outstanding that was unsecured was unchanged between 1955 and 1957 and the share of loans scheduled to ma ture in one year or less increased slightly. It appears, therefore, that the allocation of bank credit was accomplished principally through the upward pressure of market forces on the cost of borrowing. The data presented in Table 2 clearly reflect the increased cost of borrowing. They also indicate that expan sion of loan volume was proportionately largest at rates below 6 percent. It is generally known that large banks charge lower rates and make the bulk of the loans to large busi ness. (See Table 5.) Thus, they would be ex pected to participate in the expansion of busi ness loans in the 4 percent to 6 percent range. This was the case in the interim between the fall of 1955 and the fall of 1957, when banks with deposits in excess of $500 million in creased their loans to business by more than 50 percent while reducing security holdings by one fifth. Thus, large banks apparently did find higher interest rates necessary to “ ra tion” their loanable funds. It is doubtful, however, that this process had gone beyond the large banks by the fall of 1957. The volume of outstanding loans with interest rates of 6 percent or more grew at a rate commensurate with the total expansion of business loans. The upward movement in borrowing costs ended at 6 percent. Moreover, banks of intermediate size with deposits be tween $50 million and $250 million appar ently had room for further loan expansion. This bank-size group increased its total loans relatively more than the large banks, sus tained no reduction in investment holdings, and posted a substantial gain in deposits; but the relative growth in business loans of the intermediate-size banks was well behind that of the large banks. The natural relationship between large banks and large business, together with the legal limitations on the size of loan a bank can make to a single customer, appears to have the effect of reducing the period of time required for monetary restraint to take hold. Had large borrowers been able to move down the bank-size scale to satisfy their demands, it is likely that rate changes would have come more slowly at the large banks. These same forces provide small borrowers with a “ vested” interest in small banks as a source of credit. Information collected in the fall of 1957 through direct interviews with a representa tive group of Fourth District member banks confirms these findings. Bank interviews re vealed that the maturity, security, and aver age size of loan were largely tailored to the needs of the business borrower and to his credit-worthiness. A majority of the banks reported that standards of credit-worthiness, such as borrowers’ equity in the business, available collateral, and proven record of sound management, had not been tightened in 1957. Therefore, explanations of changes in terms other than interest rates, to the ex tent that such changes occurred between 1955 and 1957, should be sought in areas outside of monetary restraint. For example, security requirements (that is, collateral, endorsement, or guarantee) in crease as the maturity of the loan is extended. As indicated in the accompanying chart, about 60 percent of loans maturing in less than one year were unsecured in 1957 and 40 percent of loans carrying longer maturities were unsecured. These ratios were also typi cal of 1955, despite the moderate extension of PROPORTION OF LOANS SECURED Am ount O utstanding, 1957, Fourth D istrict M em ber Banks UNSECURED LOANS LONGER THAN ONE YEAR LOANS OF ONE Y E A R OR LESS UNSECURED MATURITY OF LOANS ACCORDING TO BUSINESS OF BORROWER Fourth D istric t M em ber Banks P o rc o n t o f A m o u n t O u t s t a n d in g , 1 9 5 7 0 25 50 75 100 ALL BUSINESSES SALES FINANCE COS. TRADE CONSTRUCTION M ANUFACTURING AND M INING REAL ESTATE PUBLIC UTILITIES ALL OTHERS the average maturity of member bank loan portfolios. Terms by Type of Business What then determines the maturity of busi ness loans? Apparently, the major influence on maturity of loan is the business of the borrower, pointing again toward a “ tailormade” loan. The accompanying chart reveals the marked differences among business bor rowers in the relative importance of short term loans. In 1957, about nine tenths of the dollar volume of bank-held debt of sales finance companies, which shift readily be tween borrowing from banks and borrowing from nonbank investors on their own short term paper, was scheduled to mature in one year or less. Trade firms and construction firms, which borrow largely to meet seasonal needs, had more than three fifths of their obligations scheduled to mature in one year or less. Real estate firms, by the nature of their business, made greater use of long-term loans. In the case of public utilities, greater reliance on longer-term bank loans appears 9 to be related to prospective long-term financ ing in the capital markets. The impact of type of business is quite evi dent when maturity and security are com pared as part of the tailor-made package. The general tendency for short-term loans to be unsecured does not hold for each type of business. Between 1955 and 1957, public utili ties and manufacturing and mining firms sharply increased the proportion of their bank borrowing with maturities of one year or less, while the percentage of loans that was un secured rose only slightly. This probably re flects the ability of large firms to obtain the terms most suitable to their needs. In 1955, construction and real estate firms had from one half to three fourths of their outstanding bank loans in short maturities, but less than four tenths were unsecured. The availability of pledgeable real estate assets accounts, in part, for this deviation from the general relationship between short-term and unsecured loans. Trade firms, which are gen erally small in size, increased their ratio of short-term loans to total loans between 1955 and 1957, but decreased the ratio of unsecured to total loans. The bank interviews revealed that inventory, accounts receivable, and buildings were the main sources of collateral for small trade firms. Moreover, some banks indicated that security requirements had been increased somewhat for retail outlets because they feared that the retail stores had over extended credit to customers. Terms by Size of Borrower An earlier analysis of interest rates and size of borrower,(1) based upon a limited sample of banks, revealed the fact that increased bor rowing costs, applicable to all sizes of busi ness between 1955 and 1957, were relatively greater for large than for small business. Table 3 and the chart on page 11 provide supporting data from the two loan Surveys. The average interest rate charged to small firms increased less than one tenth while the ( i ) Monthly Business Review, Federal Reserve Bank of Cleveland, “ Interest Rates on Large and Small Bank Loans,” March, 1958. 10 Table 3 INTEREST RATES CHARGED BY RELATIVE SIZE OF BORROWER*” 1955 and 1957 Fourth D istrict Member Banks Relative Size of Borrower Interest Rate All Sizes Small Medium Large Percent of Total Amount Outstanding— 1955 Under 4% 4% - 5% 5% - 6% 6% - 8% 8% & over 47.5% 25.2 17.2 8.0 2.1 12.8% 33.3 30.6 18.5 4.8 41.8% 29.8 19.2 7.4 1.8 82.5% 12.5 3.6 1.2 0.2 A ll Rates 100.0% 100.0% 100.0% 100.0% Percent of Total Amount Outstanding— 1957 Under 4% 4% - 5% 5% - 6% 6% - 8% 8% & over 8.0 % 45.4 33.1 10.8 2.7 3.1 % 17.6 50.6 23.2 5.5 6.9 % 35.6 41.8 13.3 2.4 12.3% 72.0 12.8 1.3 1.6 A ll Rates 100.0% 100.0% 100.0% 100.0% See Monthly Business Review, June, 1958, p. 9, for descrip tion of relative size. average rate charged to large firms increased by nearly one third. The only comment that should be added to Table 3 is the fact that about 96 percent of the amount of loans out standing in 1957 with rates under 4 percent were loans made at least two months prior to the survey date. The earlier analysis also mentioned the cost savings to banks in making single large loans rather than many small loans. The primary advantage of lending to large business is the reduced cost and risk, some of which can be passed on by lower interest charges. A prime determinant of interest rates, therefore, is size of loan, which is directly related to size of business. The typical loan size for dif ferent sizes of business can be inferred from Table 4. While small borrowers have not been entirely excluded from relatively large loans, TERMS OF BUSINESS BORROWING, 1955 AND 1957, BY RELATIVE SIZE OF BORROWER111 Fourth D istric t M em ber Banks Although SECURED LOANS are used more by small than by large borrowers, Secured Loans as a Percent of Amount O utstanding 1955 80 40 “I ALL BORROWERS SMALL MEDIUM LARGE and INTEREST RATES are higher for small borrowers, A ve rag e Interest Rate Charged 1955 3% 1957 A% S% 6% 0 1% 2% 37. r ALL BORROWERS SMALL MEDIUM LARGE the MATURITY O F LOANS does not vary significantly between small and large borrowers Short-Term Loans as a Percent of Amount O utstanding , 1955 20 40 1957 60 80 ALL BORROWERS SMALL MEDIUM ___ :......■ ....; LARGE (!)S ee Monthly Business Review, June, 1958, p. 9, for description of relative size. 11 Table 4 PERCENTAGE DISTRIBUTION OF AVERAGE SIZE«> OF BUSINESS LOANS BY SIZE OF BORROWER, 1957 Fourth D istrict Member Banks Average Size of Loan (in thousands) Size of Borrower (total assets in thousands) All Sizes Less than $10 $1025 $2550 $50100 $100500 $500 and over Percent of Total Number of Loans Outstanding Under $50 $50 - 250 $250 - 1,000 $1,000 - 5,000 $5,000 - 25,000 $25,000 - 100,000 $100,000 and over 100.0% 100.0 100.0 100.0 100.0 100.0 100.0 87.3% 49.4 20.4 8.6 1.8 All Sizes 100.0% 59.4% 11.7% 31.0 21.9 12.5 i.3 1.4 20.9% 1.0% 13.9 22.1 11.6 2.6 9.7 5.7 5.0 % 21.9 16.4 9.9 4.3 13.3 9.2 % 5.5% ^ A v e ra ge size based on original amount of loan. sometimes as large as their total assets, the typical loan amount is roughly one fifth to one tenth of their total assets. Relatively large firms appear to borrow, at least on indi vidual bank loans, amounts substantially be low one tenth of their assets. The ability of large firms to borrow in the capital and money markets probably accounts for this difference. Although the percentage of the amount of loans outstanding that was unsecured was un changed in the aggregate between 1955 and 1957 and the percentage that was short-term (one year or less) increased slightly, differ ences in these respects between large and small borrowers were apparent. Small bor rowers, which typically rely more on secured loans, increased the secured share of their outstanding bank loans, while large borrowers relied less on secured loans. On the other hand, large borrowers increased the short term share of their outstandings between 1955 and 1957, while short-term loans comprised about three fifths of total dollar indebtedness of small borrowers in both years. The actual maturity of business loans is clouded by the practice of rolling over short term loans. The prevalence of this practice was revealed in the analysis of the 1955 Sur vey,(2) and its status in 1957 will be reviewed in a later article. One change already brought (2) gee Monthly Business Review, “ Continuous Borrowing Through Short-Term Bank Loans,” September, 1956. 12 0.7 % 13.0 41.8 41.3 32.7 19.6 0.7 % 9.1 44.4 52.0 60.0 out by bank interviews was that some banks had real istically rea p p ra ised the practice of granting longer maturities, in effect, by roll ing over short-term loans. These banks concluded that the longer maturity should be provided when the loan was made and adjusted their practices accordingly. Terms by Size of Bank Reflecting the direct re lationship between size of borrower and size of bank, 3.8% 1-2% differences among bank-size groups in terms of borrow ing and changes in terms between 1955 and 1957 closely parallel differ ences among the size groups of business bor rowers. However, changes in individual bank policies and practices, as well as changes in the banking structure, bring about shifts in the relative importance of terms that are not discernible when the analysis is made by size of business. For example, the largest relative increase in average interest rates charged among smaller banks, those with less than $50 million in total deposits, occurred at banks with de posits totalling less than $2 million. Table 5 AVERAGE INTEREST RATES BY SIZE OF BANK Fourth D istrict Member Banks Size of Bank (Total Deposits in millions) Average Interest Rates October 5,1955 October 16,1957 $500 and ov e r................ $250 to $500.................. $100 to $250................... $50 to $100..................... $20 to $50....................... $10 to $20....................... $2 to $10......................... Under $2........................ 3.7 % 4.1 4.1 4.9 5.0 5.1 5.4 6.1 4.6 % 5.0 5.1 5.2 5.3 5.7 5.6 6.8 All Bank Sizes.............. 4.2 % 5.0 % This apparent exception was the result of relatively large growth in secured loans with maturities in excess of one year and interest charges at 6 percent or more. Such terms characterize small instalment loans used to finance business expenditures for equipment. Higher rates at the smallest size group of banks were, therefore, more a result of fur ther spreading of instalment lending than a result of credit stringency. For the same reason, the proportion of loans with maturities of one year or longer increased between 1955 and 1957 at smaller banks, principally those with deposits total ling less than $20 million. With two exceptions, the share of secured loans in portfolios of the various bank-size groups changed only slightly between 1955 and 1957. Loans secured by banks in the $100 million to $250 million size-class increased from 38 percent of the total amount outstand ing in 1955 to 56 percent in 1957. Much of this shift can be attributed to changes in bank structure which increased the number and size of individual banks in this class. When smaller banks are absorbed into larger branch systems, the existing structure of loans is, of course, also absorbed. Policies in absorbed of fices often change slowly. Therefore, with smaller banks generally carrying a larger share of secured loans, their absorption into larger systems can be expected to raise the proportion of secured loans held by the new consolidated bank. The other exception occurred at the smallest banks where the share of loans carrying security increased from 58 percent in 1955 to 62 percent in 1957. This change further sup ports the claim that instalment lending to finance equipment grew to a greater extent at these banks than did other types of business loans. NOTES ON FEDERAL RESERVE PUBLICATIONS Among the recent statements on Federal Reserve policy and related matters are: ‘ ‘ Borrowing from the Federal Reserve Bank — Some Basic Principles” , by Karl R. Bopp, President, Federal Reserve Bank of Philadelphia. (An address, reprinted in the June 1958 issue of the Business Review, Federal Reserve Bank of Philadelphia.) “ Banks and Rural Development” , by Charles N. Shepardson, member, Board of Governors of the Federal Reserve System. (Remarks at Conference on Rural Development Program, Mem phis, Tenn., June 17, 1958.) “ Financing Small Business” , by Eliot J. Swan, First Vice President, and Robert S. Einzig, Assistant Vice President, Fed eral Reserve Bank of San Francisco. (Presented at Conference of Directors of the Federal Reserve Bank of San Francisco and its Branches, May 28, 1958.) Copies are available at the Federal Reserve banks or Board of Governors, Washington, D. C., as indicated above. 13 Abound the tyoutiUi jbiifriict' BANK DEBITS, JUNE AND FIRST HALF (12 Medium-size Cities, Fourth District) June ’58 First H alf ’58 % change from yr. ago % change from yr. ago Mansfield Middletown Hamilton Zanesville Lexington Lorain Covington-Newport New Castle Wheeling Lima Springfield Warren Ohio + 8% - 6% - 3 Ohio + 6 - 2 Ohio + 5 Ohio - 5 + 3 - 1 Ky. + 1 - 2 - 9 Ohio - 4 - 3 Ky. Pa. - 5 - 9 -1 2 -1 0 W. Va. -1 2 Ohio - 7 - 9 Ohio -1 3 -1 4 Ohio -1 7 * # * # Steel production in the Cleveland-Lorain area recovered early in August to the halfway point between the 1958 low of 25% of capacity and the weekly average of 85% which prevailed in August a year ago. * * * * Fourth District production of all major crops— corn, wheat, oats, soybeans, and tobacco—will be greater than in 1957, according to the July 1 crop report. However, wet weather since that date has endangered full realization of the prospective increases. # # # # Cincinnati department store sales in June were unchanged from a year earlier, but all other reporting areas in the District registered year-to-year de clines. On a seasonally adjusted basis, however, Wheeling-Steubenville and Erie, as well as Cincinnati, showed slight improvement from May. * # * * By the latter part of July, close to 13,000 persons in Cleveland who had exhausted their unemployment benefits under the regular law had begun to file for extended benefits authorized by the Temporary Ohio Unemployment Com pensation Act of 1958. At the same time, an additional 40,500 claims were being filed for unemployment compensation under the regular law. The total of 53,500 indicated a decline of 6,500 from the peak of about 60,000 jobless persons at the end of April who were either filing for unemployment compensation or who had already exhausted their benefits at that time. * * * * Eeal estate loans in the combined portfolios of 17 Fourth District weekly reporting banks posted a new record high at the end of July. ( The above items are "based on various series of District or local data, which are assem bled by this bank and distributed upon request in the form of mimeographed releases.) 14 Additional copies of the MONTHLY BUSINESS REVIEW may be obtained from the Research De partment, Federal Reserve Bank of Cleveland, Cleveland 1, Ohio. Permission is granted to repro duce any material in this publication. FOURTH FEDERAL RESERVE DISTRICT mmm*
@FedFRASER