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i—| MONTHLY ^ - o ooimMKet/ieu/ IN THI S I S S U E - F E D E R A L RESERVE BANK of C L E V E L A N D — The Price of Farm Land.......................... ..3 Automated Check Processing................. ..6 Notes on Federal Reserve Publications. . . 9 fc a te , I 9 6 0 Employment and Unemployment in .10 Although the advance of farm land prices has slowed, the average price per acre is now more than ten times the net income per acre, a ratio that has been without precedent fo r more than tw enty years. * A nnual N «t Farm Incom *, including inventory c h a n s * . ** Farm la n d a n d b uildin g* on M arch 1 of th* follow in g y * a r . Additional copies of the MONTHLY BUSINESS REVIEW may be obtained from the Research De partment, Federal Reserve Bank of Cleveland Cleveland 1, Ohio. The Price of Farm Land h e l o n g continued rise in prices of farm a downward trend of farm income. Neverthe less, market values of farm real estate con land has moderated considerably in recent months. A 3 percent increase from a year agotinued to advance as farmers sought to en large existing holdings in order to obtain the in the average price of farm land in the na benefits of an increased scale of operations, tion was indicated by the March 1 survey of and as the demand for industrial sites market values conducted by the Department and rapidly growing suburban communities of Agriculture.(1) That increase was in con brought competitive bidding for land ad trast to advances of 6 percent to 8 percent a year for the previous three years. Even though jacent to rapidly growing centers of popula the latest advance was small—one percent in tion. The high level of economic activity and inflationary advance in the general price each of the three consecutive four-month periods—it lifted land prices to a new high level provided still another broad source of of 173 percent of the 1947-49 average. The demand for farm land. A traditional view present level is 68 percent higher than ten that has been widely held is that ownership years ago and 253 percent above that of of farm land affords protection of capital twenty years ago. against loss of purchasing power. The in fluence of this view on the demand for farm real estate was operative in the late ’forties, Twenty-Year Advance in Market Values but has probably been of greater significance During the decade of the ’forties, both during the past decade. land prices and farm income rose, but the The upsweep in market prices of farm real advance in farm income was much sharper, estate over the past twenty years has been as will be noted in the chart on the cover. interrupted on two occasions. Market values The relatively moderate rate of advance of actually declined in 1950 and again in 1954, farm real estate prices during this period re but in each instance resumed an upward flected the influence of a number of factors. trend in the following year. Probably the most important factor was the war-induced scarcity of labor and machinery which restrained farm operators from adding Relation of Price to Income to the size of their farms. Another factor In 1940, the beginning of the period under which presumably exerted a restraining influ consideration, the average price of farm real ence on market values was the conservative estate in the nation was $31.94 per acre and attitude of many farmers, born of their postthe net income per acre averaged $4.31, as World War I experiences, toward the incur shown by the cover chart. The ratio of aver ring of long-term debt. age price to income at that time was 7.4. Much of the ’fifties was characterized by Thereafter, the ratio narrowed to 3.9 in 1943, (i) Farm land price surveys are conducted regularly three then widened to 6.2 by 1950. During the times a yew by the U. S. Department of Agriculture and re ported in that agency’s publication, Current Developments in period of the last ten years the ratio has the Farm Real Estate Market. The May 1960 issue contains the findings of the March 1960 survey. continued to widen. With market prices aver T 3 aging $111.32 per acre and farm income $10.19 in 1959, the ratio of price to income was 11.0, the highest ratio in more than twenty years. Only twice before in the period for which records are available has the ratio of price to income exceeded 10; that was in 1921-22 and 1932-34. In both instances land prices eased before income ultimately recovered, re establishing a price-income ratio of less than 10. What the outcome will be on this occasion is not clear at this time, but the persistent advance in prices of farm land without apparent support from gains in farm income has created a relationship between values and income that is without precedent in the past twenty years. The p e rc e n t of net farm income r e quired fo r farm real estate taxes has nearly doubled in the past ten years. P.rc.m FA R M R EA L ESTATE T A X ES ( a s % of n e t f a r m i n c o m e ) Rate of Return on Market Value Another way of stating the same develop ment is to point out that the rate of return on the current market value of farm real estate is at the lowest level in two decades, as shown in the accompanying tabulation. It will be noted that the rate of return on cur rent market values as computed by the De partment of Agriculture dropped below the mortgage rate of interest after 1954. Computed Return on Current Market Value of Farm Real Estate and Farm Mortgage Interest Rates (Selected Years) Year Rate of Return on Real Estate Capital(1) 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1959 5.2 14.2 7.5 11.4 13.4 8.3 7.4 5.4 4.0 6.0 3.0 est. Farm Mortgage Interest Rate <2> 4.6 4.4 4.4 4.6 4.5 4.5 4.6 4.6 4.7 4.8 N.A. (1) Residual return on market value of land and buildings. (2) Rate charged by all lenders combined. Source: U. S. Department of Agriculture: Current Develop ments in the Farm Real Estate Market, February 1960, and Agricultural Finance Review, July 1957. N O TE — Net farm incom e is taken before real estate taxes and rent to nonfarm landlords. Owners whose farms are debt-free and others who have accumulated substantial equities in their holdings may not be greatly concerned by the present low return on mar ket values. Owners with limited equities, however, as well as prospective purchasers and lenders, do have reason to be concerned as mortgages and land contracts are becoming more difficult to repay than in much of the past twenty years, since the current rate of return is equal to about one-half of the pre vailing interest rate on newly-written farm mortgages. Mounting Real Estate Taxes Another factor of increasing importance, aside from the current low rate of return on market values, is the steady upward trend of farm real-estate taxes. Taxes on farm real estate have absorbed an increasing percentage of pretax farm income, as shown by an ac companying chart. The increase in the per centage of net income required to pay farm realty taxes has been particularly significant during the past nine years. Moreover, the growing need in many communities for more schools and other public buildings as well as for public services constitutes a strong influ ence toward further increases in the taxes assessed against farm real estate. Fewer Inquiries to Buy In view of the record level of market values of farm real estate and the unprecedentedly low return on those values, it is not surpris ing that the inquiries about buying land this spring have been reported to be below a year ago. The number of people seeking farm land is reported by the March 1960 land mar ket survey to have shown clear indications of weaker demand, particularly in the Corn Belt and the Lake States. Elsewhere in the nation, the opinions of reporters were said to be more evenly divided between those who thought Tfce advance in farm land prices during the 'fifties was greater In Ohio and Pennsylvania than it was In Kentucky and W est Virginia. that the demand for land had increased and those who said that the demand was weaker. Offerings and Transfers Remain Low The number of farms available for pur chase continues low. The survey respondents indicate that the number of farms offered for sale has not changed perceptibly over the past three years. The limited number of farms offered for sale has, in fact, tended to sustain the upward trend of market values. With limited interest on the part of pros pective buyers and sellers, ownership trans fers have remained comparatively low. About 190.000 tracts of land and farms are reported to have changed ownership during the year ended March 1, 1960. That number of trans fers is equal to a rate of 47.1 transfers per 1.000 farms, or only moderately above the all-time low of 44.1 per 1,000 for the twelve months ended March 1954. Under present market conditions a small increase in offer ings (or bids) could conceivably have a sig nificant influence on market values. Farm Land Prices in the Fourth District The market price of farm land registered further gains in the four states wholly or partially in the Fourth Federal Reserve Dis trict during the twelve months ended March 1, 1960, as shown in an accompanying chart. As also may be noted from the chart, farm land prices are currently at a new high in all four states. The magnitude of the change in market values during the recent twelve month period varied appreciably in the four states as it has on several occasions over the past twenty years. The largest year-to-year gain was reported in Kentucky where market values per acre are indicated to have ad vanced 6 percent. The increase in market values was nearly as great in Pennsylvania where the average price per acre is reported to have risen 5 percent during the recent twelve months. Market prices of farm real estate in Ohio and West Virginia, however, rose only 1 percent and 2 percent, respec tively, during the period. 5 Automated Check Processing stra n g e looking characters which World War to the point where the banks in this country have now been virtually snowed appear at the bottom of this page are the key to the solution of the biggest paper hanunder by huge drifts of paper. Last year an enormous total of 12 billion checks were is dling problem in the banking industry. Briefly sued by Americans and it is estimated that stated, the problem is the handling of checks the total this year will be 14 billion. That will from the time they are deposited or cashed by represent an increase of about 60 percent the payees until the time they are finally from a year as recent as 1952 and will be charged to the drawers’ accounts. Even today double the total at the end of World War II such characters may be seen along the bottom and three times as many as were issued an edge of many checks, and in a relatively short nually prior to the war. period of time will appear as routine and standard procedure on a very large percent Checks represent about $9 of every $10 age of all checks issued. The banking industry spent in the United States. With the increas is confident that in the not too distant future ing realization on the part of the public of the checks on which these characters do not the desirability of checking accounts as the appear will be rare exceptions to the general best medium for the payment of bills, coupled rule. with the mushrooming growth of the popu The new characters along the bottom edge lation, it is estimated that by the year 1970 of the checks are associated with other tech the number of checks issued annually will nical developments which will make possible reach the staggering total of 28 billion. complete automation in the handling of When it is considered that each check is checks. Following is a brief summary of how handled approximately ten times from the this plan evolved and how it will work in time of issuance until it is charged to the actual practice. drawer’s account, it can be seen that by 1970 approximtely 280 billion check handlings an The Problem nually will be involved. During this process Since checks were first used in this country each check will have been handled by an average of two and one-half banks, and not in Boston about in the year 1680, there has less than 50 percent of all the checks issued been a steady growth in their volume. Growth will have been handled at least once in the in use of checks was accelerated by the in Federal Reserve System’s check collection crease in the money supply during the Second T he operation. At the present time the three of fices of Federal Reserve Bank of Cleveland handle daily an average of approximately 1,200,000 checks; this is by far the largest operation of the bank. Several years ago the banking industry realized that something had to be done to cope with the relentless, ever-increasing vol ume of checks. It was becoming more difficult to recruit and maintain the armies of clerical workers for the tedious operations which had over the years made only slight progress from hand work to the present semi-mechanized proof machines. It was felt that some form of complete automation was the only answer and the American Bankers’ Association turned the problem over to its Bank Management Commission for study and recommendations. The Solution The Bank Management Commission of the American Bankers Association met with representatives of the check printing indus try and the equipment manufacturers and, after almost four years of working together, came up with the solution. Basically it was that checks would have imprinted thereon a common machine language and the equip ment manufacturers would develop machines that could read, sort, and list the checks by character recognition of such language. The common machine language decided upon is in the type font (as illustrated by the characters in the illustration) which was chosen after exhaustive tests and evaluation by the group of bankers, printers and manu facturers. It is known as Type E13B. The characters are to be printed on the check in magnetic ink which contains iron oxide. As the checks pass through the common machine language equipment, which will operate at very high speeds, the characters will receive an electrical charge which will magnetize them. Signals, which differ for each charac ter, are then transmitted to a reading head which, in turn, activates a computer that per forms the designated sorting, listing and post ing tasks. The imprinting of the common machine language is in a band extending 6 inches from the right edge of the check and % of an inch from the bottom edge. This band con sists of three areas; the right-hand area is for the amount, the middle area is for the ac count number or other information desired by the drawee bank, and the left-hand area is for the routing symbol-transit number. The latter item will consist of the present routing symbol number but only the suffix of the present transit number; that is the one in which the Federal Reserve System is the most interested since it is the area or field which will be used for sorting to drawee banks. On checks 7% inches or more in length, an optional fourth area to the left of the third area is also available for imprinting the check serial number or any other infor mation which the drawee bank or customer desires. The check routing symbol in fractional form, consisting of the full transit number as the numerator and the routing symbol num ber as the denominator, will be shown as at present in the upper right-hand corner of the check in conventional type. Information contained in all but the ex treme right area of the band is expected to be printed in the common machine language at the time the check itself is printed. The dollar amount of the check will be imprinted in the common machine language in the righthand area at a later stage. It is to be done as a by-product of the proofing operation by the use of amount encoders built in or attached to adding machines or proof machines, and it is contemplated that ordinarily this would be done by the first bank handling the item. It is of course possible and indeed preferable for large issuers of checks to supply encoding of amounts at the time the checks are issued. Once the encoding in the common machine language is in place for all four areas, it is obvious that from that time on the check can be handled by automation throughout the entire collection and on-us posting processes.(1) (1) “ On us” posting refers to the posting of checks to indi vidual accounts by the drawee bank. 7 G. A B C CORPORATION 7 123 ANY S T R E E T SOMEWHERE, OHIO / S ' . .1g NO,. X %x 56-150 412 I AY TO T H E ORDER O F , 1 X3. V S .D O LL A R S FIRST NATIONAL BANK aL SOMEWHERE, OHIO OFF ICIAL SIGNATURE I I u»O O O O O EaEu« I i:0 U 2 '"0 1 5 D H L CHECK SEfiUt NUMBER AUXILIARY ON OS fB IO Euoan* L. A .B .A . NUMBER ROUTING SYMBOL m N S i t NOMBB HELD CHECK DRHT ACCOUNT NUMBER on us raw WWWCNTH COBG AMOUNT IK U (A ctual size o f specimen check is larger than illustration.) The specifications with respect to the com mon machine language encompass certain conditions as to size and design of checks and also certain dimensional and tolerance re quirements. Full details regarding these specifications are available in Bank Manage ment Publications Nos. 147 and 149 of the American Bankers Association.(2) Check printers and equipment manufacturers are completely familiar with these specifications. An accompanying illustration shows a check properly encoded in all four areas in the common machine language. The Present Situation The enthusiastic reception of the general program for the automation of check han dling has been noteworthy. Banks generally are moving rapidly to have their new check (2) These can be secured from the American Bankers Associ ation office located at 12 East 36th Street, New York 16, New York, at a cost of $1.00 each. orders provide for the encoding of the neces sary standard information in the common machine language according to the specifica tions of the A.B.A. Even those banks which do not intend to have automated on-us check posting are cooperating with respect to the routing symbol-transit number which, as stated previously, is the encoding which is essential in the transit operations of the Fed eral Reserve System and the large commer cial banks. Of the one hundred largest banks in the United States, it is understood that well over half of them have placed orders for the new equipment. Insofar as the Federal Reserve System is concerned, it has arranged for pilot installa tions of the new equipment produced by five different manufacturers. These installations will be at the Federal Reserve banks of Bos ton, New York, Philadelphia, Chicago, and San Francisco; the major components of the equipment at the various installations will be products of different manufacturers. The first of the installations is scheduled for July of this year and the remaining four are expected to be installed at various times within the next eight months. It is contemplated that such automatic handling of checks will be standard operating practice in at least some of the Federal Reserve offices not later than the beginning of 1962. Need of Participation by Commercial Banks and Their Customers It is hoped that every commercial bank, regardless of size and regardless of whether or not it intends to go into automatic on-us bookkeeping, will cooperate in the program, at least to the extent of having the routing symbol-transit number preprinted on its checks according to the A.B.A. specifications. The cost of checks preprinted in magnetic ink will be very slightly higher than present costs. There may also be an additional cost in cases where check forms must be redesigned, but this will be a nonrecurring expense which, when spread over a period of time, can be considered as negligible. Checks drawn on any bank in the United States will, to a certain degree, be deposited or cashed in localities outside of that of the drawee bank and, as a consequence, these checks will appear in the collection stream. In the not too distant future, checks not en coded in the common machine language will be exceptions rather than the rule. Conse quently the time will come when these items will require special handling and will, no doubt, be subject to special rules in the col lection process. NOTES ON FEDERAL RESERVE PUBLICATIONS Among the articles recently published in the monthly business reviews of other Federal Reserve banks are: “ The Federal Funds Market” , Federal Reserve Bank of St. Louis, April 1960. ‘ ‘ $52 Billion on the Cuff: How Burdensome is Consumer Credit ? ’ ’, Federal Reserve Bank of Philadelphia, April 1960. “ The Seaway — Year One in Review” , Federal Reserve Bank of Chicago, May 1960. “ The Importance of Recent Inventory Changes” , Federal Reserve Bank of Dallas, May 1960. “ The Business Situation: the Long-Run Unemployment Picture” , Federal Reserve Bank of New York, May 1960. Copies may be obtained without charge by writing to the Federal Reserve Bank named in each case. 9 Employment and Unemployment in Cleveland* of good news was recently made pub lic when the President of the U. S. an nounced that employment in the nation during April reached a new record for the month of over 66 million. That was nearly 2 million more than in the preceding month, March, and over 1 million more than in the year-ago month of April. Simultaneously, there was a sharp drop off in national unemployment. From mid-March to mid-April the count of jobless persons declined by about half a million, or 13%, to 3,660,000. At this level, unemployment was only about 1% higher than it was a year earlier. A p ie c e The figures cited by the President, which were compiled by the U. S. Department of Labor, de scribed the national picture as a whole, but they do not fully and accurately portray recent trends in Cleveland. There have been sizeable employ ment gains in Cleveland also, during the past twelve months, but at the same time a significant and persistently high level of joblessness has been built up that is well above the year-ago level. The record shows that the number of persons registered for unemployment compensation in Cleveland has never returned to pre-recession levels. Last July, when continued claims were at a post-recession low of 9,300, they were still 16% above July of 1957. Unemployment has been gen erally increasing ever since then except for tem porary fluctuations associated with the steel strike. By January and February of this year, con tinued claims had expanded — and only in part for seasonal reasons—to approximately 20,000 in Cleveland; the number was still below the yearago level, but only by about 2,000. Subsequently, * A reprint of a broadcast, in the weekly “ Business Tren ds” series, by the Research Department, Federal Reserve B ank o f Cleveland, over Station W G A R , Cleveland, May 22, 1960. 10 in March, the rising number of unemployment claims reached 22,000 and overtook the year-ago level. By mid-April, the number of continued claims filed for unemployment compensation had edged higher to 22,800, which exceeded the yearago level by 7,000, or more than one-third, and was roughly twice as high as in the correspond ing months of the pre-recession years 1956 and 1957. The most recent data for May show a strong seasonal decline but there was still a sub stantial excess of about one-third above the yearago level, and the number was still double that of two years ago. Employment Gains Although as a general rule trends in unemploy ment can be traced to the ups and downs of busi ness activity, this explanation does not suffice at present. In March and April, most Cleveland busi ness indicators were at or above their year-earlier levels and, despite the increase in unemployment, there were actually more people working in the Cleveland area in March 1960 than in March 1959. Total nonagricultural employment was esti mated by the Ohio Bureau of Unemployment Compensation, in cooperation with the U. S. Bu reau of Labor Statistics, to have numbered 693,000 in March 1960, or 15,000 more than in March last year. Furthermore, when the sub divisions of employment according to industry classifications are examined, it is seen that yearto-year expansion permeated virtually the entire list. Manufacturing e m p l o y m e n t in Cleveland showed the largest increase both proportionately and in actual numbers. There were 295,000 em ployees on the March manufacturing payrolls, up 4%, or nearly 12,000, from a year earlier. Most of the increase occurred in durable goods manu facturing industries. Major increases were as follows: nonelectrical machinery employment, up 3,700; fabricated metal products, up 3,500; elec trical machinery, up 1,600; transportation equip ment and primary metals, up 1,000 in each case. There was no major industry in the durable man ufacturing group that reported an employment decline. Employment changes in the nondurable group of manufacturing industries were smaller, but still on the upside during the 12-month period. Employment in n o n m a n u f a c t u r i n g industries showed less change. The March 1960 total was 398,000, up only 3,300, or less than 1%, from the same month a year earlier. Employment by gov ernment, both Federal and local, including schools, rose by about 2,000 to show the largest nonmanufacturing employment increase. But Unemployment Remains a Problem The positive and sizeable year-to-year rise in total employment—up 15,000 as stated above— indicates that the simultaneous unemployment increase—up 2,000 in March—has not been due simply to a general cutback in employment. In stead, the figures imply that during the 12-month period new jobs have opened in considerable num bers, but these jobs have not been filled primarily from the ranks of the unemployed. In addition to the insured unemployed, employees can be re cruited from among the youngsters reaching working age, i.e., the natural increase in popula tion, from persons who come to Cleveland from other areas, and from voluntary entrants into the labor force, e.g., married women or others who take jobs, but were not previously “ unem ployed” . The question arises, why weren’t more of the new job openings filled by persons who have been laid off and are collecting unemployment com pensation? For lack of complete and detailed in formation, this question can’t be answered with certainty, but it appears that changing job re quirements may provide a considerable part of the explanation. In the current May issue of the Monthly Busi ness Review of the Federal Reserve Bank of Cleveland, a study of long-term trends in na tional employment reveals that opportunities for employment have been increasing for profes sional and technical factory workers who can carry on research and development programs, and for clerical workers and sales personnel, or in other words the so-called “ white-collar” em ployees. On the other hand, the employment of “ blue-collar” workers on production lines, in maintenance jobs, etc., has been slowly waning and requirements for the jobs that remain call for fewer but more skilled productive personnel than was the case in the past. In contrast, a large proportion of the insured unemployed have little or no training. A recent study by the U. S. Department of Labor based on February 1960 data classifies fully half of the insured unemployed in the nation and in Ohio as unskilled or semi-skilled. Only one-fourth were classified as skilled workers. Furthermore, as the report indicates, of the persons who experienced long-term unemployment and exhausted their unemployment insurance benefits in February of this year, more than half were unskilled or semi skilled. Cleveland has long been a sizeable manufactur ing labor-market area and it has, by the nature of its industries, attracted a substantial pool of labor both skilled and unskilled. In view o f the large numerical size of the unskilled group of workers, even a relatively small shift away from the use of unskilled labor may be expected to have a measurable effect on unemployment in this area. 11 FOURTH FEDERAL RESERVE DISTRICT
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