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MONTHLY IN FEDERAL RESERVE BANK of CLEVELAND-— — THIS ISSUE Deposit-Type Financial Institutions........ . .2 Farmland Prices Edge H igh er.............. .11 Employment Trends in a Heavy-lndustry p * u te t $ 6 t .15 BR.42 COMMERCIAL BANKS In Account with D a te "jj '• " '•c ' A C C nnA TIA M Q mm U ?S ?<S H llf7 7 7 7 zJ^aSM Ai£^ W ith d ra w n N® 33333 C2 fa> Q < < 9 ') Deposited B a la n c e Deposit-Type Financial Institutions a m o n e y economy, financial institutions provide services which are both relied upon heavily and used continuously. The modus operandi of financial institutions is essen tially that of any kind of intermediary or middleman. All financial institutions obtain funds, in one way or another, and in turn make such funds available, again in one form or another, to individuals and institutions that have many and varied ultimate uses for the funds. In the pages that follow, we are interested in a particular group of financial institutions, namely, deposit-type financial institutions. Deposit-type financial institutions, which in clude commercial banks, savings and loan associations, mutual savings banks, and credit unions, obtain funds from lenders, investors, and depositors; in turn, they advance such funds in various forms to all kinds of users, including businesses, individuals, and govern mental units. Since funds which are available to be ad vanced are limited, and because financial institutions, like any other business, are in terested in gaining a return, a price (inter est) must be exacted for the use of such funds. Deposit-type financial institutions, with the exception of commercial banks, deal completely in funds which in a broad, aggre gate sense have been saved in a previous period of time. On the other hand, commer cial banks deal only in part with savings. An indication of the important role played by deposit-type financial institutions is found in the number of dollars that such institutions supplied through credit and equity markets to the eeonomv in 1960 for a variety of ulti mate uses. According to the flow-of-funds data published by the Federal Reserve Sys tem, deposit-tvpe financial institutions ad I n 2 vanced $18.5 billion, net, or slightly more than 47 percent, of the total of $39.2 billion in funds supplied by all sectors of the econ omy in 1960. Of the total amount supplied by deposit-type institutions, commercial banks advanced $9.2 billion — about one-half of the funds supplied by all such institutions— while savings and loan associations, which advanced $7.1 billion, ran a fairly close sec ond. Mutual savings banks and credit unions each supplied smaller amounts of funds to the economy, $1.5 billion and $0.7 billion, respectively. It is clear from these data, as well as from other supporting information, that deposittype financial institutions carry out a major function in feeding the flow of dollars which is the lifeline of business and financial activ ity. Let us take a closer look at the four deposit-type institutions listed above. In ad dition to defining and describing these insti tutions, we shall attempt to highlight some of the facts and figures associated with their current activity, as well as those which meas ure their development in the postwar period. Definition and Description Commercial Banks. Taken as a whole, com mercial banks bulk largest among deposittype financial institutions, whether we use number of facilities, dollar magnitudes, or variety of function as the basis for compari son. At the end of 1960, there were 13,472 commercial banks in the United States, with 10,483 additional branch offices. Total assets for all commercial banks were $257.6 billion, or more than double the total assets of the other three deposit-type financial institutions combined. In individual size, commercial banks ranged from a relatively large number of banks with assets under $10 million, each, to a comparatively few banks with total assets of well over $1 billion, each. Chief among the variety of services offered by commercial banks is the provision of credit through commercial and industrial loans, personal loans, home mortgage loans, and agricultural loans, among other types of loans. In addition, commercial banks hold demand and time deposits and provide cash ier’s checks, trust facilities, and safe deposit boxes. Such a variety of services has prompted the graphic descriptions “ department stores of finance” and “ financial supermarkets.” A key characteristic of commercial banks, as compared with other deposit-type institu tions, is the ability to create money in the form of demand deposits. The commercial banking system generates the major source of the means of payment— the money supply -—in the economy. Demand deposit accounts provide both complete liquidity and complete payments service for the holders of such accounts. Hence, commercial banks are able to provide services through demand deposits which must be weighed by individuals and businesses against the net returns they can obtain from other liquidity media (includ ing, for example, Treasury bills, time de posits, commercial paper, and share accounts at savings and loan associations). The de cisions thus made by businesses and indi viduals are basic to the allocation o f funds between demand deposits and other, less liquid, interest-earning media. As shown in an accompanying balance sheet, demand and time deposits, taken to gether, represent the major source of funds o f commercial banks. Other lesser sources of funds include capital accounts and borrow ings. Demand deposits constitute an interestfree source of funds for commercial banks. The volume o f demand deposits held by com mercial banks is subject to a number of in fluences, including monetary policy actions, bank lending and investment activity, and liquidity decisions of deposit holders. In contrast, time deposits constitute funds for which banks pay a price. Time deposits are technically not quite as liquid as demand deposits in that a bank may require a 30-day notice of withdrawal before relinquishing such funds. However, banks usually waive the legal right and pay upon demand. As the balance sheet shows, time deposits amount to approximately one-half the dollar volume of demand deposits. Time deposits include both savings deposits and time certificates of de posit. The combination of such deposits thus really represents a broad grouping in that it includes, among others, savings with a pur pose, temporarily-excess funds, and funds held as a long-term but liquid investment. In general, time deposits do not usually show the volatility — that is, the sharp seasonal or cyclical variation in magnitude— of demand deposits. As also shown in the balance sheet, com mercial banks use the funds from different sources mainly to advance credit to individ uals, business firms, and governments. Loans currently represent nearly one-half of the total assets of commercial banks. In the loan portfolio, commercial and industrial loans account for the largest single share, or about 36 percent of total loans; real estate loans make up about 25 percent of total loans; while loans to individuals and agricultural and other loans comprise 22 percent and 17 percent, respectively, of total loans. Investments constitute the second largest asset outlet among the uses of funds by com mercial banks, representing about one-third of the uses of all funds. Commercial banks’ investments include holdings of U. S. Gov ernment securities, as well as holdings of state and local government obligations, and serve as the major means of extending credit to governmental units. The portion of these credit instruments that is short-term and liquid is held chiefly as secondary reserves because, while they earn an interest return for commercial banks, they usually can be liquidated quickly to meet unexpected deposit withdrawals. Cash and reserve balances, or primary re serves, represent about one-fifth of the total assets (or uses o f funds) of commercial banks. Primary reserves defined in this way are thus nonearning assets held as cash on hand or as deposits in other banks. A re serve of cash, in addition to being counted toward meeting reserve requirements, is re garded by a bank as an insurance of liquid ity, i.e., it helps provide the wherewithal to meet deposit withdrawal demands. Member banks of the Federal Reserve System main tain most o f their reserves as deposit balances in the Federal Reserve Banks, while non members hold the bulk of their primary re serves as deposits in correspondent banks. In every phase of its operations, a commer cial bank is closely supervised and regulated. Banking supervision begins with the grant ing o f a charter by either a national or state authority and extends through regulations governing voluntary or involuntary liquida tion. During the intervening life span of a bank, supervisory authorities such as the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insur ance Corporation, and state banking depart ments maintain supervision by requiring re ports and by making periodic examinations. Supervision by the Federal Reserve System involves, in part, regulation of the reserves of 4 banks in such a way as to help prevent excessive fluctuations in the volume of credit supplied to the economy by the banking system. On the other hand, the major objective of FD IC supervision is to protect deposit ac counts by providing insurance up to $10,000 for each account in the member banks of the Federal Reserve System (as well as in quali fying nonmember banks). In addition to pro viding deposit insurance, the FD IC has the power to prohibit payment of interest by banks on demand deposits and to limit the rate of interest paid on time and savings deposits of insured banks which are not mem bers of the Federal Reserve System. The rate of interest paid on time and savings deposits of member banks is regulated by the Federal Reserve System. The Federal Reserve System also provides secondary credit for commercial banks, if needed. Under existing arrangements, mem ber banks may borrow reserves from the Federal Reserve banks in order to offset tem porary deficiencies in required reserves. Savings and Loan Associations. In contrast to the manifold services offered by commer cial banks, other deposit-type financial insti tutions, such as savings and loan associations, have been described as “ specialty shops’ ’ of finance— because of their relative singularity of service. The lending and investment pow ers of savings and loan associations are rela tively restricted, as compared with the multiple lending and investment powers of commercial banks. A typical savings and loan association would be likely to define its central function as the acquisition o f savings share accounts from the public and the investment of funds so obtained in the form of loans, for the most part in home mortgage loans. Paralleling in part the expansion in residential housing, savings and loan associations have a striking record of dollar growth in the postwar period. In fact, the savings and loan industry has evolved into the largest single source of funds to the mortgage market. At the end of 1960, there were approxi mately 6,276 savings and loan associations in the United States, with 1,300 additional branches, or less than one-half the number of main offices of commercial banks and about one-eighth the number of branches. Savings and loan associations are found in each of the states, with few communities having more than 10,000 population being without an as sociation. The first savings and loan association was started in 1831 in Philadelphia, nearly a halfcentury after the first commercial bank was chartered by a state government. In the early years, savings and loan associations were literally cooperative clubs for homebuilding, operating primarily with the part-time serv ices of members. The title used commonly until the early 1930’s was that of “ building and loan association” ; in the 1930’s a general change was made to that of “ savings and loan association.” The evolution of titles reflects in part a change in emphasis on function. Similar to other deposit-type institutions (with the exception of commercial banks) savings deposits constitute the major source of funds for savings and loan associations. Since savings and loan associations can not accept or create demand deposits, they do not contribute directly to the nation’s money supply. “ Deposits” in savings and loan as sociations are technically shares, in most cases. Hence, a deposit is not technically the liability that it is at commercial banks; it is an owner’s equity or share of ownership. Shareholders, or depositors, thus receive dividends rather than interest payments. As shown in an accompanying balance sheet, the bulk of the funds available to sav ings and loan associations is channeled into mortgages, although some funds are invested in U. S. Government securities. In the case of federal-chartered savings and loan associ ations, and for most state-chartered institu tions, investment in real estate loans is lim ited to amortized first-mortgage loans on homes and small apartments in the immedi ate and surrounding communities, generally within a 50-mile radius. Moreover, federal savings and loan associations may not lend more than 80 percent of the appraised value of the mortgaged property, except on FH A insured loans and veterans’ guaranteed loans. The legal loan limit at state-chartered insti tutions varies from 70 to 80 percent for non insured loans. A secondary credit system for savings and loan associations is provided by the Federal Home Loan Bank System— to some extent a counterpart of the Federal Reserve System. About three-fourths of the savings and loan associations are affiliated with the FHLB. The Federal Savings and Loan Insurance Corporation (F S L IC ), a government corpo ration and a counterpart of the FDIC, in sures share accounts of the savings and loan associations up to $10,000. Approximately three-fifths of the associations, representing more than 90 percent of the assets of all associations, are members of the FSLIC. There is an important substantive differ ence between commercial banks and savings and loan associations regarding the settle ment of account withdrawal claims. Accord ing to specified requirements, a commercial bank must honor claims on both demand deposits and time deposits within 30 days 5 without delay, whereas the period of repay ment permitted a savings and loan associa tion under existing law is potentially much longer. If an insured savings and loan asso ciation becomes insolvent or is in default, the FSLIC settles each insured account by pay ment of cash or by making available to the holder of the account a transferred account in another insured institution. (The FDIC settles accounts in commercial banks in much the same manner.) Mutual Savings Banks. Mutual savings banks are the oldest savings-type institution in the United States; two such institutions were started as early as 1816. A mutual sav ings bank is, as the name implies, a “ mutual” undertaking. The central purpose of mutual savings banks is essentially to encourage thrift among people of lesser means and to channel funds so obtained into earning assets, which have been for the most part mortgages. At the end of 1960, there were in operation 514 mutual savings banks with a total of 486 branches; in numbers, mutual savings banks had the fewest facilities of the various deposit-type institutions. The mutual savings banks range in size from small institutions with deposits of $1 million to a number of large banks with deposits between $500 mil lion and $1.5 billion. The relative importance of this type of deposit institution varies greatly by area, since such institutions are heavily concentrated in the northeastern part of the United States. In contrast to other deposit-type institu tions, which operate under a dual chartering system, i.e., either federal or state, all mutual savings banks are state-chartered and statesupervised. Mutual savings banks do not ac cept demand deposits, although they do pro vide a number of services similar to those of commercial banks, including travelers ’ checks, cashier’s checks, safe deposit facilities, and payment of funds to utilities for their cus tomers. As shown in the accompanying balance sheet, savings deposits are the major source of funds for mutual savings banks. Earnings on such deposits are distributed quarterly or semiannually to savers in the form of divi dends. As is the general practice of savings and loan associations, requests from deposi tors for withdrawals usually are paid in full on demand. The lending and investment powers of mutual savings banks are somewhat broader than those of savings and loan associations, but are relatively less than those of commer cial banks. Although mutual savings banks are more or less restricted in their loan activ ities, they are usually permitted to extend first mortgage loans on improved real estate, to purchase mortgage paper from other lend ers, to lend to depositors against their savings accounts, and to make a number of other types of loans. As also shown in the balance sheet, the principal use of funds for mutual savings banks is lending in the form of mortgages. This is akin to the practice of savings and loan associations, although not to the same degree as the latter. Holdings of U. S. Gov ernment obligations, which account for about 20 percent of savings banks’ assets, represent a second outlet or use of funds. Most states permit mutual savings banks to invest only in an approved list of securities prepared either by the state legislature or by the state agency supervising the banks. In most in stances, permission is granted to purchase securities such as U. S. Government obliga tions, selected municipal bonds, and some “ blue-chip” preferred and common stocks. As in the case of other deposit-type insti tutions, deposits of most mutual savings banks are covered by some type of deposit insurance. The majority of such banks belong to the Federal Deposit Insurance Corpora tion, while a large number of mutual savings banks in Massachusetts, Connecticut, and New Hampshire obtain similar— and in some respects more extensive— deposit insurance through special state agencies. On the other hand, for secondary credit purposes, at least three mutual savings banks have joined the Federal Reserve System, while a number of others are members of the Federal Home Loan Bank System. Credit Unions. Credit unions are essentially cooperative, self-help, thrift and loan soci eties composed of individuals generally bound together by some common tie. The central twofold purpose of credit unions is clear cu t: (1) to encourage and promote regular sav ings among the members, and (2) to provide loans to the members at low rates of interest. Members of a credit union purchase shares that represent ownership, and which are essentially savings accounts; each member may then borrow from the association — a privilege not extended to nonmembers. In come from loans, as well as from relatively limited investments, provides the funds from which members are paid dividends according to the proportion of individual ownership. Members own, control, and operate credit unions under a federal or state charter. De spite a spectacular rate of growth during the postwar period, the position of credit unions in the aggregate in terms of pertinent dollar magnitudes is still relatively small, irrespec tive of which balance sheet item is used. In addition, because of a large number of small individual credit unions, the average dollar size of credit unions is small in comparison with the other deposit-type institutions. There were approximately 20,200 credit unions in operation at the end of I960; credit unions have proliferated throughout all 50 states and the District of Columbia, with about one out of every 17 persons belonging to such an organization. Credit unions have been established by a wide variety of organi zations. The largest number are found within manufacturing companies which have nearly 30 percent of the total number of credit unions in existence. In addition, labor unions have 5 percent of the total number, while church congregations and neighborhood or ganizations account for 9 percent and 10 per cent, respectively. The largest income-producing use of funds for credit unions is in providing loans, as is shown in the accompanying balance sheet. For the most part these are consumer loans, although in those instances where it is so per mitted, many state-chartered credit unions are entering the real estate loan market. Be cause lending and investment powers are relatively restricted, credit unions have few other outlets for their funds. Federal credit unions are permitted to invest only in time deposits of commercial and mutual savings 7 banks, accounts of insured savings and loan associations, U. S. Government securities, and to make loans only to members or to other credit unions. Credit unions are subject to both external and internal supervision. Specific terms such as maximum loan maturities, limits on the amounts of loans, and rates on loans often are set by federal or state law, with regula tions among the states differing somewhat. There is no insurance of share accounts, nor is there a source of secondary credit, as in the cases of the other deposit-type institu tions. However, a majority of credit unions provide life insurance to borrowers to pay off the loans of persons who die or become dis abled. G row th of Deposit-Type Institutions Throughout the postwar period, deposittype financial institutions, along with other financial institutions, have had to adapt, ad just, and innovate in order to meet the de mands and requirements imposed by an expanding economy. As a result, the deposittype institutions have grown in terms of both dollar magnitudes and services ren dered. An interesting by-product has been T O T A L A SSE T S E N D -O F -Y E A R DA T A 8 the increased “ democratization of credit,” as both the ability and willingness of such institutions to grow has made possible a steady expansion in the amounts and kinds of credit extended to wider segments of the economy. One representative measure of the growth of each of the deposit-type financial institu tions is the increase in total assets. As shown in the chart, total assets of deposit-tvpe institutions, taken together, nearly doubled from 1945 through 1960. At the same time, however, there was substantial variation in both the amounts and the rates of growth of the four kinds of deposit-type institutions. From 1945 through 1960, commercial banks posted the largest gain in the volume of assets. Their collective gain of $97.2 billion accounted for about one-half of the growth in the combined assets of the deposit-type institutions. Savings and loan associations were not very far behind the commercial banks with a gain of $62.7 billion; mutual savings banks and credit unions with gains of $23.6 billion and $5.6 billion, respectively, accounted for a substantially smaller amount of the growth in combined assets. On the other hand, using the amount of percentage growth in total assets of each type of institution from 1945 through 1960 as a basis for comparison, the picture changes markedly. Commercial banks, with a growth in assets amounting to 61 percent for the period, trailed the other kinds of institutions; savings and loan associations showed a growth in assets of 716 percent, mutual savings banks showed an increase of 138 percent, and credit unions achieved a spectacular growth of 1,189 percent. The fact that commercial banks started the period with a much larger base, however, must be taken into account in eval uating the respective percentages of growth. The data show that the share held by com mercial banks of the combined total assets of all deposit-type institutions has fallen stead ily during the postwar period; in fact, the share has declined in each year since 1945. In contrast, the over-all increase in the share accounted for by savings and loan associa SELECTED ASSETS AND DEPOSITS 1950 1960 Com mercial Banks Savings & Loan Assns. M ortg a g e Loans 13,541 13,714 Business Loans 21,927 — — 7,374 * * Mutual Savings Banks Credit Unions Com mercial Banks Savings & Loan Assns. Mutual Savings Banks Credit Unions Selected Items: C on su m er Loans 8,039 * 28,713 60,084 26,927 * — 43,125 — — — 590 20,135 * * 3,906 61,003 4,560 6,239 U . S. G o v e rn m ent Securities 62,027 1,489 10,877 T o ta l Loans 52,249 13,931 8,166 680 117,642 61,100 27,122 4,330 T o ta l Assets 168,932 16,846 22,385 1,005 257,552 71,401 40,574 5,606 T o ta l D eposits 155,265 13,992 20,025 850 229,843 62,116 36,353 4,945 L iq u id Assets as Percent o f T o ta l Assets 38.0 14.5 52.1 n.a. 25.0 10.1 17.5 n.a. T o ta l Loans as Percent o f T o ta l D eposits 33.6 99.6 40.8 80.0 51.2 98.4 74.6 87.6 * Asset and Deposit Relationships: * Less than $ 5 0 0 million n.a. N ot available tions has virtually equaled the decline in that of commercial banks. Mutual savings banks have not continued to hold their share recently, as revealed in the fact that the pro portion of combined total assets held by these institutions has fallen in each o f the past four years. Credit unions, while steadily in creasing their share o f the combined assets, still hold a relatively small portion of the total. A number of the features in the growth of deposit-type financial institutions are shown in the accompanying table, which presents selected assets and deposit items. One such feature is that holdings of U. S. Government securities were reduced only at commercial banks and mutual savings banks from 1950 through 1960. A t the same time, all other balance sheet items for each of the institution types registered moderate to substantial in creases. The various rates of increase were not consistent among the institutions, how ever. Of particular note was the large in crease in both the volume and the proportion of mortgage loans held by savings and loan associations and the comparatively smaller 9 rises in the volume and the proportion of such credit held by commercial banks and mutual savings banks. The table is perhaps more important in that it reveals a number of the basic lending and investing differences among the various deposit-type financial institutions. It is evi dent that commercial banks, in addition to providing more diversified credit services, lend to sectors of the economy such as busi ness firms that are not reached by the other deposit-type institutions. Because of the rela tively more restricted lending powers of sav ings and loan associations, mutual savings banks, and credit unions, as discussed earlier, the loans of these institutions in each case are of one predominant type, i.e., mortgage loans or consumer loans. In addition, regula tions regarding investments account for the relative importance (or lack of importance) of U. S. Government securities among the total assets of the various deposit-type insti tutions. Changes in asset and deposit relationships that have occurred since 1950 are also in cluded in the table. For example, a decline in the holdings o f U. S. Government securi ties is reflected in a shortfall in the relation ship o f liquid assets to total assets for three of the deposit-type institutions. This relation ship, which is the proportion of the total of cash and U. S. Government securities against total assets, is important in part as a meas ure of the ability of institutions to meet un expected demands for deposit withdrawals.(1) (1) Although it is not the usual practice, long-term U . S. Government securities are here considered as liquid assets. This has been done because of an inability to make a sta tistical separation of long-term securities from the total holdings of U . S. Government securities of all deposit-type institutions. The relationship is also important in that it provides an indication of the portfolio pre ferences of the particular institution. Thus, even though a decline in investments was in each case more than offset by increases in loan portfolios, the respective institutions quite clearly became less liquid. In 1950, mutual savings banks, with liquid assets amounting to 52.1 percent of total assets, were the most liquid; by 1960 the percentage had fallen to 17.5 percent. Using the same relationship, savings and loan asso ciations were the least liquid in both years of record, with 14.5 percent and 10.1 percent, respectively. Although the corresponding fig ure for commercial banks declined from 38.0 percent to 25.0 percent, it was still the high est for any of the deposit-type institutions at the end of 1960. As would be expected from the shifts in loan and investment portfolios, all of the deposit-type institutions, with the exception of the savings and loan associations, in creased the ratios of total loans to total de posits between 1950 and 1960. Since the loan-deposit ratio is often used as a measure of the ability of financial institutions to in crease loans, it is noteworthy that savings and loan associations, which are usually vir tually loaned-up, were the only deposit-type institution to reduce the ratio between 1950 and 1960. However, as the table shows, the decline was fractional. Although the loandeposit ratio of commercial banks climbed substantially during the decade, a rise of about 34 percent in the ratio of mutual sav ings banks was nearly twice as great, again reflecting changes in portfolio preferences. Errata, May 1961 Issue. In the article “ Changes in National Product Related to Selected Business Series” which appeared in the May 1961 issue of this review, two errors occurred in the printed version of Equations 1 and 2, in respect to the coefficients of the “ bank debits” variable. The errors affect also a small part of the table of estimates. None of the general conclusions of the article are affected. A detailed statement of correction is available on request to the Research Department, Federal Reserve Bank of Cleveland. 10 Farmland Prices Edge Higher h e market value of farmland in the ward push 011 farm land values. nation continued to rise in the past year. Foremost among a number of forces which The percentage increase on a year-to-yeartend to retard an advance in farmland values basis, however, was much less than it had is a relatively low net income derived from been in previous years. During the year farm land in relation to the prevailing mar ended March 1, 1961, farmland prices showed ket price of such land. According to histori some weakness between March and July 1960, cal experience, as shown on an accompanying then steadied during the following four chart, the relationship between farm income months, and finally strengthened in the re and farmland prices during recent years mainder of the period; the over-all result was would, in the absence of other influences, that farmland prices moved up one percent have tended to bring about a decline in farm for the period under review taken as a whole. land prices. Thus, at current price and in The late-in-the-period resurgence in market come levels, for example, the ratio of the values, reflecting a number of influences in market price of farmland to annual net including some recovery in farm income, has come(2) is about 10 to 1; that is, the average been revealed by the annual March 1 survey of the farm real estate market, which is con (2) In arriving at the “ n e t" farm income figures, certain expense items, such as fo r labor, management, interest on ducted by the Department of Agriculture. mortgage debt, etc., have not been subtracted. This is in ac T As shown in an accompanying chart, the increase in the market price of farmland in the last year of record completed seven suc cessive years of advances. The average gain in market values during the seven-year period amounted to about 4.6 percent a year, com pounded annually. The latest upswing in farmland prices is a continuation of a long term upward trend that has prevailed with but two interruptions since 1941.(1) Over the twenty-year period beginning in 1941, mar ket values increased 246 percent, or 6.4 per cent a year, compounded annually. cordance with usual farm accounting procedure. A v e r a g e p ric e s of f a r m l a n d ros e this p as t y e a r for the sevent h c o n s e c u t i v e year, bu t the p e r c e n t a g e in c re a s e w a s the sm all e st fo r the entire period. 11 1r IN D E X 1947-49=100 FARM LAND PRICES Factors which have been especially impor tant in influencing land price trends in re cent years are discussed below, including some which operate as downward pressures and others which continue to exert an up ( P lo t te d A n n u a l l y a t o f M a r c h 1) (i) The two interruptions in the upward march of land values during the past two decades occurred in 1 9 5 0 and 1 9 5 4 . In each case, the break in the average price of farm land was preceded by a significant decline in the price of farm products as well as a concomitant decline in net farm income. 11 market price is about ten times as great as the average annual net income per acre. The relationship of market values to net income is thus approaching that which prevailed in the early 1930’s. Although the market price of farm acreage was unusually low in the early 1930’s, net income dropped to a level low enough to cause the ratio of value to income to increase to nearly 10 to 1. As farm income rose in the latter half of the 1930’s, the ratio of value to income returned to about 6y2 to 1, or the annual average o f the past 30 years. Further increases in income without a corresponding rise in market values caused the ratio to drop to less than 5 to 1 during the war and early postwar years. Thereafter, however, the ratio turned up, rising sharply as land values ad vanced even though net income fell back from the comparatively high levels reached in 1951 and 1952. The persistent advance in the price of farmland since 1954, despite lower prices of farm commodities and lower income, indi cates that there are offsetting upward pres sures also at work. These forces are related to the advancing technology in agriculture and to certain developments in the nonfarm sector of the economy. Demand Fostered by Farm Enlargement The upward movement of the general price level at the same time that prices of all farm products remained generally below 1954 levels encouraged a rapid adoption of the new tech nological developments in crop and livestock production. Many of these new developments are most efficiently used when applied on a larger scale than is generally possible on the smaller commercial farms. As a consequence, many farmers have felt the need for more land, and have thus bid aggressively for the limited number of farms offered for sale. On the other hand, the number of farms offered F A R M L A N D VALUE RELATED TO A N N U A L NET IN C O M E Value le of Incom e* 10 * Farm land prices on M arch 1 of indicated year, expressed as multiple of net income for previous calendar year. A t la st a nnu al re port, f a r m l a n d p ric e s in relation to net i n c o m e s t o o d h i g h e r than in an y y e a r s ince 1933. 12 for sale has been restricted by some of the same factors that have contributed to the demand. The farm enlargement process has ac counted for a continuously increasing pro portion of the farm transfers since 1950. As is noted in an accompanying table, in 1954 purchases for farm enlargement represented 29 percent of the farm transfers in the na tion. By 1960, purchases for farm enlarge ment had increased to 45 percent of all the transfers in the nation. Purchases For Farm Enlargement (Year ended March 1) Year Percent of Total Purchases 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 22% 24 26 28 29 32 33 38 40 42 45 Source: U .S . Department of Agriculture The trend toward increased farm enlarge ment since 1954 has been particularly sig nificant in the Corn Belt and in the major wheat producing states, where transfers for the purpose of enlarging farms accounted for 53 percent and 69 percent, respectively, of all farm transfers in 1960. Availability of large-scale equipment fostered the trend in the Corn Belt. In the wheat areas, the cut back in acreage as a result of the national aereage-allotment and price support programs proved to be a strong incentive for farmers to acquire additional land to maintain an acreage allotment that would permit efficient use of available labor and equipment. Land Contracts A factor which has enabled increasing numbers of prospective owners to bid effec tively for farmland in recent years is the growing use of land contracts. This lowequity means of financing is reported to have accounted for 38 percent of all of the creditfinanced transfers in the year ended March 1, 1960. The down payment on transfers financed by land contract is reported to have averaged 27 percent of the purchase price, as compared with about 45 percent of the purchase price for credit-financed transfers handled by commercial lenders. The popularity of the land contract as a means of financing farm transfers is indi cated by the steady rise in the proportion of all sales of farmland financed by land con tracts. The pertinent figures are shown in the following table. As can be seen from the data, the proportion of all purchases financed by land contracts rose from 15 percent in 1950 to 28 percent in the year ended March 1, 1961. Purchases Financed By Land Contracts (Year ended March 1) Year Percent of Total Purchases 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 15% 15 16 17 18 19 18 21 21 20 25 28 Source: U .S . Department of Agriculture The rapid rise in the use of land contracts to finance the transfer of farm ownership stems from at least two principal factors, one of which appeals to a purchaser and the other to a seller. The low down-payment fea ture of the land contract is attractive to a purchaser who lacks the funds necessary to make the customary down payment required by most commercial lenders. On the other 13 FARMLAND VALUES PER ACRE m Fourth District, 1959 AVERAGE VALUE PER ACRE r_ j m to $150 * » « - *3 0 0 m $ 3 0 1 - $400 $451 and up (1) I n c l u d e s l a n d a n d b u i l d i n g s S o u rc e : C e n s u s o f A g r ic u lt u r e , 1 9 5 9 hand, a seller frequently finds to his advan tage the use of the capital gains provision under Federal income tax laws which ap plies when the down payment is 30 percent or less of the purchase price. Nonfarm Developments Among the nonfarm developments that have exerted an upward influence on the market price for farm land are included the comparatively high level of business activity which has fostered a rapid expansion of in 14 dustrial capacity, the upward movement of the general price level, and the increasing need for space to provide for a growing pop ulation. The dispersal of industrial plants to rural-urban areas surrounding the larger cities and towns tends to enhance the market value of adjacent farmland, because of its current and prospective use to accommodate the homes, schools, shopping centers, high ways, and other services required by the employees of these plants. The transfer of (Continued on Page 20) Employment Trends in A Heavy-Industry District According to the list of area classifications recession of 1960-61, which now which was released by the U. S. Department appears to have bottomed out in Febru ary or March, will probably be classifiedof Labor for April 1961(1) and used in pre paring this article, only one of 14 major generally as one of the mildest of the post labor market areas in the District — Colum war economic declines in terms of both dura bus, Ohio — had an unemployment rate of tion and severity. Within the Fourth Fed less than 6 percent. On the other hand, the eral Reserve District, however, the impact of same classification showed that the number the recession of 1960-61 was in some respects of smaller areas in the District regarded as more severe than that of 1957-58. This turn areas with a substantial labor surplus had of events resulted in large part from the fact reached 39, an all-time high. that the business decline was concentrated in a number of industries, notably steel, which W ith 13 of the 14 major areas affected, the bulk large in the industrial complex of the Fourth District thus carries a relatively District. The relatively greater severity of heavier load of areas with excessive unem the recent recession in the Fourth District, ployment than does the rest of the U. S., as compared with both the national experi where only 88 out of 136 regularly surveyed ence in 1960-61 and the experience in the major areas were classified as substantial District in the 1957-58 recession period, is labor surplus areas in April. Within the Dis illustrated by developments regarding em trict are included about 8 percent of the ployment and unemployment. nation’s population, nearly 8 percent of the total of nonfarm wage and salary workers, Labor Surplus A reas and nearly 10 percent of all persons employed in manufacturing. However, in April of this During no previous period was a map of year the District accounted for 12 percent of the Fourth District more crowded with the total number of major areas with sub “ areas of substantial labor surplus” , i.e., stantial labor surpluses and nearly 20 per areas with unemployment of 6 percent or cent of the 199 smaller areas so designated. more, than in the early months of 1961. At the close of the previous recession of As shown in the accompanying map, most 1957-58, 12 percent of all major areas but of the geographical territory of the District only 15 percent of the smaller areas with a currently carries a “ substantial surplus” substantial labor surplus were located in the label. The individual areas so classified in Fourth District. clude 66 of the 88 counties in Ohio. (The 66 As the map indicates further, a number of counties contain nine-tenths of the state’s the 52 areas in the District which are cur manufacturing employment.) In addition, all rently classified as having substantial labor six counties in the portion of West Virginia lying within the District, as well as 15 of the (1) Classifications released for M ay removed one major area 19 District counties in Pennsylvania and 23 and added one smaller area to the list of substantial labor surplus areas in the D istrict. In addition, three major areas of the 56 District counties in Kentucky, are were reclassified from the group with 1 2.0 percent or more unemployment to the group with unemployment between 9.0 classified as substantial labor surplus areas. percent and 1 1 .9 percent. T h e 15 AREAS of SUBSTANTIAL LABOR SURPLUS (Fourth District) C f o i t i f i e d b y U .S . D e p a r t m e n t o f L a b o r in A p r i l 1 96 1 DATE of ORIGINAL DESIGNATION os SURPLUS AREA H H ll Prior to D e c e m b e r 1955 B e tw e e n J u ly 1957 a n d M a y 196 0 A fte r M a y 19 6 0 List of Sm aller A re a s Indicated by M a p Numbers O H IO 1. Ashland 2. Ashtabula-Conneaut 3. Athens-Logan-Nelsonville 4. Batavia-G eorgetow n-W est Union 5. Cam bridge 6. Defiance 7. East Liverpool'Salem 8. Findlay-Tiffin-Fostoria 9. Kent-Ravenna 10. Kenton 11. Lima 12. Mansfield 13. M arietta 14. Marion 15. Mount Vernon 16. New ark 17. New Philadelphia-Dover 16 18. 19. 20. 21. 22. 23. 24. 25. Portsmouth-Chillicothe Sandusky-Fremont Springfield St. M a ry s W ashington-W ilm ington Zanesville Lawrence County (p a rt of Huntington-Ashland are a) G allipolis (p a rt of Point Pleasant-Gallipolis are a) P E N N S Y L V A N IA 26. Butler 27. Indiana 28. Kittanning-Ford C ity 29. M eadville 30. New Castle 31. Oil City-Franklin-Titusville 32. 33. 34. Sharon-Farrell Uniontown-Connellsville Som erset County (p a rt o f Johnstown are a) K EN T U C KY 35. Corbin 36. Hazard 37. M iddlesboro-Harlan 38. Morehead-G rayson 39. Paintsville-Prestonsburg 40. Pikeville (p a rt of Pikeville-William son are a) 41. Boyd County (p a rt of Huntington-Ashlaitd area) W E S T V IR G IN IA 42. New M artinsville IN SU R E D U N E M P L O Y M E N T RATES IN T W O R E C E S S IO N S Fourth D istrict* most recent classification showed that five of the major areas had unemployment rates falling between 6.0 percent and 8.9 percent, four had unemployment rates between 9.0 percent and 11.9 percent, and four had rates of 12 percent or more.(3) In the smaller areas, information released by local employment service offices indicates that unemployment levels which were already high tended to be pushed still higher during the recession. For instance, in the Uniontown-Connellsville area, an unemployment rate of 26 percent was reported for March 1961 as compared with 17 percent one year earlier. Rotes of Unemployment M o nth s Following Peak * Based on data for 14 m ajor areas. The insured unemployment rate in the Fourth Dis trict during the business decline of 1960-61 peaked in February 1961 at 9.8 percent, or 0.9 basis points above the highest rate during the 1957-58 reces sion. Due to the higher take-olf point in 1960, the increase spanned only 5.7 percentage points, as compared with 6.6 percentage points in 1957-58. surpluses acquired the designation long be fore the onset of the business decline in 1960. For example, three of the major areas— Erie, Pittsburgh, and Wheeling— have borne the “ surplus” label continuously since early in 1958. Among the smaller areas, the five lo cated in the southeastern part of Kentucky, as well as the Uniontown-Connellsville area in Pennsylvania, have been on the list since 1953-54, reflecting the long-standing prob lems of the coal industry. Between July 1960 and April 1961, nine major and 21 smaller areas were added to the previous total of four major and 18 smaller areas in the Fourth District desig nated as substantial surplus areas.<2) The (2) Tw o m ajor areas — Huntington-Ashland, W est Virginia, and Johnstown, Pennsylvania — which are only in part located in the Fourth D istrict are not included in these to tals since the m ajor population centers of the two areas are located outside of the District. A counterpart to the monthly nationwide estimate of total unemployment is not avail able for the Fourth District, either as a total or as a percentage of the civilian labor force. It is possible, however, to compare unemploy ment in the Fourth District with national levels by using the “ rate of insured unem ployment” . This rate represents the number of continued claims filed for state unemploy ment compensation as a percentage of the number of workers covered by state unem ployment insurance systems.(4) The rate of insured unemployment (not seasonally adjusted) in the Fourth District, as shown in the accompanying table, more than doubled between May 1960 and Febru ary 1961, or from the beginning of the busi ness downturn to the possible trough. Despite the fact that unemployment rates in Ken tucky, Pennsylvania, and West Virginia were in excess of the national average before the onset of the recession, the rate for the Fourth District, taken as a whole, had been held be low the national average by the weight of (3) The nation’s 1 01 substantial surplus areas in April 19 6 1 included 70 with unemployment rates in the 6 .0 per cent to 8 .9 percent group, 18 in the 9 .0 to 1 1 .9 percent group, and 13 in the 12-percent-or-over group. (4) “ Insured unemployment” covers few er persons than does the monthly estimate of total unemployment prepared from Bureau of Census data. The rate oi insured unemployment is usually lower than the rate of total unemployment except near the trough of a recession. Insured unemployment is more sensitive to changes in the economy than is total un employment. However, because of its exclusion of unem ployed workers who have exhausted their benefit rights, it tends to understate unemployment during periods when the number of exhaustions is high. 17 (for week ending nearest the 15th of each month) May 1960 Feb. 1961 Mar. 1961 Apr. 1961 F ou rth D istrict (14 m a jor areas) 4 .1 % 9 .8 % 9 .2 % 8 .1 % 6.5 3.9 5.6 6.9 11.5 9.5 10.9 13.0 11.6 9.0 10.1 12.0 11.6 7.8 9.3 11.0 U .S ............................. 4.3 8.4 7.9 7.0 K e n tu c k y ............ O h i o ..................... Pennsylvania. . . W est V ir g in ia . . Not adjusted for seasonal variation a lower rate in Oliio. However, as the Ohio rate rose toward an all-time high of 9.5 per cent in February 1961, the rate for the entire District came to exceed the national average, as it had also done at the bottom of the pre vious business cycle. The nature of the distribution of industrial employment between manufacturing and nonmanufacturing industries provides a key to the greater fluctuation of unemployment levels in the District over the business cycle, as compared with the national pattern. Manufacturing industries bore the brunt of the business decline and the resultant reductions in employment during the recent recession. Seven-tenths of the increase in insured unemployment in the nation between January 1960 and January 1961 was attrib utable to the manufacturing industries. The durable goods industries alone accounted for one-half of the entire increase. Of every ten nonfarm wage and salary workers in the Dis trict during the first half of 1960, four were employed in manufacturing, with a heavy concentration in durable goods; in contrast, only three such workers out of ten were similarly employed throughout the nation. Within the manufacturing sector, the metals industries suffered the heaviest layoffs in the Fourth District, as they did in the entire country. For example, the national rate of unemployment in the primary metals 18 industry quadrupled between January 1960 and January 1961, while the rate for the transportation equipment industry grew 214 times as large at the end of the interval. Of every ten people working in manufacturing industries in the District, six were employed in the primary and fabricated metals, ma chinery, and transportation equipment indus tries, as compared with four out of ten in the nation. Since the employment status of every fourth nonfarm employee in the Fourth District, as compared with every eighth worker in the nation, was tied to the eco nomic fortune of the metals and metal prod ucts industries, it is not surprising that unemployment figures reflected the sharp de cline in activity in these industries more clearly in the Fourth District than in the nation as a whole. Employment Changes in M ajor A reas Employment levels in the Fourth District declined during the recession as the number C H A N G E S IN E M P L O Y M E N T Fourth District (as p ercen t o f M ay 1960 em p lo y m e n t) 102 100 V 98 % 96 \ k '1 \ 94 \, 92 NONI ARM I Rate of Insured Unemployment 9 * X \ 90 V s 88 i \ MANUf ACTUI IING \ X V 5 MET ALS IN DUS1 RIES * 1 •s '• v v *» 86 84 PR MAR Y METALS 82 \ 80 ''f r 'n 0 " » J J A 5 I9 6 0 0 N D J F M A 1961 The l a r g e s t re d u c tio n s in e m p l o y m e n t in the Fo u rt h D i s t r i c t d u r in g the re c e s s io n of 1960-61 o c c u r r e d in m a n u f a c t u r i n g , p a r t i c u la r ly in the p r i m a r y m e t als a n d f o u r o t h e r m e tals industries. Percent Change in Employment, M ay 1960 to March 1961 (10 major areas in the Fourth District) N on fa rm T ota l A k r o n ....................................... C a n t o n .................................... C in cin n a ti.............................. C le v e la n d ............................... C o lu m b u s ............................... D a y t o n .................................... E r ie ........................................... Pittsbu rgh .............................. T o le d o ..................................... Y o u n g sto w n -W a rre n ......... — — — — — — — — — 7 .0 % 10.4 4.9 6.8 2.8 4.5 6.1 8.1 8.1 10.8 M a n u fa ctu rin g T ota l — — — — — — — — — 9 .6 % 17.8 7.6 12.9 6.2 6.4 9.6 13.1 12.0 15.7 N on m a n u factu rin g D u rab le G o od s T o ta l Fin ance, Ser vices, G o v ernm ent -1 2 .8 % — 19.8 — 9.6 — 14.8 — 7.0 — 7.1 — 10.7 — 14.6 — 14.1 — 16.7 -4 .3 % — 3.0 — 3.2 — 2.6 — 1.6 — 3.1 — 3.0 — 5.1 — 5.8 — 6.3 0 + -4 % — .4 + -3 + 3 .1 — 1.1 0 — .4 — .2 — .8 Not adjusted for seasonal variation of unemployed workers mounted. Nonfarm wage and salary employment in the District in March 1961 amounted to 6.2 percent less than at the beginning of the downtrend in business activity in May 1960. The compara ble nationwide reduction was 2.8 percent. Thus, like the increase in the rate of un employment, the shrinkage in employment in the Fourth District was greater than the average for the nation as a whole over the 10-month span. Manufacturing employment declined by 11.2 percent in the Fourth Dis trict but by only 5.5 percent in the nation. Nonmanufacturing employment in the Fourth District decreased by 2.8 percent as compared with 1.6 percent in the nation as a whole. Declines in employment totals between May 1960 and March 1961 were reported by all of the ten major metropolitan areas in the Fourth District for which monthly estimates of employment are available, as shown in the accompanying table. The relative size of the reductions shows a close relationship to the industrial composition of a particular area, i.e., to the weight of manufacturing in total employment and to the respective shares of employment in nondurable and durable goods industries. Three out of the four areas show ing the largest decline in total nonfarm jobs -—Youngstown, Canton, and Pittsburgh— are those with the highest proportion of employ ment in the primary metals industry. On the other hand, Columbus, which of the ten areas has the smallest percentage of employment in manufacturing,(5) reported the lowest over-all reduction in employment. In addi tion, Columbus was the only major area in the District not classified as having a “ sub stantial labor surplus” during the recession. Nonmanufacturing industries in the ten areas encountered much smaller declines in employment than did manufacturing indus tries during the recent recession period. It is noteworthy that ten months of recession did not seriously interrupt the continued longrun advance in employment of three major components of the nonmanufacturing group. Employment in the finance - insurance - real estate, services, and government (including public schools) groups increased or remained unchanged in one-half of the areas and showed insignificant declines in the remain der, notwithstanding the relative severity of the reduction in manufacturing employment in the same areas during the recession. ( 5) In M ay 1 9 6 0 . m anufacturing employment as a propor tion of nonfarm (w age and salary) employment amounted to 29 percent in Columbus as compared, for example, with 4 8 percent in Youngstown and 51 percent in Canton. 19 The Outlook A number of improvements in the national economy point to either February or March as the probable turning point of the past recession. Evidence of actual or impending recalls or enlargements of work forces sup port the view that the bottom of the recession has been passed. It is still too early to determine how quickly production and employment in the Fourth District will recover to pre-recession levels. Past experience indicates that em ployment levels generally lag in the early stages o f business recovery, because in some industries or individual plants an increase in hours worked usually occurs prior to an in crease in personnel. Furthermore, data cover ing the three most recent recessions in the postwar period show that the peak number of substantial surplus areas in the nation in creased significantly from one recession to the next, and that the level to which the total number of surplus areas settled back during the recovery portion of the cycle like wise was higher after each recession. Whether or not such an apparent updrift constitutes a trend which will continue cannot be known at this time. Recently enacted federal legislation to aid in the redevelopment of “ depressed areas” embodies a recognition that a portion of the country suffers from a type of unemployment which fails to respond completely to a cyclical upturn in business, and which may require specific remedies. Three of the major areas in the Fourth District — Erie, Pittsburgh and Wheeling — along with 18 smaller areas (6 each in Kentucky and Pennsylvania, 4 in Ohio, and 2 lying partly in both West V ir ginia and Ohio) have been designated offi cially as “ areas of persistent and substantial labor surplus,” which is one of the prerequi sites of eligibility for benefits under the new legislation. FARMLAND PRICES (Continued from Page 14) farmland to commercial, industrial, residen tial and other nonfarm uses, while greatest near the larger cities and towns, is reported to involve annually about one million acres throughout the nation. Farm Yalues N ear Cities The market values of farm land in the counties having one or more large cities tend to be considerably higher than in the coun ties that are predominantly rural. This rela tionship is quite clearly illustrated on the accompanying map of the Fourth Federal Reserve District. It can be seen that the nine counties with tjie highest average value per acre of farmland in 1959 were also the coun ties having at least one of the major cities in the District within its boundary or adjacent to it. While part of the difference in market value presumably reflects the potential site value for nonfarm use, part of it also arises from the higher agricultural values associ20 ated with the more intensive types of farm ing such as market gardening, greenhouse crops, and horticultural specialties commonly found near heavily urbanized areas. Trend of Values in Fourth District The recent survey revealed evidence of mixed trends in the market value of farm land within the Fourth Federal Reserve Dis trict during the past year. Market values are shown to have advanced to new highs in Pennsylvania and Kentucky where, on March 1 of this year, values were 185 and 156 per cent, respectively, of the 1947-49 average. Values in Ohio and West Virginia are indi cated to have slipped from the high of a year earlier, and amounted in March of this year to 177 and 140 percent, respectively, of the 1947-49 average. The changes within District states ranged from an increase of about 2% in Pennsylvania to a decline of about 3% in West Virginia.
@FedFRASER