Full text of Economic Review (Federal Reserve Bank of Cleveland) : May 1967

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M A Y 1967

IN

THIS

I SSUE

M onetary Policy in a
Changing W orld
.

FEDERAL



RESERVE

.

2

C ap ital Spending Plans
in C levelan d and
Northeastern O hio . .

10

Agricultural Loans at
Com mercial Banks
in the Fourth District .

14

BANK

OF

CLEVELAND

ECONOMIC REVIEW

MONETARY POLICY
IN A CHANGING WORLD
by

W. B ra d d o c k H ickm an, President
F e d e ra l R eserve Bank o f C le v e la n d

Talk d e liv e re d b y P resid en t H ickm an as p a rt o f the series " D istinguished
Lectu res on B anking an d M o n e ta ry P o lic y " at The O h io S ta te U n iversity,
C olu m b u s, O h io , M a y 3 , 1967. The view s e x p re sse d a re M r. H ickm an's
a n d do not n ecessa rily re fle c t those o f the F e d e ra l R eserve S ystem .

MONETARY POLICY AND
UNCERTAINTY

seem to b e the p rin cip al so u rces an d ca u s e s
of the errors.
Let us start with the co n v en tion al w isdom

I am d elighted io b e with you io d ay , and

a s it is d escrib ed in the elem e n ta ry textbooks.

honored io p a riic ip a le in the serie s of "D is­

T here is tod ay alm ost com p lete a g reem en t

tinguished L ectu res on Bankin g an d M one­

that m o n etary p o licy an d fisca l p o licy sh a re

ta ry P o lic y ." M y topic tod ay is "M o n etary

the sa m e g en e ra l o b je ctiv e s: to help the eco n ­

P olicy in a C h an g in g W o rld ." M ore p recisely ,

om y a ch ie v e eco n om ic grow th without in fla­

it should b e c a lle d "M o n etary an d F isc a l

tion and with re a so n a b le eguilibrium in the

P olicy in a C h an g in g W o rld ," sin ce the one

in tern atio n al b a la n c e of p ay m en ts. The text­

can n o t b e d iscu ssed without the other; but

books tell us further, that an ap p rop riate m ix

I w ill try to em phasize m onetary p o licy and

of m o n etary an d fisca l p o licy is n eed ed io

thus conform m ore clo sely to the title of the

a ch ie v e th ese o b jectiv e s. O n som e o cca sio n s,

lectu res. I sh a ll touch briefly an d inform ally

it m a y b e d esira b le to h a v e a little m ore fiscal

on the elem e n ta ry textbook theory of fiscal

p o licy and a little le ss m o n etary p o licy , and

an d m o n etary p o licy and in d icate som e of

on som e o cca sio n s, the rev erse. But the point

the problem s that a rise w hen w e attem p t to

is that the sta te of the eco n om y is assu m ed

ap p ly pure theory in a world of u n certain ty

to b e know n with alm ost com p lete certain ty ,

an d ch a n g e. I sh a ll then review the record

so that th ere is v irtu ally no u n certain ty ab o u t

of recen t y e a rs and point out som e of the

the ap p rop riate econ om ic p o licy mix.

errors that I think h a v e a ctu a lly b ee n m ad e

A num ber of problem s a rise w hen w e a t­

in this a re a . And finally, I sh a ll id entify w hat

tem pt io ap p ly textbook theory in p ra ctice ,

Digitized for
2 FRASER


MAY 1 9 6 7
due la rg e ly lo the difficulty of pred iciing

A nother illu stration of a n exo g en o u s — and

econ om ic ev en ls. The econom y — in stead of

u n p red ictab le — in flu en ce on the eco n om y is

m oving a lo n g a ste a d y path a t a co n stan t

the fa ct that w e a re fa ce d this y e a r with m an y

ra te

co n stan tly

m ajo r la b o r n eg o tiation s an d the p o ssib ility

ch a n g in g rate, w hich is difficult to fo recast

of w ork stop p ag es. T h ese, too, h a v e serious

a cc u ra te ly . This is not re a lly surprising sin ce

unknow n im p licatio n s for the p a c e an d di­

the p rin cip al p a ra m e te rs of the econ om ic s y s ­

rection of econ om ic a ctiv ity in 1967. A nother

tem a re not re a lly sta b le, econ om ic relatio n ­

com p lex of fa cto rs — p a rtly exo g en o u s and

ships a re not fu lly understood, and u nex­

p a rtly en d o g en o u s— h a s to do w ith con su m er

p ected d evelopm en ts affect the sy stem at

spending p lan s. G iv en the u n certa in ties of

variou s tim es an d in variou s w ay s. A s a

V ietn am an d p o ssib le la b o r stop p ages, a s

g en e ra l m atter, ra te s of growth of population

w ell a s the current low er le v el of the structure

ch a n g e

d eter­

of in terest ra te s an d the u n certain cou rse of

with

d isp o sa b le p e rso n a l incom e, it is difficult to

in n ovation s; an d con su m ers' attitud es and

predict how co n su m ers w ill b e h a v e in the

ta s te s shift e rra tica lly . M ost im portantly of

m onths a h ea d . A n y or a ll of th ese fa cto rs

of

m ined

grow th — m oves

over

tim e;

production

at

a

te ch n o lo g ically
functions

ch a n g e

all, F ed eral spending and taxin g a re d eter­

could e a s ily an d a p p re cia b ly ch a n g e the

m ined in part b y so cial, political, an d in ter­

fu tu re co u rse of the eco n om y in 1967, a s w ell

n a tio n a l co n sid eratio n s and on ly in part b y

a s the ap p rop riate m ix of m o n etary an d fisca l

w hat would b e good econom ics.

po licy to d a y .

The b a s ic p roblem of an ap p ro p riately co ­

This type of u n certain ty is in d eed unfortu­

ord inated m o n etary an d fiscal p o licy is to

nate, alth ough u n certain ty is a b a s ic fa ct of

d eterm ine the co u rse of the eco n om y over

life. P olicy m a k ers must assu m e, on the b a s is

a finite period a h ea d . If the period is a s long

of the b est e v id e n c e a v a ila b le , ih a i the e c o n ­

a s a y e a r and a h alf (as in the P resid en t's

om y w ill b e h a v e in a ce rta in fash io n over a

a n n u a l budget, for exam p le), this is a n ex ­

finite period, an d form u late a n ap p rop riate

trem ely difficult jo b w hen you co n sid er the

p o licy m ix for th at finite period. If econ om ic

kinds of ex o g en o u s fa cto rs a t work. To illu s­

conditions a lter u n ex p ected ly during the p e ­

trate: the step-up of our d efen se effort in

riod of the fo reca st, w hat w a s o n ce ju d g ed to

V ietn am h ad m ajo r influ en ces on dom estic

b e ap p rop riate p o licy w ill b eco m e in ap propri­

econ om ic activ ity in the seco n d h alf of 1965

ate. The in flexibility an d rigidity of the p o licy

and in a ll of 1966 (influences that w ere la rg e ­

mix — p a rticu la rly the fisca l a sp e cts of that

ly m issed in the stan d ard fo recasts m ad e at

p o licy — c re a te the crux of th e difficulty.

the b eg in n in g of both y ears). W h at is in store

W h ile m o n etary p o licy c a n ad a p t guickly,

for 1967? F ran kly, I do not know . Bui I do

fisca l p o licy can n ot. The in flexibility an d

know that with the future m agn itu d e and

rigidity of fisca l p o licy w ere c le a r ly d em on­

duration of our m ilitary effort unspecified,

strated during the seco n d h alf of 1965 an d the

th ere is a w ide m arg in for error in a n y fore­

first h alf of 1966, w hen fisca l p o licy w as loo

c a st of econ om ic a ctiv ity in the period ah ead .

ex p a n sio n a ry w hile the eco n om y w a s o v er­




3

ECONOMIC REVIEW
h eatin g , and during la te 1966, w hen fiscal

effects on the eco n om y a re still unresolved.

p o licy w as in a d e q u a tely ex p an sio n ary w hile

The lead -lag relatio n sh ip s of ch a n g e s in b a n k

the econom y w as cooling off. The b a s ic p rob­

reserv es, the m oney stock, b a n k credit, and

lem of fiscal p o licy is the inflexibility of the

in terest ra te s a re not fully understood. For

F ed era l budget o n ce form ulated, an d the

exam p le, tight m on ey in 1966, h a s had , and

slow n ess with w hich it ca n b e reform u lated

w ill continue to h a v e, u n ev en effects on v a r­

under our existin g institutional arran g em en ts.

ious secto rs of the eco n om y in 1967 an d p er­

M o n etary p o licy a lso h a s its problem s, but

h a p s beyon d , an d the am ount an d tim ing of

th ey a re not the sa m e problem s a s those of

th ese effects a re u nresolved . The u n certain ty

fisca l policy. Both ty p es of p o licy rest on fa l­

a sso cia te d with v a ria b le tim e la g s an d im ­

lib le fo reca sts, but, fortu nately, m o n etary

p a cts a re pro b lem s that a re, of co u rse, not

p o licy is not rigid an d inflexible. To the

unique to m o n etary p olicy. F isc a l p o licy also

co n trary , it is ex trem ely resp on sive and a c ­

h a s distributed effects on v ariou s secto rs of

com m od ative. G iv en the right inform ation,

the econ om y, an d the m agn itu d es of th ese

m o n etary p o licy c a n b e ad ju sted qu ickly to

effects a re not know n. For ex am p le, the

ch a n g in g econom ic circu m stan ces, a s a ttest­

elim in ation of the 7 p ercen t in v estm en t tax

ed b y the shift that occurred last N ovem ber.

credit in O cto b er 1966 (just a t the w rong tim e,

A lthough p o licy m ak ers look a h e a d a s far

a s it turned out) h a s had, an d w ill continu e

a s the horizon perm its, p olicy c a n b e reform ­

to h a v e, pronounced effects on the am ount

u lated a t in terv als a s short a s the periods

an d tim ing of p lan t an d equipm ent exp en d i­

b e tw e e n m e e tin g s of the F ed era l O p e n M ar­

tu re s in 1967, the extent of w hich c a n on ly

ket C om m ittee. This flexibility is m uch g reater

b e ap proxim ated . In addition, I do not know

th an that of fisca l p olicy, w here the o p era ­

w hat the effects of the resto ratio n of the in ­

tion al la g m a y b e a s m uch a s a y e a r and a

vestm en t tax cred it w ill b e in 1967 — or in

h alf, from Ja n u a ry through the end of the

1968, or beyond .

next fisca l y ea r, w hich is the current plan n in g
period for the F ed e ra l budget.

O n ly one thing, b a se d on in v arian t h istori­
c a l ex p e rie n ce , is re a lly clea r. If the eco n ­

The re lativ e flexibility of the F ed era l R e­

om y o v erh ea ts la ter this y ea r, the o v erh e a t­

serv e S y ste m p artly reflects the fa ct that it

ing w ill b e b lam ed on m o n etary p olicy, no

is not com m itted to a pu blished fo recast, and

m atter w hat fisca l p o licy m a y b e or m a y h a v e

p a rtly the fa ct that it is an ind epen d ent

b een . It w ill b e said that w e o v errea cted to

a g e n c y within, but not of, the G overnm ent.

re ce s sio n a ry fe a rs in la te 1966 an d e a rly

W ithin the Sy stem , a sm all group of peop le

1967. O n the other hand , if the eco n om y w ere

(FOM C) — with

and

to s a g further, w e w ill b e b la m ed for e x c e s ­

in terests — m eets frequ en tly to d iscu ss e c o ­

siv ely tight m on ey in 1966 or the fa ct that

nom ic d evelop m en ts an d must m ak e a p olicy

w e u n d erreacted in 1967, in d ep en d ently of

d ecision

the n atu re of fisca l p olicy. The rule is: h ead s,

at

d iverse

each

back g ro u n d s

m eeting.

N evertheless,

d esp ite tim elin ess an d flexibility of m o n etary

m o n etary p o licy lo ses; tails, fisca l p o licy

p olicy, m an y b a sic qu estions reg ard in g its

wins. H opefully, in the rem ain d er of m y talk

4 FRASER
Digitized for


MAY 1 9 6 7
I w ill b e a b le to rise a b o v e Ihe p erp etu al

ap prop riate. From mid-1965 until mid-1966,

sq u a b b le about the resp ectiv e ro les of m one­

ih e eco n om y w as ch a ra cte riz ed b y e x c e ssiv e

tary an d fisca l p olicy, and sh ed som e light

a g g re g a te d em an d re la tiv e io ih e n atio n 's

on the p ra c tica l difficulties of the F ed era l

c a p a c ity to produce. The resu lts w ere im ­

R eserv e S y stem a s it attem p ts to conduct

b a la n c e s an d d isioriions in v ariou s secto rs

m o n etary p o licy on the b a sis of ih e in form a­

of ih e econ om y, an d a g e n e ra l in flatio n ary

tion a v a ila b le . Lei us therefore turn io a

o v erh eatin g. In mid-1965, a cc e le ra te d d efen se

review of econ om ic d evelopm ents sin ce the

spending for V ietn am w as su perim posed on

last recessio n , and the role of p u blic p olicy

rap id ly rising b u sin ess expen d itu res for fixed

in that period.

p lan t and equipm ent. In v en tory spending
also exp an d ed rapid ly, both for d efen se pur­

ECONOMIC DEVELOPMENTS
SINCE 1961

p o ses an d other u ses. (P a ren th eiica lly , a s I
w ill d iscu ss later, our inform ation on d efen se

In ih e long b u sin ess exp an sio n sin ce ea rly

spending

an d

in ven tory

in vestm en t

w as

1961, ihe econ om y h a s b ee n ch aracterized

hig h ly in a d e q u a te a i that iim e.) O p eratin g

b y three distinct period s of econ om ic growth,

ra te s in m an y lin es b e g a n to ex c e e d desired

with a different mix of m on etary and fiscal

lev els, an d la b o r sh o rta g es ap p eared . A fter

p o licy in e a c h period. B etw een the c y c lic a l

y e a rs of v irtu al sta b ility , unit la b o r co sts

trough in F eb ru ary 1961 and m id-1965, ih e

b e g a n to rise rapid ly, profit m arg in s fell, and

eco n om y a d v an ce d a i a re m a rk a b ly w ell-

in flatio n ary p ressu res a cc e le ra te d . Betw een

b a la n c e d an d n o n in flaiio n ary p a c e . R e a l GNP

the seco n d q u arter of 1965 an d ih e third q u ar­

rose a i a high a v e r a g e rate of abo u t 5.5 p er­

ter of 1966, re a l GNP ro se a i a sa tisfa cto ry 5.5

cen t, an d ih e GNP deflator rose a t a re la tiv ely

p ercen t a n n u a l rate, but the GNP p rice d e­

low a v e ra g e a n n u a l ra te of abou t 1.4 p ercen t

flator in crea sed a t a 2.9 p ercen t a n n u a l rate,

a y ea r. In a n effort io clo se ih e g ap b etw een

abou t tw ice the in c re a s e of the ea rlie r period.

ihe eco n o m y 's p o ten tial and a c tu a l output,

The su rge in eco n om ic a ctiv ity g en era ted

both m o n etary an d fisca l p o licy w ere e x p a n ­

enorm ous d em an d s for funds, w hich could

sio n a ry throughout the period. Around ih e

noi b e satisfied without a n e x c e ssiv e e x p a n ­

tim e of ih e reduction in p erso n al and corp o­

sion of credit. A s in flatio n ary p ressu res in ­

ra te in com e ta x e s in F eb ru ary

crea se d , the F ed e ra l R eserv e S y ste m b e c a m e

1964, re a l

econ om ic grow th a cc e le ra te d but without a

le ss acco m m o d ativ e, ih e grow th of b a n k

n o tice a b le a cc e le ra tio n in prices. The F ed e ra l

cred ii sla ck en ed , an d ih e en tire co n stellatio n

R eserv e S y stem m aintain ed a n acco m m o d a­

of in terest ra te s b e g a n to m ove up. The in ­

tive m o n etary po licy , w hich provided ih e

c r e a s e in the d iscouni ra te from 4 p ercen t to

m on ey an d credit need ed io support en larg ed

4V2 p ercen t in D ecem b er 1965, alth ough at

spending

by

b u sin esses,

consu m ers,

and

governm ent.

first h ig h ly unpopular, g a in ed grudging sup­
port from inform ed qu arters w hen ii b e c a m e

During e a c h of the next two periods, ih e

ap p a ren t ih a t ih e A d m inistration w as not go­

mix of m o n eiary and fiscal p o licy w as le ss

in g io a sk for a n ap p rop riate co n tra cy clic a l




5

ECONOMIC REVIEW
in c re a se in in com e tax es. The log ic support­

m on ey supply in crea sed , an d in terest ra tes

ing e a rlier fisca l m easu res to in v ig o rate a

declined .

la g g in g eco n om y now arg u ed for the re v erse

F is c a l p o licy b e g a n to p la y a n ap p rop riate

fisca l policy, but this w as not to b e the ca se .

co n tra cy clic a l role e a rly in 1967. The A dm in­

D espite token fisca l m easu res, su ch a s the

istration re le a s e d funds that h ad b ee n w ith­

p a rtia l resto ratio n of previou sly red u ced ex ­

held from the h ig h w ay program , m ad e m ore

cise ta x e s and a c c e le ra te d incom e tax w ith­

m o rtg ag e funds a v a ila b le through FNMA,

holdings, the m ajo r burden of restrain t fell

sp eed ed up v etera n s ' dividend p ay m en ts,

on m o n etary p olicy.

an d in M arch c a lle d for im m ed iate re in sta te­

This, a s it turned out, had m an y unfortu­

m ent of the 7 p ercen t in vestm en t tax credit.

n a te co n seg u en ces. For exam p le, a s m one­

The e x iste n ce of m od eratin g ten d en cies in

ta ry p o licy b e c a m e p ro g ressiv ely tighter, and

the eco n om y w a s reconfirm ed b y the F ed era l

in terest ra te s so ared to the hig h est le v els in

R eserv e S y ste m in M arch w hen reserv e re-

40 y e a rs, sav in g s that norm ally flow through

guirem ents on ce rta in tim e d eposits w ere

n o n b an k deposit-type institutions w ere di­

reduced, an d a g a in in April, w hen the dis­

verted d irectly into hig her yield in g m oney

count ra te w as cut from AV2 p ercen t to 4 p er­

m ark et in vestm en ts. S in ce d eposit-type in sti­

cent. From the third g u arter of 1966 to the

tutions n o rm ally su pply the bulk of funds for

first g u arter of 1967, r e a l GNP ro se a t a so m e­

re sid en tial construction, the m o rtg ag e m ar­

w hat m ore subdued ra te of 2.3 p ercen t but

k et w as serio u sly sgueezed . The result w as a

the p rice d eflator continu ed to rise at a high

sh arp d eclin e in housing starts an d in re si­

a n n u a l ra te of 2.8 percen t, alth ough other

d en tial construction.

m ajo r

p rice

in d exes

show ed

m od eratin g

ten d en cies.
The third period b e g a n in the fa ll of 1966
w hen it b e c a m e ap p aren t to the F ed era l

D espite the re cen tly im proved mix of m on e­

R eserv e that the o v erh eated eco n om y w as

ta ry an d fisca l p o licy , the n atio n 's re a l e c o ­

b eg in n in g to co o l off. W h ile p rices w ere still

nom ic grow th w ill b e sm a ll in 1967, jud ged

rising, the p a c e of the private secto r slow ed,

b y recen t stan d ard s. B u sin ess in vestm en t in

an d in d u strial production b e g a n to level.

new plan t an d eguipm ent is ed g in g down,

M oreover, just a s econ om ic activ ity b e g a n

inventory accu m u la tio n h a s b e e n reduced ,

to m o d erate in O cto b er 1966, fisca l p o licy

an d until recen tly , con su m er spending h a s

took a restrictiv e step with the su spension

b ee n sluggish . The b a s ic guestion of the m o­

of the 7 p ercen t tax cred it on b u sin ess in v est­

m ent, from the point of view of m o n etary

m ent an d a c c e le ra te d d ep reciatio n allo w ­

policy, is w h eth er our sta n c e is about right,

a n ce s. The bu rden o n ce a g a in w as on m one­

or w h ether w e should e a s e further or tighten.

ta ry p olicy, w hich turned p ro g ressiv ely e a sie r

W h a te v er p o licy is ad opted , our b a s ic g o a l

b eg in n in g in N ovem ber. A fter a short period

rem ain s the sa m e a s it h a s a lw a y s b e e n —

of hesitation, b a n k reserv e s b e g a n to grow

to a ch ie v e

rapid ly, b an k credit exp an d ed sh arp ly , the

nom ic growth.

6 FRASER
Digitized for


b a la n c e d

n on in flation ary

eco­

MAY 1 9 6 7

LESSONS OF RECENT EXPERIENCE

step would b e to d evelop b etter u nd erstan d ­

In m y brief review of econom ic d evelop ­

ing an d a g reem en t a s to w hich bu dget co n ­

m ents sin ce the last recessio n , I d elin eated a

cep t is most ap p rop riate for p o licy p lan n in g

long period from 1961 to mid-1965 w hen the

purposes. The p resen t sy stem of m ultiple

eco n om y en jo y e d stea d y grow th an d sta b le

bu d g ets is con fusin g to the la y m a n , an d lend s

p rices, an d two short periods, m id-1965 to

itself to m an ip u lation to show a surplu s— or

m id-1966, w hen grow th w as sa tisfa cto ry but

a sm a ll deficit — in w h atev er bu dget h a p ­

p rices spurted, an d mid-1966 to the p resent,

pen s to b e in fav or a t the m om ent. A s a

w hen grow th sla ck e n e d w hile p rices co n ­

form er C h airm an of the C ou n cil of E conom ic

tinued to rise. A ll of us c a n tak e pride in the

A d visers re cen tly pointed out, w e a re oper­

record a s a w hole, but it could h a v e b ee n

atin g in a kind of "fis c a l fo g ” that could b e

better, g iv en b etter inform ation, d eep er in­

hig h ly d an gerous. F ortu n ately, the P resid ent

sights, and m ore app rop riate m ixes of m one­

p la n s soon to esta b lish a b ip a rtisa n group

ta ry an d fisca l p olicy. Let us s e e w hat co n ­

to study bu dget p ro cesse s, with a view to­

structive step s should b e tak en to im prove

w ard s reform an d im provem ent. I p erso n a lly

public p o licy in the future.
First, it is im p erative that w e find som e w ay

think a ls o that som e w a y m ust b e found to
provide for sp eed ier ad ju stm en ts in the tax

of redu cing the inflexibility and resulting un­

sy stem

tim elin ess of fisca l p olicy. Part of the trouble

P erh ap s a n in d epend ent a g e n c y m ight b e

to ch a n g in g

econ om ic

conditions.

lies in the budget m aking p ro cess itself.

given the pow er to ad ju st ta x e s upw ard or

F ed era l bu dg ets a re b a se d on sp ecific, one-

dow nw ard a s n eed ed w ithin a sm a ll p er­

shot fo reca sts of w hat the eco n om y w ill b e

c e n ta g e ran g e, su b je ct to review an d revision

like over the next 18 m onths; a g a in st this

b y C on g ress or the E xecu tive. A dm ittedly,

backg rou n d , receip ts a re estim ated , la x pol­

the p ra c tica l p o litical difficulties of a n y such

ic y p lanned , an d spending pro jected . If the

p lan a re enorm ous, but the p o ten tial e c o ­

fo reca st is w rong, a s it alm ost a lw a y s is for

nom ic b en efits a re ev en g reater.

a n y 18-month period, estim ates of incom e

Seco n d , m o n etary p o licy a lso is in need

w ill b e w rong, an d spending p lan s an d tax

of som e im provem ent, p a rticu la rly in the

p o licy will b e in ap p rop riate for econ om ic

a r e a of m easu rin g tim e la g s an d im pact.

stab ilization an d growth. The difficulty is that

F ran kly, I think m o n etary p o licy h a s b ee n

F ed e ra l program s for spending an d taxin g

quite good sin ce e a rly 1960. T h ere now seem s

ta k e m an y m onths to p la ce in train, g ain

to b e g e n e ra l a p p ro v a l am on g econ om ists

m om entum in the p ro cess, and can n o t e a sily

of the tim elin ess an d direction, if not the m a g ­

b e reversed , o n ce started.

nitudes, of recen t m o n etary p o licy ch a n g es,

O n e p ra c tica l solution would b e to provide

alth ough th ere is co n sid era b ly le ss a g r e e ­

for the reg u lar p u blicatio n of revised q u arter­

m ent, a s I h a v e in d icated , on w hether w e

ly bu dgets, sim ilar to those the B ureau of

tend to o v ersta y our position. A lso, m an y

the Budget w ill provide this y e a r to the Joint

criticize us for not d esig n atin g one p articu lar

E conom ic C om m ittee. A nother constructive

econ om ic lim e serie s a s the m ajo r m o n etary




7

ECONOMIC REVIEW
v a ria b le . Should it b e Professor Brunner's

com bin ed m an u factu rin g an d trad e in v en ­

"c re d ii b a s e ,'' P rofessor F ried m an's ''b ro a d ”

tories now la g s the even t b y abou t two

m on ey supply, or the F ed eral R eserv e's own

m onths. This m e a n s th at tod ay w e know

b rain child, ''th e b an k credit p ro x y ''?

som ething about w hat h ap p en ed to in v en ­

F ran k ly , I do not know the answ er, and

tories in F eb ru a ry , but su b seq u en t d evelo p ­

doubt that an y o n e else does. In p ra ctice , the

m ents rem ain shrouded in m y stery. This is

F ed era l O p en M arket C om m ittee looks at a ll

not on ly b a d b y itself, but the e a rly re le a s e s

kinds of v a ria b le s and tries to acco u n t for

on in ven tories a re su b je ct to su b sta n tia l rev i­

sign ifican t

ch a n g e

sion, due ch iefly to difficulties in ob tain in g

v ariatio n s

in ra te s

of

am o n g them . Econom etric m od els h a v e a

re lia b le inform ation on m an u factu rin g an d

w ay of in d icatin g that one or an o th er of a set

reta il stocks. The sa m e difficulties ca rry over

of v a ria b le s is the m ost im portant v a ria b le

into the GNP statistics. To illu strate, in Ja n u ­

to b e consid ered, but the se le cte d v a ria b le

a ry an d e a rly F eb ru a ry , the F ed e ra l O p en

h a s a d iscon certing w ay of ch an g in g , d epend ­

M arket C om m ittee o p erated on the assu m p ­

ing upon the m odel and tim e period consid ­

tion th at b u sin ess in v en tories h ad in c re a s e d

ered. In part, this p ro b ab ly reflects inherent

b y $14.4 billion in the fourth qu arter of 1966,

sta tistic a l p roblem s a sso cia te d with econom ic

on ly to lea rn a t the end of F eb ru a ry that

m odel building, for exam p le, the high d eg ree

inventory in vestm en t h ad b e e n $2 b illion

of in terco rrelaiio n b etw een the dependent

higher, im plying a m uch m ore sev ere in v en ­

v a ria b le s in the m odel, se ria l co rrelatio n , in­

tory ad ju stm en t later on.

co rrect assu m ption s about the distribution

In addition to a c c u r a c y an d tim elin ess, w e

of error term s, and so forth. In part, I su sp ect

n eed to im prove the co v e ra g e of our statistics.

that it a lso reflects the fa ct that econom ic re ­

C onsider, for exam p le, the im portant influ­

lation ship s a re too com plex and in terrelated

e n c e of ch a n g e s in liquid a ss e t holdings of

to b e rep resen ted b y a n y sing le tim e series,

b u sin esses an d con su m ers on sa v in g s flows,

or a n y sin g le set of v a ria b le s. In a n y event,

the m on ey stock, an d so u rces of co m m ercial

the F ed era l R eserv e Sy stem is k een ly a w a re

b a n k funds. W e re ly h ere on q u arterly FTC-

of the g a p s in its k now led ge an d is sin cerely

SEC estim a tes of " c a s h ," "U. S. G overnm ent

trying to fill them.

s e cu rities," an d "o th e r" liquid a sse ts, rath er

A s a third step in im proving pu blic p o licy

th an on m ore p recise an d m ean in gfu l c a te ­

in g en eral, w e d esp erately need to im prove

gories (now alm ost to tally u n a v a ila b le to us)

our inform ation system , by o b tain in g m ore

of su ch item s a s co rp orate hold ings of Euro­

a cc u ra te an d tim ely statistics, b y im proving

dollars, tim e ce rtifica tes of deposit, foreign

co v e ra g e , an d b y filling som e of the g ap s in

T rea su ry bills, an d so forth, a ll of g rea t co n ­

our k now ledge. C onsider, for exam p le, bu si­

cern to the m o n etary authorities.

n ess inven tory investm ent, w hich p la y s a

A third m ajo r inform ation p roblem in volves

m ajo r role in ex p lain in g c y c lic a l sw ings in

the g a p s in our know led ge. A m ajo r in form a­

eco n om ic activ ity g en erated in the private

tion g ap re la te s to d efen se spending. A s m en­

sector. P u blication of m onthly statistics on

tioned ea rlier, the huge an d la rg e ly u n ex­

Digitized for
8 FRASER


MAY 1 9 6 7
peeled su rge in d efen se spending ih a i b e g a n

the fisca l p ro cesse s of the G overn m en t itself.

in la ie 1965 g en era ted far-reach in g reactio n s

U n less an d until h igh -level pu blic officials

in ih e econ om y, ih e effects of w hich a re still

recogn ize the d a n g ers involved, no d ep art­

with us. U ndoubtedly, if m onetary an d fiscal

m ent of ih e G overn m en t w ill re ce iv e a d e ­

p o licy m ak ers h ad b ee n fully a w a re of d e­

q u ate

v elopm ents then, step s would h a v e b ee n

things a s d a ta co llectio n or d a ta p ro cessin g ,

approp riation s

for

su ch

m u ndane

ta k en e a rlier to restrain them , an d le ss re ­

w hich a re so n e c e ss a r y for efficient p o licy

straint would h a v e b e e n need ed la te r on. The

m aking. It is in co n ce iv a b le th at the g rea test

fa ct is, how ever, that k ey v a ria b le s relatin g

nation in ih e world, with a G ro ss N ational

to d efen se spending a re alm ost im p ossible to

Product of over $750 billion, an d with F ed e ra l

predict, an d im p o ssible to obtain ev en w ithin

G overn m en t o u tlay s of ov er $150 billion a

ih e v ariou s a g e n c ie s of the G overn m ent it­

y ea r, spen ds on ly $125 m illion on its F ed era l

self. U nfortunately, th ese u nexp ected e s c a la ­

sta tistica l program s. S u rely , w e need to im ­

tions an d d e-escalatio n s in d efen se spending

p rove the q u ality an d tim elin ess of our e c o ­

c a n do serious harm to the dom estic eco n ­

nom ic inform ation, ev en if it m e a n s spending

om y, u nless offset b y ap p rop riate pu blic pol­

m ore m oney.

icy. At least, im portant p o licy m ak ing groups

T h ese then, in b ro ad brush, a re the e le ­

su ch a s the C ou ncil of Econom ic A d visers and

m ents n eed ed for a b etter mix of m o n etary

the F ed era l O pen M arket C om m ittee should

an d fisca l p o licy in the future: first, a m ore

b e inform ed, to the extent possible, of m ajo r

flexib le fisca l p olicy, p a rticu la rly a m ore flex­

shifts in d efen se spending, ev en if su ch infor­

ib le tax po licy ; secon d , a n im proved th eoreti­

m ation must b e w ithheld from the pu blic on

c a l b a s is for m o n etary p o licy ; an d third,

grounds of n atio n al security. If this ty p e of

b etter d a ta for the p o licy m ak er in su ch im ­

inform ation

portant a re a s a s liquid a sse ts, b u sin ess in ­

is

not

a v a ila b le ,

then

step s

should b e tak en to develop it b y the appro­

ven tories, an d

d efen se spending. W e, of

p riate a g e n cie s.

cou rse, a lso need to im prove our econ om ic

In g en eral, I su sp ect that the root of the

fo reca sts. This is som eth in g io w hich w e ca n

difficulty in o b tain in g a d eq u a te an d tim ely

a ll contribu te — in ih e u niversities, in G ov­

inform ation g o e s b a c k io our old b u gabo o ,

ernm ent, an d in bu sin ess.




9

ECONOMIC REVIEW

CAPITAL SPENDING PLANS
IN CLEVELAND AND
NORTHEASTERN OHIO

M an u factu rin g firm s in the four-county

tiv en ess of the sa m p le .1

C le v e la n d m e tr o p o lita n a re a ex p ect total
sp en d ing for new p lan t and eguipm ent in 1967

CLEVELAND AREA

to b e 27 p ercen t larg e r th an in 1966, with a

The ex p ected 27-percent in c re a s e in this

slight reduction in the ra te of c a p ita l spend ­

y e a r's c a p ita l spen din g b y C lev e la n d m an u ­

ing in d ic a t e d fo r 1968. T h ese p la n s w ere

fa ctu rers (see T a b le I) co n sid era b ly ex c e e d s

re v ea led in a su rv ey of ca p ita l spendin g in

n a tio n a l ex p ecta tio n s for 1967, a s re v e a le d

n o rth eastern O hio ta k en in M arch 1967.

b y the m ost recen t n ation w id e su rv ey s. At

This y e a r's su rv ey of ca p ita l

spending

the sa m e tim e the 27-percent in c re a s e rep re­

differs from ea rlie r su rv ey s b y the F ed era l

sen ts on ly ab o u t h alf a s la rg e a rise a s h ad

R eserv e B ank of C lev elan d . In a n attem pt to

b e e n an ticip a ted a t the tim e of the previous

red u ce dup lication and, at the sa m e tim e,

su rv ey b y this B an k in the fa ll of 1966. The

to im prove the u sefu ln ess of the results, this

dow nw ard rev ision in spen din g p la n s for

B a n k 's sem ian n u al su rv ey of the C lev e lan d

1967 u nd ou btedly reflects ch a n g e s in the

a r e a w as com bin ed with the a n n u a l su rvey

ev a lu a tio n of the n ear-term econ om ic outlook

of the eight-county n o rth eastern O hio a re a

b etw een the two su rv ey d ates.

prev iou sly

con du cted

by

C h a m b er of C om m erce

the

and

C lev elan d

the

G rea ter

The g en e ra l p attern of in c re a se d spending
in 1967 an d red u ced spending in 1968 in the

C lev e lan d G row th Board. G rea ter g eo g rap h ic
c o v e ra g e w as acco m p an ied b y a la rg e in­
c r e a s e in the num ber of p articip atin g firms;
a ll

m an u factu rin g

estab lish m en ts

in

1 Questionnaires mailed to prospeclive participanls above
a certain size were similar to those used by this Bank
in previous surveys. A much abbreviated form, however,

the

w as sent to the large number of smaller firms newly

eight-county a re a , re g a rd less of size, w ere

included in the survey. As a result, only the percentages

invited to co o p e rate in the survey. W h ile this

of year-to-year changes in spending and the proportions

resu lted in a low er resp o n se rate, the e x ­

of total spending for structures and for machinery, re­
spectively, are based on all returns. All other findings

p an d ed su rvey g re a tly in crea sed the num ber

reflect only that portion of the respondents completing

of resp o n ses and im proved the re p re se n ta ­

the full-size questionnaire.

10




MAY 1 9 6 7
TABLE I

sizable increase in 1968.

Capital Spending by Manufacturing Firms
Cleveland Metropolitan Area
(Spring 1967 Survey)

The im p act of ex p ected industry ch a n g e s
in c a p ita l spen din g on to tal c a p ita l in v est­
m ent in the C lev e la n d a r e a is, of cou rse,

Year-to-Year Percent Changes

p roportionate to the am ount of spen din g b y
1966 (actual)
to
19 6 7 (planned)

19 6 7 (planned)
to
1968 (planned)

Durable g o o d s ....................

+

31%

—

Stone, clay, and glass .

+

33

—

34

Primary metals . . . .

+

65

+

2

.

+

15

....................

—

2

+
—

11
6

Fabricated metals
Machinery

.

4%

the ind u stries involved. A s a n ex am p le, the
ex p ected 30-percent redu ction in this y e a r's
spen din g b y the ch e m ic a l industry rep resen ts
m an y m ore d ollars th an the 33-percent in­
cr e a s e in the ston e, c la y , an d g la s s industry.

+

17

—

26

G en e ra lly , to tal c a p ita l spen din g in the

Transportation equipment

+

23

—

9

In stru m e n ts ....................

—

16

+ 128

C lev e la n d a r e a is d eterm ined la rg e ly b y the

Other durables*

.

.

.

+

50

—

21

Nondurable goods

.

.

.

+

9

—

6

F o o d ..................................

—

13

—

11

A p p a re l.............................

+

27

—

88

turing ind u stries (27 percen t) an d for the

Paper and paper products

+400

—

64

d u r a b le g o o d s c o m p o n e n t (31 p ercent) in

Printing and publishing .

+

12

+

2

C h e m ic a ls ........................

—

30

+

59

Electrical equipment .

.

Rubber and plastics .

.

+

73

—

14

Other nondurablesf .

.

—

27

+

29

T O T A L ..................................

+

27%

—

4%

d u rab le goods secto r, a s show n b y the n ea rly
id en tica l p ercen t c h a n g e s for a ll m a n u fa c­

Table I. The la tter com ponent a cco u n ts for
ov er 80 p ercen t of ex p ected to tal spen din g in
1967, with a lm ost on e-half com in g from the
prim ary

m e ta ls

ind u stry

a lo n e

an d

the

* Includes ordnance, lumber, furniture, miscellaneous
manufacturing.

other h alf from tran sp o rtatio n equipm ent,

■f Includes textiles, petroleum products, leather.

m a ch in ery , e le c tric a l equipm ent, an d fa b ri­

S o u rc e :

ca te d m etals, in that order. In co n trast, the

F e d e r a l R e se rv e B a n k o f C le v e la n d

C lev ela n d a r e a holds true for the d u rable

re la tiv e ly sm a ll n o n d u rable good s sector,

and n on d u rable good s sectors, a s w ell a s for

w h ere the ch e m ic a l industry ou tran ks a ll

about h alf the ind ivid u al ind u stries show n

o th ers in size of this y e a r's ex p ected spen d ­

in T a b le I. A few industries ex p ect spending

ing, ex e rts re la tiv e ly le ss in flu en ce on the

to rise in both 1967 an d 1968. The group in­

a r e a 's to tal spending.

clu d es the prim ary m etals, fa b ric a te d m etals,

A bout on e out of ev e ry five d o llars of new

an d printing an d pu blishing ind u stries that

ca p ita l in vestm en t b y a ll m an u factu rin g in ­

prev iou sly reported redu ced spen ding in 1966

dustries in the a r e a w ill b e for new structu res

a s co m p ared with 1965. O ther ind u stries ex ­

in 1967 (see T a b le II). A s usual, ind ivid u al in ­

pect to red u ce spending in 1967 an d a g a in in

dustries v a ry w id ely a s to the proportions of

1968; th ey inclu de the m ach in ery an d the

spen din g for structu res a s a g a in st m ach in ery .

food ind u stries w here spending in 1966 w as

The proportion of spen din g ea rm a rk ed for

high co m p ared w ith 1965. The ch e m ic a l in ­

ex p an sio n of fa cilitie s — ab o u t 60 p ercen t, a s

dustry, w hich ex p ects redu ced spending in

show n in T a b le II — is low er th a n the 67

1967 from a high 1966 level, a n ticip a te s a

p ercen t in d icated in la st O cto b e r's su rvey.




11

ECONOMIC REVIEW
This p ro b a b ly reflects som ew hat le ss p res­

p ercen t in the la test su rvey. T hat a v ery high

su re on c a p a c ity now th an last fall, w hen

proportion of rep lies w ere m ark ed " le s s th an

alm ost h alf of the rep lies show ed "le s s than

a d e q u a te " in the printing an d p u blish in g in ­

a d e q u a te " c a p a city , in co n trast to on ly 30

dustry, su g g ests c a p a c ity sh o rta g es in som e
a re a s.

TABLE II
Capital Spending by Manufacturing Firms
Cleveland Metropolitan Area
(Spring 1967 Survey)

A pp roxim ately 90 p ercen t of the d ollar
am ounts to b e spent for new p lan t an d equip­
m ent in 1967 an d 1968 w ill b e fin an ced in­
tern ally , a slig h tly la rg e r p ercen t th an indi­

Percent Distribution of Total Spending by Type*
(Between Structures and Equipment and Between

ca ted in the previous su rvey. H ow ever, the

Expansion and Replacement)

proportion of firm s ex p ectin g to fin a n ce this

Structures')"
1966
Durable goods

25%

1967
19%

Expansion^

y e a r's spending en tirely from in tern al so u rces

1968

1966

1967

1968

— 80 p ercen t of th ose rep ly in g — is slig h tly

23%

61%

63%

58%

sm a ller th an show n for eith er 1966 or 1968.

Stone,
clay, and glass 22

13

19

43

59

63

Primary metals

16

12

32

73

80

83

Fabricated
metals

29

24

32

56

38

44

Machinery

32

26

16

57

46

37

Electrical
equipment

48

38

35

60

72

68

19

12

6

53

47

45

Instruments

9

7

5

77

74

72

T otal ca p ita l spending in the n o rth eastern
O hio a r e a is la rg e ly d eterm in ed b y the ind u s­
trial p attern s of the two m etropolitan a r e a s —

Transportation
e q u ip m e n t

NORTHEASTERN OHIO AREA

C lev ela n d an d A kron— inclu d ed in the eight-

Other durables § 18

33

6

79

77

88

cou nty group, w hich con tribu te 70 p ercen t

Nondurable goods 30

32

30

59

65

67

an d 20 p ercen t, resp ectiv ely , of n o rth east­

Food

44

30

26

Apparel

74

67

14

Paper and paper
products
41

60

18

-0 72

-0 92

-0 -0 -

C lev ela n d a re a , w hich a cco u n ts for about
n.a.

n.a.

n.a.

Printing and
publishing

25

22

25

55

70

58

Chemicals

26

22

51

63

62

83

Rubber and
plastics

28

8

4

77

91

94

14

12

45

21%

24%

61%

Other
nondurables#
TOTAL

9
26%

ern O h io 's m an u factu rin g em ploym ent. The

2
63%

* Based only upon returns in which these breakdowns
were supplied.
f Spending for equipment equals 100 percent less the
percentage shown for structures.
t Spending for replacement equals 100 percent less the
percentage shown for expansion.
§ Includes ordnance, lumber, furniture, miscellaneous
manufacturing.
# Includes textiles, petroleum products, leather.

three-fourths of new c a p ita l in vestm en t ex ­
p ected b y reporting m a n u factu rers, c le a rly
d om in ates the spending p attern for the en tire
eight counties. This is p a rticu la rly evid en t in

36

the

60%

h e a v ily co n cen tra ted in the C lev e la n d a re a .

d u rab le

goods

industries,

w hich

a re

A co m p ariso n of the d a ta in T a b le s I an d
III show s that p ercen t ch a n g e s in spending
p la n s for the d u rab le good s group a s a w hole
a re v irtu ally the sa m e for the en tire north­
e a stern O hio a r e a an d for the C lev ela n d
portion. A m ong com ponent industries, y ear-

n.a. Not available.

to-year ch a n g e s in spen din g a re of sim ilar

Source: Federal Reserve Bank of Cleveland

size in som e in sta n ce s an d m ove in the sa m e

12FRASER
Digitized for


MAY 1 96 7
TABLE III

on ly 15 p ercen t of total spen din g in a ll m an ­

Capital Spending by Manufacturing Firms
and Utilities
Northeastern Ohio (Eight Counties)
(Spring 1967 Survey)

u factu rin g industries.

Year-to-Year Percent Changes
196 6 (actual)
to
19 6 7 (planned)

M a n u factu rers in the A kron a r e a exp ect,
on a v e ra g e , to spend 15 p ercen t le ss for new
p lan t an d equipm ent in 1967 th an la st y e a r
an d to ra ise the lev el of spen din g b y 2 p er­

1967 (plannei
to
1 968 (plannei

cen t in 1968. The reported to tals a re h ea v ily
in fluenced b y spending p la n s of the rubber
industry, w hich in clu d e a 22-percent red u c­

Durable g o o d s ....................

+

31%

—

Stone, clay, and glass .

+

31

—

20

Primary metals . . . .

+

71

+

3

+
—

11
4

+

3

g a in in 1968. The ch e m ica l industry, ranking

—

6

seco n d in the A kron a r e a in the am ount of

+

17

—

25

Transportation equipment

+

29

—

15

In s tr u m e n ts ....................

—

17

Other durables*

Fabricated metals
Machinery

.

.

....................

Electrical equipment .

Nondurable goods

.

5%

tion in spen din g in 1967 an d a 10-percent

spending p lan n ed for 1967, show s in cre a s e s

+

35

in 1967 and 1968 of 18 p ercen t an d 7 percen t,

. .

.

+

26

—

19

resp ectiv ely . Together, the ru bber an d ch em ­

.

.

—

10

+

6

.

F o o d ..................................

—

41

—

15

ic a l industries acco u n t for over 70 percen t

A p p a rel.............................

+

22

—

87

of a ll new p lan t an d equipm ent spending

Paper and paper products

+255

—

60

Printing and publishing .

—

2

+

8

C h e m ic a ls ........................

—

21

+

35

co n trast, the d u rab le goods sector, w here

Rubber and plastics .

.

—

16

+

6

Other nondurablesf • •

redu ced spending is ex p ected in both 1967

27

—

27

+

TOTAL MANUFACTURING

+

17%

—

2%

U T IL IT IE S .............................

+

12%

+

27%

* Includes ordnance, lumber, furniture, miscellaneous
manufacturing,

reported b y A kron a r e a m an u factu rers. In

and 1968, con tribu tes le ss th an one-fourth of
to tal spending in the a re a .
For the en tire n o r th e a s te r n O h io a r e a ,

t Includes textiles, petroleum products, leather.

ch a n g e s in spen din g b y the la rg e ly Akron-

Source: Federal Reserve Bank of Cleveland

b a se d n on d urable goods ind u stries an d b y
the C lev elan d -d om in ated d u rab le good s in ­

d irection in a ll in stan ce s, a s b etw een C lev e­

dustries a re p a rtly offsetting. A s a result, total

land and the en tire a re a .

spending b y a ll m an u factu rin g firm s in the

Sp en d ing p lan s for the eight cou nties in

eight cou n ties is ex p ected to rise in 1967 b y

the n on d u rable goods sector, how ever, b e a r

17 p ercen t an d in 1968 to d eclin e b y 2 p ercen t

the stam p of the A kron a re a , w here 40 p er­

(see T a b le III).

cen t of n o rth eastern O hio's em ploym ent in

Public utilities in the en tire n o rth eastern

n on d u rable goods m anu factu ring is located .

O hio a r e a p la n to in c re a s e their ca p ita l

O ne-half of a ll c a p ita l spending b y those

spending b y 12 p ercen t in 1967 an d b y a

industries in the com bin ed eight cou nties is

further 27 p ercen t in 1968, a s show n in T a b le

reported from the A kron a re a , in co n trast to

III.




13

ECONOMIC REVIEW

AGRICULTURAL LOANS
AT COMMERCIAL BANKS
IN THE FOURTH DISTRICT
A num ber of in teresting fa cts regard in g

At m id y ear 1966, abou t 60 p ercen t of a ll farm

the u se of b an k cred it b y farm o p erato rs in

o p erato rs in ih e D istrict w ere using b an k

ih e Fourth D istrict em erg e from the n atio n ­

credit, a m uch la rg e r proportion th an ten

w ide ag ricu ltu ral lo an su rvey condu cted b y

y e a rs ea rlie r w hen on ly abou t 40 percen t

ih e F ed e ra l R eserv e Sy stem a s of June 30,

w ere in d ebt to D istrict b a n k s. In terestin gly,

1966.1 W h ere ap prop riate, th ese fa cts are

ih e num ber of borrow ers in 1966 — 111,462 —

co m p ared w ith the results of the previous

w as a ctu a lly 17,500 le ss th an ten y e a rs ea rlier

a g ricu ltu ral lo an su rvey conducted in 1956.2

due ch iefly io a d eclin e in ih e num ber of
farm s. In addition to a la rg e r proportion of

1 The d ala discussed in this article are derived from a
stratified random sample of 110 Fourth District insured
commercial banks, which w as part of a nationwide sur­
vey on bank financing of agriculture. Each bank reported
detailed information on a sample of farm loans in addi­
tion to several other items of information. The sample
banks were stratified by size, as measured by dollar
volume of farm loans outstanding. Each of ihe respondent

farm ers using b a n k credit, the am ount of
debt per borrow er w as la rg e r in 1966 th an
in 1956.
Total a g ricu ltu ral lo a n s at D istrict b a n k s
a s of Jun e 30, 1966, am ounted to $484 million,
or 71 p ercen t m ore th an ien y e a rs earlier.

banks reported on all farm borrowers with $100,000 or

The $484 m illion of a g ricu ltu ral lo an s in­

more of debt outstanding and on from 20 to 50 additional

cluded 163,599 lo an s a v e ra g in g $2,956 ea ch .

farm borrowers within a designated alphabetical seg­

M an y borrow ers h ad m ore th an one b a n k

ment. The data were expanded to represent the total
of all farm loans reported by all District banks on the
Report of Condition as of the same date.
Results of the nationwide survey on bank financing of
agriculture will be presented in the Federal R eserve
Bulletin.

- See "Bank Loans to Agriculture," Monthly Business

loan, an d the a v e r a g e am ount outstand ing
per borrow er w as $4,399. The a v e r a g e size
of lo an w as abou t tw ice ih e m agn itu d e of
ten y e a rs ea rlier.
The grow th of ag ricu ltu ra l lo an s a t D istrict
b a n k s o ccu rred la rg e ly from ih e resou rces

Review, Federal Reserve Bank of Cleveland, December,

of ih e ind ivid ual b a n k s. The 1966 su rv ey indi­

1956.

ca ted that during ih e 12 m onths end ed June

Digitized for14
FRASER


MAY 1 9 6 7
30, 1966, Ihere w ere only 72 loans, totalin g

g ory (not show n in tab le). In 1966 the group

$2.7 m illion, that b a n k s in the D istrict w ere

with the la rg e st num ber of b orrow ers (30,054)

u n a b le to acco m m o d ate b e c a u se the size of

w as in the $2,000 to $4,999 ra n g e; ten y e a rs

individual lo an s ex ceed e d the b a n k 's le g a l

earlier, the group w ith the la rg e st num ber

lending limit to one borrow er. U n acco m ­

w as in the under $500 ca te g o ry (not show n

m odated lo an s during the 12-month period

in table). A s a ls o show n in T a b le I, a s the

am ounted to 0.04 p ercen t and 0.56 percent,

d ollar am ount of d ebt per borrow er in crea sed ,

resp ectiv ely , of the num ber and d ollar vo l­

the num ber of notes p er borrow er a lso in­

um e of ag ricu ltu ral lo an s outstanding a s of

crea se d . Thus, w hile the num ber of borrow ers

m id y ear 1966. The u naccom m od ated lo an s

and the num ber of lo a n s w ere re a so n a b ly

w ere p ro b ab ly h and led to som e extent b y

clo se in the sm a ller d ebt ca teg o rie s, borrow ­

particip atio n

ers in the la rg e r d ebt groupings held a n in ­

loan s. The su rvey in d icated

that, a s of June 30, 1966, there w ere 28 p artici­

cre a sin g ly la rg e r num ber of notes.

p ation lo an s (totaling $2.5 million) originated

A s would b e exp ected , the a v e ra g e ef­

b y reporting b an k s an d 20 p articip atio n lo an s

fectiv e in terest ra te on a g ricu ltu ra l loan s

(totaling $431,000) originated b y corresp ond ­

d eclin ed a s the am ount of b a n k d ebt per

ent b an k s.

borrow er rose. In the sm a lle st d ebt ca teg o ry

The growth in ag ricu ltu ral lo an s a t District

(under $500), the a v e r a g e effectiv e in terest

b a n k s b etw een 1956 and 1966 w as a cc o m ­

rate w as 7.6 p ercen t; in the la rg e st d ebt c a te ­

p an ied b y a m ore th an two-fold in c re a se in

gory ($100,000 an d over), the a v e r a g e rate

a g ricu ltu ral lo an s outstand ing b y other insti­

w as 5.4 percen t. For a ll ca teg o rie s, the a v ­

tutional le n d ers.3 In con trast, the dollar vol­

e ra g e effectiv e in terest ra te a s of Jun e 30,

um e of lo an s b y ind ivid u als for ag ricu ltu ral

1966, w as 6.4 percen t, w hich com p ared with

pu rposes reg istered a m od erate d eclin e dur­

5.7 p ercen t ten y e a rs ea rlier.

ing the sa m e period.

OUTSTANDING BANK DEBT
OF BORROWER

MAJOR PURPOSE OF LOAN
A s of June 30, 1966, the volum e of lo an s to

The am ount of d ebt per borrow er a t Fourth

p u rch a se farm re a l e sta te w as co n sid era b ly

D istrict b a n k s ro se su b stan tially b etw een

la rg e r th an for a n y other m a jo r purpose, a c ­

1956 an d 1966. A s show n in T a b le I, the la rg ­

counting for 41.5 p ercen t of a ll a g ricu ltu ral

est volum e of d ebt w as in the ca teg o ry

loan s, an d w as so m ew h at h ig h er th an a

w here outstanding d ebt ran g ed from $10,000

d eca d e ea rlier. B ank lo an s for in term ed iate

to $24,999; ten y e a rs earlier, the la rg e st vol­

term in vestm en ts, su ch a s p u rch a se s of farm

um e of debt w as in the $2,000 to $4,999 c a te ­

m ach in ery , au to s an d other con su m er dur­

3 Corollary studies of the experience of other institutional

a b le s, im provem ent of lan d an d bu ildings,

lenders to farm operators, including the several agencies

an d other livestock , ran k ed next. T ak en to­

of the Farm Credit Administration and life insurance com­
panies, are in progress; findings are to be reported by

geth er, th ese lo an s a cco u n ted for 29.8 p ercen t

the Economic Research Service of the Department of

of to tal loan s, or slig h tly le ss th an in the

Agriculture.

ea rlie r period.




15

ECONOMIC REVIEW
TABLE I
Fourth District Agricultural Loans
Total Debt Per Borrower
June 30, 1966
Number of
Borrowers

Number of
Loans

Outstanding

Average

(thousands
of dollars)

Effective
Interest Rate

Under $ 5 0 0

.................................................................................................

19,776

21 ,3 5 2

5 ,1 9 9

7 .6 %

$ 5 0 0 — $9 9 9

.................................................................................................

14,421

16,892

9 ,822

7.0
7.0

$

$ 1 ,0 0 0 — $ 1 ,9 9 9

.......................................................................................

18,380

23,1 1 8

25 ,1 6 2

$ 2 ,0 0 0 — $ 4 ,9 9 9

.......................................................................................

30 ,0 5 4

45 ,4 5 8

9 5,892

6.5

$ 5 ,0 0 0 — $ 9 ,9 9 9

.......................................................................................

16,543

29,651

1 14,324

6.4

$ 1 0 ,0 0 0 — $ 2 4 ,9 9 9

..................................................................................

10,164

2 2 ,4 4 8

153,5 8 6

6.2

$ 2 5 ,0 0 0 — $ 4 9 ,9 9 9

..................................................................................

1,814

3 ,919

5 9 ,3 1 5

6.1

$ 5 0 ,0 0 0 — $ 9 9 ,9 9 9

..................................................................................

293

670

17,385

6.1

$ 1 0 0 ,0 0 0 and o v e r ..................................................................................

18

92

2 ,975

5.4

111,462

163,5 9 9

$ 4 8 3 ,6 6 2

Total

...............................................................................................................

6 .4 %

Source: Board of Governors of the Federal Reserve System

The proportion of b a n k credit em p loy ed in

of a g ricu ltu ra l lo an s at D istrict b a n k s w as

fin an cin g cu rrent op eratin g ex p e n ses w as

to borrow ers with a net w orth of $25,000 to

g re a te r in m id-1966 th an ten y e a rs earlier.

$99,999 (T ab le III). L oan s in th at ca te g o ry

Loan s to co n so lid ate and re p a y debts, a s

a cco u n ted for 45 p ercen t of the to tal volum e,

w ell a s lo an s for m iscellan eo u s purposes,

and abou t one-third of a ll borrow ers. The

rep resen ted a sm aller proportion of the total

next la rg est ca te g o ry w as the group w ith a

(in num bers and outstandings) in 1966 than

net w orth of $10,000 to $24,999, follow ed b y

in 1956.

the group with a net w orth of under $10,000.

A s T a b le II show s, the a v e r a g e size of

The sm a llest group inclu d ed b orrow ers with

lo a n s to p u rch ase farm re a l e sta te w as larg er

a net worth of ov er $100,000. The two la rg e st

th an for a n y other purpose, an d lo an s to

groups, w hen com bin ed , a cco u n ted for 55

p u rch ase au to s and consu m er d u rab les w ere

p ercen t of the lo an volum e an d 36 p ercen t

the sm allest.

of the borrow ers.

The a v e ra g e effectiv e in terest ra te ran g ed

The a v e r a g e am ount o utstan d ing p er b or­

from 6.1 p ercen t on lo an s to p u rch ase feed er

row er v aried in direct relatio n to net worth.

liv estock and re a l e s ta te to 8.8 p ercen t on

Borrow ers with a n et w orth of over $100,000

lo an s for au tos an d consu m er d u rables. The

h ad the la rg e st a v e r a g e am ount of b a n k

effectiv e ra te on lo an s to fin an ce cu rrent e x ­

d ebt an d th o se with a net worth of le ss th an

p e n se s w as 6.3 p ercen t, an d interm ed iate

$10,000, the sm allest.

in vestm ents, 7.1 p ercen t.

LOANS BY AGE OF BORROWER
LOANS BY NET WORTH
OF BORROWER
The la rg e st proportion (num ber an d am ount)

16



Borrow ers 45 y e a rs an d over h ad ih e la rg ­
est am ount of b a n k debt, a s show n in T a b le
III, acco u n tin g for 54 p ercen t of the volum e

TABLE II
M ajor Purpose of Fourth District Agricultural Loans
June 30, 1966 and June 30, 1956

Number of
Loans
June 30, 1966
Feed er livestock...................................
Current operating and
family living expenses

8,591

June 30, 1966
5 .2 %

June 3 0 , 1956
3 .8 %

Outstanding
(thousands
of dollars)
June 30, 1 966
$ 26,721

Distribution
June 3 0 , 1 9 6 6
5 .5 %

June 3 0 , 1956
4 .2 %

Average
Original
Size
June 30, 1966

Average
Effective
Interest Rate
June 30, 1966

$ 3 ,1 1 0

6 .1 %

51 ,975

31.8

29.5

6 4 ,5 1 7

13.4

10.3

1,241

6.4

All current e x p e n s e s .........................

60,5 6 6

37.0

33.3

9 1 ,2 3 8

18.9

14.5

1,506

6.3

O ther liv e s t o c k ...................................

7 ,934

4.9

5.2

21,351

4.4

5.6

2,691

6.2

M a c h in e r y .............................................

30,981

18.9

19.8

6 5 ,5 2 8

13.6

13.6

2 ,115

6.9

Autos and consumer durables

.

11,942

7.3

7.4

13,242

2.7

3.6

1,109

8.8

Improvement of land and buildings

10,264

6.3

6.7

4 4 ,0 7 3

9.1

8.7

4 ,2 9 4

6.3
7.1

. . . .

All intermediate investments .

.
.

.

Purchase farm real estate . . . .
Consolidate and p a y debts .

.

T o t a l ......................................................

.

61,121

37.4

39.1

1 44,194

29.8

31.5

2 ,35 9

2 8,1 0 8

17.2

15.1

200,561

41 .5

38.3

7 ,13 5

6.1

5,775

3.5

5.9

2 5 ,6 9 2

5.3

8.1

4 ,4 4 9

6.3

8,028

4.9

6.6

2 1 ,9 7 6

4.5

7.6

2 ,7 4 6

6.6

1 0 0 .0 %

1 0 0 .0 %

1 0 0 .0 %

10 0 .0 %

163,599

$ 4 8 3 ,6 6 2

Sources: Board of Governors of the Federal Reserve System and Federal Reserve Bank of Cleveland




$ 2 ,9 5 6

6 .4 %

ECONOMIC REVIEW
TABLE III
Fourth District Agricultural Loans
Characteristics of Borrowers
June 30, 1966
Number of
Borrowers

Percent

Outstanding
(thousands

Percent

Average
Outstanding

Distribution

of dollars)

Distribution

Per Borrower

$ 5 3 ,345

Net Worth of Borrower
26,359

2 3 .6 %

$ 1 0 ,0 0 0 — $ 2 4 ,9 9 9

.................................................

33,219

29.8

1 27,252

26.3

3,831

$ 2 5 ,0 0 0 — $ 9 9 ,9 9 9

................................................

36,188

32.4

2 1 6 ,2 5 0

44 .7

5 ,976
12,911

Under $ 1 0 ,0 0 0

..........................................................

1 1 .0 %

$ 1 0 0 ,0 0 0 and o v e r ................................................

3,734

3.5

4 8 ,2 1 0

10.0

Not r e p o r t e d ...............................................................

11,963

10.7

38,604

8.0

T o t a l .............................................................................

111,462

1 0 0 .0 %

$4 8 3 ,6 6 2

$ 68,313

$ 2 ,0 2 4

3 ,2 2 7

1 0 0 .0 %

$ 4 ,3 3 9

1 4 .9 %

$ 4 ,5 6 4

Age of Borrower
Under 35 y e a r s ..........................................................

14,967

1 4 .1 %

35-44 y e a r s ...............................................................

29,299

27.6

1 43,497

31.3

4 5 years and o v e r .....................................................

61,715

58.2

246,171

53.8

T o t a l ..............................................................................

105,981

10 0 .0 %

$457,981

1 0 0 .0 %

Proprietorship...............................................................

105,981

9 5 .1 %

$457,981

C o r p o r a t io n ...............................................................

271

4,898
3 ,989
$ 4,321

Type of Enterprise

0.2

9 4 .7 %

$4,321

6,102

1.3

22,5 5 3
26,9 6 3

P artn ersh ip ....................................................................

125

0.1

3,373

0.7

Not r e p o r t e d ...............................................................

5,085

4.6

16,206

3.3

T o t a l .............................................................................

111,462

1 0 0 .0 %

$ 4 83,662

1 0 0 .0 %

3,187
$ 4 ,339

Source: Board of Governors of the Federal Reserve System

and 58 p ercent of the borrow ers. The group

larg est proportion of ban k loan s, 94.7 percent.

from 35 to 44 y e a rs of a g e acco u n ted for 31

Loans to corp orate farm s am ounted to only

percent of the dollar volum e and 28 percen t

1 p ercent of the total, but the a v e r a g e am ount

of the loans. T ak en together, the two a g e

per borrow er — $22,553 — w as co n sid erab ly

groups (35 to 44 an d 45 and over) acco u n ted

larg er than for individual proprietorships.

for over four-fifths of both the loan volum e

Partn erships acco u n ted for a n even sm aller

an d num ber of borrow ers. Borrow ers under 35

proportion, but the a v e r a g e am ount per bo r­

constituted the sm a llest group using ban k

row er w as larg er th an for a n y other group.

credit, with 15 p ercent of the lo an volum e and
14 percen t of the borrow ers. Borrow ers 45
y e a rs of a g e and over had a sm aller a v e ra g e

MATURITY OF LOANS
A v erag e

loan

m aturity

w as

som ew hat

am ount of b an k debt than those in either the

longer in m id-1966 than a d eca d e earlier, re­

under 35 or 35 to 44 groups, p resu m ab ly b e ­

flecting ih e fa ct that farm re a l esta te lo an s

ca u se m ore of the form er w ere a t a sta g e

acco u n ted for a larg er proportion of the total.

w here they w ere not a g g re ssiv e ly seek in g

The shift in m aturity structure resulted from

funds to expand their operations.

in c re a s e s in the num ber an d d ollar am ount of

Individual proprietors acco u n ted for the
Digitized for 18
FRASER


lo an s with a m aturity of eight m onths or m ore,

TABLE IV
Maturity and Security of Fourth District Agricultural Loans
June 30, 1966 and June 30, 1956

Number of
Loans
June 30, 1966

Distribution
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
June 30, 1966 June 30, 1956

Outstanding
Percent
(thousands
Distribution
of dollars)
— June 30, 1966 June 3 0 , 1 9 6 6 June 30, 1956

Average
Original
Size
June 3 0 , 1966

Average
Effective
Interest Rate
June 30, 1966

$ 3,681

6 .0 %

Maturity

5 -7 months........................................
8 -1 0 m o n th s...................................

23,685

1 4 .5 %

13,916

8.5

39,055

23.9

11%
AO
4
y

$ 6 7 ,0 1 6

1 3 .8 %

16,269

3.4

7 4 ,8 1 8

15.5

15%
28

1,218

6.1

1,986

6.1

1,552

6.1

2 ,9 8 6

6.2

6,739

4.1

10,079

2.1

2 8,172

17.2

7 5 ,8 9 5

15.7

14-29 months...................................

14,406

8.8

2 3 ,8 5 8

4.9

2 ,215

8.0

3 y e a r s .............................................

12,045

7.4

31 ,2 0 6

6.5

3 ,648

7.7

5,768

3.5

2 6 ,3 2 8

5.4

6,121

7.1

6 -10 y e a r s ...................................

10,576

6.5

6 5 ,954

13.6

8 ,809

6.3

11 years or m o r e .........................

9,239

5.6

9 2 ,2 4 0

19.1

12,708

6.1

1A

29

11 11

45

163,599

1 0 0 .0 %

100%

$ 4 8 3 ,6 6 2

1 0 0 .0 %

100%

$ 3,655

7 4 ,1 3 5

4 5 .3 %

40%

$ 1 2 0 ,0 8 8

2 4 .8 %

25%

$ 1,620

Security
U n s e c u r e d ........................................
Secured
Endorsed........................................

9,312

5.7

16

13,390

2.8

7

1,483

Chattel mortgage, etc. .

.

.

38,412

23.5

20

80,7 8 2

16.7

14

2 ,103

Real estate mortgage

.

.

3 9 ,946

24.4

21

2 6 2 ,2 8 3

54.2

51

6 ,5 6 6

All o th e r .............................................

1,795

1.1

3

7,1 2 0

1.5

3

1 0 0 .0 %

100%

1 0 0 .0 %

100%

.

163,599

$ 4 8 3 ,6 6 2

Sources; Board of Governors of the Federal Reserve System and Federal Reserve Bank of Cleveland




3 ,9 6 7
$ 2,956

6 .4 %

ECONOMIC REVIEW
and redu ction s in Ihose with a m aturity of

tel deed of trust, or con d ition al s a le s con tract).

sev en m onths or less, a s show n in T a b le IV.

This secu rity acco u n ted for 17 p ercen t of

The num ber of d em and lo an s w as re lativ ely

the d ollar volum e of lo an s o utstan d ing and

g re a te r in 1966 but the d ollar volum e w as

n e a rly one-fourth of the to tal num ber of loan s.

m o d erately less. E xcept for d em and lo an s

A m ong secu red lo an s, en d orsed lo a n s w ere

an d lo an s with m aturities of 10 m onths or

the sm a llest in a v e r a g e size an d re a l esta te ,

less, the effectiv e in terest rate w as low est for

the

the lo an s of lon gest m aturity (11 y e a rs or

slig h tly la rg e r th an en d orsed loans.

la rg est.

U n secu red

lo a n s

w ere

on ly

m ore). The p red om in an ce of secu red re a l e s­
ta te lo an s in the latter ca teg o ry p ro b ab ly

AMOUNT OF ORIGINAL NOTE

a cco u n ted for this pattern. The 8.0 percen t

A s show n in T a b le V, m ore th an 90 percen t

effectiv e interest ra te for lo an s with a m atu­

of the lo an s w ere for a n o rig in al am ount of

rity of 14 to 29 m onths and the 7.7 p ercen t rate

le ss th an $10,000. O f the le ss th an 10 percen t

on 3-y ear lo an s p ro b ab ly c a n b e attributed

of the lo an s that w ere in e x c e s s of $10,000,

to the re la tiv e ly high proportion of auto an d

the bulk fell b etw een $10,000 an d $25,000.

con su m er d u rab le lo an s that fa ll w ithin those

In term s of d ollar volum e, abou t 85 p ercen t of

m aturity categ o rie s.

the lo an s w ere for a n o rig in al am ount of le ss
th an $25,000. In k eep in g with the u su al re la ­

SECURITY OF LOANS

tionship b etw een in terest ra te s an d size of

The u se of re a l e sta te an d ch a tte l m ort­

loan, the a v e r a g e effectiv e ra te of in terest

g a g e s a s secu rity g ain ed in re lativ e im por­

d eclin ed a s the o rig in al am ount of the note

ta n c e

in crea sed .

b etw een

1956 and

1966. This w as

ev id en ced b y in crea sed proportions (both
n um ber and d ollar volum e) of lo an s secu red
b y th e se two ty p es of secu rity (see T a b le IV).

METHOD OF REPAYMENT
AND INTEREST CHARGE

In contrast, there w as a d eclin e in the num ber

A bout 54 p ercen t of the d ollar volum e an d

an d dollar volum e of end orsed lo an s and

35 p ercen t of the num ber of lo a n s provided

lo a n s with other ty p es of security. U nsecu red

for rep ay m en t in in stalm en ts, a s in d icated

lo a n s rep resen ted about the sa m e proportion

in T a b le V. The in terest c h a rg e on m ost of

of to tal dollar volum e in m id-1966 a s ten y e a rs

th ese lo a n s w as on the outstand ing b a la n c e ,

ea rlier.

with the a v e r a g e effectiv e ra te of 6.1 p ercen t

R e a l e sta te m o rtg ag es w ere the most com ­
m on ty p e of secu rity reported in the su rvey,

on ly slig h tly h igh er th an on sin g le p ay m en t
loan s.

acco u n tin g for 54 p ercen t of the to tal dollar

S in g le p ay m en t lo a n s a cco u n ted for n ea rly

volum e of lo an s outstand ing in 1966, a m od­

two-thirds of the num ber of lo an s, but rep re­

e ra te ly la rg e r proportion th an in 1956. Next

sen ted on ly 46 p ercen t of the volum e; reflect­

in re lativ e im p o rtan ce w as the ch a tte l m ort­

ing the fa ct that the a v e r a g e o rig in al size of

g a g e (including the clo sely a sso cia te d se cu ­

sin g le p ay m en t lo an s w as abou t one-third

rity a g reem en t and fin an cial statem en t, c h a t­

the size of in stalm en t loan s. S in g le p ay m en t


0


TABLE V
Characteristics of Fourth District A gricultural Loans
June 30, 1966
Number
o f Loans

Percent
Distribution

Outstanding
(thousands
of dollars)

Percent
Distribution

A verag e
O riginal
Size

A ve rag e
Effective
Interest Rat

Size o f Loan
....................................................................................................

1 4 ,9 3 8

9 .1 %

2 ,0 5 6

0 .4 %

145

6 .4 %

$250— $499

..............................................................................................

1 5 ,3 4 7

9.4

4 ,8 7 5

1.0

346

6 .9

$500— $999

..............................................................................................

2 5 ,6 3 5

15.7

15,028

3.1

671

6.9

Under $ 2 5 0

$

$

$ 1 ,0 0 0 — $ 1 ,9 9 9

........................................................................................

3 0 ,6 6 4

18.7

3 5 ,3 1 8

7 .3

1,340

6.8

$ 2 ,0 0 0 — $ 4 ,9 9 9

........................................................................................

4 0 ,7 7 8

24 .9

1 0 0 ,4 1 9

20 .8

3,05 3

6.6

$ 5 ,0 0 0 — $ 9 ,9 9 9

........................................................................................

2 0 ,8 7 9

12.8

1 0 9 ,2 7 7

2 2 .6

6,58 3

6.3

$ 1 0 ,0 0 0 — $ 2 4 ,9 9 9 ..................................................................................

12,761

7 .8

1 4 3 ,4 5 6

2 9 .7

1 4,139

6.2
6.1

$ 2 5 ,0 0 0 — $ 4 9 ,9 9 9 ..................................................................................

2 ,31 4

1.4

5 8 ,3 5 4

12.1

3 1 ,7 0 5

$ 5 0 ,0 0 0 — $ 9 9 ,9 9 9 ...................................................................................

266

13 ,8 1 0

2.8

57,1 66

6.1

$ 1 0 0 ,0 0 0 and o v e r ...................................................................................

6

0.2
*

1,069

0.2

2 0 5 ,9 1 7

5.2

1 0 0 .0 %

$ 3 ,65 5

6 .4 %

4 6 .1 %

$ 2 ,3 5 6

1 6 3 ,5 9 9

1 0 0 .0 %

$ 4 8 3 ,6 6 2

6 4 .5 %

$ 2 2 3 ,0 3 0

Method of Repayment and Interest Charge
Single p a y m e n t...............................................................................................

10 5 ,4 9 2

6 .0 %

5 8 ,1 0 8

3 5 .5

2 6 0 ,6 3 2

5 3 .9

6 ,0 1 4

.......................................................................

4 0 ,2 0 2

2 4 .6

2 3 4 ,9 1 5

4 8 .6

7 ,7 5 5

6.1

Add o n ..........................................................................................................

15 ,5 6 0

9 .5

19,346

4 .0

1,876

11.6

3,62 2

13.9

Outstanding balance

1.4

6,371

D iscount..........................................................................................................

2 ,34 6

Total ......................................................................................................................

16 3 ,5 9 9

1 0 0 .0 %

4 .0 % — 4 . 9 % ..............................................................................................

401

0 .2 %

5 .0 % — 5 . 9 % ..............................................................................................

5 ,44 5

3.3

4 1 ,0 2 0

8.5

10,606

6 .0 % — 6 . 9 % ..............................................................................................

1 2 8 ,7 3 4

7 8 .7

4 0 3 ,3 4 8

8 3 .4

3 ,7 7 6

6.1

7 .0 % — 7 . 9 % ..............................................................................................

10,022

6.1

9 ,18 9

1.9

1,031

7.1
8.3

$ 4 8 3 ,6 2 2

1.3

7 .9

1 0 0 .0 %

$ 3 ,65 5

6 .4 %

0 .9 %

$ 1 5 ,2 8 2

4 .6 %

Effective Interest Rate
$

4 ,23 2

5.5

8 .0 % — 8 . 9 % ..............................................................................................

2 ,07 4

1.3

1,695

0 .3

1,023

9 .0 % — 9 . 9 % ..............................................................................................

1,693

1.0

2 ,73 9

0.6

2,781

9.5

1 0 .0 % — 1 0 . 9 % ........................................................................................

1,090

0 .7

1,652

0 .3

2,351

10.7

1 1 .0 % — 1 1 . 9 % ........................................................................................

8 ,22 6

5 .0

12 ,0 7 5

2.5

2,161

11.5

1 2 .0 % — 1 2 . 9 % ........................................................................................

1 ,854

1.1

2,421

0.5

1,722

12.6

1 3 .0 % — 1 4 . 9 % ........................................................................................

2,49 4

1.5

2,231

0.5

1,354

13.7

2,54 2

18.4

1 5 .0 % and o v e r ........................................................................................

1 ,566

Total ......................................................................................................................

1 6 3 ,5 9 9

1 0 0 .0 %

$ 4 8 3 ,6 6 2

1 0 0 .0 %

$ 3 ,65 5

10 ,1 4 0

6 .2 %
*

1 1,043

2 .3 %
*

$ 1,405

1.0

3 ,05 9

0 .6

6 .4 %

Origin of Purchased Loans
Merchant or d e a l e r ...................................................................................
O t h e r f ................................................................................................................

79

2 43

8 .9 %

3,86 4

12.8

3 ,80 4

6.3

Not p u r c h a s e d ..............................................................................................

153,381

9 3 .8

Total ......................................................................................................................

1 6 3 ,5 9 9

1 0 0 .0 %

$ 4 8 3 ,6 6 2

1 0 0 .0 %

$ 3 ,65 5

6 .4 %

16 1 ,2 9 2

9 8 .6 %

$ 4 7 8 ,1 3 3

9 8 .9 %

$ 3,65 4

6 .4 %

4 7 2 ,3 7 6

9 7 .7

Repayment Status
Not o v e r d u e ....................................................................................................
Note is overdue

........................................................................................

2 ,3 0 7

1.4

5 ,5 2 9

1.1

3,76 5

6.1
6 .7

Number of days overdue:
4-32 d a y s .....................................................................................................

621

0.4

1,226

0.2

2,37 3

33-92 d a y s ...............................................................................................

417

0.2

1,76 7

0 .4

5 ,12 8

6.2

93 or more d a y s ...................................................................................

1,269

0.8

2,53 6

0 .5

3,99 8

5 .7

1 0 0 .0 %

$ 4 8 3 ,6 6 2

5 1 ,2 7 2

3 1 .3 %

$ 1 4 1 ,5 2 5

4 0 ,4 7 3

2 4 .7

1 1 3 ,0 6 7

1 0 ,7 9 9

6.6

2 8 ,4 5 8

5 ,31 4

3.2

13 ,3 3 6

5 ,48 5

3.4

15,122

Note not re n e w e d ........................................................................................

11 2 ,1 4 2

68 .6

3 4 1 ,9 9 0

Not re p o rte d ....................................................................................................

185

0.1

147

Total ......................................................................................................................

1 6 3 ,5 9 9

1 6 3 ,5 5 9

1 0 0 .0 %

$ 3 ,65 5

2 9 .3 %

$ 3,14 8

6 .4 %

Renewal Status

U np lan ne d ....................................................................................................
Due to low income

.......................................................................

1 0 0 .0 %

$ 4 8 3 ,6 6 2

2 3 .4

6 .3 %

3 ,1 8 7

6.1

5 .9

3,001

7 .0

2.8

2,74 0

6 .6

3.1

3,25 4

7 .3

7 0 .7
*

3,89 2

6.4

845

6 .0

1 0 0 .0 %

$ 3 ,65 5

6 .4 %

*Less than 0 .0 5 % .
^Includes a small number of loans purchased from insurance companies.
Source: Board of Governors of the Federal Reserve System




21

ECONOMIC REVIEW
lo an s h ad low er a v e ra g e effectiv e interest

p u rch ased , som e of w hich w ere from insu r­

ra te s th an in stalm en t loans. The a v e ra g e e f­

a n c e co m p an ies, a v e ra g e d slig h tly la rg e r

fectiv e in terest ra te on in stalm ent lo an s of 7.9

th an th ose not p u rch ased . The a v e r a g e effec­

p ercen t reflects the influence of "a d d o n ” and

tive in terest ra te of p u rch a sed n otes — 8.9

"d isco u n t" rates, w hich w ere a p p lic a b le to

p ercen t — w as m ore th an one-third h ig h er

about 5 p ercen t of the dollar volum e of loans,

th an that on n otes not p u rch ased .

an d w ere used m ostly on lo an s that w ere
m uch sm aller in a v e r a g e size th an in stalm en t
lo an s, on w hich interest w as ch arg e d on the
ou tstand ing b a la n c e .

REPAYMENT STATUS
The re la tiv ely high le v el of farm incom e
during 1966 a p p a ren tly contribu ted to a co m ­
p a ra tiv e ly low p e rce n ta g e of overd u e lo an s

EFFECTIVE INTEREST RATE

a s of m id-1966. A s show n in T a b le V, only

The effectiv e in terest rate for a ll ag ricu l­

1.1 p ercen t of the d ollar volum e an d 1.4 p er­

tu ral lo an s at D istrict b a n k s a s of Jun e 30,

cen t of the num ber w ere reported overdue at

1966, a v e ra g e d 6.4 p ercen t in co n trast to a

the tim e of the lo an su rvey. T h ese w ere m uch

corresp ond ing ra te of 6.7 p ercen t in the

sm a ller proportions th an in 1956, w hen the

nation. A s in d icated in Table V, a la rg e pro­

am ount of lo an s overd u e w a s 5.1 p ercen t of

portion of the lo an s (93 percen t of d o llar vol­

o utstan d ings an d 2.8 p ercen t of the num ber.

um e an d 82 p ercen t of the num ber) h ad an

A s in 1956, m ost overd u e notes h ad b e e n o v er­

a v e r a g e effectiv e ra te of 6.1 p ercen t or less.

due for 33 d a y s or m ore at the tim e of the

The h ig h er a v e r a g e ra le for a ll lo an s w as

s u rv e y .

a cco u n ted for b y high rates on a re lativ ely

The o rig in al size of overd u e n otes a v e ra g e d

sm a ll proportion of loans, ran g in g up to 15

som ew h at la rg e r th an n otes not overdue,

p ercen t an d higher for the 1 p ercen t of the

su g g estin g th at th ere w ere a sign ifican t num ­

lo a n s with the h ig h est rates. O n ly about 7

b er of secu red re a l e sta te lo a n s am o n g o v er­

p ercen t of the d ollar volum e carried effectiv e

due notes. Su ch lo a n s a re u su ally som ew h at

ra te s a v e ra g in g a b o v e 6.1 p ercen t.

la rg e r th an other lo an s an d p ro b a b ly a cco u n t
for the slig h tly low er a v e r a g e effectiv e in ter­

ORIGIN OF PURCHASED NOTES

est ra te in d icated for overd u e loan s.

V irtu ally a ll of the p u rch ased notes held
b y D istrict b a n k s in m id-1966 w ere from m er­

RENEWAL STATUS

ch a n ts an d d ea lers sellin g equipm ent and

R en ew a l of lo a n s d oes not n e c e ss a rily im ­

su pplies to farm ers, with n e a rly 90 percen t

ply th at the borrow er h a s found it im p o ssib le

for in term ed iate term investm ents. The notes

to m eet o rig in al term s. In fact, re n ew a l m a y

p u rch ased from m erch an ts and d ealers, a s

b e part of a p la n to exten d rep a y m en t over

show n in T a b le V, rep resen ted 2.3 p ercen t

a period of lim e b ey o n d th at for w hich the

of the d ollar volum e of a ll farm lo an s and

note is o rig in a lly draw n, an d in v o lv es a re ­

w ere m uch sm aller in o rig in al size th an notes

n ew al u nd erstan d in g b etw ee n borrow er and

that w ere not pu rch ased . The other notes

lend er at the tim e th e lo an is gran ted . About

Digitized for 22
FRASER


MAY 1 9 6 7
four ouf of five of the 51,272 ren ew ed loans

size of th ese lo a n s w a s so m ew h at le ss th an

at D istrict b a n k s in m id-1966 w ere plann ed

p lan n ed re n ew a ls an d the a v e r a g e effectiv e

ren ew a ls, a s in d icated in T a b le V. L oan s that

in terest rate w a s high er. N early h alf of the

w ere ren ew ed on a p lan n ed b a sis rep resen ted

u np lan n ed re n ew a ls w ere due to low incom e

abou t 23 p ercen t of the d ollar volum e and

of the borrow er.

25 p ercen t of the num ber of a ll loan s. The

A bout 70 p ercen t of the lo a n s o utstan d ing

a v e r a g e size of th ese lo an s w as som ew hat

a s of June 30, 1966, h ad not b e e n ren ew ed , a

la rg e r th an lo an s ren ew ed on a n unp lanned

figure not m uch different from ten y e a rs e a r ­

b a sis, and a v e r a g e effectiv e in terest rate

lier, w hen abou t two-thirds w ere reported a s

low er.

not renew ed . The o rig in a l am ount of the lo an s
w as la rg e r th a n for a n y other group in this

U nplanned re n ew a ls rep resen ted abou t 6
p ercen t of the d ollar volum e. The o rigin al




classifica tio n , but the a v e r a g e effectiv e in ­
terest ra te w as the sa m e a s for a ll loan s.

23




Fourth

Federal

Reserve

District