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February
NIE·
1960
LY REVIEW
Interrelationship of
Monetary and Fiscal Policies . . .
page
Butter-The "Balance Wheel"
of an Industry . . . . . . . . . .
page 10
Current Charts and Statistics .
page 1S
.
.
.
3
FEDERAL RESERVE BANK
OF KANSAS UITY
Subscriptions to the MONTHLY REvrnw are available to the public without charge. Additional
copies of any issue may be obtained from the
Research Depa,r tment, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
Interrelationship of
Monetary and Fiscal Policies
attitudes toward Government finance have undergone a gradual but striking change. As the growing
importance of Government budgets in the
national economy has created a heighten cl
pubJic awareness of their significance, concurrent advances in economic analysis have
demonstrated that budget policy can make
a positive contribution to the over-all performance of the economy. Whereas at one
time the financial operations of Government
were judged in terms of what were held to be
inflexible laws, present thought is more nearly
characterized by its consideration of the appropriateness of budget policy in terms of
prevailing national economic objectives.
Perhaps the outstanding example of this
change in attitudes has been the rather general agreement that budgetary policy should
be designed to contribute to the over-all stability of the economy, rather than to maintain an annual balance. Thus the stimulus to
economic activity provided by the reduction
of tax liabilities during the economic decline
of 1957-58 was widely held to be felicitous
under the circumstances, and fiscal policies
during the decline were made with a recognition that attempts to increase tax revenues
might tend to reinforce recessionary developments. Similarly, the increase of tax liabilities that has accompanied economic recovery
is generally regarded as appropriate to a
period when total demands for goods and
services are rising in relation to productive
capacity. The conscious approbation of year-
I
N RECENT DECADES,
Monthly Review •
February 1960
to-year instability in the net financial position
of the Treasury is striking evidence of the
widespread recognition that budget policy
has a vital bearing on the p rformance of the
economy.
The Basic Budget Position
However, the cyclical behavior of the huclget is only one aspect of budgetary policy,
and the abandonment of the principle of annual balance in favor of a flexible budget
designed to modify economic fluctuations
leaves open the question of what might be
referred to as the underlying or long-run
budgetary position of the Federal Government. The Federal budget might tend toward
more or less continual deficit or surplus over
the course of an entire business cycle, or it
might tend toward balance, with the surpluses
accumulated in years of prosperity tending to
match the deficits resulting from recession .
Compensatory fluctuations in the Treasury's
budget position can take place under any of
the three alternative underlying budgetary
trends.
It might seem at first glance that the longrun budgetary position of the Federal Government should be permitted to evolve out
of short-run considerations of economic stabilization. For example, it has been argued
that, given prevailing economic and financial
conditions, the Federal deficit or surplus each
year should be of a magnitude which provides
for high levels of employment and production without inflation. But this argument
3
Interrelationship of
overlooks the fact that there are alternative
economic policies, particularly monetary policies, that are presently employed as tools of
economic stabilization, and that different
mixtures of monetary and fiscal policies may
each be consistent with economic stability.
While there are various alternatives that may
lead to economic stabilization, the choice of
a particular blend of monetary and fiscal policies is significant with respect to the achievement of other social objectives, since monetary and fiscal policies tend to produce differing effects on the distribution of the economy's productive resources among their various
possible uses.
This article clcals with the effects on resource aJlocation that may stem from alternative mixtures of monetary and fiscal policies.
Following the general discussion of these effects, a brief review of past trends in the
Federal budget is followed by some consideration of possible trends in the Federal
budgetary position during the years ahead.
Goals of Fiscal and Monetary Policies
The underlying trend of the Federal budget
plays an important role in determining the
strength of private demands for goods and
services through its influence on the finances of the businesses, households, and other
spending units that comprise the private
sector of the economy. Aside from Federal
fiscal influence, the other major area of control over private demands is monetary and
credit policy. Primarily through its control
over the lending power of the banking system, monetary and credit policy affects the
cost and availability of borrowed funds for
use in financing private spending. A paramount objective of credit and fiscal poJicies
taken together is to regulate the strength of
private demands for goods and services so as
to achieve the full utilization of the productive capacity of the economy without generating excessive demands that would create
4
inflationary pressures. Stated more specifically, the goal of credit and fiscal policies
combined is to foster a "target" level of demand for goods and services that is appropriate to the realization of the national economic goals of full employment and stable
prices.
Although the ultimate level of private demand is affected both by fiscal and by monetary and credit policies, a given target level
of spending can be achieved with a wide
variety of combinations of the two types of
influence. The possible influences of the budget on private spending range, by continuous
gradations, from the very cxpansiv<' C'ffocts of
a large deficit to the very rest rictivc effects of
a large surplus. lkgarclless of the phase of
the business cycle, the more permissive is
fiscal policy with respect to private spending,
the more restrictive must be monetary and
credit policy if a given target level of private
demands is not to be exceeded. Conversely,
the more restrictive is fiscal policy, the more
permissive may be monetary and credit policies.
The Government Budget and Private Incomes
The significance of the state of the budget
Hes mainly in its effects on the level of disposable income available for private spending. When the budget is balanced, the fiscal
actions of the Treasury leave private disposable incomes unaffected in the aggregate.
Federal outlays, which are sources of private
income, are precisely matched by Federal
revenues, which reduce the disposable incomes of those who pay them. Thus a balanced budget subjects the aggregate disposable income of the private sector of the economy to two opposing influences of equal
strength. This accounting truism has led
economists to the preliminary working proposition that a balanced budget has no impact
on private demands for goods and services.
The conclusion is correct only under strictly
Monetary and Fiscal Policies
limited conditions not likely to be realized
in practice, mainly because almost any combination of spending and taxes has important effects on the distribution of private
wealth and income that will invariably influence both the amount and the kinds of private demands for goods and services. For
example, corporation income taxes bear more
heavily on incomes otherwise destined for investment spending than do personal income
taxes, and the relative importance of the two
taxes has an important influence on the composition of private demands as between investment goods and consumer goods and services.
However, evell though such considerations
weigh heavil y against the probability that a
balanced budget is actually neutral with respect to private demands for new output, an
unbalanced budget can exert a profound influence of a different nature because it directly affects the level of disposable income
in the private sector. If the budget shows a
deficit, disposable private incomes are raised
as the Government outlays add more to them
than is being taken out by current taxation.
This increased income is available for disposition in the form of both larger consumption
outlays and greater private savings which
are potential sources of demand for investment goods. Conversely, a budgetary surplus
lowers private disposable incomes as the
Government takes more funds from the private sector than it provides through its current outlays. This influence operates to reduce private consumption spending and the
amount of private savings being made available for investment.
In the light of the influence of the budget
on the ability of the private sector to finance
consumption and investment out of current
income, it is clear that the credit conditions
appropriate to the achievement of a given
target level of private spending are not independent of the state of the budget. The
Monthly Review •
February 1960
higher the level of private disposable income
( that is, the smaller the budget surplus or the
greater the deficit), the greater must be the
restriction on the ability of the private sector
to finance demands through borrowing if the
target level of spending is not to be exceeded.
Offsets to Unbalanced Budgets
To a certain extent, the Treasury debt operations that normally accompany an unbalanced budget provide a credit market offset
to the effects of the imbalance on private
disposable incomes. A deficit is usually accompanied by a roughly equal amount of
Gov<'rnrncnt horrowiug which involves an
absorption of funds from the money and
capital markets that might otherwise he used
to finance private spending. The superimposition of Government demands for borrowed
funds on private demands creates upward
pressures on interest rates which discourage
private borrowing, and fosters more restrictive bank lending policies. In effect, then, the
deficit leads to a channeling of funds away
from private borrowers to finance the gap
between Government receipts and expenditures.
However, the upward pressure on interest
rates may attract new supplies of loan funds
into the credit markets as it becomes profitable for individuals and businesses to cut
clown working cash balances to take advantage of the higher level of interest rates. To
the extent that this happens, the Government demand for borrowed funds tends to
create its own supply without reducing the
amount of funds available to private borrowers. Additional restraint in the credit markets
may be required to compensate fully for the
stimulus to private spending arising out of
the deficit. Thus, in the achievement of a
given target level of demand for goods and
services, a deficit implies a greater stringency
in the credit markets than would be appropriate if the budget were balanced.
5
Interrelationship of
Conversely, when a Treasury surplus is devoted to the retirement of outstanding Government debt, the holders of the repaid Government obligations are in a position to buy
private securities or invest the money directly, thus augmenting the sources of private
demands for new output. The reduction of
private disposable incomes that goes with a
surplus is thus at least partly offset by an
expansion in the availability of credit funds.
Interest rates tend to be lower, and bank
credit accommodation easier, than they would
be if the budget were balanced. However,
the augmentation of the supply of loan funds
that accompanies tlw surplus may work,
through its downward pressure on interest
rates, to discourage the economizing of working cash balances because it lowers the cost
of holding cash in terms of forgone interest
income. To the extent that the debt retirement merely leads to an increase in private
cash balances, it must be reinforced by a
further easing of credit if the desired level of
spending is to be achieved.
Cyclical Developments Obscure
Fiscal Influence
The foregoing line of reasoning as to the
influence of the state of the Federal budget
on credit conditions might lead to the supposition that Treasury deficits are typically accompanied by tight money, while Treasury
surpluses normally produce conditions of
credit ease. More often than not, the pattern
has been just the opposite because other financial developments have tended to obscure
the influence of Federal debt operations on
credit conditions. Wartime experiences aside,
Treasury deficits are generally expected to
occur during periods of recession and recovery when tax revenues are low. These are
precisely the times when private demands for
borrowed funds are weak.
Conversely, Treasury surpluses are usually
expected during periods of general economic
6
prosperity when tax yields are high; during
these periods, private demands for loan funds
are very active and tend to overpower the
influence of debt retirement on the supply of
loanable funds.
It is nonetheless true that the state of the
Federal budget has an important bearing on
the credit conditions existing at any time because the influence of the budget on the private sector's ability to finance demands out
of disposable income operates at all points in
the economic cycle. At any given point
smaller deficits or larger surpluses would
make appropriate easier credit conditions;
looked at the other way, larg r deficits and
smaller surpluses mak necessary gr atcr
credit restrictions throughout the course of
the business cycle if a given target level of
spending is to be achieved.
Thus, the more or less continual use
of debt rather than taxes to finance Government spending implies the development
of substantially greater restraints on private
credit financing than would be necessary if
the budget were basically in balance. On the
other hand, an underlying surplus in the
Federal budget makes possible an augmentation of the supply of funds available for private borrowing while still holding spending
down to the appropriate target level.
The Underlying Trend of the Budget and the
Composition of Private Demands
The significance of the choice of a particular blend of budget and credit policies to
achieve a given target level of private demands derives importantly from its influence
on the character of private demands. Although compensations in monetary and credit
conditions can allow for a wide range of alternative budgetary policies while preserving
the target level of demand for goods and services, the particular mixture of fiscal and monetary influences that is used has an important
influence in shaping the kinds of demands
Monetary and Fiscal Policies
that make up the total. Since the greater part
of private disposable income is used to finance
household expenditures on current consumption, while the greater part of private borrowing is used to finance spending on producer and consumer durable goods, a fiscal
policy that is permissive with respect to private spending is generally looked upon as
exerting upward pressures on consumer demand in particular, while restrictive credit
policies are thought to hold down the demand
for durable goods that add to the wealth and
productive capacity of the economy. To the
degree that this is true, the choice of a particular blend of fiscal and monetary policies
influences the allocation of the economy's
productive resources between producing for
current consumption and producing durables
that add to wealth and future capacity.
An awareness of this aspect of the implications of Federal budgetary policy is highly
useful in making intelligent policy decisions.
Those who favor the promotion of economic
growth at the expense of current standards
of consumption are prone to argue that the
monetary and credit restrictions necessitated
by an underlying budgetary deficit are in
general prejudicial to capital formation. It
is widely recognized, however, that the present state of empirical knowledge can offer
only limited information concerning the precise effects of fiscal and credit policies. While
it is true that credit is extended primarily for
the purchase of producer and consumer durable goods, and that credit restrictions tend to
hold down these outlays, just which kinds of
spending on durables are most sensitive to
credit restrictions is problematical.
On the consumer side, the rate of spending
for residential housing appears to be much
more sensitive to interest rate changes than
does the demand for the shorter-lived consumer durable goods, such as automobiles,
furniture, and home appliances, that are often
financed by consumer instalment loans. In
Monthly Review •
February 1960
part this is because the ceiling rates of interest on Government-insured mortgages discourage investment in them as the general
level of interest rates rises, although the practice of discounting these mortgages has, to
some extent, made it possible for lenders to
realize more than the legal maximum rate. In
addition, since the interest component of the
total payments on long-term mortgages bulks
much larger than does the interest component
of payments for shorter-term consumer instalment loans, the demand for mortgage
funds is apt to be the more sensitive to interest rate changes.
Thc samc kind of logic is used to arg11P
that long-term capital investment is generally
rnon• susceptible to influ •nee through changing interest rates than is shorter-term lmsiness spending on such items as inventories
and short-lived machinery. There is some
empirical evidence that may be used to buttress the logic of this point, but the analyst
must be wary of trying to push too far his
reasoning as to the effects of credit conditions
on particular kinds of business investment.
Many who favor Government policies designed to promote long-term capital investment therefore argue for the use of other devices, such as tax incentives for capital outlays, or reduced corporation income taxes to
increase the amount of corporate earnings retained for investment.
Recent Experience and Possible
Future Trends
In spite of these qualifications, it is important to recognize the role of the underlying
state of the budget in determining the financial atmosphere surrounding investment decisions; appraisals of the adequacy of the
over-all level of Federal taxation in relation
to expenditures cannot be divorced from a
consideration of these effects. The balance of
this article deals with the fiscal experiences
of the recent past and the possible course of
7
Interrelationship of
Federal Cash Surplus or Deficit
Fi1c•I 1950 • 1960
Billions of
Dollars
+10
Cash Sur pl us
+5
0
-5
- 10
Cash Def I cit
- I 5 L--19--'-5-0---'-, 5-'--2--'---, 5.._4_...___
, 5~6-'---~
, 5~8 ~-----:,--::
6 -:-0~
SOURCE : The Budget of The U.
s.
Government: 1981.
developments in the near future, without attempting to judge their appropriateness. The
purpose is to clarify the facts upon which a
judgment as to the appropriateness of present levels of taxation might be made in the
light of their importance in determining the
availability of loan funds for private borrowers.
The fiscal experience of the Federal Government over the past decade is summarized
in the chart, which shows the cash receipts
and expenditures of the Treasury for each of
the fiscal years 1950-59, along with the latest
official projections for fiscal 1960. These
cash budget figures, which involve the consolidation of Federal transactions with the
public, including trust fund operations, give
a more accurate indication of the financial
impact of the Federal Government on the rest
of the economy than does the administrative
( or President's) budget, which carries certain
items on an accrual basis and excludes trust
fund transactions. Until very recently, the
administrative budget has tended to show
8
larger deficits and smaller surpluses than have
the cash budgets for the same years. The
absolute levels of spending and receipts carried in the administrative budget are lower
than those shown by the cash budget, primarily because the former excludes the trust
funds.
The fluctuations between surplus and deficit shown in the chart have tended to conform, in general, with the variations in business conditions for the economy as a whole.
For the entire decade from fiscal 1950 through
fiscal 1959, Federal deficits exceeded surpluses by $11 billion. By and large, the underlying state of the budget appears to have
been one of near balance over most of the
period.
However, some observers have felt that
recent developments point to a basic budgetary deficit. The $13.1 billion cash deficit of
fiscal 1959, the highest in peace-time history,
occurred in the face of cash receipts that
were down less than $300 million from the
previous year, and only about $500 million
below the record high of 1957. The $14.8
billion increase in Federal payments over
the 1957 level was composed partly of recession-induced "automatic" increases, such
as Social Security payments for unemployment compensation. Added to this were unusually large payments for agricultural price
supports necessitated by the iarge crops of
1958. But in addition, more or less permanent increases, both in defense and nondefense outlays, were pushing up the total.
Furthermore, Treasury payments have failed
to recede in fiscal 1960-Midyear Budget Review estimates project a level of payments
slightly over $95 billion for the current fiscal
year. Current revenue estimates, made in
the light of the impact of the steel strike on
tax receipts, point to a slight deficit in the
cash budget. Fiscal 1961 holds out promise
of a surplus, provided the economy remains
prosperous. The President's Budget Message
Monetary and Fiscal Policies
forecasts a sizable cash surplus which traces
partly to new revenue proposals.
The uncertainty concerning future trends
in expenditures, which depend on such unpredictable elements as national defense
needs and the climate of public opinion concerning the proper scope of Federal nondefense spending, makes it impossible to assess
precisely the long-run adequacy of present
Federal revenue laws, even if the proper
underlying budgetary trend is agreed upon.
Nevertheless, it is interesting to consider the
projections of Federal Government expenditures and receipts through fiscal 1968 prepared by Professor Otto Eckstein of Harvard
University for the Committee for Economic
Development.
Without attempting to forecast short-run
economic fluctuations or changes in the price
level, and assuming that the international
situation does not change appreciably, Eckstein submits four different projections of
Federal Government cash outlays: very high,
high, medium, and low-the medium projection being the one he considers most probable.
The level of Federal cash receipts is projected on the assumption that there will be
no change in the present tax laws, and the
growth in tax revenues therefore depends
largely on the rate of increase in the gross national product, which Eckstein assumes will
average 3 per cent a year in real terms. On
the basis of his medium projection of Government expenditures, Eckstein foresees a Federal cash surplus of about $6 billion by 1964,
presuming that there is no recession at that
time. Such a surplus would seem to be ade-
Monthly Review • February 1960
quate to make up for the deficits that would
arise if recessions continue to be as mild as
those experienced in the 1950's.
Eckstein's projections for fiscal 1968 show
an increase in the cash surplus ( again assuming no recession) to about $11 billion under
the medium range of projections of Federal
expenditures, which would seem to provide
for an underlying surplus if the extent of
cyclical swings remains as limited as it has
been in the recent past.
Such projections are, of course, only informed guesses, and the swing back toward
an underlying balance or a slight surplus is
not the only possibility to be considered. On
the basis of his very high expenditure projection, Eckstein foresees a cash deficit of $6
billion to $7 billion by fiscal 1968 provided
there is no recession at that time and that
there are no changes in the tax laws. Conversely, the low expenditure projection, which
assumes a strong economy-minded attitude
throughout the period, would lead to a surplus of about $21 billion in 1968.
As the future unfolds, decisions concerning
the fiscal adequacy of Federal revenues will
be importantly involved in establishing the
availability of private credit and hence the
division of economic resources between producing for current consumption and producing consumer and producer durables. Only
in the case of Eckstein's low expenditure projection does it appear that the present revenue
laws would provide a substantial underlying
surplus. Such a surplus would imply a
marked alteration in the influence of fiscal
policy on financial conditions.
9
BUTTERThe (!(!Balance Wheel" of an Industry
important role in balancing supplies and stabilizing prices in the
dairy industry. While other dairy products
help fulfill this role, butter is most important
hecausc of ils larger mark t and its combination of characteristics- responsiveness of con sumplion to price changes, storability, and
lack of bulk.
B
UTTER PLAYS AN
Seasonal ity Creates the Need for a Stabilizer
Seasonal imbalances between production
and consumption of milk cause markets to be
unstable. Milk in fluid form is highly perishable and bulky. It can be stored for only a
short time and at a high cost. Excess supplies
of fluid milk ( grade A) have a strong pricedepressing effect because fluid consumption
is relatively unresponsive to price changes.
Consequently, fluid milk plants find it profitable to divert supplies in excess of what can
be sold at prevailing prices into manufactured
products, such as butter and cheese. The output of an individual plant may have a significant influence on prices in a local fluid
milk market, but have no discernible influence
on prices in large national markets for butter
or cheese. Large seasonal excesses of milk can
be processed into butter and other manufactured products with small effects on their
prices because of their storability and nationwide markets.
The diversion of excess fluid milk into
manufactured products not only stabilizes
selling prices of fluid milk products, but it
helps reduce price fluctuations to producers. If
10
some method of diversion were not possible,
fluid milk markets probably would be demoralized . Prices would drop so low during
flu sh produ ction seasons that many producers
would he forcecl out of business. This would
r sult in shortages during slack production
periods. Consumers would suffer an un certain
supply of milk and pay widely fluctuating
prices. Average prices to consumers probably
would be higher, while profits to producers
and distributors would be lower.
The basic instability in fluid milk markets
is illustrated by statistics from 22 markets
operating under Federal milk marketing
orders. Average physical receipts varied seasonally for this group from 82 to 124 per cent
of a 12-month moving average for the period
Seasonal Variation in Average Physical
Receipts and Sales of Fluid Milk
22 Selected Markets Under Federal Milk Marketing Orders
1947-51
INDEX*
140
130
f
120
110
100
90
80
70
JAN.
...l
FEB .
..L
MAR .
..L
APR .
MAY
....l
JUNE JULY
...l
I
L
AUG. SEPT. OCT.
*Index numbers of physical volume are average ratios
to 12-month moving averages, adjusted to total 1200.
SOURCE : U. S. Department of Agriculture .
L
NOV. DEC.
Butter
Seasonal Variations in Production of All Milk,
Creamery Butter, and American Cheese
million pounds in February and 544 million
pouncls in August for the same period.
United States, 1947-55
Trends in Production and Utilization
INDEX*
160
r-'------------------~
, , - - \ \ AMERICAN
140
I
r•--,
I
CHEESE
/
'
'
120
100
MILK
80
CREAMERY
/'
BUTTER
"-'
,,'
~
60
JAN
FEB
MAR
APR
MAY
JUNE
JULY
AUG
SEPT
I
OCT
NOV.
DEC .
•Index numbers of physical volume are average ratios
to 12-month moving averages, adjusted to total 1200.
SOURCE: U. S. Oepanment ot Agriculture .
1947-51. Average physical sales, in comparison, varied only from 96 to 102 per cent, and
the variations were contraseasonal relative to
receipts. The seasonal variation in total milk
production is similar to that in the 22 markets.
The amplitude of seasonal fluctuations in milk
sold for manufacturing uses tends to be
greater than for milk sold for fluicl use. New
technology and management methods have
recluced seasonal variations in recent years
and this has been most effective in fluid milk
sheds where seasonal pricing plans have been
used. Despite these changes, milk production
has by no means approached an even flow.
The production of butter and cheese varies
more than milk production from season to
season. This is because excess fluid milk is
used for manufacturing butter and cheese
during flush seasons. Consumption of butter
and cheese varies much less than production
and, apparently, contrascasonally to production. This results in large variations in cold
storage stocks. Butter stocks varied from a
February average of 170 million pounds to
a July average of 295 million pounds for the
period 1953-57. Cheese stocks averaged 402
Monthly Review •
February 1960
Butter's stabilizing role has changed over
the years and its importance has grown despite declines in butter production and consumption. The changing role has resulted
from the concurrent changes in farm milk
production, sales of whole milk, use of milk
on farms, consumption patterns, and use of
whole milk for butter production.
Farm milk production increased from 89
billion pouncls in 1924 to nearly 126 billion
in HJ,57, and has cleclinecl slightly during the
past :2 years. Whole milk sold lo dealers
quadrupled from W24 to H.l.58, while cream
sold to dealers declined by two thirds. Milk
used on farms and milk and cream retailecl by
farmers declinecl considerably during this
period.
Butter production declined precipitously
during World War II, but has leveled off
since, although there have been considerable
annual fluctuations. The use of milk in fluid
milk and cream and in manufactured products,
other than butter, increased rapidly during the
('arly 1940's, and has increased steadily, but
Farm Milk Production and Sales to Dealers,
Whole Milk or Equivalent (Fat Basis)
United States, 1924-51
BILLION
POUNDS
140
120
100
,., ,"
80
WHOLE MILK SOLO ____ ,---"'
TO DEALERS , '
,,.,
60
40
,,
-
--- _,,, ... ---;
.,.,;
20
0
1924
I
'30
- l
L
'35
'40
-'- J
'50
I
'55
'58
SOURCE: U. S. Department of Agriculture.
11
Butter
more slowly, for the past decade. The proportion of milk utilized in butter production
has declined over the past two decades. Despite these changes, more milk has been used
for butter production than for all other
manufactured products combined for every
year through 1958. About one fourth of the
butterfat in milk and cream sold by farm rs
was used for producing butter in 1958.
Butter was made almost exclusively from
farm-separated cream prior to 1934. Farmchurned butter exceeded creamery-churned
butter until about 1900, and it exce ded
reamery butter mad from whol milk ( factory-s paratcd) lhrongh 1948.
sc of farmseparated cream for butter prod11c tion dedined rapidly during the early 1940's, an<l
has <leclinc<l continuously since 1950. Butler
manufactur d from factory-separated cream
purchased as whole milk has increased some
800 per cent since 1946. This resulted from
two different trends - farmers shifting from
the sale of cream to that of manufacturing
milk and the use of more excess grade A
milk for producing butter.
Per capita consumption of butter declined
slowly from 1934 to 1943, then dropped precipitously. There was another period of
Utilization of Milk in Fluid and Manufactured
Products, Whole Milk Equivalent (Fat Basis)
United StatH, 1924-58
BILLION
POUNDS
60
FLUID MILK
50
40
30
20
10
1
1924
'30
~~.__l__.__.L _____._____l._.
'35
'40
...__i____
'45
SOURCE: U. S. Department of Agriculture .
12
_,J -~-''50
'55
'5B
Use of Milk in Butter, Whole Milk Equivalent
(Fat Basis)
United StatH. 1924-S8
BILLION
40
POUNDS
~--~
30
20
10
_;;,'- .........
FARM CHURNED
,,;.,,......,
0
1924
'~Q
...
_
CREAMERY CHURNED
WHOLE MILK
......... _,,,---..
-:r!5
I
,...... ,'
........__"'---,!_ \ /
,._,,,,,.--.._. /...., -......,.;. ..........
', ~Q
,.,
I
,J!5 1
I
I
,Jo'
I
__ -....
I
•~!5
I
'58
SOURCE : U. S. Department of Agriculture .
gradual decline from 1944 to 1953, followed
by a fairly stable period since. In terms of
whole milk equivalent ( fat basis), per capita
consumption of butter exceeded or equaled
fluid milk and cream consumption up to 1941.
Per capita consumption of milk fat in fluid
milk and cream has averaged about twice as
much as in butter for the past 8 years. Cheese
consumption has increased fairly steadily
since 1924. The ratio of cheese to butter consumption increased from 1-7 in 1924 to 1-2
in 1958 on a whol -mi]k-equival nt basis. P r
capita consumption of manufactured dairy
products, other than butter and cheese, has
more than doubled from 1924 to 1958. Much
of this increase was in ice cream consumption.
The pattern of nonfat milk solids consumption has changed even more than has milk fat
consumption. Whole milk sales to dealers
have increased as farm milk use and cream
sales have declined. Nonfat dry milk, cultured buttermilk, skim milk used in chocolate
drinks, and froz<'n milk <less rts have accounted for most of the increased consumption of nonfat solids.
These trends suggest that butter is declining
both as a user of milk and as a consumer
product. However, recent experience sug-
Butter
Per Capita Consumption of Various Dairy
Products, Whole Milk Equivalent (Fat Basis)
United StatH, 1924-58
CREAM
400
300
200
MANUFACTURED DAIRY PRODUCTS
EXCEPT BUTTER AND CHEESE
~
100
---------.._.,,-----
-
-/-
CHEESE
O
1924
I
'30
, ,
~
I
'35
1
1
,
,
I , , , , I ,
'40
1.
'45
,
,
I , , ,
'50
I , ,
'55
'58
SOURCE : U. S. Department of Agriculture .
gests that butter production may have reached
a stable level which will be maintained indefinitely. On the other hand, the downward
trend may have been slowed but not stopped.
Use of fat-type table spreads declined during
World War II as a matter of Government
policy. Following the war, margarine of improved quality was produced in large quantities and sold at comparatively low prices.
When price controls were lifted, butter prices
increased and margarine prices rcmaine<l low.
Federal and most state taxes and restrictions
on the sale of yellow margarine were lifted in
the early 1950's. The shifts from butter to
margarine during this period can be attributed largely to these special causes. There has
been very little change in the per capita consumption of either butter or margarine since
1952.
Effect of Government Programs
On the Role of Butter
Two Government programs - dairy price
supports and Federal milk marketing orders
-have increased the importance of butter's
stabilizing role. Prices of manufacturing
milk and cream are supported by Government
purchases of butter, cheese, and nonfat dry
Monthly Review •
February 1960
milk. Market prices have differed little from
support prices for several years until quite
recently. This has resulted in fairly stable
price levels for manufacturing milk and cream.
Also, it has supported fluid milk prices to a
large extent because they are related to manufactured product prices through Federal milk
marketing orders and a degree of interproduct
competition.
The Federal milk market order program included some 78 markets in mid-1959. About
40 per cent of the whole milk sold by farmers
is sold under the terms of these orders and
about 10 hillion of the 36 billion pounds
marketed 1111dPr Federal milk orders in 1958
were diverted to manufactured products. Fccl('ral onkrs provide for the setting of minimum
prices to pro<lucers according to pricing formulas based on manufactured product prices
or various economic variables. Some 67 of
the orders use a manufacturing milk formula
for determining minimum prices, and the
price of butter is involved to some extent in
most of these formulas. A typical order sets
the minimum prices of excess class milk ( milk
in excess of fluid use) according to some
measure of its value for manufacturing purposes and provides a higher differential price
for milk used in fluid form. Various adjustors
arc used to keep class prices in line with each
other, prices in other markets, and various
other economic factors. Thus, to some extent,
much of the milk sold under Federal milk
marketing orders is related to butter prices.
Producers' milk prices are regulated by
some 15 states. The U. S. Department of
Agriculture estimates that 16-17 billion pounds
of milk were affected directly by state regulation in 1958. This is in addition to the
amount regulated by the Federal Government.
Thus, from 55 to 60 per cent of the whole
milk sold by farmers is subject to price regulation by various government agencies. State
regulation follows no set pattern, but most
of the prices are set in relation to prices in
13
Butter
Federal order markets and / or prices of manufacturing milk. Prices in many markets not
subject to Federal or state regulation are influenced by them through intermarket competition. The relationships among various
market areas are not close enough to constitute
an integrated national market for milk, but
they do seem to he sufficiently strong to permit the conclusion that the price of butter is
an important factor in the pricing of milk in
general.
The Importance of Butter's Economic Role
Butter's role as a milk price regulator is not
unique. Cheese and evaporated milk also
serve this ml<' h11l to a lesser extent. If the
ability of butter lo fulfill its role should decline, it is doubtful that cheese and evaporated milk could assume this function satisfactorily because of their limited consumption.
However, other products may be developed which can assume this role as well or
better. The improvement of techniques to
produce sterile milk concentrate and dry
whole milk are particularly significant. While
butter and cheese production is a one-way
14
process, the newer products can be reconverted to fluid form. Evaporated milk also can be
reconstituted, but the new products have the
advantage of tasting more like fresh milk
when reconstituted. Sterile milk concentrate
seems to be the more promising of the two.
It is quite possible that, in the future, fluid
milk plants wilJ use part of their seasonal excesses to make sterile milk concentrate which
they will reconstitute for distribution when
milk supplies are short.
Several conclusions may be drawn about
the economic role of butter: ( 1) It has declined in importance as a "primary" farm
product in that sales of farm-churned butter
and farm-separated <.:rC'am have declined
sharply. ( 2) The importance of butter as a
consumer product decreased sharply during
the 1940's but has stabilized since. ( 3) The
importance of butter in stabilizing milk prices
has been enhanced by Government programs.
( 4) Butter probably will continue to play an
important, stabilizing role for a long time in
the future unless new products are developed
which can perform the function more effectively.
Marketable Treasury Securities Held By Individuals
Comparative Market Yields
J•nuary 1952-NovemlMr 1959
And Yield On Long-Term Treasury Securities
PER CENT
BILLIONS OF DOLLARS
5
20
PER CENT
7.0
PER CENT
7.0
*
18
6 .0
6.0 -
YIELD ON LONG-TERM
TREASURY SECURITIES
4
(RIGHT SCALE)
STOCK
~
· 5.0
5 .0
,--
16
3
4.0
4.0
CORPORATE
(AAA)
14
(LEFT
3.0
3.0
TREASURY SECURITIES
OTHER THAN SAVINGS BONDS
HELD BY INDIVIDUALS
2
SCALE)
U.S. GOVT. BONDS
2.0
O '--'---'---'--'---'---'---'--~~'--'---'--' O
1954
'55
'56
'57
'58
'59
1.0
LuJ.,...J.....L....L.J..u.J..,.L..u..~L...L....1.u.J.~w.L.u.uLu.w.J~u..u.Lu..Lu..Lu.w.J.u.L...L.,,.,J~
1952
*September data . All other data June 30 and December 31.
District
and
States
Banks
City
Member
Banks
+2
t
+1
+13
+1
-1
t
+1
+1
+3
+2
-6 +4
t
Colorado
+2
+u
Kansas
+8
+8
New Mexico *
Wyoming
+3
+15
- 4 +4
Dec.
1959 1958
Nov.
-6
t
Oklahoma *
Banks
+4
+9
Nebraska
Country
Member
+9
+2
Missouri*
'56
' 57
'58
1.0
'59
Dec.
1959
Nov.
1959
Dec.
1958
123.7
Consumer Price Index
(1947-49=100)
125.5
125.6
Wholesale Price Index
(1947-49 = 100)
118.9
118.9
119.2
Prices Rec'd by Farmers (1910-14 = 100)
228
230
244
Prices Paid by Farmers
297
297
295
(1910-14 = 100)
December 1959 Percentage Change From
Nov. Dec. Nov. Dec. Nov. Dec.
1959 1958 1959 1958 1959 1958
Tenth F. R. Dist.
'55
Index
Reserve
Country
Member
Banks
'54
PRICi: INDEXES, UNITED STATES
Deposits
Reserve
City
Member
'53
*Chanae of Issues Include<! .
BANKING IN THE TENTH DISTRICT
Loans
2.0
(LONG-TERM)
t +15
t +9
+8
- 2
- 1 -- 11
District
and Principal
Metropolitan
Areas
t
+3
+1
TENTH DISTRICT BUSINESS INDICATORS
- 3
Percentage change-1959 from 1958
Dec.
Year
Dec.
Year
+5
+9
+2
+6
+12
+12
+8
Wichita
- 6
+2
0
+ 9
+6
+6
Kansas City
+2
+4
**
**
+4
- 1
+ 1
+3
- 3
+11
+ 7
- 11
+1
+2
Oklahoma City
**
**
+2
+11
**
**
+1
-1
Tulsa
*Tenth District portion only.
t less than 0.5 per cent.
Value of
Department
Store Sales
Denver
Tenth F. R. Dist.
**
**
Value of
Check
Payments
Omaha
+ 1
+9
+4
- 4
+4
+s
+ 12
+11
+2
+3
+s
+4
0
+8
+ 7
**No reserve cities in this state.
15
@FedFRASER