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February
NEBR.
1961
M(Hf BLY REVIEW
KANS.
Relationship of
Bank Size and Bank Costs
What's Happening on
Tenth District Farms?
. .
. . page
3
. . . . . . page 10
Current Charts and Statistics . . . . . page 16
FEDERAL RESERVE BANK
OF KANSAS CITY
Subscriptions to th e MoNTIILY REvrnw are available to the public without charge. Additional
copies of any issue may be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
Relationship of
Bank Size and Bank Costs
the July 1960 issue of the
Monthly Review entitled, "Growth and
Earnings at Individual Commercial Banks,"
offered evidence suggesting that rapid growth
does not automatically assure a bank of a high
net income po<;ition. Banks with high postwar
growth rates, it was found, had relatively high
rates of gross earnings, h11t their cost ratios
also tended lo lw higher than average. The
result was that the advantages of larger gross
earnings were not carried through to net
earnings.
While high growth rates need not lead to
an immediate expansion of profits, growth
may still be profitable from a longer-run point
of view if there are distinct advantages to be
gained from operations on a larger scale. A
major question involves the relationship between hank size ancl hank costs-that is, the
possibility that large hanks enjoy significantly
lower average costs than small hanks.
How arc bank costs related to bank size,
and how significant is the size factor as a determinant of hank costs? Questions of this kind
cannot be answered abstractly. Reductions in
costs with increasing size often are thought
to be present in almost every industry, since
some of the sources of these cost savings-such
as the increased specialization of labor that is
possible with large-scale operations-are applicable to virtually every fonn of economic
enterprise. But there arc other sources of cost
advantage to large firms that are more important in some industries than in others. For
example, large-scale operations may result in
lower average costs if modern production techniques require the use of substantial quan-
A
N ARTICLE IN
Monthly Review •
February 1961
tities of machinery and equipment that cannot be employed efficiently on a small scale.
This source of cost reduction may be critical
in certain lines of manufachll"ing or in the
public utilities, hut it is of considerably less
significance in other industries such as hanking. Furtherrnorc, in any given industry there
nwy also he factors tending lo proclnn' higlwr
average costs for the larger siz firms. It is
often contended that as a firm expands, a
point ultimately is reached at which the increasing complexity of managerial organization tends to raise costs. Thus, if the sources
of decreasing costs with increasing size were
relatively unimportant, they might be offset
by forces operating to increase costs before a
very large scale of operations was attained.
Whether size has a significant bearing upon
costs in banking must he determined, therefore, by looking at empirical evidence. In the
present article, the relationship of hank costs
to bank size is explored through the use of
statistical analysis applied to cost data for
member banks in the Tenth Federal Reserve
District.
Evidence from Operating Ratio Data
A useful point of departure for the discussion may be found in a review of the evidence
on size-cost relationships that may be deduced
from regularly published statements on operating ratios of member banks-showing cost,
earnings, and other ratios for banks in differen t size classC's. In these statements, costs are
expressed as a percentage of total earnings,
which obscures somewhat the relationship between costs and size, but a reasonable ap-
3
Relationship of
proximation to the ratios of costs to assets for
each size class of banks is readily obtainable.
Table 1 presents estimates of cost-asset ratios
for all member banks in the Tenth District,
classified according to size, during 1959. The
footnote to the table explains the procedure
by which these ratios are derived.
The data in that table show an inverse relation between cost ratios and size of bankthe ratio of total costs to assets for banks with
less than $1 million in deposits is about one
fourth higher than that for banks with more
than $50 million in deposits. The decline in
costs with increasing size appears to he
steeper when interc'st on deposits is removed
from total costs. Thus, tlw ratio in column S
is about one third higher for the small('st than
for the largest bank size class, r ·fleeting
mainly the fall in wages and salaries relativ
to assets as the size of bank increases. Comparable data for all member banks in the U.S.
also indicate an irregular decline in wages and
salaries as a per cent of assets with increasing
bank size, but the fall is more pronounced
among District members.
Table 1
Cost-Asset Ratios of All Tenth District
Member Banks, 1959
Ratio to Total Assets
Bank Size
(Deposits
in millions
Wages and
of dollars) Total Costs Salaries
Less than 1
1-2
2-5
5-10
10-50
Over 50
All banks
(1)
(2)
2.78
2.82
2.62
2.65
2.70
2.23
2.67
1.59
1.51
1.30
1.25
1.18
.97
1.33
Total Costs
Minus
Interest on
Other
Interest on
Deposits Expenses Deposits
(3)
(in Per Cent)
.26
.40
.46
.50
.58
.33
.46
(4)
(5)
.94
.89
.84
.88
.94
.91
.88
2.52
2.42
2.16
2.15
2.12
1.90
2.21
NOTE : Column 1 represents the difference between average ratios
of gross and net earnings to total assets for each size class
Columns 2. 3, and 4_ are approximate ratios obtained by taking the
product, for each srze class, of the average ratio of gross earnings to assets and the average ratio of the relevant expense item
to gross earnings. A rough test of the reasonableness of this proced~re may be made by comparing the sum of columns 2, 3, and
4 wrth column 1. For each bank class. the sum of columns 2. 3,
and 4 deviates from column 1 by 1 per cent or less . Column 5
represents the difference between columns 1 and 3. Data on gross
earnings to asset ratios and ratios of costs to gross earnings
were obtained from published operating ratio statements for District member banks.
4
Table 2
Time Deposit Ratios of All Tenth District
Member Banks, 1959
Ratios of:
Bank Size
Time to Total Interest on Deposits
(Deposits in millions
Deposits
to Time Deposits
of dollars)
In er ent
1.69
13.3
Less than 1
2.13
19.2
1-2
21.4
2.11
2-5
2.19
23.8
5-10
2.33
26.1
10-50
2.37
15.5
Over 50
All banks
21.2
2.13
At District hanks, the three identifiable su hcomponcnts of the total cost ratio- ratios of
wages and salaries, interest on deposits, and
other expenses lo total assets- each display a
different relationship to size of bank. Th
wage and salary ratio declines continuously
as the size of bank increases, while the "other
expenses" ratio appears to demonstrate no
systematic association with bank size. The
ratio of interest on deposits to total assets, on
the other hand, rises with increasing bank size
up to $50 million in deposits, but declines
thereafter. The behavior of this latter variable
can be explained in terms of the distribution
of deposits between cl mancl and time accounts in the various size classes, and the average rate of interest paid on time deposits. As
indicated in Table 2, both the ratio of time to
total deposits and the ratio of interest payments on deposits to time accounts increase
with size of bank up to $50 million in deposits, but the percentage of deposits in the
time and savings account category decreases
sharply thereafter.
It is evident that when allowance is made
for differences in the relativ volume of time
accounts and the rat s paid on time deposits,
the relationship between bank costs and bank
size is altered considerably. There are, of
course, other structural characteristics of
banks that also have an important bearing on
costs-such as the proportion of assets held in
Bank Size and Bank Costs
the form of loans and the type of loans made.
How would the association between size and
costs appear if allowances were made for differences in these structural characteristics?
Clearly, that question cannot be answered
from operating ratio data, nor is there available any information which would show directly the proportion of a bank's costs attributable to each of the bank's activities. But the
statistical method of multiple regression and
correlation analysis can be applied to data
for a group of individual banks to reveal the
relation between size and costs when the effects on costs of other structural characteristics of the hanks have been acconnl<'cl for.
For this purpose, ratios of costs to total assets were gathered for a sample of approximately 270 District member banks for the
period 1956-59. With unimportant exceptions,
all of these banks are unit banks. Measures
representing structural characteristics of each
bank-such as the percentage of assets in the
form of loans, the proportion of a bank's
loans made to consumers, the relative volume
of time deposits, and others-believed to be
important cost-determining factors, also were
assembled. The technique of multiple regression and correlation analysis then was applied to the data in an attempt to separatc
from the effects of bank size on costs the influence of a number of these structural characteristics.1 The results of this study will be
presented in the following pages with relatively little attention given to technical questions except in footnotes. The reader interested in these aspects of the study may wish
to refer also to the technical notes at the end
of the article.
bank figures for the years 1956-59. The averaging process was undertaken to reduce unusual influences that may affect data for a
single year. Through considerable experimentation, it was found that differences in ratios
of total costs to total assets among the sample
banks could best be accounted for in terms
of six characteristics of the banks: ( 1) bank
size ( measured by assets), ( 2) the ratio of
time to total deposits, ( 3) the ratio of total
loans to total assets, ( 4) the ratio of securities other than U. S. Government issues to
total assets, ( 5) the ratio of consumer loans
to total loans, ancl ( 6) the percentage growth
of assets between 1956 and 1959. The association b<.'lwcen these variables and total cost
ratios may he expressed in the form of a regression equation which indicates the average relationship between costs and bank size
when the effects on costs of the other five
Chart 1
Relationship Between Total Cost Ratios
and Bank Size
Sample of Tenth District Member Banks, 1956-59
l
PER CENT
_
3 4
(TOTAL COSTS TO)
TOTAL_: ssETs
7
3.0
2.6
2.2
1.8
1.4
0
0
100
l_
l
200
300
ASSETS IN MILLIONS OF DOLLARS
Bank Size and Costs-1956-59 Averages
Statistical analysis was applied to data obtained by averaging the individual sample
1
The analysis is of the cross-section type-regression
equations were fitted to data for each of the years
1956-59 and to averages of the data for the 4 years.
Monthly Review •
February 1961
400
=
NOTE: The equation on which the chart Is based Is: X1
1.377
.394 log X1 t .0162X3 f .0221X4 - .0126X 5 -t .0156X 6
.0078X7, where X1 1s the ratio of total costs to total assets
X1 is assets in millions, X3 is the ratio of time to total deposits'
X4 is _ ~he ratio of total loans to total assets, X5 is the ratio of
sec_ur1t1es other than Government issues to total assets, X6 is the
ratio of consumer to total loans, and X7 is the percentage growth
of assets from 1956 to 1959. All ratios are expressed in percent~ge terms .. The multiple correlation coefficient for this equation
1s .78. All independent variables are statistically significant at the
5 per cent level. T~e chart is obtained by setting variables X3 ,
X4, . . . X7 at their mean values and then graphically portraying the resulting relation between X 1 and X1 •
+
s
Relationship of
Chart 2
characteristics have been eliminated. ThPaverage relationship between total costs ( as
a per cent of total assets) and bank size found
among the sample banks over the period
1956-59 is shown in Chart 1.
The downward movement of the curve in
Chart 1 indicates that the ratio of total costs
to assets declin s as the siz of bank increas s,
after the effects on costs of the five other
structural characteristics have been removed.
The amount of decline in costs, however, becomes less as the size of bank increases. This
is not surprising. A $1 million increase in assets repr sent a 10 pc>r c nt increase' in size
for a hank with $10 million in assets, hut only
a I per cent increase for a hank with $ I 00
million in assets. Therefore, one would exp<' -t
the effect on costs of a given dollar increase
in assets to be larger in the former case. The
size-cost line in Chart 1 is drawn on the assumption that equal percentage changes in
size have equal effects on costs, an assumption
that appears justified on the basis of statistical
tests. 2
This association between cost ratios and
percentage changes in size is more readily appreciated when the size-cost line of Chart I
2
A test for linearity of fit was made for the function
d scribed in the note to Chart 1 with the size variahl<'
expressed first in absolute amounts and then in logarithmic terms. The residuals wer arrayed according
to increasing size of bank and the Durbin-Watson
ratio was caleulat d. With the size variable expressed
in logs, the ratio was 1.95, which suggests an absence
of nonlinearity of fit. Using size in absolute amounts,
the ratio is 1.72. This use of the Durbin-Watson test
statistic is described in S. J. Prais and H. S. Houthakker, The Analysis of Family Budgets ( Cambridge,
1955), pp. 50-52. The multiple correlation coefficient
also is somewhat higher with the size variable expressed in logs.
A si~ilar conclusion was obtained by dividing the
banks mto two groups-over and under $2,5 million in
ass •ts-and fitting the function indicated in the note to
Chart 1, with size measured in absolute amounts, to
each of the two groups. The regression coefficient of
the size variable was -.0303 for banks with assets of
less than $2.5 million and -.0018 for the group of
larger banks.
6
Relationship Between Total Cost Ratios
and Bank Size
Sample of Tenth District Member Banks, 19S6-S9
PER
4 _6 ~
CENT (TOTAL COSTS TO)
TOT~L ASSET_S _ - , - - - - , - - -
4 .2
3 8
34
3 0
2 6
2 .2
18
14
I
5
10
AS S f T S IN MILL IONS
or
~o
100
OOL L AH S
NOT[ : The clots In the chart are not actual cost ratios but residuals m asured from the s11e cost line .
is plotted on a chart measuring bank size on
a logarithmic seal , where equal percentage
increases in size are represented by equal distances along the scale. This converts the
curved line of Chart 1 into a straight line, as
indicated in Chart 2. The ratio of total costs
to assets falls, on the average, by .39 percentage points for each tenfold increase in size of
bank. Thus, the solid line of Chart 2 shows
an average ratio of total costs to assets of 2.78
per cent for hanks with $1 million in assets,
2.39 per cent for banks with $10 million in
assets, and 2.00 per cent for hanks with $100
million in assets. The clots plotted around the
size-cost line in Chart 2 indicate cost differences among the sample banks that are not
explained by bank size or by the five other
characteristics of the banks included in the
analysis. Bank size and these five characteristics account for 62 per cent of the differences
in total cost ratios among the sample banks;
other uniclentifi d forces account for the remaining 38 per cent.
Wage and Salary Expenses
The procedure used to obtain Chart 2 took
account of cost differences among the sample
banks that were due to different ratios of
time to total deposits. The downward slope of
Bank Size and Bank Costs
Chart 3
Relationship Between Wage and Salary
Ratios and Bank Size
Sample of Tenth District Member Banks, 1956-59
PER CENT
3.6
(w~~E; 0~:~ ~~\~;15ES)
32
2 .8
24
2 .0
·, · .
1.6
1.2
. l
~
.. ,I
10
•
A SSETS IN Mill ION<;
'I .... !
l
50
or
'
100
J
'I
500
DOU /\HS
NOTE : The equation on which this chart is based Is: X1 = l.108
- .327 log X2
.0087X4 - .0115X 5
.0083X6
.0030X7,
where X1 is the ratio of wages and salaries to total assets, and
X2 , X4 , . . . X7 are defined as in the note to Chart 1. The multiple correlation coefficient is .70 . All independent variables are
statistically significant at the 5 per cent level. As in Chart 2,
the dots in Chart 3 represent residuals plotted around the sizecost line. Tests for linearity of fit , described in footnote 2, were
made for this function also , with generally similar results to those
obtained when the total cost ratio is used as the dependent vari able.
+
+
+
the size-cost line, therefore, mainly reflects a
decline in costs other than interest on deposits
- that is, in wages and sa]aries or in the "other
expenses" category of Table 1.::1 It is perhaps
to be expected that if there are cost economies
associated with larger scale operations in
banking, th ey would be found mainly in wage
and salary expenses. But this does not preclude the existence of economies in other cost
categories, and it is therefore useful to isolate
the types of costs ( other than interest on deposits) which tend to decline in relation to
assets when the size of bank increases.
3
A variable measuring average interest rates on time
deposits could not b e included in the es timating
equation without introducing problems of multicollinearity, since th e simple correlation between average
rates paid on time accounts and the relative volume
of time deposits is too high- the correlation coefficient
is .549. However, the ratio of tim e to total deposits
is strongly correlated with the ratio of interest paid
on deposits to total assets. The simple correlation coefficient between these two variables is .940.
Monthly Review •
February 1961
Chart 3 shows the average relationship between wages and salaries, as a per cent of total
assets, and bank size ( measured in logarithmic terms) for the sample banks over the
period 1956-59. As in Chart 2, the size-cost
relationship depicted in Chart 3 is that which
is found when effects on costs of the five other
characteristics mentioned above are removed. 4
The size-cost line again is tilted downward
to the right, with the ratio of wages and salaries to total assets ( in per cent) falling, on
the average, by .33 percentage points with
each tenfold increase in size of bank.
Attempts to discover a relationship between
hank size and the ratio of miscellaneous other
expenses to total assets were generally un successful. This category of expenses seemed
to show a weak negative association with bank
size, but the ability to explain differences in
ratios of "other expenses" to assets among the
sample banks in terms of bank size and other
structural characteristics of the banks was
quite limited. The principal factors giving
rise to bank-to-bank differences in these expense ratios thus were not discovered-apparently bank size is not among them.
Paral1el evidence for this conc1usion is found
in a comparison of the slopes of the size-cost
lines in Charts 2 and 3. It was noted above
that the downward slope of the size-cost line
in Chart 2 is accounted for primarily by the
decline in costs other than interest on deposits.
As a per cent of assets, these other costs fall
.39 percentage points, on the average, for each
tenfold increase in size of bank. The ratio of
wages and salaries to total assets, meanwhile,
drops .33 percentage points for each tenfold
increase in bank size. and thus comprises more
than 80 per cent of the decline in the total
cost ratio.
• In this case, however, the time to total deposit ratio
was not included in the regression equation, since experimentation indicated that this variable did not bear
a statistically significant relationship to wage and
salary costs.
7
Relationship of
Do Costs Ultimately Rise with
Increasing Bank Size?
In studies of this kind, it is important. to
determine whether, even though average costs
may tend at first to decline as size increases,
there is some point beyond which further increases in size lead to higher costs. Is there,
in other words, a bank size for which ratios of
costs to assets are a minimum in the sense that
both larger and smaller banks tend to experience higher costs? The logical possibility
that this type of size-cost relationship might
exist was noted earlier.
The key to th question is found in the dots
which are plotted around the size-cost lines
in Charts 2 an<l 3- reprcsenting varia tions in
costs of the sample banks that ar not explained by forces included in the analysis. If
there were a size among the sample banks at
which cost ratios reached a minimum, or if
cost ratios stopped declining after a certain
size was reached, these dots would tend to
form a U-shaped pattern around the size-cost
lines. This does not seem to be the case-the
dots are rather evenly distributed on both
sides of the size-cost lines all the way along
the size range. Thus, no critical turning point
in the size-cost relation can be found among
Tenth District member banks, nor is there evidence of a leveling out of the size-cost line. fi
Cost ratios appear to fall with rising bank
size over the full range of bank sizes present
within the District banking community. However, there are relatively few banks in the District with more than $200 million in assets
and whether a minimum point in the size-cos~
relation would be found to exist among banks
larger than those in the District cannot be
determined with the data employed in this
study.
~ As noted earlier, tests for a nonlinear distribution of
residuals around the size-cost lines in Charts 2 and 3
do not indicate the presence of any significant departure from linearity.
8
Summary Remarks
These measurements suggest that there are
substantial cost economies associated with
large-scale operations in banking-cost savings
that result mainly from the reduction of wage
and salary expenses in relation to total assets
as the size of bank increases. But there remain other interesting questions that might be
asked concerning the association between
bank size and bank costs. For example, do the
lower ratios of wages and salaries to total
assets found among the large banks result from
differences in wage and salary payments per
employee or from other sources? More importantly, consideration may he given to other
structural characteristics of hanks that rnay
affect costs but which wcr ~ not indudcd in the
regression-correlation analysis. In this way,
the source of differences in costs among the
sample banks can be isolated further, and the
interpretation of size-cost relationships in
banking improved. These and other aspects
of size-cost relationships in banking will be
discussed in a subsequent issue of the Review.
TECHNICAL NOTES
1. The sample of banks drawn for this study included
all 31 Tenth District m<'mher banks which had assC'ts
of over $,50 million on December 31, 1959, about two
thirds ( 81 hanks) of those with assets of $10-$50
million, one third ( 49 banks) of those with assets of
$5-$10 million, one fourth ( 72 banks) of those with
assets of $2-$5 million, and one fifth ( 35 banks) of
those with assets of less than $2 million. In the size
strata for which the sampling fraction was less than
100 per cent, the sampling procedure was not strictly
random, since the sample was selected partly for
reasons other than the measurement of size-cost relationships. This deliberate departure from randomness
is believed not to have influenced the results of the
regression-correlation analysis to any significant degree.
2. Preliminary investigation suggested that banks involved in a merger or absorption tended to experience unusually high costs in the next year or two.
Consequently, data for such banks in the 2 years following the merger date were not employed. In calculating averages of the data for the period 1956-59,
therefore, any bank involved in a merger between
January 1, 1954, and January 1, 1960, was dropped
from the sample.
Bank Size and Bank Costs
3. Data for the individual years 1956-59 were computed on the basis of earnings reports for the full year
and averages of three condition reports, following the
procedure used to calculate operating ratio data.
Average ratios for the period 1956-59 were computed
by averaging the ratios of each bank for each of the
4 years, rather than by aggregating original data for
each bank for the 4 years and then computing an
average ratio.
4. The years 19,56-59 were selected for the purpose
of including figures covering a full short cycle in
economic activity, and thereby avoiding any bias that
might be introduced by data for a single year of the
cycle. District banking data, however, have been
affected more by longer-term trends over the postwar
period than by short cycles in economic activi ty, suggesting caution in generalizing from the r<'sults of the
yea rs I 9,56-.5H to other periods. It may he noted,
how<'V<·r, that th<' dominant shifts in th<' assd :111d
liabilit y slruC'l nn· of DistriC'l nH•fllh<'r hanks during th<'
postwar period hav(• hC'cll tlw growth in loans r<'lativt·
lo assets, th<' incrcas<· of consun1<'r loans as a proportion of total loans, and the substantial expansion
of time deposits, and variables representing these
structural characteristics are among the independent
variables employed in the regression equations.
5. The five independent variables other than bank
size included in the regression equations were selected from a list of about 15 variables thought to be
possibly important factors influencing bank cost ratios.
Some variables on the original list were dropped from
the regression equations because no significant relationship to costs of the sample banks could be
found-the ratio of real-estate to total loans is a case
in point. The majority, however, were eliminated by
Monthly Review •
February 1961
reason of intercorrelation with another independent
variable. Omission of such variables has a particularly
important bearing on the measured relationship between bank size and bank costs when the variable is
omitted because of intercorrclation with hank size. In a
subsequent article, an attempt will be made to arrive at
qualitative judgments as to the influence on the sizecost relation that such variables may have had.
6. The reader of the notes to Charts 1 and 3 may
have noted with surprise the negative sign attached to
the coefficient of the ratio of securities other than U.S.
Governmen t to total assets. Logic would suggest that,
given the ratio of total loans to total assets, costs
would tend to be positively associated with the ratio
of other securities to total assC'ts. The partial associa tion between cost ratios and the ratio of otlwr securities lo total assets is, in fact, positiv<' when hoth
th<' ratio of loans to assds and the ratio of lT. S.
Cov<'mlll<'lll S<'<·11rili(·s lo :iss<'ls ;m' IH'ld c·o11sla11l.
B11t wlwn only tll<' ratio of loa11s lo assds is lH'ld <·011
sla11t, tll!' pallial association is 1l('g;1liv1· . Tliis n·s11lt:-.
from th<' high degr<'e of i11len·OJT<'latio11 IH'IW<'C'll
the ratios to total assets of loans, Government securities, and other securities, which forces the variable
representing oth er securities lo take on the opposite
sign of the loan var~able. ( Because of this intercorrclation, not more than two of the three could be
included in the equation without encountering the
characteristic evidences of multicollinearity.) It is
clear, therefore, that the coefficient of the other securities ratio can be assigned no analytical significance.
It was included in the model, nevertheless, because it
proved to be statistically significant, it improved the
fit of the regression equation, and, more importantly,
it expressed an influence on costs that might otherwise
have been partly absorbed by the bank size variable.
9
What's Happening
on Tenth District Farms?
on farms in the Tenth Federal Reserve District have changed substantially since 1954, according to the 1959
Census of Agriculture. Generally, capital inputs have continued to be substituted for land
and labor inputs. Although the total amount
of farm land used is practically unchanged
from H).5,1 levels, inputs of power and machinery, fertilizer, biological supplies , petroleum products, and many other capital items
have increased to record levels. Farm labor
inputs, on the other hand, have decreased
considerably in all District states.
The changing combination of land, labor,
and capital, along with the use of new production techniques in farming, has influenced
both the social and economic structure of the
economy. Firms selling goods and services to
farmers find themselves supplying a greater
volume of business to a decreasing number of
operators. Competition between firms tends
to be intensified by such trends. Financial
institutions are discovering that previously
accepted methods of extending credit to farmers may no longer be adequate to meet present
needs. In many cases, marketing agencies find
plant expansion necessary in order to handle
an increasing volume of farm output. Consumers, related farm organizations, and farmers themselves all are being influenced by the
changes occurring in agriculture.
The agricultural census, made available
each 5 years by the Federal Government, provides data that are useful in examining
changes that have taken place in farming.
Although the data may not always be comparable from one census to the next, they
R
10
ESOURCES USED
afford a useful and valuable guide for measuring trends in modern farming. The census
is revised as changing conditions dictate, to
improve the accuracy and usefulness of the
data. One of the most relevant revisions in
the 19,59 census was in the definition of a
farm. The J ~).54 definition was, " . . . each
place operated as a unit of :3 or more acres
on which the value of farm products produced totaled $150 or more, as well as each
place of less than 3 acres from which the value
of all agricultural products sold totaled $150
or more." In 1959, however, a farm was defined as, " . . . each place operated as a unit
of 10 or more acres from which the sale of
agricultural products totaled $50 or more, as
well as each place operated as a unit of less
than 10 acres from which the sale of agricultural products totaled $250 or more."
In this article, an effort will he made to
examine the changing combination of resources and structure of farms in the Tenth
District since 1954. The analysis will include
data for all of the seven District states, including those sections of Missouri, New
Mexico, and Oklahoma not included in the
District.
Changing Resource Structure
In addition to being familiar with the total
physical quantities of resources used in farming, it is important to be acquainted with their
changing composition. Although the total
quantity of agricultural inputs used has
changed little in recent years, the amount of
labor used has decreased and that of purchased capital inputs has increased. Labor
What's Happening on Tenth District
accounted for nearly half of the total agricultural inputs in 1947-49, but dropped to less
than one third by 1959. This sharp reduction
in the farm labor force caused land and
capital inputs per farm worker to increase
substantially. The changing combination of
resources and other influences of technological
innovation has resulted in increased productivity for agricultural resources genera1ly.
The census data verify that these trends,
which have prevailed for a number of years,
continued unabated during the 1954-59 period.
One evidence of the changing pattern
Labor o[ fanning in the District is the ckcreasing number of family and hired
farm workers. The dccr<'aS<' in f'arn1 f:11nily
workers, which makes 11p more than three
fourths of the total farm labor supply, has
been substantial. Farm operators working on
farms fell from 554,000 in 1954 to 444,000 in
1959-a 20 per cent decline. Numbers of unpaid family workers declined 25 per cent in
the same period - from 326,000 to 246,000.
Although changes in the definition of a farm
account for part of the reduction in family
workers, a large proportion was caused by
movement of families from the farm. The
greatest loss in family Jahor apparently occurrccl among the yo, mger operators, as the
average age of operators increased from 49
in 19.54 to 50 in 19.59. The proportion of farm
operators over 65 increased from 18 per cent
in 1954 to 19 per cent in 1959.
Although several forces have been influential in causing farm families to leave the farm,
the relatively unfavorable level of farm income received by many farmers undoubtedly
has been a significant factor in recent years.
This has been especially true of farmers on
small forms with inadequate capital capacities
for plant expansion. Although many of these
operators have quit farming, others have
stayed on the farm and attempted to supplement their farm incomes by off-farm employment. In 1959, 50 per cent of the farm operaMonthly Review •
February 1961
Farms?
tors in District states reported working at offfarm jobs, compared with 48 per cent in 1954.
The proportion of these operators working 100
or more days off the farm also increased from
26 per cent in 1954 to 31 per cent in 1959. The
proportion of farm operators working off farm
in 1959 ranged from 64 per cent in Oklahoma
to 31 per cent in Nebraska. New Mexico reported 61 per cent; Colorado, Kansas, and
Missouri, 51 per cent; and Wyoming, 43 per
cent.
Regular hired workers ( workers employed
1.50 or more clays on the farm during the
year) clccJinecl 7 per cent-from 60,000 in 1954
to SG,000 in 1D,59. Purchased inputs tended
lo he s11hstit11ted for labor as costs of these
i11p11ts he<:amc <:heap in relation to hired labor
costs. In recent years, wage rates to farm
workers increased substantially more than did
prices of most other goods and services used
on the farm.
It is interesting to note in connection with
labor used on farms that, despite a lower
number of regular hired workers since the
previous census, the purchase of many labor
services from off-farm sources increased. A
large proportion of the increase came in the
form of machine hire for such tasks as applying commercial fertilizers and insecticides.
Expenditures for machine hire increased 17
per cent from 1954 to 1959.
The movement of operators from DisLand trict farms has released farm units for
consolidation into other units. With the
land in farms practically unchanged since
1954, farms in the seven District states have
become larger and fewer in number as these
conso1idations occurred. Reduction in number of farms for individual states varied from
a high of 24 per cent in New Me\'.ico to a low
of 10 per cent in Nebraska. For District states
as a whole, the number of farms declined 16
per cent. Part of this decline in numbers,
however, must be attributed to the difference
in the definition of a farm. It has been esti-
11
What's Happening on
Number and Average Acreage of Farms
Tenth District States
State
Number of Farms
_lIB__
~
Colorado
Kansas
Missouri
Nebraska
New Mexico
Oklahoma
W omin
Seven States
40,749
120,167
201,614
100,846
21,070
118,979
11402
614,827
33,390
104,345
168,673
90,475
15,919
94,675
9 743
517,220
Average Acreage
1959
_lIB_
Percentage
Decrease
Jl>
16
19
14
14
1,1 62
481
197
528
2,905
378
3 712
557
942
416
170
471
2,347
300
3 069
472
18
13
16
10
24
20
Percentage
Increase
11
19
21
lL
15
SOURCE: U. S. Census of Agriculture : 1959.
mated that the new definition, adopted for the
1959 census, accounted for approximately 3.6
per cent of the loss in nurnher of farms for the
Dis tri ct as a whole.
TeclmologicaJ innovations that have occurred since 1954 have provided a strong incentive for individual farmers to increase the
acreage of land in their farms. In many cases,
once certain techniques are introduced, costs
on a per-acre-farmed basis decline sharply as
farm size is increased. The incentive to expand
farm size, along with land made available for
consolidation, has caused the average acreage
per farm between the two census years to
increase from 472 to 557 for District states as
a whole. As would be exp<:cted, the largest
percentage increases in average acreage operated per farm occurred in those states in
which number of farms declined most sharply.
Average acreage operated per farm increased
21 per cent in Oklahoma from 1954 to 1959,
but by only 11 per cent in Nebraska.
A wide variation in the average acreage per
farm existed among the District states and
ranged from 197 in Missouri to 3,712 in Wyoming in 1959. Farms with 1,000 or more
acres predominated in Colorado, New Mexico,
and Wyoming, and accounted for the large
average size of farms in these states. The
average acreage was 1,162 in Colorado and
2,905 in New Mexico, while the average acreage was 481 in Kansas, 528 in Nebraska, and
378 in Oklahoma. Although the acreage per
12
farm varied widely within each state, over 50
per cent of the farms in Colorado, Kansas,
Nchraska, and Wyoming exceeded 260 acres
i11 IU59. l11 N<'w Mexico, 47 per cent of th e
farms exceeded this acreag in 1959, while the
proportion was 41 per cent in Oklahoma and
only 24 per cent in Missouri.
For the District as a whole, farms of less
than 500 acres in size generally declined in
number, while those with 500 or more acres
increased. Biggest decreases were recorded in
Number of Farms by Acreage Size Groups
Tenth District States
ACRES
UNDER 10
10 - 49
50 -69
70 - 99
100 -139
140-179
180-219
220-259
260 - 499
500 - 999
1000
¢ OVER
0
25
NUMBER
50
OF FARMS
75
100
IN THOUSANDS
SOURCE: U. S. Census of Agriculture: 1959.
125
Tenth District Farms?
the "less than 10 acres" group, where there
were over one half fewer farms than in 1954.
A part of the sharp decline in this size group
was caused by the change in definition of a
farm. In the next larger size groups used by
the census ( including 10-49, 50-69, 70-99, 100139, and 140-179 acre classifications) decreases also were quite significant, varying from
20-24 per cent. In the three remaining groups
of less than 500 acres, the decline in number
of farms was approximately 17 per cent in the
180-219 and 220-259 acre groups and 6 per
cent in the 260-499 acre group. Farms in the
260-499 acre group predominate in Kansas ,
Missouri , Nebraska, and Oklahoma, and :w co1ml for approximately 22 per cent of all
farms in the District.
In the two size groups greater than .500
acres, a 5 per cent increase in farms was recorded in the 500-999 acre group and a 7 per
cent increase in the group with 1,000 or more
acres. Thus, farms with 500 or more acres
became relatively more important in the District in 1959-accounting for 20 per cent of all
farms, as compared with 16 per cent in 1954.
There is some indication that farms have
been enlarged hy farm operators incorporating into existing units Janel formerly farmed
by tenants. The proportion of farms operated
hy tenants dropped as much as 20 per cent in
Oklahoma, with variations in other states
ranging from no change in New Mexico to a
16 per cent decrease in Missouri. Thus, the
number of farms operated by tenants in District states declined in relative importance
from 25 per cent of all farms in 1954 to 22 per
cent in 1959.
The substitution of machines and
Capital other capital items for both labor
and land in farming is reflected in
the increased quantities of these goods used
on District farms. There were 9 p('r cent more
tractors, 1 per cent more grain combines, 9
per cent more motor trucks, 32 per cent more
pick-up balers, and 25 per cent more field
forage harvesters used on District farms in
19.59 as compared with H),54. The relativel y
greater increase in pick-up hakrs and field
forag<' harvesters probably ca n lw alt rilrnl<'d
largely lo more' recent major lcch11ological innovations for these items of <'quipmcnt as compared with some of the other items. However, a shifting pattern of farming within th e
District and increasing size of farms has contributed to th e increase also. Other types of
relatively new technological equipment such
as power-operated elevators, grain driers, and
electric milk coolers have also become more
numerous on District farms.
Since 19.54, the use of purchasC'd production
items such as Ji vC'stock frecl, ckctrieity, petroleum produ cts, insecticides, and fertilizer
also have increased substantially. Expenditures for purchasing feed for livestock and
poultry increased 9 per cent, while those for
purchasing p etrol eum products increased ] 2
Farm Equipment
Tenth District States
(In nearest thousands)
Grain
Combines
Tractors
State
Colorado
Kansas
Missouri
Nebraska
New Mexico
Oklahoma
Wyoming
Seven States
1954
62
176
183
163
17
106
19
726
1959
66
184
218
180
18
109
22
797
1954
14
76
45
51
3
28
4
m
Pick-up
Balers
Trucks
1959
12
72
52
53
2
27
4
222
1954
49
112
96
72
21
86
15
451
1959
52
122
110
84
20
93
16
497
1954
4
18
21
13
2
9
2
69
1959
8
25
32
19
2
11
4
101
Field Forage
Harvesters
1954
4
13
8
8
1
3
1
38
1959
5
18
10
11
1
4
1
50
SOURCE: U. S. Census of Agriculture: 1959.
Monthly Review •
February 1961
13
What's Happening on
per cent. The higher expenditures for feed
represent a substantial increase in the quantity of feed purchased as prices paid for feed
declined 12 per cent during this period. The
increased expenditures for petrol eum prod ucts, however, were apparentl y partly accounted for hy higher prices , since they in creased somewhat frorn 195.J to 1959. Expenditures for commercial frrtilizer also were
higher in 1959 and represented an increased
volume of fertilizer purchases, since fertilizer
prices were slightly lower in 1959 than in
19,54. Farmers in District states applied 1.5
million tons of commercial fertilizer to 19 mil lion acr<'s in 19.59, as compa r<'d with 1.:1 mil
lion tons to 1G million ancs in I 9S L Tlic
quantity of lime 11s<'d in Dislrid slates i11
creased hut it was us<'d more i11tc11sin·lv 011 a
smaller number of acres. Apprm..imatc,] y 2.5
million terns of lime were applied to 1.0 million acres in 1959, as compared with 2.2 million tons to 1.1 million acres in 19,54. Iissouri
accounted for 7 4 per cent of the total quantity
of lime used in 1959, while Kansas accounted
for 18 per cent; Oklahoma, 4 per cent; and
Nebraska, 3 per cent.
The incr<.'ased use of capital it<.'ms, technological innovations , and larger-siz<.' farms
has had a pronounced influc'ncc' 011 agricu 1tural output in recc'nt years. Many of the labor
resources released in agriculture also have heen
employed in agricultura1ly related industries
and have helped foster the rapid rate of
growth achieved in output per man-hour in
farming. These developments have stimulated
agricultural production and efficiency.
Economic Classification
The economic cJassification of farms mac.le
by the census was based upon three factors :
( 1) total value of a11 farm products sold , ( 2)
number of days the farm operator worked off
the farm , ( 3) the relationship of the income
received from off-farm sources by the operator and members of his family to the value of
14
all farm products sold. On the basis of these
three factors, farms were classified into two
general groups - "Commercial Farms" and
"Other Farms." Each of these general groups
was then broken into subclassifications.
Generally, farms were classified as commercial farms if the sales from farm products
were $2,500 or more. Farms with product
saJes from $50-$2,499 also were classified as
commercial farms , if the operator had less
than 100 days off-farm employment during the
year and if his income and that of his family
from off-farm sources was less than the value
of all products sold . As would he C\':pectccl on
the basis of the ('ha11gi11g 1-csm11T<' strud11r<' of
Dislrid larr11s , Iii(' 111111d)('r of ('()lllnH'ITial
far111s witl1 ;1 rC'lalivcl y larg<' dollar volt1111c of
~ales i11c1-c.1scd , while those with a small volu,nc of sales decreased . For the District as a
whole, the changes ranged from a 36 per cent
increase for commercial farms with product
sales of $10,000 or more to a 75 per cent decline for those with sales from $50-$2,499.
Commercial farms with sales from $5,000$9,999 declined 7 p er cent, while those with
sales from $2,,500-$4,999 declined 21 per cent.
Generally speaking, the changes in the munher of commercial farms in each of the subgroups i11 each of the District states were simi lar to those for the District as a whole.
Number of Farms By Economic Class
Tenth District States
Economic Class
Commercial Farms:
Farms with sales
of $10,000 or over
Farms with sales
of $5,000-$9,999
Farms with sales
of $2,500-$4,999
Farms with sales
of $50-$2,499
Other Farms:
(Part-time, part-retirement, abnormal)
Total All Farms*
Number of Farms
Percentage
Change
1954
464,233
1959
371,594
85,521
133,494
+36
118,089
109,359
- 7
118,097
93,764
- 21
142,526
34,977
- 75
150,745
614,978
144,900
516,494
- 4
- 16
-20
* The number of farms by economic class is not exactly equal to
the number by size groups .
SOURCE: U. S. Census of Agriculture: 1954 and 1959.
Tenth District Farms?
One of the most significant changes from
the standpoint of income available for spending and investment has been the increase in
the number of farms with farm product sales
of $10,000 or more. Farms in this economic
class accounted for 36 per cent of all commercial farms in the District in 1959, as compared with only 18 per cent in 1954. The significant decrease of commercial farms with
sales from $50-$2,499 caused this group to
become relatively less important in 1959. This
group made up only 6 per cent of commercial
farms in 1959, as compared with 31 per cent
in 1954.
The genera] group, "Other Farms," was s11hdassifkd into part-lime, parl-r<'lircmcnt , and
ah11onna] farms. Parl-titn(' farms wc1 c units
where the operator was under 6.5 years of age,
worked off the farm 100 or more days with
the income from off-farm sources being greater
than the value of farm products sold, and
from which sales of farm products were less
than $2,500. Part-retirement included units
Monthly Review •
February 1961
where the operator was 65 years old or over
and had farm product sales of less than $2,500.
Abnormal farms included public and private
institutional farms, community enterprises, experiment station farms, grazing associations,
and similar units. This general group of farms
declined 4 per cent from 19.54 to 1959. Although the change in the number of farms in
these economic classifications was slight for
the District as a whole, there was considerable
variation from state to state. Variations ranged
from a 30 per cent increase in Nebraska to a
32 per cent decline in New Mexico. Changes
in othPr states inel11clccl increases of J8 per
cent in Kansas and I per cent in ~Iissomi; and
declines of 2,t p<'r c-c11l in Color;1do, 17 1wr
c<·nl in Oklahoma , and G per cent in \Vyomi11g.
J n conclusion, C<'nsus data vcrify that the
trends toward fewer and larger farms continued from 19,54 to 1959. The resource "mix"
of land, labor, and capital continued to he
altered, with purchased inputs becoming increasingly more important.
15
RELATIVE SHARES OF LIQUID ASSETS
HELD BY THE PUBLIC
LIQUID ASSETS HELD BY THE PUBLIC
500
BIL . DOLLARS
ADJUSTED
SEASONALLY
BIL . DOLLARS
SEMI - LOG
500
SCALE
400
400
300
300
PER
PER CENT
100
:-:-:.:
···:;:
-:•:•:
r
ill ::r
\I
}::
]:
,•,:.::
)
;:;:::'.
: ::
TIME DEPOSITS AND SAVINGS AND
LOAN SHARES
-------
_____ , ,-
DEMAND DEPOSITS AND CURRENCY
I?
100
80
__ ,.
80
200
SAVINGS AND
LOAN SHARES
60
60
__ ,. ,,--
__ ,.,.-
100
SAVINGS BONDS
80
200
CENT
SHORT - TERM
MARKETABLE
TREASURY ISSUES _
100
TIME DEPOSITS
-
80
SAVINGS BONDS AND SHORT - TERM
MARKETABLE TREASURY ISSUES
60
60
- 40
40
_L_
PER CENT
CENT
PER
100
100
90
80
70
l
RATIO : TOTAL LIQUID
ASSETS
TO GNP
90
DEMAND DEPOSITS
AND CURRENCY
20
20
80
*SEPT. 30 DATA
70
'5 4
1951
'56
0
0
1950
'60
'58
BANKING IN THE TENTH DISTRICT
Loans
District
Banks
and
States
Country
Member
Banks
Reserve
City
Member
Banks
Country
Member
Banks
December 1960 Percentage Change From
+5
+5 +4
Colorado
+2
+1
Kansas
+6
Missouri *
+1
Nebraska
+2
New Me x ico *
Oklahoma *
Wyoming
**
+15
+2
t
+3
+2
+5
+1
+3
-1
+4
+3
+20
+3
-1
+14
+1
+1 +5
+1
+5
+4
+4 +4
** +5
16
'GO*
'58
Dec.
1960
+4
+5
+6
- 1
+2
+4
+1
+ 3
+ 9
**
**
t
- 1
+ 2
+ 8
+ 19
+1
- 4
+ 6
**
**
+ 1
+1
**
**
t
Nov.
1960
Dec.
1959
Consumer Price Index
(1947-49 = 100)
127.5
127.4
125.5
Wholesale Price Index
(1947-49 = 100)
119.5
119.6
118.9
Prices Rec'd by Farmers
(1910- 14 = 100)
242
241
230r
Prices Paid by Farmers
(1910-14 - 100)
298
297
296r
r Revised .
+15
+ 6
* Tenth District portion only .
than O.S per cent.
t Less
'56
Index
Nov. Dec. Nov. Dec. Nov. Dec. Nov. Dec.
1960 1959 1960 1959 1960 h959 1960 1959
Tenth F. R. Dist.
'54
PRICE INDEXES, UNITED STATES
Deposits
Reserve
City
Member
'52
+5
+ 1
** No reserve cities in this state.
TENTH DISTRICT BUSINESS INDICATORS
District
and Principal
Metropolitan
Areas
Value of
Department
Store Sales
Value of
Check
Payments
Percentage change- 1960 from 1959
Dec.
Year
Dec.
Year
+2
+3
+4
+1
Denver
+3
+a
+3
+3
Wichita
- 3
-4
- 9
- 13
Tenth F. R. District
Kansas City
+ 1
+3
+3
+2
Omaha
+4
+3
+21
+13
Oklahoma City
+6
+1
- 6
- 1
Tulsa
- 1
+1
0
- 3
@FedFRASER