Full text of Economic Review (Federal Reserve Bank of Kansas City) : January-February 1967

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January-February 1967

NEBR.

MflNJ· LY REVIEW
KA NS.

The Budget, Fiscal Action, and
Short-Run Economic Change: Part 1 . . . page 3
Financial Intermediaries and
the Postwar Home Mortgage Market .. page 12
Farm Lending by Commercial Banks
in the Tenth Federal Reserve District . . page 22

FEDERAL RESERVE BANK
OF KANSAS CITY

Subscriptions to the MONTHLY REVIEW 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, Federal Reserve Station, Kansas
City, Missouri 64198. Permission is granted to
reproduce any material in this publication.

The Budget, Fiscal Action, and
Short-Run Economic Change: Part 1
Bu Gle111t fl . M ilf N, Jr.
111-: H JN DAl\H: NTA L purpose of an y budg ' t
do umc nt is th e presentation of plans for
future action. It xami ncs proposed polici s,
es pecially their financial asp cts, and includes
available data that are appropriate for their
evaluation. In the United States, the F ederal
budget that serves these functions is an executive budget, often referred to simply as "the
President's budget." A major purpose of the
President's budget has been succinctly described b y the Director of the Bureau of th
B id get as follows:

... it must pr sent to th Congress and th
public th proposed ov ra1l plan and program for the
ov rnrncnt for the corn ing
year, including recommendations concerning
both existing and proposed new Federal acti viti es. As a program statement, it also contains the mos t complete reporting available
on stewardship of the p ast fiscal year and the
revised outlook for the current fiscal year. 1

At the same time, the U. S. governmental
system of coordinate powers places in Congress the power to raise revenu s and appropriate funds. Thus, the total influcn e of the
fis cal asp cts of Gov rnment programs is to
1
Statement of Charles L. Schultze, then Assistant Di rector, Bureau of the Budget, in U. S., Congress, The
Federal Budget as an Economic Document, Hearings
before the Subcommittee on Economic Sratistics of the
Joint Economic Committee, 88 th Cong ., 1st Sess.,

1. The effi ci ncy wi th which resources are
drawn from the private se tor and us d by
the Government.
2. The effects of changes in Governmen t
receipts and expenditures on the economic
stability of the private sector.
3. The impact of Federal fiscal programs
on the distribution of priva te incomes.
4. The role of Government receipts and
xpenditures in the economic growth of the
ati on.
5. The in1lu n es of budg
omponcnts
on the allocation of resom s within the
pri va tc sector. 2
2
U. S., Congress, Subcommi ttee on Economic Statistics
of the Joint Economic Committee, The Federal Budget
as an Economic Document, 87th Cong ., 2d Sess.,

1962, p . 95 .

1963 , p . 150 .

Monthly Review

be fo11n<l not from th · h11dget do ·11mcnl alon
hut jn th r s11lts of th e Administration's proposals both as modified b y the l gisla ti ve
process and, la ter, as execu ted by the various
departments and agencies.
The formulation and execution of F ederal
Government policy necessarily have economic
aspects, and another major purpose of the
budget stated by Schultze is to "present the
basic information necessary to evaluate the
impact of the Government's program and finances on th ov ra1l national economy." The
conomi · asp, ·ts of Fed 'ral pro T ams may
be classif icd as follow :

•

January-February 1967

The Budget, Fiscal Action, and
This article will be focused on the second
item in the list-the effects of changes in Federal receip ts and expenditures on economic
activity in the short run.
Attention has been paid to the effects of
changes in Federal receipts and expenditures
on over-all economic activity since the acceptance of aggregativ income analysi as a
means for understanding and xplaining the
behavior of the economy. Only a skeletal
description of that analysis in relation to Federal fiscal actions is necessary here, since the
fundamental fram work of national income
analysis is now widely und erstood and r 'c.Hlily
a<.·c(·ssihlc. Stripped to ils cssc nlials, lhc
analysis shows lhat lotal oulp1 1t, cmployrn ' Ill,
and pri · 'S ar' d 't rminc<l h y aggrcgal
spending in the e onomy. Aggregat sp nding is the total of a11 spending by consum rs,
business, and government. Whether intended
or not, Government operations affect aggrega te spending and therefore output, employment, and prices. Government spending contributes directly to aggregate demand while
taxation reduces private spending. Thus a
reduction in taxes or an increase in spending
t nds to raise the level of e onomi activity
( and/ or pri cs, dcp nding on th cuncnt rate
of resource use) while decreased spending or
higher taxes tend to have the opposite effect.
Furthermore, Government may consciously
undertake fiscal action with the goal of influencing economic activity. Thus in periods
of actual or incipient recession, fiscal policy
may call for tax cuts and/or spending increases ( an expansionary policy) , while higher
taxes and/ or reduced expenditures may be the
goal at times when inflation threat ns ( a resh·ictivc pol icy). Although the fundamentals
of a stabilizing fiscal policy thus may b e outlined briefly and straightforwardly, many concep tual as well as practical problems are
bound to arise in any specific situation.
Once it is recognized that fiscal action influences economic activity, it becomes im-

portant to know something of the magnitude
of the effect. The analyst, therefore, must
look at some specific measure of the amount
of Government expenditures and receipts.
Summary information on the fiscal impact of
Government op rations may be organized in
several different ways, depending on th e purposes for which it is to be used and on the
con cpts underlying the various presentations.
In practice, the three major forms of pres ntation are: ( 1) the administrative, or conventional, budget; ( 2) the consolidated cash budget, or statement of Fed ral rec ipts from and
payments lo the pu hi ic; and ( 3) Federal r ccipls and cxpcndil111-cs in Lhc nalional in come and product ac<·o1111ls, so111dinws ahhrcvial ,d as the NIPA lrnd gct. Tlllls lh
analyst interested in th' fiscal impa 't of Government op rations on economic activity in
the short run faces a choice between these
alternative presentations.
TYPES OF FEDERAL BUDGETS

The existence of three major types of Federal budgets, and the important differences
between them, now is recognized widely.
However, a brief description of th budgets
and their differ nccs will be included here,
with emphasis on those differ nccs that arc
cspe ially signifi ant for short-run eco nomic
analysis.

The Administrative Budget
This form of the budget, which is only one
of many possible sets of totals of receipts and
expenditures, is introduced first, not because
it is the most important but because it is still
the most familiar. Sometimes it is referred to
as th conventional budg t, or ev n simply as
"the budg t. " Primarily an instrum nt of
managem nt and control, the administrative
bu<lg t is the means by which the President
quantifies his program and transmits it to
Congress. It serves as the d evice through
which Congress and the President impose fis-

Short-Run Economic Change: Part I
cal discipline on governmental spending units,
and provides data useful to the Government
for housekeeping purposes.
"The administrative budget covers receipts
and expenditures of funds owned by the Federal Government . . . . ":i That is, it is concerned almost wholly with expenditures for
which Congress makes reg ular appropriations
and with the associated revenues required.
I• or many years, the administrative budget
served as the principal financial plan for conducting th e affairs of Government. It repres nts a focal point for management and dec isionmaking with respect to Government
activiliC's whiC"h arc financed by ll1 c GovC'rn 1ncnt's O'vVll f1111d s. As long- :1s almost all Fed eral fina11 ci: d lr:11 1s:1l'lio11s wcr' carried 011l
with federall y m ll<'d f1111ds , th' adminislr:1 livc l)llcl gcl provided adcqualc cov 'ragc.·1

However, since the 1930's the Federal Government has undertaken certain programs involving receip ts and expenditures of funds
which are not federally owned. Most of these
programs generally may be described as trust
programs, for which disbursements are made
from funds collected for special purposes and
he]d in trust for specific beneficiaries or uses.
Th e receipts and expenditures for these programs ( such as the social insurance and highway progrnms) have grown greatly in the ]ast
30 years, and a measure of F ederal fiscal
action which excludes them can no longer be
considered complete. This exclusion of certain Federal receipts and expenditures from
the administrative budget is most responsib]e
for its rejection as an adequate measure of
Federal fiscal action in an analysis of over-all
economic activity.
Other signal features of the administrative
budget arc its cash basis treatment of receipts
and expenditures, and certain other accounting conventions. Receipts arc recorded upon

U. S., The Budget of the United States Government:
1967 (Washington: U. S. Government Printing Office,
1966), p . 378.
4
Ibid., p. 376.

Monthly Review

•

January-February 1967

collection and expenditures are noted when
payment actually is made ( i.e., when checks
are issued), except that interest on the public
debt is shown on an accrual basis. Only the
net expenditures of wholly owned Government enterprises, such as the Post Office, appear in the administrative budget. Actions of
Government-sponsored enterprises, such as the
Federal Home Loan Banks, do not enter into
the administrative budget, except for their
interest payments to the Government or the
Government's purchase of their securities.
Some intragovernmental receipts and expenditures are incl11dcd in th, adm ir i.st.rativc budget lo give a more proper pi ·turc of Lhc fi nancial opcralio11s o f i11di v idual agencies.

The Consolidated Cash Budget
The growing importance of the trust funds
made it apparent that the admin istrative budget was no longer an adequate measure of
Federal fiscal action and its impact on the
economy. A more comprehensive presentation-the consolidated cash budget-was developed to provide a measure of all Federal
cash payments to, and receipts from, the public. By presenting more fully th e flow of
total cash trnnsa 'lions ( excluding borrowing )
between the Federal Government and the
public, the consoli<lat d cash budget gives a
measure of th e total impact of Federal fiscal
action on the economy superior to that available from the administrative budget. The
cash budget also reflects the Government's
financial position b etter than the administrative budget and may be used to determine
Government financing and net borrowing
requirements.
Broadly speaking, the consoli lated cash
budget totals of receipts and expenditures involve the addition of some items to the administrative budg t totals, and the elimination
of certain items for which continu ed inclusion
would be conceptually inconsistent. The cash
budget is more comprehensive than the ad-

The Budget, Fiscal Action, and
ministrative budg t, because the form r includes receipts and expenditures of th e trust
funds as well as funds wholly owned by the
Government. Transactions between budget
accounts and trust funds are excluded, beca use the cash hudg t is meant to measur
the flow of cash b tw n the public and the
F edcral Governm nt. Cash flows r ultin g
from the activiti s of Gov rnment-sponsorccl
nterprises, excl uded from the adminisb·ativc
budget, are contained in the cash budget, and
interest paym nts, h·catcd on an accrual basis
in the administrativ bud g t, ar put on a
cash basis. A 'tivilics of agcn ·ics that arc cnlC'rcd on a net e, pcncliturc ha sis in th e ad minisl ralivc h11dgct conlin11c· to he so ncordcd
in Lhc cas h budgel. Although th e ,tirnination
of many intragovcrnmcntal transactions from
the cash budget means that certain activities
are recorded at lower levels than in th administrative budget, inclusion of trust fund
and other transactions omitted from th administrative budget makes total receipts and
expenditures considerably larger in the consolidated cash budget.
In outline form, the derivation of the consolidated cash budget from the adm inistrative
budget i · accomplished as fo11ows:
] . To the adrninislrativ budg 't figm 'S,
add the receipts and c pcnditurcs of th tru st
funds and of Government-sponsored enterprises.
2. Eliminate intragovern mental transactions that involve no exchange of cash with
the public. ( Seigniorage also is deducted because it is not a cash receipt from the public.)
3. Adjust transactions of a few accounts
from a noncash to a ash basis.
. Hccord inter 'St 'hargcs on a ash
rather than an a ·crual basis.
B. Adjust to cash basis for Gov rnm nt
expenditur s made by issue of bonds or
notes.
C. Adjust for the amount of check outstanding, since xpenditures are recorded
6

in the administrative budget on a "checks
issued" basis and the concept of a cash
budget requires expenditure data on a
"checks cashed" basis, in order to measure
Federal payment to the public.
The dcfi it or surplus of the cash budget is
indicative of th impact of Fed ral fiscal
a tion both on the asset position of the public
and on th e Govcrnm ·nt's cash position and
its potential debt operations. For example,
a cash budget deficit means that the public is
acquiring Government securities or cash, as
th 1 Government either borrows from th ' public or nms clown its ·as h balan ·e in order to
pay its hills . ;\ c:1sh h11d gct smplu s, 011 Lhc
olhc-r hnnd , rnrn11s d< t·111n1ilation hy tltc public
of mo1wy and / or Covcrnnwnl sc ·milies a11d a
reduction in Government dehl and / or an in crease in the Government's ·ash balan ·e. In
either case, Federal Government debt operations are significantly influenced by the flows
of cash reported in the consolidated cash
budget.
The Federal Budget on National Income
and Product Account

The national in ·om' a ·counts budgt t is
intended lo measure the direct 'Onlribut ion
of Federal fiscal action lo the curr 'nt flow of
total in ·om' and output in the ation. T he
national income accounts system of the Department of Commerce measures the current
ou tput of goods and services in the economy
by type of expenditure-consumption, investment, net exports, and government. As far as
the Federal Government is concerned, data on
its activities are consolidated into a national
income and product ac ount for the F d ral
s tor. This, in turn, is us ,d wi th the accounts for the oth 'r spending cctors to produce statistical aggr ga tes such as the gross
national product.
onstru -ted to fit into th'
U. S. D partm nt of omm 'rcc's fram work
of national income ac ounts for th en tire
economy, th Federal budget on national in-

Short-Run Economic Change: Part I
come and product account is generally regard ed as a sp cialized instrument well suited
to the purposes of economic analysis.
F ederal receipts on a national income basis
are generally classified into four summary
categori s:
1. Personal tax and nontax receipts, primarily individual income tax receipts;
2. Corporate profits tax accruals;
3. Indirect business tax and nontax accruals, primarily from excise taxes and customs duties ; and
4. Contributions for social insurance, primarily the cmploym 'Ill tax s.
Five ea lcgorics ,lr<' 11sccl in classifying Fedend expenditures on a 11at ional inconw acco11 nls basis, cal 'gories w hi ·h ar co nsist 'nt
with the total framework of accounts.
1. Purchases of goods and services account
for more than half of total F deral
IPA
spending, and represent the value of current
output purchased by the Federal Government.
As such, it is-along with consumption, investment, net exports, and state and local
government spending-a major component of
gross national product. Included in this category arc compensation of Federal employees,
now construction, and other purchases, such
as equ ipment and supplie · for national def nse and other F deral programs.
2. Federal transfer payments make up
about one fourth of total Federal NIPA expenditures. Most are domestic transfer payments to persons, primarily social insurance
beneficiaries or recipients of unemployment
compensation. Receivers of transfer payments
provide no current output or service in return ;
therefore, transfer payments are not counted
in the gross national product. They affect
general conomi activity, however, since th ey
do ent 'r the stream of disposabl personal
income upon which consumption spending
dep nds.
3. Grants-in-aid to state and local governments are similar to h·,rnsfer payments in that

Monthly Review

•

January-February 1967

their influence on economic activity is felt
when spent b y the grantees.
4.
et interest paid also adds to personal
income but not directly to gross national
product, since it is not considered as a payment for current output.
5. Subsidies l ss curr nt surplus of Governm nt enterprises is a consolidation of Fcdral subsidy paym nt to business and the
current surplus or deficit of Government
enterprises.
The IPA budget-a statement of Federal
receipts and xpenditur s construct "d to b
onsislcnt with th national in ·omc accounts
- nce<'ssaril y diffns i11 s V('ral ways from th e
<:011so lidatcd ·ash h11dg , t, He ·c ipls and ex penditures of the District of Columbia an
not part of th
IPA budg t, inc the District is placed in the state and local sector of
the national income accounts. Certain receipts included in the cash budget are netted
against expenditures in the national income
budget. Contributions of employer and employees to Federal employees' retirement
funds, excluded from the cash budget because
there is no cash flow to the public, are included in the NlPA budget, inee they are
part of the compensation of Governm 'nt employc s for s rvices eUIT ntly r nder d. ( The
surplus or d Heit is unaff 'Cted ither by inclusion of thes intragov rnm ntal transactions or by the netting procedure, since total
receipts and total expenditures are changed
by the same amount. )
Purely financial transactions, such as Federal loans and loan repayments, and purchases
of existing assets, are excluded from the national income budget. These transactions do
not dir 'ctly affect th cmrent flow of inc9me
and output, and their inclusion would be in cons istent with the structure of the national
income accounts which, of co urse, also excludes such tran actions in the private sector.
Differences in the timing of receipts and
expenditures comprise an important distinc7

The Budget, Fiscal Action, and
tion between the consolidated cash budget
and the national income accounts budget.
The cash budget counts receipts, including
business tax receipts, when collected while
the
IPA budget records some taxes-most
importantly, the corporate income tax-when
the tax liability is incurred. 5 Expenditur s are
recorded in the cash budget at th time payment is mad but purchases of goods and
services are dated in the national income budget at the time delivery is made. Cash payment may precede delivery, lag slightly ( as
in the ca e of wages paid to Federal employc s) , or lag sign ifi ·antly ( as in th case of
m11ch defense equipment). Finally, interest
on savings hon<ls aml Tnasmy hills, whi ·h
is treated on a payment basis in th cash
budget, is treated on an accrual basis in the
N IPA budget, on the assumption that th true
economic impact on those to whom it is due
occurs when the interest accrues.
The major differences between the three
types of Federal budget transactions may be
summarized as in the following table.
TYPE OF BUDGET
Item
Admini strative Cash
NIPA
Timing of receipts
Coll ection Collection Accrual
Timing of expenditur s Payme nt
Payme nt De livery
Credit tronsoctions
Included
Includ ed Excluded
Trust fund tronsoctions Excluded
Included Included

THE CASH BUDGET AND THE
NIPA BUDGET, 1961 - 1966
The administrative budget now seldom is
used in analyses of the impact of Federal fiscal action on over-all economic activity. It
has been superseded largely by the consolidated cash budget primarily because of the
latter's greater comprehensiveness, due to the
inclusion of trust account transactions, and
h cause of its cone ptual mphasis on cash
flows b etween the Federal Government and
5
"
• on the ground that the main economic impact
of these taxes is more closely associated with the acc rual of liabilities than with actual cash collections."
The Budget of the United States Gove rnment : 1967 ,
p . 378.

Chart 1
RECEIPTS, EXPENDITURES, AND
SURPLUS OR DEFICIT,
NIPA BUDGET, 1961 - 1966
Billions of Dollars

Bill i ons of Dollars

Quarterly, Seasonally Adjusted Annual Rotes

150

140

130

120

11 0

100

90
10

Surplus or Deficit

10
1961

'62

'63

'64

'65

'66

SOURCE : U. S. Department of Commerce, Survey of Current
Business.

the private s tor of the conomy. However,
the cash budget does compete with th Federal budget on national income and product
account for the attention of economists. The
fundamental points of difference between
them concern the timing of impact, because
of the NIP A budget's use of accrual methods;
and the treatment of financial transactions,
because of its conformance with national income accounting cone pts.
These differ n cs between th cash and
th
IPA budgets som times lead to differ nt
conclusions con erning the timing, e t nt, and
even direction of influence of the impact of
fiscal action on economic activity, depending
on which measure is being used. Such questions have been examined before by econ-

Short-Run Economic Change: Part I
of Current Business. Cash budget data in the
form of seasonally adjusted quarterly totals
were taken from the Treasury Bulletin and
converted to the quarterly seasonally adjusted
annual rate basis at the Federal Reserve Bank
of Kansas City.
Charts 1 and 2 may he compared to observe
th' differences in Federal receipts, expenditures, and surpluses or deficits during the expansion period from the first quarter of 1961
through the third quarter of 1966. The overall movement of receipts and expenditures for
the entire period is generally similar by either
oF the two rneasmcs. The N IPA receipts and

Chart 2
RECEIPTS, PAYMENTS, AND
SURPLUS OR DEFICIT, CONSOLIDATED
CASH BUDGET, 1961-1966
Billions of Dollars

Billions of Dollars

170

Quarterly, Seasonally Adjusted Annual Rotes

170
160
150

140

130

120

cxpc11clil11r<'S c-11rv<'s appear lo rise sornewliat
1non' s1nootldy Ll1a11 do the C'ash scrics. Fed eral cash payrncnls lo the puhli · arc gcn crally larger than NlPA budget expenditures

11 0

100
90

throughout the period, while the two measures of receipts display similarity in magnitude
with differences occurring primarily in timing.
Differences in the financial results of Federal fiscal action, according to the measures
used, are shown more clearly in a comparison
of the quarterly deficits or surpluses on a
cash budget and on a national income budget
basis. From Chart 3, it may he ohscrved that,
at a seasonally adjusted annual rate, the NIPA
budget shows a surplus in 7 of the 23 quarters
induded, while only in 2 quarters did the
cash budget reach a surplus. Furthermore, in
19 of the 23 quarters included, the cash budget was in deficit while the N IPA budget was
in surplus; or the cash budget surplus was
smaller, when both were in surplus; or the
cash budget deficit was larger, when both
were in deficit.
A comparison of quarterly deficits or surpluses according to the two measures was
part of an earlier Monthly Review article,
which covered the period 19.56 through 1960. 7
That time period included two recessions,

20
10

+
0

Surplus or Deficit
l - - - - - - - - - - - - - -- -~ --1--11----1

+
0

10
20

'66
SOURCE: U. S. Treasury Deportment, Treasury Bulletin.

omists/ and will he returned to in Part l1 of
this artidc- which will appear in the ncxl
issue of the Monthly Re view. First, however,
statistics on Federal receipts, expenditures,
and surpluses or deficits during the current
expansion period for each of the two measures
will be presented graphically so that their
behavior may be compared.
Since annual data generally are not sufficient for short-run economic analysis, data
will be given for shorter time periods. The
charts in this section all present quarterly data
at seasonally adj11stcd annual rates. Data from
the N IPA budget arc found in this form in
the U. S. Department of Commerce's Survey
6
See, for example, "Federal Receipts and Expenditures
- Alternative Measures," Monthly Review, Federal Reserve Bank of Kansas City, August 1961, pp. 3-9.

Monthly Review

•

January-February 1967

Ibid., pp. 6-8.

The Budget, Fiscal Action, and

Chart 4

making the following observations pos ible in
the article.
As far as timing is concerned, the turns in
the surpluses or deficits shown by the Commerce series have been closely in accord with
standard prescriptions for fiscal stabilization
policies, and analysts r lying heavily on the
ational In ome series have gi n the
budget rather high marks for the timing of
swings toward surplus or d ficit during recent business flu tuations.
. . . analysts who us cash budget fi gures
take a much dimmer view of the budget's
stabilizing role than do those who rely on
the Comm rec s ries.

FEDERAL GOVERNMENT RECEIPTS,
NIPA BUDGET, 1961-1966
Bill ions of Dollars

150

Timing of swings in hud gct totals in relation
lo c-yelic-al lfoc-tuation s is nol an ap l s11hjcel
li<'r<', since only a11 < xpansio11 period is ·ov<'rcd hy the <lala c.:harlc<l in this article. I lowChart 3
FEDERAL SURPLUS AND DEFICIT,
1961-1966
+20

140

130

120

110

100

+20

-+15

,,,._____________________ ;, __ ,,,

Corporate Profits Tax Accruals

-------

Bill i ons of Dollars

Quarterly, Seasonally Adjusted Annual Rotes

150

140

20
Billions of Dollars

Billions of Dollars

Quarterly, Seasonally Adjusted Annual Rates

,-----_,." Contributions for Social Insurance

In dire ct Business Toa and Nontu Accr:ols

20
10

+15

Consolidated
Cash Budget

1961

'62

'63

'64

'66

+10

SOURCE : U. S. Department of Commerce, Survey of Current
Business.

-5

- 10

-15

ever, qu stions of the timing of the impact of
Federal fis al a tion will b tr -at <l in Part 11.
lthough cash budg t data f r total r 'ceipts, total xp nditures, and surpluses and
deficits ar published on a monthly seasonally
adjusted annual rate basis and as seasonally
adjusted quarterly totals ( from which quarterly seasonally adjusted annual rates may be
constructed), seasonally adjusted data are not
published showing receipts by source or expenditures by any spending classification.
Herc the CPA budget data are superior, in
that receipts by source and exp nditures by
spending categories consist nt with the national income accounts are publish d quarterly on a s asonally adjust d annual rate
basis, permitting comparison with other s asonally adjusted series on private economic

+10

NI PA Budget
+5
0
-5
- 10
'65

'66

SOURCE : U. S. Treasury Department, Treasury Bulletin, and
U. S. Department of Commerce, Survey of Current Business.

Short- Run Economic Change : Part I

Chart 5
FEDERAL GOVERNMENT EXPENDITURES,
NIPA BUDGET, 1961 - 1966
Bil lio n s of Dollars

Bill i ons of Dollars

160

Quarterly, Seasonally Adjusted Annual Rotes

140

of tim e. The importance of th e income taxes
- both p ersonal and corporate-in total Federal receipts is evide nt, as is the significance
of th e purchase of goods and services-especially for national d efense-within total Federal exp enditures. Again, co untercyclical
swings are not evide nt since no recession
p eriod is involved.

120

SUMMARY
10 0

100

Purchases of Goods and Services (Total)
60

Pu rchases ot Goods and Services (National Defense)
Transfer ,!,ayments to Person!.,

Grants-in-Aid to State and Local Govts .

___..--

o . _ . _ _ . _ _ . _ ~ _ . _ _ . _ ~ ~_._~~_._.___.~_._.___.~_,_,o

1961

'62

'63

'6 4

'65

' 66

SOURCE : U. S. Department of Commerce, Survey of Current
Business.

activity. In Chart 4, the four receipt categories are presented for the period und er consideration h ere while Chart .5 includes th e
major ex penditure classes for the same span

Monthly Review

•

January-February 1967

Part I of this article is meant to provide an
inh·odu ction and th e n ecessary backgrou nd
for Part II, which w ill he more analytical in
c haracter. Parl l has emphasized th e purposes
of bud get ing ancl th e irnportan<.T of the <' <.'0 11omie impad of Fcd cr;d fis ca l a<:l ion , and
has disc ussed in so,ne detail th e alternati ve
measures o[ Federal rece ipts and expenditures. In so doin g, an attempt has b een made
to stress those features that arc important in
short-run economic analysis. Finally, th e results of the opera tions of the F ed eral Government during th e p eriod 1961 to 1966, as m easured by the cash budget and the NIPA budget, have b een charted and briefly d escribed.
Part II will examine ques tions of the magnitude and timing of the impact of Federal fi scal action on general economic activity.

Financial Intermediaries and
The Postwar Home Mortgage Market
By]. A. Cacy

major postwar finan cial developments has bee n the drnmali <.: grow th
in th volum of horn mortgag debt ( <leht
on owner-occupied residential properties).
Durin g the past 20 years, this debt increased
almost tenfold, and by mid-1966 was $220 billion.1 Aside from the absolute growth, home
mortgage debt increased as a proportion of
private long-term debt_from around one third
at the end of World War II to about two fifths
at present. For the postwar p eriod as a whole,
moreover, d ebt on owner-occupied dwelling
units grew more rap idly than d ebt on rental
properties, although this has not b e 'n th e case
in recent y ars. At the nd of 1965, home
mortgage debt was an estimated seven times
the d ebt outstanding on rental prop rties,
compared with four and one half times in
1946. As is well known, a large pmtion of
home mortgage debt extensions during the
postwar period were made by four types of
financial institutions-savings and loan associations, commercial banks, mutual savings
hanks, and life insurance companies.

NE OF TllE

Current est imates of mortgag e debt on owner-occupied
properties a s such ore not availabl e. In thi s paper, we
use the fi gures for debt on one- to four - family dwelling
units a s a proxy for debt on owne r- occupied properties
or home mortgage debt . One- to four - family dwelling
units consist primarily of one - family, owner- occupied
units.

In th e following pages, attention is d ire ·led
lo postwar ( tl1ro11 gl1 H)GS) movcn1cnts in
home mortgage rnarkct shares h( kl hy th e four
major lenders, the chan g ing position of horn
mortgages in th eir portfolios, and the growth
rates of their total assets. First, a summary of
postwar market share movements is presented.
Since changes in market shares reflect portfolio adjustments and growth rates, the second section traces the portfolio policies of the
different lenders and their asset growth. Third,
thC' mannC'r in which portfolio adjustments
and growth rates affected market shares is des<.:ribc<l in some d tail. I• omth, the influence
of 'Crtain fea tures of th e preva iling institutional and legal structure on the behavior of
market shares, portfolio policies, and growth
rates of the major mortgage lenders is discussed. Finally, some brief comments concerning future developments are offered. 2

MARKET SHARE MOVEMENTS
The volume of home mortgages held by the
four intcrmediari s gr w more rapidly during
the postwar period than home mortgage d ebt

1t should be pointed out that thi s paper is not directly
concerned with the ve ry interesting mortgage market
developments of the post year or so, but should pro vide some useful background material for a considera tion of these events .

Financial Intermediaries and the Postwar Home Mortgage Market
outstanding, even thou gh their combined
assets grew much less rapidly. In consequence, th eir combined share of total home
mortgage debt outstanding increased-from 69
per cen t at the encl of 1946 to 87 per cent at
the end of 196.c:5. In this connection , developments in the conventionall y financed sector of
the market differed from those in the Government-underwritten sector.
In the conventional market, th e relative
importance of noninstitutional investors dedin cl steadily throu ghout th ~ postwar period
and th e comhincd importance of the major insliluliona1 lenders steadi ly inereascd . \iVhile
supplying ovcr nine lcntlis of the total in<:rcasc- in <·011vc11l io11:d dehl outslanclin g, the
major lenders inereascd Lheir rnarkct share
from 62 per cent at Lhc encl of 1946 to 88 per
cent at the end of 1965. This enhancement of
an already dominant position was most pronounced during th e first postwar decade.
Since around 195,5, the importance of the four
lenders not only has increased less rapidly;
but, unlike the earlier period, the gain in their
combined share has been due almost entirely
to an increase in the share of one type of inst itution- the savings and Joan associa tion.
The major lenders also dominated th Covern me nt-und 'rwrittcn sector of the postwar
home mortgage market. TI1ey provided
slightl y over four fifths of the postwar increase
in Government-underwritten debt. Note, however, that this is less than the nine tenths
figure for the conventional sector. In further
contrast with developments in the conventional market, the share of the Governmentunderwritten market held by the leading lenders declined- from 90 per cen t at the end of
l946 lo 83 per cent at the encl of 1965. I; or
th period as a whole, this is largely a reflection of an increase in the share held by
th e Federal National Mortgage Association.
FNMA's share grew rapidly from 1946 through
1950, but has fluctuated between 5 per cent
and 10 per cent since that time. The relative
Monthly Review

•

January-February 1967

Chart 1
MARKET SHARES: HOME MORTGAGE
DEBT HELD AS A PER CENT OF
TOTAL OUTSTANDING
Per Cent

Per Cent

CONVENTIONAL

_,,...--

,--'

_.,,, /

.,,,,..---

,,,,,.,

_,,../
50

,,,,,../ Savings ~ Loon
Associations

.,,,,,,.,.

20
Commercia l

Bonka

Lite Insurance Companies

-------.. _________f!~tuJI Savings Banks __

'"''-.,:::'-:.-,.
I

__ ... ,

.,,,"'-Savings ~ Loon
Associations

Commercia I Banks

o ~..__._.__.__.___.___._._.__._.____.__.___._~.___._..~~o

1946

'50

'55

'60

'65

SOU RCE : Board of Governors of the Federal Reserve System,
Federal Home Loan Bank Board, Department of Housing and
Urban Deve lopment, and Institute of Life Insurance .

participation of holders other than FNMA and
the major lenders declined sharply during the
immediate postwar years, but has been trending upward since 1950, especially during the
1960's. At th e end of 196.5, these lenders· held
11 p er cent of the total, ompared with 2 per
cent in 1950 and 10 p er cen t in 1946.
Postwar movements in conventional and
Government - underwritten home mortgage
market shares varied among the major lenders,
a nd during the earlier and later years of the
p eriod. As shown in Chart 1, savings and loan

Financial Intermediaries and

associations and life insurance companies
greatly increased their conventional market
shares during the first postwar decade. After
sharp increases in 1947 and 1948, the share
held by commercial banks declined through
1955, but remained slightly above the 1946
level. In the 1955-65 period, life insurance
companies effected a moderate reduction in
their relative participation, while the position
of commercial banks was slightly stronger in
1965 than 10 years earlier, and the share held
by savings and loans continued upward. The
relative importance of mutual savings banks
in the conventional market declined thro11gh 011l the postwar period, although less rapidly
in r<'cent years.
As was just implied, savings and Joan associations throughout the postwar period
steadily strengthened their position in the conventional home mortgage market. At the end
of 1946, these institutions held about two and
one third times the volume held by commercial banks, the second most important type of
lender. By the end of 1965, this measure of
market dominance had increased to about
four times. Share differentials in the conventional market arc considerably greater between
savings and Joans and any other major lend r
than among the other thrc knd('rs, although
the position of comm rcial hanks relative to
that of life insurance companies and mutual
savings banks has been steadily enhanced
during the past decade. At the end of 1965,
commercial banks held one and one half times
the amount held by life insurance companies
and three times the amount held by mutual
savings hanks.
In the Government - underwritten home
mortgage market, mutual savings banks were
the only major lenders to increase their market share significantly during the postwar
period. ( Sec Chart 1.) It will he remembered
that these institutions were the only lenders to
reduce their relative participation in the conventional market. Life insurance companies
14

held a slightly higher percentage of the total
Government-underwritten debt at the end of
1965 than at the end of 1946, while savings
and loan associations and commercial banks
held considerably smaller shares. From 1946
to 1951, the share of life insurance companies
increased rapidly, and that of savings and
loans declined rapidly. Since 1951, life insurance companies have experienced a steady reduction in their share, while the relative participation of savings and loans in the Government-underwritten sector remained about the
same. The share of savings hanks increased
sleaclily throughout the period , while that of
cornrnc1-eial hanks dcdin<'d steadily.
No single lypc of lender dominates the
Covernm('t1t-11ndcn rillcn sector as savings
and loan associations do the conventional. At
the end of 1965, mutual savings banks, the
most important lender in the Governmentunderwritten sector, held only around one and
one third times the amount held by life insurance companies, two times the amount held
by savings and loans, and two and one half
the amount held by commercial banks. In
contrast to the conventional sector, postwar
share rankings changed considerably in the
Covcrnment-11ndcrwrillen sector. Most dra matically, savings hanks grew from least important to most important lender and the opposite is true for commercial banks. Savings
and loans and life insurance companies held
about the same market share at the end of
1946, but for most of the period and at the end
of 1965, life insurance companies have been
the more important of the two lenders.

GROWTH RATES AND PORTFOLIO
ADJUSTMENTS
A lender's market share is related to his size
and the composition of his portfolio. In fact,
the share of the market held by a lender is
equal to the product of ( 1) the ratio of home
mortgages held by him to his total assets and
( 2) the ratio of his total assets to the volume

the Postwar Home Mortgage Market
Table 1

GROWTH RATES OF MAJOR HOME
MORTGAGE LENDERS AND HOME
MORTGAGE DEBT
Percentage Increase in Asse ts
and Mortgage Debt
1946 to
1965
Assets
Commercial banks
Savings & loon associa tions
Mutual savi ngs banks
Life insurance companies
Home mortgage debt
To tal
Conventional
Government -underwritten

1946 to
1955

1955 to
1965

153. l
1, 168.8
211.3
229.7

41 .5
269. 1
67 .2
87.7

78 .9
243.7
86 .2
75 .7

827.0
728.7

283.1
191.l
539 . 1

142 .0
184.7
8 7 .8

I , 100 .4

SOU RCE : See Chart 1, p . l 3.

of home mortgage debt ou tstandin g. This di vision of th e nwrkct share into two parts enables 11s lo co11sidcr th e effects of a lend er's
growth a nd portfoli o policic s 011 his shar '.
Suppose, for <'xample, that a l n<lcr's total
assets increase over time at the same percentage rate as home mortgage d ebt outstanding.
In this case, the lender can maintain his market share by holding unaltered th e percentage
division of his portfolio between home mortgages and other assets. If the lender fails to
grow as rapidly as the total market, however,
he can maintain his market share only by ad justing his portfolio in favor of horn' mortgages.
The postwar growth r<'cor<l of th e four
major home mort·gage 1cndcrs and of home
mortgage d ebt i. prcs<'nted in Table 1. Savings
and loan associations grew considerably more
rapidly than the other three lend ers during th e
period and were the only institutions whose
growth outpaced that of home mortgage debt.
Life insurance companies and mutual savings
banks both grew around one fomth as rapidly
as home mortgage debt, whi le commercial
hanks grew th , least. Some difference ca n h e
seen between the first and sc ond postwar
d ecades . Due to th e phenomena} increase in
the Governmen t - underwritten sector, the
growth of home mortgage debt outpaced even
the rapid increase in the assets of savings and
loans durin g the first postwar decad e. During
Monthly Review

•

January- February 1967

th e 1955-65 period, however, Governmentunderwritten d ebt grew much less rapidly, and
since conventionally financed d ebt increased
at about the same rate as earlier, th e percentage growth in total home mortgage d ebt was
reduced. Savings and loans also grew somewhat less rapidly durin g the second period,
although their growth was more rapid th an
th a t of home mortgag debt. The growth
record of savings hanks and specially of commercial banks was better during th e 1955-65
p riod than in the previous d ecade, while life
insuran e companies gr w less rapidly during
th e recent period. Total horn mortgage debt
increased more rapidly than the asscls of tl1cs<'
three lend ers in both de ·adcs.
The incr asc in the importan ·c of th e lead ing 1 nd rs in th horn mortgage mark t,
even thou gh th eir combined assets grew considerably more slowly than the volume of d ebt,
implies that the relative importance of home
mortgages in their combined portfolios increased. At the end of 1946, home mortgages
held by th ese institutions accounted for
around 7 p er cent of their combined assets.
By the end of 196,5, this proportion exceeded
2.5 per cmt. Aga in , th 're are diffcrrnces helwcen th e ·onvcntional an<l
overnm ·nt11nderwrittcn sectors, among types of lend ers,
and 1 ctwccn th e first and s con I postwar
decad es.
Conventional home mortgages increased in
relative importance in the portfolios of each
of th e four lenders during the postwar period,
especia1ly durin g the earlier years. ( See Chart
2. ) For the entire period , portfolio adjustments were most pronounced for commercial
hanks and li fe insurance companies in the
sens<' that th p erce nta ge increase in the -ratio
of mortgages to total assets was larger for
th ese lenders. In recent years, life insurance
companies have not noticeably increased the
per cent of their assets allocated to conventional mortgages, and the upward trend has
moderated for commercial banks and savings

Financial Intermediaries and

Chart 2
PORTFOLIO COMPOSITION: HOME
MORTGAGES HELD AS A PER CENT
OF TOTAL ASSETS
Per Cent
65

Per Cent

__,, ,.--------,,,---"

CONVENTIONAL

..,,,,,-

_,,,

/"s avings ~ Loan
Associations

_____

Mutual Savings Banks

___ .. -------·

--------------------_Lite
--_-_
_ -_Insurance
-_Companies

GOVT. UNDERWRITTEN
35

,,,..

,'
25
20

r-,
'

Mutual Savings

Banks
25

t Loan

..... ,

...._ Associations

, ,,

Commercial Banks

'-.,L.--...._~avings

,,,,,

---

,,'

___ _, , , ..

0L--l-'--'-_._...L_...._,_,_.____._---'--L----'--'-.L-J'--'___._-..J..~o

1946

'50

'55

' 60

'65

SOURCE: See Chart l , p . 13 .

and loan associations. On the other hand,
mutual savings banks have accelerated the
rate of portfolio adjustments toward conventional mortgages. Savings and loans, of course,
hold a considerably huger proportion of their
total assets holdings in the form of conventional mortgages than do the other three lenders . At the end of 1965, these loans accounted
for 64 per cent of the assets of savings and
loans, compared with 12 per cent for savings
16

banks, 8 per cent for life insurance companies,
and 6 per cent for commercial banks.
The changing position occupied by Government-underwritten home mortgages in portfolios of the various lenders is portrayed in
Chart 2. For the first postwar decade as a
whole, these assets increased in relative importance in the portfolios of each of the major
lenders. Since 1956, however, Governmentunderwritten mortgages have clcclincd in relative importance for all except mutual savings
hanks. \ ,Vhilc conventional mortgages arc
rn11 ch more important in the portfolios of
savings and loans than for the otlicr three
lcndcrs, savings h.mks hold a ('onsiclcrahly
larger proportion of their total ;1ssds in the
form of Cov<' rnrncnt-11ndcrwrillc11 111ortgagcs
than do the otl1crs. At th e encl of H)G,5, these
mortgages accounted for 40 per cent of th e
assets of savings banks, compared with 11 per
cent for life insurance companies, 9 per cent
for savings and loan associations, and 2 per
cent for commercial banks.
MARKET SHARES REFLECT PORTFOLIO
POLICIES AND GROWTH RATES

Attention now is directed to the manner in
which postwar market share movements refl ected the portfolio policies and grow th rates
of th e different lenders. It can he seen from
Table 2 that grow th in assets relative to the
growth of the market as well as portfolio adjustments operated toward increasing the share
of the conventional market held by savings
and loan associations during both postwar
decades. That is, during both periods, the
total assets of these lenders grew in percentage terms more than conventional debt, and
they adjusted their portfolios in favor of conventional mortgages. The rate of change in
portfolio adjustments was considerably slower
during th e 1955-65 period than in the earlier
decade; hut, due to rapid asset growth , the
rate at which savings and loans extended their
market position was not reduced. In contrast

the Postwar Home Mortgage Market

Table 2
MARKET SHARES OF MAJOR HOME
MORTGAGE LENDERS
Market Shore
( mortgages

Portfolio
Composition

Lender's Size
Relative t o
Market

hel~e~~
mortgage debt
outstanding)

h(eldo~tsg~gpeesr
cent of tota l
assets)

( roi!~e~! :~t ol
mortgage debt
outstanding)

~rr

1946 1955 1965 1946 1955 1965 1946 1955 1965
Conventiona l:
13 .7 14.4 15.l
Commercia l banks
32.2 46. l 59.2
Savings and loon
9 .2 5.6 4 .9
Mutua l savings banks
7 .0 13.2 9.2
Life insurance
Govern men t -underwr i tten :
37 .0 20.5 12.5
Commercial banks
22.9 18 .7 15 .7
Savings and loon
7.921.431.7
M utua l savings banks
22.4 28. 7 2 3
Li f insurance
Tot a l :
19.9 17 . 1 14.2
Commorciol bank
ovings on l loon
29.7 34.0 44 .3
M ut ua l saving bank
8 .8 12.G 14 . 1
1 1.1 20.0 14 .0
Lif in uroncc

8.8
.6
1.1
2.8

4.3
.8
.6
1.8

2.7
.9
.4

1.5 3.8 2.4 24.6
13 .6 19.3 8.9 1.7
2.6 26.7 39.8 3 .1
2.8 12.4 10.7 7 .9

5.4
1.0
.8
2.3

5.2
1.8
.8
2.2

6.5

2.4
.4

.8
2.1

1.8
.6

.4
1.0

1.6 3.3 5.6
53.4 60.4 64.2
8 .3 8.8 11 .8
2.5 7 .2 8. 1

3.1 7 .1 8 .0
)7. 1 79.7 73.1
10.9 35.'> 'i l .6
5.3 19.5 18.8

l. l

SOURCE: See Chart 1, p. 13 .

to developments in the conventional sector,
portfolio adjustments by savings and loans and
their growth rate had opposite directional effects on their share of the Government-underwritten market during both postwar decades.
In the earlier period, favorable portfolio adjustments were more than offset by the rapid
growth of the market. From 19,5,5 to 1965,
savings and loans sharply reduced the proportion of their assC'ls allocated lo Governmcnt11nderwriltC'n mortgages, and this more than
offset the rapid growth of their assets relative
to the market. Thus, their share declined during both periods. Unlike the immediate postwar period, the decline in the relative importance of Government-underwritten mortgages
in portfolios of savings and loans during the
1955-65 period more than offset the increase
in the importance of conventional mortgages
so that the proportion of assets allocated to
total home mortgages declined. In recent
years, ('Specially in the 1960's, savings and
loan associations have allocated an increasing
proportion of their assets to mortgages on
multi-family properties.
The increase in the relative participation of
commercial banks in the conventional market

Monthly Review

•

January-February 1967

during both postwar decades occurred even
though their assets grew much less rapidly
than the market. They enhanced their position
by undertaking substantial portfolio adjustments in favor of conventional mortgages. The
1946-55 reduction in the commercial hanks'
share of the Government-underwritten mark-ct
reflects the rapid growth of this <leht in relation to the growth of comrnercial banks, while
the 195,5-65 decline reflects the decreased relative importance of Government-underwritten
mortgages in their portfolios. Unlike savings
and loan associations, commercial banks had
a larger pe1T<' nlagc of their assets allocated lo
total home rnorl g:,gcs al the end of 196.S tl,an
10 years carlin, altlio11gh tlic ralc of portfolio
aclj11slrnc11ls in favor of liorne mortgages was
considerably greater during the first postwar
period. \i\lhile savings and loans have been
active in the multi-family mortgage market in
recent years, commerdal banks have increased
their commercial mortgage lending.
The substantial decline in the conventional
market share of mutual savings banks during
the 1946-55 period reflects the slow growth
rate of these lenders rc1ative to that of conventional mortgage <lcht, since the relative importance of convcnlional mortgages in their
portfolios remained almost constant. Dming
the second postwar decade, the growth record
of savings hanks improved, and they increased
moderatc1y the proportion of assets allocated
to conventional mortgages. Consequently,
their market share declined less than during
the earlier period. The dramatic portfolio adjustments by mutual savings banks in favor
of Government-underwritten home mortgages
during the immediate postwar decade resulted
in a threefold incr ase in their market share
despite the fact that Government-underwritten debt grew abont four times as rapidly as
the assets of these hanks. During the 1955-65
period, they continued to allocate an increasing proportion of their assets to Governmentunderwritten mortgages. The increase in their

Financial Intermediaries and

market share since 1955 reflects these adjustments, as th eir assets have grown in percentage terms about as much as Governmentunderwritten debt outstanding. Savings banks
increased the importance of both conventional
and Government-underwritten mortgages in
their portfolios in both postwar decades. onseq ucntly, their holdings of home mortgages
in relation to their total assets increased substantially. In recent years, mutual savings
banks, like savings and loan associations, have
adjusted their portfolios in favor of multifamily mortgages, and like commercial banks,
have increased th p r c nt of their assets allocat('d lo comnicr ·ial mortgages.
During the HH6-.5.5 period, life insurance
companies made portfolio adjustmen ts in fovor
of conventional horn mortgages of sufficient
magnitude to more than offset the slow rate of
growth of their assets. They thereby increased
their relative participation in that market.
During the second postwar decade, the rate of
increase in the importance of conventional
mortgages in the portfolios of life insurance
companies was greatly reduced. Since they
continued to grow less rapidly than the mark<.>t, their share d cl ined. Portfolio adjustm 'nts made hy life insurance compani s in
overnment-underwrittcn mortgag s during
the first postwar decade wer similar to adjustments in conventional mortgages. Market
share movemen ts also were similar. During
the second postwar decade, life insurance
companies reduced the proportion of their
assets allocated to Government-underwritten
mortgages. This reduced their market share
since their growth approximately equaled the
growth of the Governm nt-undcrwritten market. The decline, during the 1955-65 p riod,
in the importan e of Gov rnment-und rwrittcn home mortgages in life insurance company
portfolios offset th small increase in the importance of conven tional mortgages so that
home mortgages accounted for a smaller percentage of the assets of these lenders at the
18

end of 1965 than 10 years earlier. Throughout
the past decade, life insurance companies have
adjusted their portfolios in favor of commercial mortgages, and, in recent years, have allocated a larger percentage of their assets to
multi-family mortgages.
IMPACT OF INSTITUTIONAL AND
LEGAL STRUCTURE
Portfolio policies and growth rates of financial intermediaries are determined, in general,
by the a ttempts of the intermediaries to maintain some desired balance between the r turn
on their investments and the risks to whi ·h
they are exposed; the demand on the part of
co nsu mers, l>t1 si11< sscs, and gover nme nts for
vario us types of credit ; th saving prop nsitics of the comm unity; and the actions of
monetary authorities in augmenting or diminishing the flow of savings. The postwar market share movements, portfolio adjustments,
and growth rates of the different home mortgage market participants also were influenced
by certain features of the institutional and
legal structure in which the lenders operate.
Perhaps of primary importance were geographic restrictions on ·onventional home
mortgage lending and legal limitations on th
ability of som I nders to compete for savings.
ln the following pages, the impact of these two
factors is discussed. The discussion is not
complete; rather it is intended as an identification of what appears to be some of the more
obvious ways that certain public policies have
influenced the behavior of market participants
over the past decade or so.
Although there are many exceptions to geographic restrictions and th y have b e n liberalized in recent y ars, a large portion of the conventional mortgag holdings of individual
savings and loan associations, state-chart red
commercial banks, and mutual savings banks
must necessarily be collateralized by properties located within a specified geographic area.
In general, the area is determined by the loca-

the Postwar Home Mortgage Market
tion of the lender's home and branch offices.
Since mutual savings banks arc not geographically distributed throughout the ation,
they arc prevented, with some exceptions,
from competing for conventional home loans
in many areas. Aside from those depository
intermediaries which have taken advantage of
the recent 1ihcralizations, ]ifc insurance companies, which arc not suhjcct to geograph ic
restrictions, arc., tlw only major national conventional lenders.
As noted above, the pattern of movements
in market shares and portfolio a<ljustmcnts has
hccn similar for savings ancl loan associations
a11d <·0111t1H'1Tial hanks during tlw past decade
i11 that hotl1 types of institutions have adjusted
th eir portfolios in favor of conventional mortgages, and increased their conventional market
shares. Tl1cse developments were influenced
by geographic re trictions. Due in part to
such restrictions, it appears that, in many
areas of the Nation, a trend has been developing during the past decade or so toward a situation in which locally based savings and loan
associations and commercial banks constitute
the major competition in local conventional
home mortgage markds . This is true even
tho11gh some savings and loan assoc iations
have hccn permitted to engage in limited nationwick conventional lending and some
mutual savings hanks have hecn given increased flexibility in their conwntional lending activity. Life insurance companies were,
of course, not unimportant conventional lenders, and they did restructure their home mortgage portfolios in favor of conventional loans.
everth clcss, they became increasingly less
important conventional market participants
beca use they adjusted their portfolios away
from home mortgages and th 'Y grew consid rahly less rapidly than the mark ·t.
Geographic restrictions also influenced developments in the Govcrnmcnt-underwritt<.'n
sector. In view of the slow growth of this sector in recent years, one wou]d expect these
Monthly Review

•

January- February 1967

mortgages to dec1ine in relative importance in
the portfolios of some lenders, and this occurred for savings and loan associations, commercial banks, and life insurance companies.
On the other hand, one would not necessarily
expect portfolio adjustments to be extensive
enough to produce th e decline in the relative
parti ·ipation of each of these lenders in the
Government-1mdcrwrittcn market. Of course,
it may be that their policies had a moderating
cffc,ct on the growth of Government-11nderwritten home mortgage debt. It is true that
conventional lending terms were liberalized
dming the 19.5.5-65 period , and this would
tc'ncl lo make convC' nti orwl financ-ing mm< attraC'livc· lo hor-row<'rs . I l sho11ld he n•I1wrn hcred , however, tlwt th' terms of Governnwntunderwrittcn loans wcr liberalized also.
Moreover, any potential effect of some lenders'
preferences for conventional mortgages on the
growth rate of Government- underwritten debt
was minimized and probably offset by the behavior of mutual savings banks. Due in part
to geographic restrictions on their conventional lending, mutual savings banks competed
very actively in the Government-underwritten
sector. Their competition was effective. The
other lenders, cspe ia11y savings and loan associations and commercial hanks, responded to
this competition and to the strength of demand in the conventional sector by r ducing
their participation in the Government-underwritten market and increasing their participation in the conventional market. Thus the role
played by mutual savings banks explains in
part the reduced relative participation of savings and loan associations, commercial banks,
and life insurancP companies in th e Governmcnt-undcnvrittcn mark t. At the same time,
mutual savings hanks provided a source of
credit for those borrowers who desired Govcrnm nt-undcrwrittcn financing.
The postwar pattern of market shares also
was influenced by differences in the competitive position of the different lenders in the
19

Financial Intermediaries and

market for the community's savings. This is
seen most clearly with regard to savings and
loan associations and commercial banks. We
have noted that the pattern of movements in
market shares and portfolio ad justmcnts was
similar for the two lenders. There are, however, some differences. While both lenders increased their relative participation in the conVC'ntional market and i-cduced their relative
participation in the Government-underwritten
market, share movements were considerably
more pronounced for savings and loan associations than for commercial hanks. Also,
(·omrnerc-ial hanks have adjusted their portfolios in favor of c.·onvcntional mortgages Lo a
gr<'alcr clcgr('(' in n·c.·cnl yea rs than have savings and loans, and a<ljuslrncnls away from
Government - underwritten mortgages have
heen less pronounced for commercial banks.
The differences, however, in the rate of change
in the market shares of the two lenders reflect
primarily the more rapid rate of growth of the
assets of savings and loan associations. This
in turn reflects in part the more favorable
competitive position that savings and loans
have had in the savings market. Furthermore,
savings and loan associations have hecn aggressive in taking advantage of their position.
Due in parl to an altered competitive position,
the growth record of commercial banks
equaled that of savings and Joan associations
in 1964 and 1965. It is interesting that, during
this period, the home mortgage market share
increased more rapidly for commercial banks
than for savings and loans.

FUTURE DEVELOPMENTS
As in the past, many factors will affect the
future pattern of market share movements,
portfolio adjustments, and growth rates of the
different home mortgage lenders. Important
among the d etermining forces will he the
strength of the demand for owner-occupied
housing relative to the demand for other types
of housing and for other goods and services

financed by credit extensions. Also, the existing institutional and legal sh·ucture and
changes therein will continue to exert an important influence.
Further substantial increases in the volume
of home mortgage d cht no doubt will occur
hut the rate of growth is likely to be less
rapid than during the past two decades. On the
other hand, there is no reason to suppose that
the growth rate of financial intermediaries wm
he reduced, notwithstanding the experiences
of the past year or so. Thus, although the
m,1jor lenders may continue lo increase their
C'omhinccl sl1arc of the home mortgage market,
il is likely Iii.it the reb tivc position occupied
hy these .issds in their combined portfolios
will he enlarged al a less rapid rale.
Mortgages on rental properties will continue
to offer attractive alternatives to home mortgages in the future portfolios of financial intermediaries. Reflecting the growing demand
for rental housing, the ratio of multi-family
mortgages to total residential mortgage debt
held by th e four major lenders has been increasing in recent years; and this is likely to
continue. As was noted, multi-family mortgages have hecome in creasingly important in
the portfolios of savings and Joan associations,
life insurance companies, and mutual savings
banks. Due in part to regulatory limitations,
commercial banks have remained unimportant
in this area. It may be that the increased demand for mortgages on rental housing will be
met by savings and loan associations, mutual
savings banks, and life insurance companies,
and an increasing percentage of the demand
for home mortgages will be met b y commercial hanks.
Developments in the home mortgage market
will be influenced by any changes in public
policy affecting the competitive position of the
various participants in the savings market. If
restrictions on competition arc relaxed, it is
reasonable to assume that commercial banks
will attract an even larger portion of the com-

the Postwar Home Mortgage Market
munity's savings than during the past 20 years.
As a result, these banks would probably respond by increasing their relative participation in the home mortgage market, especially
if other lenders are attracted increasingly to
multi-family mortgages.
Further liberaliza tion of geographic res b.-ictions on conventional lending also would affect the future behavior of mortgage lenders.
Perhaps the most significant liberalization
would be an enhancement of the flexibility of
mutual savings banks with regard to conventional lend ing. One of the questions raised
hy this lilwralization is its effect on the Govcrnm<'nl-11ndcrwrillcn S<'ctor of the home
rnorlgage market. We have seen how geograp hi · reslri<.:lions have operated lo help provid, a source of f un<ls for this market. One
might speculate as to what would have developed in the Government-underwritten sector if mutual savings banks had been permitted nationwide conventional lending. Would
the growth rate of Government-underwritten
debt have been even less during the past
decade? Or, would the same volume of debt
be distdbuted more evenly among the lenders?
If the answer to the first question is affirmative, the future of the Govcrnment-undcrwdt-

Monthly Review

•

January- February 1967

ten mortgage may be jeopardized by granting
authority to mutual savings banks to undertake nationwide conv ntional lending. It may
b e mentioned with regard to the FHA mortgage, that some observers feel that a thorough
reevaluation of the program is in order. If
modifications arc not undertaken, the appeal
of the program to both lend,]rs and borrowers
will probably continue to decline. In this
case, mutual savings banks will have added incentive to seek alternative investment outlets
and to contend for the liberalization or elimination of geographic restrictions on their conventional lending. This likely would result in
an increase in their relative importance in lho
conventional home mortgage market. I l is not
illogieal lo c pcet sueh a dcvelopmenl lo b e
a ·companied by an increase in the participation of the other lenders in the Governmentunderwritten market.
In conclusion, developments can reasonably
be visualized that would produce a more uniform distribution of both conventional and
Government - underwritten home mortgage
debt among the various lenders, and, for each
lender, a greater degree of portfolio diversification with regard to different types of mortgage holdings.

Farm Lending by Commercial Banks
In the Tenth Federal Reserve District
By Raymond]. Doll
Richard D. Rees
Gene L. Swackhamer
1966, comm rcial hanks in
A s the Tenth Federal
Hcscrvc District were
OF MIDYEAH

extending $1.9 billion of farm credit to 254,000 farm borrowers. This estimate, along with
much other information pertaining to commercial bank financing of agriculture in the
Tenth District, was revealed by the Federal
Reserve System's Agricultural Loan Survey of
June 30, 1966.
This article is based on data provided by a
stratified random sample of 181 District insured commercial banks. Each of these banks
reported detailed information on a sample of
its farm loans, along with items of information
for the bank as a whole. It is a tribute to
these bankers that they responded 100 per
cent to this substantial request for information. The sample banks were stratified by
size, as measured by dollar volume of farm
loans outstanding. All banks with $3 million
or more of farm loans were included, 15 per
cent of those banks with from $2,000,000 to
$2,999,999, and smaller proportions for seven
additional groups. At least one bank was
picked at random for each state in the three
groups with the smallest volume of farm
loans. Each of the banks selected reported on
all borrowers with $100,000 or more of debt
outstanding and on from 20 to 50 additional
borrowers within a designated alphabetical

segment. Banks with a large vo111rnc of farm

loans r •port 'cl on an alphabetical scgm ·nt
that represented approximat ly 5 per cent of
all borrowers, while banks with a relatively
small volume of farm loans reported on an
alphabetical segment that represented about
50 per cent of all borrowers. Banks from all
seven Tenth District states were includedvarying in number from 51 in Nebraska to
only 9 in the Tenth District part of New
Mexico.
The objective of the sample design was to
obtain the minimum number of reports necessary to achieve an acceptable degree of
validity in subsequent analysis; th reby keeping respondents' burdens as small as possible.
The data then were expanded to the total of
farm loans reported by all banks in the Report of Condition, which was obtained at the
same time. The following parts of this article
will provide a brief descriptive summary of
the major findings of the survey. Additional
analytical studies of a more definitive nature
will be made as more tabulations are made
and as time and resources permit.
CHARACTERISTICS

There has been considerable discussion recently about sharply increasing capital requirements in the agricultural industry be-

Farm Lending by Commercial Banks in the Tenth Federal Reserve District
cause of increasing investment and cash
production expens s. Farm income has failed
to keep pace with the growing capital requirements. Consequently, the use of farm er dit
has grown more rapidly than capital requirem nts. Th se developments have had an impact on farm loans made by commercial
banks. Therefore, a more detailed evaluation
of th characteristics of farm financing by
commercial banks is appropriate. Insofar as
data permit, comparisons are made with the
situation that prevailed a decade ago when
the last study of farm loans at commercial
hanks was made.
IT 1s JNTEI\ESTJ c: to not' that
By Borrower
a fifth of th e borrowersthose with outstanding hank
d ht of more than $10,000- were holding about
70 p r cent of th total dollar volume of bank
farm debt. On the other hand, nearly two
fifths of the borrowers-in those groups having outstanding debt of less than $2,000held only 4 per cent of the total debt. The
largest group of borrowers had outstanding
farm debt of from $2,000 to $4,999. The
largest dollar volume of debt was held by the
group with outstanding debt of $25,000$99,999. Since many banks in the Tenth Distri t do not have capital structures large
enough to £inane farmers with a large volum of outstanding debt because of loan
limits, it has been necessary for these banks to

Table 1
TOTAL OUTSTANDING BANK DEBT
PER BORROWER
(June 30, 1966)
Size Per Borrower

r".fo'
,000-,.,isoo

1
l ,999
2,000- 4,999
5,000-$9,999
10,000-$24,999
25,000-$99,999
100 ,000 or more
Total

Average
Number
Effective
Notes Interest Rote
Borrowers

Amount
Outstanding
( In thousands)
8,111
$
19,628
52,223
190,862
311,561
558,986
579,062
192,644
$1,913,076

32,902
28,386
37,657
59,722
44,015
36,680
13,697
799
253,857

36,700
36,448
53,260
102,125
103,460
97,175
48,173
2,730
480,071

10. l
8 .4
7.7
7.3
6.9
6.8
6.4
6 .2
6.7

NOTE: Details may not odd to totals due to independent rounding.

Monthly Review

•

January-February 1967

use participations or other schemes for providing a large proportion of the dollar v lume of
farm credit. This problem wiJl be discussed
in more detail in a subsequent section.
An average of 1.9 notes were held per borrower. As would be expected, most borrowers
with a small dollar volume of d bt outstanding had only 1 note. The av rage number of
notes per borrower tended to increas with
size of debt and averaged 3.4 for borrowers
with $25,000 or more of debt outstanding.
Interest rates charged by th banks averaged 6.7 per cent, which compares with an
avcrag rate of 6.1 p r cent a d cad arli r.
Althoup;h averag: rates charg d decreased
·onsist 'Ji lly with increasing size of dcht per
borrower, Lhc read r should he cautioned that
factors other than siz ar lik ly lo b responsible for part of the rate variation. For
example, as will be shown later, feeder livestock loans are almost nine times larger than
loans made for purchasing autos and other
consumer durables. Feeder livestock loans
generally are well secured and made to
farmers with relatively high net worths.
Other factors, such as these, also are freq ucn tly intercorrelated with size.
Tim MAJOR purpos s for which
Major
bank credit is used by Tenth DisPurpose
trict farmers arc: to purchase
feeder livestock, to purchase oth r livestock,
and for current operating expenses and family living. Almost three fourths of the total
dollar volume of credit was used for these
_purposes. Although more farmers borrowed
to purchase machinery than to buy feeder
livestock or other livestock, the average size
of note for machinery purchase was substantially smaller, so the dollar volume of
redit used for this purpose was relatively
1 ss important.
The averag amount of outstanding bank
credit held by farmers for all purposes was
176 per cent greater than a decade earlier.
The rate of increase was substantially above

Farm Lending by Commercial Banks

Table 2
MAJOR PURPOSE FOR WHICH BANK CREDIT WAS USED
Major
Purpose
Current operating
expense and
family living
Purchase:
Feeder livestock
Other livestock
Machinery, trucks,
equipment
Farm real estate
Auto or other
consumer durables
Consolidate or pay
other debts
Improve land and
buildings
M1 ccllaneous
Total

Amount Outstanding
Percentage
1956
1966
Change
( In thousands)

Number of Notes
Percentage
1966
Change
1956

---

Average
Effective
Average Size of Note
Interest
Percentage ~
1956 ~ Change 1956 1966

$214,958

$ 451,196

110

206,692

196,451

-5

$1,040

$2,297

121

6.4

6.8

175,058
90,730

542,708
385,815

210
325

32,054
36,274

58,687
69,806

83
92

5,461
2,501

9,247
5,527

69
121

5.4
6.1

6.4
6.6

7 6, l 81
64,333

211,913
154,773

178
140

57,917
13,034

78,521
19,456

36
49

1,315
4,936

2,699
7,955

105
61

7.4
5.1

7.3
6.5

10,375

28,409

174

16,382

22,700

633

1,251

8.8

8.9

41,754

66,273

16,020

12,790

-20

2,606

5,182

6.2

7.2

14,973
5,87 1
$694,233

44,033
7,954
$1,913,076

194
376
176

8,323
3,668
390,368

10,250
11,408
480,07 I

23
211
23

1,799
1,600
'ji I ,778

4,296
2,450
$3,985

139
53
124

6.
5 .6
6.1

6 .8
6 .7
6.7

NOTE: Details may not add to totals du to indcpend nt rounding.

average for loans used for the following purposes: miscellaneous, purchasing other livestock, purchasing feeder livestock, and improving land and buildings. The rate of increase was much below average when the
loans were used for consolidating or paying
other debts, paying current operating and
family living expenses, and purchasing farm
real estate. Average size of note increased
about 2J{ times during the decade, with larg
increases being shown for aJl categories.
There was considerable variability in interest rates and in the change in rates by purpose in both 1956 and 1966. Rates were highest in both years for purchasing autos or
other consumer durables; however, the rates
for these loans were practically unchanged in
1966 from 1956 levels. Rates were lowest in
1966 on loans made for purchasing feeder
livestock, but the increase during the decade
was a full percentage point-from 5.4 per cent
in 1956 to 6.4 per cent in 1966. The second
lowest rate in 1966 was for purchasing farm
real estate, despite the fact that this rate increased 1.4 percentage points during the
decade-from 5.1 per cent in 1956 to 6.5 per
cent in 1966. Rates charged on loans for pur-

chasing farm machinc1y also were virtually
unchanged in 1966, as compared with 1956.
Generally, rates that were lowest in 1956
showed the largest increases during the
decade, but continued to remain relatively
low in 1966. Variability in rates charged by
purpose declined substantially from 1956 to
1966.
FAnM LOA s outstanding in the
Maturity
Tenth District at mid-1966 were
predominantly short-term loans.
About 60 per cent of the dollar volume of
loans outstanding had a maturity of 1-7
months and an additional 2,5 per cent of the
dollar volume had a maturity of 8-13 months.
These relatively short maturities probably can
be explained largely by the purpose for which
the loans were made, as discussed in the
previous section. Feeder livestock and operating expense loans-which accounted for over
half of the dollar volume of loans-because
of their nature usually are short-term loans.
Loans for purchase of other liv stock usually
are written for a somewhat longer period of
time. This probably explains the relatively
large increase in importance of loans with 813 month maturities from 1956 to 1966, since,

in the Tenth Federal Reserve Distr ict

Table 3

BANK LOANS BY MATURITY
(Outstanding June 30)
Amount
Outstanding

1966

Maturity

Percentage
Distribution

Number
of Notes

Average
Size of
Note

Average
Maturity
in Days

1966

1956

1966

5
59
25
7
4
100

4
65
18
10
3
100

19,501
278,245
112,222
60,219
9,885
480,071

Average
Effective
Interest Rate

1966

1956

6 .7

6.2
6.0
6.4
6.8
4.7
6.1

( In thousands)

87,327
1,125,578
478,668
138,277
83,226
$1,913,076
$

Demand

1-7 months
8- 13 months
14-66 m onths
Over 66 months
Total

$4,478
4,045
4,265
2,296
8,419
$3,985

'i<s5
332
957
5,185
508

6.5

7 .0
7 .3
6 .2
6.7

NOTE : Details may not add to totals due to independent rounding .

as was shown previously, th e dollar volume
of "ol11C'r 1iv stock" loans in creased sharply
during th e decad e.
lnlcr<'sl rat es increased approxima tel y one
half of a perce nta ge point for a ll matu ri ty
groupin gs, ex ·cpl for lhc "over 5 years" group.
The rates for this groupin g, 70 per cent of
which were real-estate loans, increased 1.5
percentage points-from 4.7 p er cent in 1956
to 6.2 per cent in 1966:
THE USE O F security increased in
Security
relative importance during the
p ast d ecade in the extension of
farm credit, as evidenced by th e decline since
1956 in the unsecured proportion of total dolla r volume. As Lhc av 'ra g ' size of loans and
total d emand for credit increase, it is logical
to
p ·t f wer unsecur d loans to b
x-

t ndcd. Furthermore, secured loans fr q ue ntly com mand a lower rat of int rest; however,
it is customa ry fo r Lh ' ins lil11lion lo lreal ead1
·11 slomc r on l1is indi vic.l1ia l merits. A favorabl ' finan ·ia1 slal 'mcnt and personal k, ow] ·dgc of th c ustomer freq uently arc substituted for formal se urity.
The most common security for loans reported in the survey were the chattel mortgage and the closely associated security agreement and financial sta tement, chattel deed of
trust, or conditional sales contract. These
types of security were the basis for more than
two thirds of th e total dollar volume outstanding in 1966- an increase of 208 per cent for
the decade. Th average size of Joans s cur d
in th sc ways incr 'ased 113 p r c nt sine
1956.

Table 4

BANK LOANS TO FARMERS BY SECURITY
( Outstanding June 30)
Amount Outstanding
Percentage
1966
Change
1956
7Tri thousands )

Type of Security
Unsecured
Secured
Endorsed or co - maker
Chattel mortgage, security
agreement and financial
statement, chattel deed of
trust, or cond itional sa les
contract
Real -estate mortgage
Government guaranteed
or insured
Other
Total

Number of Notes
Percentage
Change
1956
1966

Average Size of Note
Percentage
1956
1966
Change

$155,033
539,201
17,742

$ 375,864
1,53 7,2 11
43,990

142
185
148

149,999
240,869
15,952

145,063
33 5,008
15,058

-3
39
-6

$1,034
2,238
1,112

$2,591
4, 588
2,921

150
105
163

425,795
74,287

1,3 13,373
142,729

208

200,804
16 ,903

291,118
2 1,51 2

45
27

2 ,1 20
4,395

4,511
6,63 5

11 3
51

6,247
15, 130
$694,233

14,636
22,483
$1,9 13,076

134
48
176

2,254
4,462
390,368

1,807
5,5 13
480,071

-20
24
23

2,771
3,391
$1,778

8,100
4,078
$3,985

192
20
124

NOTE : Details may not odd to totals due to independent rounding .

Monthly Rev iew

•

January- Fe bruary 1967

Farm Lending by Commercial Banks

otes secured by real-estate mortgages increased 27 per cent in number and 92 per
cent in dollar volume from 1956 to 1966. The
number of endorsed or co-maker notes decreased 6 per c nt, while the average size of
such notes increas d 163 p r cent. Government guaranteed or insured loans also incPased 134 per cent in dollar volume, but dereased 20 per cent in number of notes. As a
result, Government guarante d not s increased
sharply in average size since 1956- from
$2,771 to $8,100.
As a whole, s cur d not
incr ascd 185
per cent in dollar volum and 39 per
nt jn
1111111hcr. The avcrngc siz , of sc ur ·cl notes
inercasecl I 0.5 per ·cnt and of un sccm cd not 'S
1,50 per nt sin · 1956. Although th dollar
volum of m s m ed loans jncr as d 142 p r
cent over the past 10 years, their r lative importance decreas d from 22.3 per cent in 1956
to 19.6 per cent in 1966.
VARIATIO
1
ET worth of borrow~:rth ers was large in both 1956 and 1966.
Borrowers in the $25,000 to $99,999
net worth group had the largest dollar volume
of outstanding debt for any group. This group
had a total outstanding d ht of $761 million
in 1966- an incr as of 206 p r c nt. In this
gro up, th numb r of borrow 'rs in reased 91
p ·r cent, wh il the averag siz of borrower
debt inereas d 61 p r cent.
An interesting fea ture revealed in Table 5
is the trend in farm debt by net worth group-

ings from 1956 to 1966. Th smaller net worth
groupings show a deer ase in perc ntage
change in amoun t outstanding and number
of borrowers for the 10-year period, while the
larger groupings show relatively large increases. Th changes were persist ntly from
negative to positive with ea ·h successively
larger net worth grouping. These tr nds in
amo11nt outstanding and number of borrowrs by net worth grouping largely r fleet the
influence of the changing structure of agriulture durin g the decade on the size of farm.
The average d bt p r borrower increas d at
a d -r asing rat as th net worth siz increased, with an in T 'asc of almost 2)~ tim s
for the ncl worth group of 1111d 'r $3,000 and
only abou t a fourth for th group $100,000 and
ov r.
When combined, the two Iarg t net worth
groups accounted for about 75 per cent of the
loan volume and 48 per cent of the borrowers
in 1966, compared with 61 and 26 per cent,
respectively, in 1956. Conversely, the three
smallest net worth groups, together, accoun ted
for only 20 per cent of the dollar volume and
about 39 per cent of the borrowers in 1966a decrease from 39 per cent and 71 p r cent,
r sp ·tivcly, in 1956.
FARM • R 45 YEAR of ag and over had
Age th e larges t volume of outstanding bank
debt. Th ir borrowings incr ased 156
per c nt sine 1956 and accounted for more
than one half of the total amount at mid-1966.

Table 5
BANK LOANS TO FARMERS BY NET WORTH

(Outstanding June 30)
Net Worth
of
Borrower
Under $3,000
r000-$9,999
10,000- 24,999
25,000-f 99,999

l 00,000 and over
Not reported
Total

Amount Outstanding
Percentage
1966
Change
~thousands)

1956

$ 20,660
103,476
145,606
248,328
172,314
3,849
$694,233

16,328
103,535
260,212
761,151
684,141
87,710
$1,913,076

-21

"79
206
297
2,179
176

NOTE: Details may not add to totals due to independent rounding .

Number of Borrowers
Percentage
1966
Change

Average Amount Per Borrower
Percentage
1956
1966
Change

1956

25,812
70,193
64,712
49,995
8,529
6,149
225,390

8,476
33,804
57,687
95,380
27,153
31,357
253,857

-67
-52
-11
91
218
410
13

800
1,474
2,250
4,967
20,203
626
$ 3,080

$ 1,926

3,063
4,511
7,980
25,196
2,797
$ 7,536

141
108
100
61
25
347
145

in the Tenth Federal Reserve District

Table 6
BANK LOANS TO FARMERS BY AGE
( Outstand ing June 30 )
Amount Outstanding
Percentage
1956
1966
Change
- - (,-n thousands)

A ge of
Borrower
Under 35
35-44
45 and over

$ 95,174
181,875
391,557
21,776
3,849
$694,233

$ 238,538
446,391
1,004,521
84,560
139,066
$1,913,076

151
145
156
288
3,513
176

Corporation forming
N ot reported
Tota l
NOTE : Details may not odd to totals due to independent rounding.

TI1e number of borrowers of this age increased 25 per cent and their average borrowjngs 10.5 per cnl during th dccad '.
The 011ngcsl farrn horrowcrs- thosc under
.'3;5 cars of .1gc i11c1-c.1scd Lhcir aggrega te
hank dchl hy IS I per <.:<'Ill. Tl1c average dchl
per horrowcr increased hy a grcal 'r amount
- 160 per ccnl- sin 'C th ' a 'lual number of
horrowers in this gro up decreased over the
past 10 years. It should be noted that the
average age in this group was only 29 years,
so these borrowers have not had many years
to prove their managerial ability nor to build
up a substantial net worth.
Corporations exp erienced the greatest percentage ·hange in outstanding volume of
loans and number of borrowers of any age
group- increases of 288 per cent and 336 per
cen t, r spc 'tivcly. The average amount outstanding d 'creased J l per cent during the 10year period, since the number of borrowers
increased by a greater per cent than did the
amount outstanding. These percentage changes
are not particularly significant because of the
relatively small amounts involved.
Partnership farms were included in the "not
reported" category and primarily accounted
for th e hug increase in dollar volume outstanding in this group- 75 per cent of th'
$139 million of hank debt outstanding in th
"not r ported" category in 1966. Partn 'rships,
by natur , tend to be r latively large-scale
operations and, in 1966, had an av 'rage debt
of $31,200 per partnership. This compares
with an average debt per corporation farm of
Monthly Review

•

January-February 1967

Average Amount Per Borrower
Percentage
1956
1966
Change

Number of Borrowers
Percentage
1956
1966
Change

44,426
63,489
111,1 20
206
6,149
225,390

42,791
62,062
139,2 12
898
8,893
253,857

-4
-2
25
336
45
13

2,142
2,865
3,524
105,710
626
$ 3,080
$

$ 5,574
7,193
7,216
94,165
15,638
$ 7,536

160
151
105
-11
2,398
145

$94,165 and $6,922 per singl -proprietorship
farm.
BANK DIFFICULTY IN FINANCING

FARM CUSTOMERS
A som 'what surprising result of 1l1e s11r c
was that 85 per cnt of all agri ·ultural loans
w re made by banks that indicated they experienced no difficulty in financing their farm
customers. Only 10 per cent of total agricultural loans were made by banks indicating
they experienced greater difficulty in financing agriculture, as compared with past years.
The remaining banks reported experiencing
litt] difficulty, or the same amount of difficulty, as in past years. Part of the explanation for th e apparent 'as, in finan ·ing agri c ulture may b found in th fact that gross
farm income had been growing rc1ativ ly
rapidly for about a year and a half prior to
th e survey.
For those banks reporting greater difficulty
in financing farm customers, two possible explanations appear relevant. Either these banks
could not attract sufficient deposits for making loans or farm loan d emand substantially
xceeded th e banks' resource capabilities. A
comparati.v ' analysis of the inter t rat s
hanks were paying for r ·gular savings and
other time d posits did not r v al any significan t differences b etween banks r porting
grea ter and no difficulty in financing farm
customers. Of those banks reporting greater
financing difficulty, howev r, more than half
27

Form Lending by Commercial Banks

Table 7

TOTAL OUTSTANDING AMOUNT OF PARTICIPATION
LOANS ORIGINATED BY RESPONDENT BANK
( June 30, 1966)
Size of Capital and Surplus
Amount Held
y Reporting Bank

Under

$200

$300

$500

$1,000

$299

$499

$999

$1,999

$2,000
and
Over

Total

( In thousands)
None
Under $5,000

$5 ,000-$24,999
$25,000-$99,999
$ 100,000-1499 ,999
$5 00,000 -. 999,999
$1,000,000 or more

Total

$ 2,236

$ . ---

2,726
6,095
40,165

114
20,956
34,743

$51,222

$5 5,8 13

----

$ 5,981

8,217

36}388
13,050

6))32
12,358

1,320
20,434
1,26 5
5,871

.. 250
4, 166
22,161

7)62
28,371
138,511
30,839
28,032

$49,938

$23,312

$34,871

$26,577

$241,731

4,922

\ c1T p,1 yi11g I ·ss llian 3., pcr cent on regular
sav in gs. Fifty-lhr ·e p 'r c nt of th "no diffi culty" banks were payin g the ma ximum 4 per
cent on regular savings.
Several comparisons suggest that the farm
loan d emand experienced by banks reportin g
greater financing difficulty was substantial.
They had 174 per cent more acceptable farm
loans per bank that they could not grant from
th eir own resources- because the reques ts exceeded th eir legal limit- than did banks reporting no financin g diffi culty.
Of more importance than loan nun hers was
the size of the Joans xceeding loan limits.
Banks reporting greater finan ing diffi ulty
averaged $245,494 in a ceptable Joans xc cdin g th eir legal limits during the past year,
compared with $53,376 for those banks reporting no financing difficulties . Also, these
banks had twice as many outstanding participation loans as the "no difficulty" banks,
averaging $170,937 per bank more in total
outstandin g participation loans . Obviously,
th cr ' was som variability in how banks d fin ed "difficulty" sine even th e "no diffi culty" group of banks had loan requ es ts larger
than their legal limits.
Of 1,905 District banks, 1,119 were reported
to be working with outside financin g sources
during th e past year. As exp ected , a large ma-

joril o f lli csc hanks- >8 p( r ·c nl- worked
w ilh ·orrespondents. Ninel ·en per ent obtained outside funds from in suran e com panies, an<l only 7 per cent obtain d funds
from agricultural credit corporations.
Of the 12 per cent reporting that they did
not work with correspondent banks, about
three fifths obtained funds from insurance
companies. None reported receiving funds
from agricultural credit corporations. Seven
hundred and twenty-four banks did not work
with outside [inanci, g · rvi ·cs, and an es ti mated 62 hanks <lid not r port o, th ir outsi<l ' finan cin g.
District banks r ported a total of $131 million in acceptable farm loa ns that th y were
unabl e to grant from their own resources in
the past year because the reques ts exceeded
their legal loan limit. The group of banks
which reported that they had worked with
outside financing sources during the past year
es timated that they obtained funds in the
followin g proportions: corr spondents, 71 p r
cent; insuran ·e compani ' S, 16 p r c nt; agricultural r dit corporations, 10 per cent; and
other sourc s, 3 p 'r cent. For th 1,119 banks
which worked with outside sources of financing during the past y ar, the amount of loans
they wer unable to grant from th ir own resources, due to maximum legal limits, was 6.4

in the Tenth Federal Reserve District

Table 8
TOTAL OUTSTANDING AMOUNT OF
PARTICIPATION LOANS ORIGINATED BY
RESPONDENT BANKS
(June 30, 1966)
Maturity of Notes in Months
8 - 13
Over 13
Under 8
( In thousands l
$ ....
$ 89,040
$21,826
Feeder livestock
$3,965
79,914
8,944
390
Other livestock
19,541
30
Other current expenses
1,098
1,632
Equipment
2,966
Debt consolidation
120
269
6,255
Farm real estate
Land and bui lding
613
4,922
improvement
·;fos
Miscellaneous

$114,830
89,248
19,571
2,730
2,966
6,644

$7,063

$241,731

Major Purpose
of Loon

Demand

Total

$3,965

$ 199,023

$31,681

Total

5,534
208

per cen t of tliC'ir total 011lslancling loan
vol11rnc.

PARTICIPATION LOANS

lthough parlic:ipation loans ac ·otmted for
less than 1 per cent of total agricultural loans
outstanding, they accounted for 13 per cent
of the dollar amount of all agricultural loans.
The average participation loan amount outstanding was $80,687, compared with an average outstanding amount for all agricultural
loans of $3,98,5. Of nearly $242 million in
participation loans originated by respondent
hanks, other hanks, inclt1cling correspond nts,
held outstanding balances of $1.55 million.
f n order to examine the circumstances surroundin g participation loans, both characteristics of the originating hanks and purposes
of the loans were evaluated. Sixty-five per
cent of the total outstanding amount of participation loans was originated by banks of
less than $500,000 capital and surplus ( Table
7). Banks of $.500,000 to $1 million capital
and surplus accounted for 10 per cent; banks
of $1 to $2 million, for 14 per cent; and those
with $2 million and ov 'r, for 11 per c nt.

Monthly Review

•

January- February 1967

As expected, most participation loans were
for the purchase of feeder and other livestock
( Table 8 )-accounting for 85 per cent of the
outstanding volume.
early $20 million in
participation loans were to finance other current operating expenses. The average outstanding amount per borrower of participation
loans originated by r pondcnt banks was
$87,740. The average outstanding amount of
participations per borrower at other banks in
loans originated at the respond nt bank was
$,56,230. In other words, correspondents and
oth r hanks h eld nearly 6.5 per c nt of the
outstand ing amount of participalion loans.
T,,: Tl c D1sT111cT hanks reported
Lines of
cxlcnding lines of credit lo 17
Credit
per cent of all agri ·ullural borrowers. Th ~sc borrow rs, in turn , a ount ·cl
for $572 million-or 30 per cent-of the District's $1.9 billion in outstanding agricultural
loans . District borrowers w re using slightly
more than one half of the maximum available
credit under existing lines. The average line
of credit provided for $25,312 in loans.
There was substantial difference in net
worth and debt between line of credit borrowers and others. The average n t worth of
borrowers using a line of credit was about
$7,5,000, compar ,d with $50,000 for the "no
line of er dit" borrower. Th average total
debt of all line of credit borrowers was about
$35,000, compared with $20,000 for borrowers
without lines of credit. Average bank debt
per line of credit borrower is about $13,600,
compared with $6,300 for borrowers without
lines of credit. Only 30 per cent of the outstanding amount of participation loans was
made under a line of credit, although almost
all of these loans wer $100,000 or larg r.

Special Publications
The following booklets are currently available from the Federal
Reserve Bank of Kansas City:
Foreign Trade and American Agriculture. This booklet provides a historical perspective of international agricultural trade, revi ws th e current status of this trade, and discusses th e agricultural
implications of current interna tional trade negotiations.
Farm Debt as Related to Economic Class of Farm. An analysis of the Nation's d bt as it relates to economic class of fa rm- a
meas ure of farm siz . Based on th e 1960 Sample Survey of Agri·ultur , th e hooklet takes a look at variahil ity of hum d ~ht among
<.' ·onomi · ·lasses of farms as well as th e charnc-lcrisl ics associated
wilh debt variabilit y among farms in parlic1dar ('lasses.
A Study of S ·ale Economics in Banking. Through a statis tical
anal ysis of cost and earnin gs data for member banks in th Tenth
Federal Reserve District, this 60-page study attempts to shed ligh t
on th e qu estion of how th e size of bank influences bank costs and
earnings. The booklet is based in part on a series of articles published in the Monthly Review during 1961 and 1962.

Essays on Commercial Banking. A collection of nine essays previously published in the Monthly Review dealing with various
aspects of commercial banking, including management of cash
reserves, investment policies, deposit instability, and factors affecting earnings.
The Wheat Adjustment Problem- Potential Economic Impacts.
Discusses the wheat problem in the United States, as well as th e
world wheat situation, with particular emphas is on supply and
demand adjustment prospects for the future.
Water Resources . . . Development and Use. A 68-page booklet dealing with problems associated with water resources, including
demand and supply of water, national benefits from water resources
development projects, water allocation and its relation to the achievement of regional goals, and water quality.
Financing Agriculture Through Commercial Banks. A 48-page
pamphlet r porting th e results of a special study of methods and
procedures used by commercial banks in fin ancing agriculture.

Any of these publications may be obtained by writing to the
Research Department, Federal Reserve Bank of Ka nsas City, Federal Reserve Station, Kansas City, Missouri 64198.

Full text of Economic Review (Federal Reserve Bank of Kansas City) : January-February 1967

FRASER