MONTHLY REVIEW of Ninth District Agricultural and Business Conditions FEDERAL RESERVE BANK of MINNEAPOLIS

MONTHLY REVIEW of Ninth District Agricultural and Business Conditions FEDERAL RESERVE BANK OF MINNEAPOLIS

Serial Vol. 10 OCTOBER 31, 1950 No. TO

Construction Boom Fostered by Credit NEof the main pillars of postwar economic prosperity in the • Not only residential but commercial, industrial, Ninth Federal Reserve district has and public building has surpassed that of for- been the construction boom. For a mer years, despite rising construction costs substantial proportion of our urban workers, it has provided employment ■ Mortgage lending, insured or guaranteed by on construction sites, in factories, federal agencies, comprises major portion of and, to a smaller measure, in wholesale and retail outlets. credit in the residential field The number of workers employed in this district on construction sites By OSCAR F. UTTERER for commercial, industrial, and public alone has been close to 6% of the construction and for residential total number employed in all types panded public facilities grew out of building has been plotted on the ac- of economic pursuits, exclusive of the virtual shutdown of construction companying chart. It provides a pic- farming. In states like Montana, on such projects during World War ture of the relative size of the first North Dakota, and South Dakota, H and the rapid growth of over- type of construction in comparison which have large federal government population during the past decade. with the housing boom. projects under way, employment on The dollar amount of contracts As may be observed on the chart, construction sites has been close to awarded from January 1946 to date commercial, industrial, and public 10% of the total. The demand for building materials CONSTRUCTION CONTRACTS AWARDED IN THE NINTH DISTRICT —structural steel, cement, brick, building blocks, lumber, millwork January 1946 to August 1950 products, plumbing fixtures, heating -Million Dollars equipment, etc.—creates an additional amount of employment. A substantial proportion of the increase in pur- 70- chasing power in our cities and towns is traced to construction activity. 60 The current construction boom frequently is characterized as a housing boom. In fact, it encompasses de, cidedly more than the building of houses. Business concerns have in, vested large sums of money in new plants and equipment. Recently an, other spurt has taken place in corn, mercial and industrial building. AID, parently the heavy demand for civil, ian merchandise which has been ex, perienced for the past several weeks and the large impending defense pro, gram have motivated business execu- tives to hasten the expansion of facilities in their concerns. ..1F MA NIJJ ASONDJ F MA HJJASONDJ 1946 1947 1948 1949 1950— In this district, state, county, and municipal governments have spent large sums for public buildings and ALTHOUGH the total dollar volume of residential construction was other facilities. In recent years, the less than other types of building, it has increased by a larger percentage pressing need for additional space in in the past year. public buildings, for improved high- ways and strew, and for other ex- Source: F. W. Dodge Corporation. 103 AGRICULTURAL AND BUSINESS CONDITIONS construction greatly exceeds the vol- CONSTRUCTION COSTS IN THE TWIN CITIES AREA ume of residential building. Although January 1947 to August 1950 (1926-29=100) the volume of residential building is smaller, both types of construction Per Cent surpassed the volume in previous (FRAME RESIDENCES postwar years. Both types of con- 230- struction have been a large source of the demand for labor and construction materials and, therefore, led to 220 a shortage of both. In addition to private residential 210- building, some public housing is under construction. In St. Paul, the local housing and redevelopment au, 200-- thority has accepted bids for the "BRICK STEEL COMMERCIAL building of 512 units. Planning and 90- . FACTORY BUILDINGS other preliminary work to the actual construction of housing are under 180 way in Duluth, Chisholm, Fergus 1.1 Falls, Hibbing, and Winona. Other cities both in Montana and in the 170— .0Ae1 eastern end of this district also may be in a preliminary stage in the con- I 1[1 1 I 1 I 1 I 11111111111 I I 1 1 I 1 I I 11 I 1 I I I I I I i 1 I 1./.1 struction of public housing. 160 \J JFLIAMJJASONDJFMAMJJASONDJFMAM 1 J94J 9ASONDJFNMAJJASOND In the nation as a whole, it is 1947 1948 1950 estimated that construction may have been started on close to one and one- half million houses this year. This COSTS rose sharply in the recent construction season, and they now number will set a record in home surpass the peak reached in the latter quarter of 1948. building. Source: E. It. Boeekh Associates, Inc.. consulting valuation engineers, Waahington, D. C. CONSTRUCTION COSTS EXCEED 1948 PEAK Since the demand for building and curtailed lumber production. As a re- ning of the 1949 construction sea- other types of construction has ex- sult, the demand for lumber in the son, the cost dropped sharply, declin- ceeded the volume that the construe, current season far outstripped the ing by 6% before the trend was re- tion industry can supply, prices of available supply. According to E. H. versed in August of that year. Cur- building materials and wages of Boeckh and Associates, lumber prices rently, the cost of such building is building tradesmen have risen sharp- in the recent summer months sur- above the former high point reached ly. A comprehensive measure of passed those prevailing in black mar- in the winter of 1949. building costs in the larger cities of kets during World War II. The first the nation is prepared by E. H. break in prices occurred during the MOST HOUSES BOUGHT BY Boeckh and Associates. The cost of first week in September when the THOSE WITH INCOMES OF constructing frame residences and price of green, common fir lumber $4,000 AND OVER brick and steel commercial and fac- broke on the market. However, fin- The source of a boom in any phase tory buildings in the Twin Cities ishing-lumber prices still are holding of economic activity is found in a metropolitan area from January, 1947 firm. sudden rise in the demand. Under the to date was plotted on the accompany, Reports received from retail lum- present circumstances, the demand ing chart. ber dealers in this district reflect an for commercial, industrial, and public As may be observed, the cost of exceptionally large demand for lum- construction was anticipated. How- building a frame residence rose stead- ber. For example, in August the num, ever, the demand for new housing ily during 1947 and 1948. In the last her of board feet of lumber sold was frequently has been characterized as quarter of 1948, the cost ceased rising 22,0 larger than the number of board phenomenal. and soon turned down. The low point feet sold in August 1949. The dollar Numerous developments in the was reached in August, 1949, with sales were 36% larger, reflecting both economic outlook as well as liberal a 10% reduction from the 1948 peak. the rise in prices and the larger credit terms apparently were respon- In the fall of 1949, costs again turned volume of lumber sold. sible for the unprecedented demand up, but the sharp rise began with the The cost of brick and steel con- for new housing. A long expected present construction season. The cost struction for commercial and factory postwar recession, such as those now exceeds the former peak reached building, like that of frame residential which have followed all former major in the autumn of 1948. building, rose steadily during 1948 wars, did not materialize in 1949. The Lumber prices have led the rise in and 1949. In the last quarter of 1948 public finally became convinced that building material prices. Exception- and 1949, the cost of such construc- building costs might not decline in ally inclement weather last winter tion was on a plateau. At the begin- Continued on Page 111 RE6 S

NINTH F E DISTRICT 104

AGRICULTURE Land Prices and Farm Debts Heading Upward EAR of further inflation seems to January 1, this year, was $5.4 bil- Inflation fears step up interest F be the basis for a vigorous inter- lion. This was 6% larger than a year in farm land. est in farm land both by farmers earlier and 16% higher than at the and city investors which has been low point in 1946. District farm real-estate debt evidenced by an important upward The record shows that increases of turns up for first time in quar- shift that has occurred in recent over 30% have already occurred in ter century. months in the general trend of land more than half of the U. S. The in- values and farm real-estate credit. crease in the Ninth district has been P■ Farmers treble production cred- less than 5% up to January 1 of this it in past five years in modern- Another thing that has stimulated izing and equipping farms. interest in farm land is the sharp up- year. ward trend in prices of farm products, The percentage increase in farm particularly since the start of the real-estate debt for individual states Korean war in late June. in this district is indicated by the 1950, call reports of member banks. Along with the trend to higher chart on this page. It shows increases An analysis of this data indicates land values there has occurred an from about 3% in Minnesota to 8% that the increase in farm debt during increase in farm real-estate mortgage in Montana during 1949. 1950 may be substantially higher in debt. Farmers and others are borrow- Montana is the only state in this all states of the district compared ing more on land security, to finance district that had an increase in its with last year. the purchase of land and for other farm mortgage debt before 1949. Its purposes, than they have in recent debt has been going up steadily since NON-REAL-ESTATE FARM LOANS years. 1946. Land values in Montana have TREBLE IN FIVE YEARS It is significant that the total vol- also advanced more percentage-wise In sharp contrast to the substantial ume of farm mortgage debt in the than has been true for the other reduction in district farm mortgage Ninth district turned up substantially states. debt since the end of World War this past year for the first time in over The latest data available on farm II, non-real-estate farm loans have a quarter of a century. However, real-estate debt is from the June 30, more than trebled. farmers in this area have been suc- cessful in halving their real-estate debt during the last 15 years. OUTSTANDING NON-REAL-ESTATE FARM LOANS IN NINTH DISTRICT MEMBER BANKS This has happened because prices of farm products have been unusually June 30, 1946 1950 high in relation to costs and because E— Million Dollars favorable weather conditions have MINNESOTA NO DAKOTA SO DAKOTA MONTANA stimulated record agricultural pro- 40 duction over the past 10 years or so. 38 As a result, most farmers are now in excellent financial position in relation to mortgage debts. Whether or not the recent shift from downtrend to uptrend in mortgage debt in 1949—and thus far this year—represents a new long-time trend, will depend on what happens to the general level of prices and income, and to developments in world affairs. Currently, at least, people seem concerned about the prospects of a "cheaper" dollar as defense ex- penditures mount, and they are re- appraising land values and real-estate indebtedness in the light of current inflationary trends in the economy. Although farm mortgage debt turned upward only last year in the Ninth district, this trend had been THE TREND in farm production loans has been sharply upward since noticeable for the U. S. as a whole the end of World War 11, but the increase has been tempered somewhat in each of the last four years. Total during the post 12 to 75 months. debt for the country as a whole on IOS AGRICULTURAL AND BUSINESS CONDITIONS

During the war, farmers were not PERCENTAGE INCREASE IN NINTH DISTRICT able to secure all the equipment, ma- FARM MORTGAGE DEBT chinery, and supplies they needed. As soon as these were available, farmers January 1, 1949 - January 1, 1954 rushed in to buy. Bank deposits, cash savings, along with an expansion in bank credit, were used to satisfy the deferred demand for goods of all kinds. Outstanding farm production loans in Ninth district member banks on June 30, 1947, were almost double the amount of a year earlier. Increases have occurred every year since 1947, but it has been at a decreasing rate. (See chart on non-real-estate farm loans.) There is evidence, also, that a FARM MORTGAGE DEBT increased approximately 4% in the Ninth larger proportion of farmers use in over a quarter-century, it is credit now than did at the end of the district during 1949. The first real increase war, and the average amount bor- continuing in 1950, apparently at an accelerated rate. rowed is larger. , Source: "Agricultural Finance Review" supplement, May, 1950. Wisconsin and Michigan The slowing up in non-real-estate percentage figures are for entire states. farm loans during the year ended June 30, 1950, may indicate several Average Prices Received by Farmers in the Ninth District things: (I) Perhaps farmers have Parity Prises Sept. 15 Sept 15 Sept. 15 United States largely satisfied the more pressing de- Commodity and Unit 1937-41 Avg. 1949 1950 Sept. 15, 1950 mands for machinery, repairs, and equipment, and (2) declining farm Crops prices, and net income-until recently Wheat, bushel $0.72 $ 1.91 $ 1.95 $ 2.25 ----may have made farmers more cau- Corn, bushel .57 1.06 1.32 1.63 Oats, bushel .25 .54 .65 .960 tious about borrowing. Potatoes, bushel .47 1.22 1.26 1.78 Furthermore, real-estate mortgage Products credit may increasingly be used to Livestock and Livestock Hogs, 100 lbs. 8.53 19.22 20.45 19.50 finance capital improvements or even Beef Cattle, 100 lbs. 7.73 20.10 24.35 17.60 to refinance existing short-term pro- Veal Calves, 100 lbs. 9.22 24.14 28.55 19.70 duction credit. In fact, one study of Lambs, 100 lbs. 8.15 21.24 25.10 19.40 the use made of farm mortgage Wool, lb. .27 .50 .60 .521 Milk, wholesale, 100 lbs. 1.60 3.23 3.20 4.48 credit in early 1950 showed that more Butterfat, lb. .30 .66 .64 .717 than half of such credit was used to Chickens, live, lb. .133 .203 .200 .295 finance the purchase of equipment or Eggs, doz. .198 .451 .332 .519 capital improvements apart from land • Source: "Agricultural Prices"-September 29, 1950. purchase or refinancing of existing The term parity as applied to the price of an agricultural commodity is that price which farm mortgages. will give to the commodity a purchasing power equivalent to the average purchasing power of the commodity in the base period, 1910-14. PRODUCTION LOANS January-July Cash Farm Income TENDING TO LEVEL OFF (Thousands of Dollars) At the present time, there is little 1935.39 1950 In Percent to indicate a reversal in the upward State Average 1949 2 1950 of 1949 trend of non-real-estate farm loans, although it apparently is tending to Minnesota $ 180,401 $ 635,844 $ 602,561 95% North Dakota 44,916 247,082 167,466 68 level off somewhat. Farm production South Dakota 54,320 288,413 240,464 83 costs are relatively high, and farm Montana 32,037 148,749 118,694 80 adjustments, made necessary by rap- Ninth District 355,582 1,455,884 1,260,602 87 idly changing demand and economic United States 4,100,168 13,935,359 12,966,994 93 conditions, are likely to keep the de- Source: "Farm Income Situation," August, 1950. mand for farm production loans at Includes 15 counties in Michigan and 26 counties in Wisconsin. a high level. Revised. Includes an upward correction of $10 million for crops in May, USDA. Also, banks are under no particular pressure to reduce their farm loan portfolios. Some banks are currently loans. Additional loans may be es- uct prices is maintained and the agri- pretty well "loaned up," but others pecially welcome in the period ahead cultural outlook continues favorable. would welcome additional sound farm if the recent strength in farm prod- END lu

NINTH FEDERAL RESERVE DISTRICT 106

BUSINESS ahi Retailing Slackens, but Manufacturing Is Up

T NDUSTRY is replenishing the in- program in other states and thereby Inventories rose materially, al- ventories of civilian merchandise hope to escape the winter layoff in though outstanding orders at which were depleted during the sum- construction and lumbering. stores remained high. mer months. The volume of out- In Minnesota, the rise in employ- standing orders among retailers was ment during September was traced Expansion of factory employ- still high, but shortages gradually largely to adding of workers to the ment has created shortages of were disappearing. pay rolls of manufacturing concerns skilled labor. For example, the supply of com- and the reopening of public schools, Department store sales re- mon fir lumber which was scarce which placed teachers back on pay turned to more normal level. during the summer reached a quan- rolls. In Minneapolis, several com- tity during the first part of Septern• panies are working on government ber which forced a break in prices. defense orders, which was a factor in In an effort to supply the large de- the increase. May, before the war in Korea began. mand for civilian merchandise, indus- The shortage of workers was By the end of September, the orders trialists have expanded their labor mostly in the skilled classifications. outstanding had decreased approxi, forces. Shortages of certain types of The commission in Montana reported mately by 3%. skilled labor have been reported. that the shortages of carpenters, min- Although the volume of outstand- ers, and other skilled workmen be- ing orders remained high, stocks held EMPLOYMENT APPROACHES came acute in local labor markets. by department stores have risen POSTWAR HIGH Sawmill and logging men, automobile steadily since the end of July. At that Employment in this district con- repair mechanics, machinists, and time, the adjusted index of stocks for tinues to rise steadily. It may soon construction laborers also were in this district reached a low point of equal the all-time high reached in the great demand. 286% of the prewar base period. By fail of 1948. In the Twin Cities area, skilled and the end of September, the index again unskilled foundry workers have been was up to 323 %---an increase of The Duluth office of the Minne- 13%. In terms of dollar volume, this sota Division of Employment and in short supply for some time. Ma- chine helpers and general factory represents a level of stocks equal to Security foresees the possibility of a those held at the end of May, continued rise in employment with workers also have been in short sup, the November figure approaching the ply. Some industrialists have relaxed In spite of heavy sales, retail lumber dealers were accumulating some all-time high of October 1948. The specifications for new applicants to Minneapolis office writes that ern, acquire needed workers in unskilled stocks in August. In this district, the ployment has climbed for the seventh classifications. number of board feet on hand at the end of August was I0% larger than consecutive month. The number of RETAIL INVENTORIES RISE workers employed in September was at the corresponding period of last the highest total for the year. The In August, the volume of outstand- year. Mounting stocks of common St. Paul office states that employ, ing orders at department stores in this lumber caused a break in prices dur- ment has reached the highest level district apparently reached a peak. ing the first part of September. since December 1947 and the highest At that time, such orders aggregated Some items remained in short sup- since World War II, with the excep, over three and one-half times the ply. For instance, appliance dealers tion of November and December amount outstanding at the end of reported that major appliances were 1947. In Montana, the upward trend in Northwest Business Indexes employment was halted in Septem- (Adjusted for Seasonal Varianons-1935-39=100) ber. According to preliminary esti- mates released by the Division of Un Sept. SO Amt, 50 Sept. 49 Sept. 48 employment Commission, the total Bank Debits-93 Cities 354 383 313 342 number of wage earners decreased Bank Debits—Farming Centers. 472 474 414 429 by .2 of I %, or by approximately 300 Ninth District Department Store Sales 289p 321 276 287 workers. The commission pointed out City Department Store Sale 320 356 296 299 that the minor drop in employment Country Department Store Sales 258p 285 256 274 from August was caused by a lack of Ninth District Department Store Stocks 323p 302 296 336 applicants rather than from a lack of City Department Store Stocks 285p 211 251 279 Country Department Store Stocks jobs. College and high school students 354p 327 333 381 withdrew from the labor market in Country Lumber Sales 178p 192p 202 168 late August and early September. Miscellaneous Carloadings 144 137 145 143 The number of migratory workers in Total Carloadings (excl. Misc.) 115 117 102 118 the state has been down this year. Farm Prices (Minn. unadj.) 243 228 274 They are working in the rearmament p—preliminary ment Store Sales at Ninth District Department Stores Sales by Cities Number of Stores % Sept. ISM % Jan.-Sept. IPSO showing Unadjusted 1935-39=100) of Sept. 1949 of Jan.-Sept. 1949 Increase. Decrease

Total District + 4 4 150 130 = Sept. Mpls., St. Paul, Dul/Sup + 7 8 19 10 MINNESOTA Duluth-Superior 338 +11 + 4 Country Stores — — 2 131 120 Fairmont 330 — 5 — 2 Minnesota (City and Country) + 7 -I- 7 162 154 Mankato Minnesota (Country) + 2 — 1 33 35 Minneapolis 363 + 7 + 8 Central + 6 + 2 4 4 Rochester 252 — 2 —4 Northeastern + 7 + 2 3 2 St. Cloud 340 -j- 4 — 4 Red River Valley — — 8 1 3 — 4 — 4 6 7 St. Paul g 304 +11 + 8 South Central 1 7 4 Willmar 313 + 4 + 1 Southeastern + 5 + + 1 12 15 Winona 299 + 8 +5 Southwest ern MONTANA Montana +2 + 0 21 13 Great Falls 343 —12 — 8 Mountains +12 + 4 7 3 Plains — 2 — 1 14 10 NORTH DAKOTA Bismarck 349 —16 a North Dakota —10 — 12 37 rand Forks 336 —12 — 6 North Central — — 5 5 5 not 334 —19 — 5 Northwestern —18 — 6 1 6 alley City 259 — 3 — 7 p Red River Valley — 7 — 6 2 16 Southeastern —11 —11 3 10 SOUTH DAKOTA Southwestern (2) (2) Aberdeen 442 + 0 7 Rapid City 398 + 8 + 0 Red River Valley-Minn. N. D. — 7 —6 Sioux Palls 386 — 4 3 South Dakota o — 3 Yankton 299 — 1 3 Southeastern — — 0 WISCONSIN OtherEastern + 3 — La Crosse 277 4 1 Western — Wisconsin and Michigan + 5 + 1 Based on daily average sales. Northern Wisconsin + 1 + 2 3 Based on total dollar volume of sales. Per- West Central Wisconsin + 4 + 1 centage comparison is with the same period +9 a year ago. Upper Peninsula Michigan —0 Reflects in part work stoppages at certain ■ Percentages are based on dollar volume of sales. ,cores last year, September 1950 compared with September 1949. Not shown, but included in totals. Insufficient number reporting. difficult to replace. According to fur- niture dealers, rugs and steel furni- termer 1949. In South Dakota, sales fallen below last year's volume. Since ture especially were in short supply. were equal to those of last year and in last June, sales in the four large cities North Dakota, they were down 10%. have led the increase in the district. DEPARTMENT STORE SALES Of course, some items still were in With retail sales declining to a nor RECEDE FROM SUMMER PEAK great demand. mal level and industry operating close Department store sales in Septem- For the first two weeks in October, to maximum output, inventories soon ber settled back toward the volume sales in the four large cities were only may be restored. Some retailers, es- prevailing before June of this year. 2% above the volume for the corres- pecially appliance dealers, plan to In this district, September sales were ponding period last year. Very likely, carry smaller inventories than for- 4% above the dollar volume for Sep- sales in the smaller communities have merly, END 4 jl OM UMW

NINTH FEDERAL RESERVE DISTRICT 108

ANICING Loan Earnings Boosted Bank Profits

R ANKS fared well in the first half Government portfolios averaged Net profits of Ninth district L.' of 1950. Reporting aggregate net slightly higher in the first six months member banks totaled $9.5 profits of $9,514,000, member banks of 1950 than in the same period a million in the first half of 19.50 of the Ninth Federal Reserve dis- year ago. At the same time earnings —up $1.3 million over first half trict showed a gain in net profits of were lifted by the somewhat stiffened of 1949. $1,306,000 (16%) over the record of yields on short-term government is- a year ago. sues. interest and discounts on loans On an annual basis, net profits in Ninth district member banks also topped last year by 10%. the first half of this year were 8.7% realized higher earnings from service Ob Nonrecurring charges against of capital funds compared with a charges on deposit accounts. From current income declined, due ratio of 8.0% in 1949. Ninth district $2,705,000 in the first half of last mainly to smaller transfers to year, income from service charges member banks compared favorably reserves for bad debts. with the national ratio. In the first rose to $2,909,000 in 1950. half of 1950 all U. S. member banks realized net profits at the rate of 8.5% LOAN EARNINGS CONTRIBUTED of total capital accounts. HALF OF CURRENT INCOME during World War II, interest on The reasons for this year's im- Loans and government security government issues was the source of proved earnings are not hard to find. holdings are the major sources of more than 50% of current earnings. bank earnings. This year interest and Income on loans trailed considerably • The drop in reserve require- discounts on loans totaling $20,568,- behind, accounting for 26%. ments in May 1949 gave com- 000 accounted for almost half of the mercial banks more funds to current earnings pie, while interest EXPENSE TO EARNINGS RATIO invest. on government securities of $13,484,- SHOWED MARKED STEADINESS • Mounting business activity in 000 contributed 30% of total oper- Ninth district member banks re- the first half of 1950 gave rise ating earnings. ported expenses totaling $28,096,000 to an accelerated demand for Since 1946 there has been a steadily for the first half of this year, top- loans. rising trend in the importance of ping last years record by 6%. Almost • With many banks reaching the earnings on loans, while the relative three-fifths of the increase was ex- maximum allowable tax deduc- share of earnings stemming from in- plained by the rise of $1,011,000 in tion for transfers to reserves for terest on government securities has the bill for wages and salaries. In- bad debts, such charges against continuously fallen. As a result, this terest on time deposits showed prac- current income were less than year's figures contrast sharply with tically no change, while miscella- in the first half of 1949. those of four years ago. neous expenses rose $707,000. Then—in the first half of 1946— In recent years expenses of mem- GROSS CURRENT EARNINGS ON ber banks in this district have shown LOANS ADVANCED 6% reflecting the tremendous volume of government securities accumulated marked stability in relation to total Ninth district member banks re- earnings. In the first half-year peri- ported gross current earnings of $44,- ods of the past three years, banks 566,000 in the first half of this year— EARNINGS AND DIVIDENDS have spent roughly 65% of their cur- up 6% over the 1949 half-year. The OF ALL NINTH DISTRICT MOINES RANKS, rent earnings in meeting operating main factor in this increase was the First 0.11.11 45 Forst 11.11. IPSO expenses. rise of $1,942,000 in interest and dis- Its ) 46 Thus, notwithstanding the per- counts on loans. GROSS CURRENT EARNINGS sistent rise in current expenses, it has Reflecting the upsurge of business GROSS CURRENT EXPENSES Nagiall been possible for banks to realize a activity accompanied by rising prices, NET CURRENT EARNINGS steadily increasing margin of net op- bank loans rose steadily in the first NET LOSSES, ETC.. erating earnings. half of this year. On the average, TAXES ON NET INCOME loans in Ninth district member banks NET NONRECURRING CHARGES NET PROFITS Hell. 39.19 were 61/2% higher than in the 1949 I. 1st }NIL 1450 AGAINST INCOME DECLINED half-year period. Moreover, higher- DreICIENOS For the fourth consecutive year, yielding consumer and real estate RETAINED PROFITS Ili nonrecurring items—recoveries and losses—resulted in a charge against loans accounted for the lion's share Net losses, ellargr•offo and transfers IN re ern ascounIs on leans, of the over-all gain. securities, lid ell oiler /asses and chore-off. current income. Since 1948 the main Second to earnings on loans was factor in these charges has been large transfers to reserves for bad debt a $323,000 advance in interest and IN LINE with expanding busi- losses. dividends on municipal and corpor- ness activity, bank earnings in- ate securities, while interest on U. S. creased in the first half of 1950. These transfers have been made in government securities rose $160,000. accordance with a Treasury ruling is- 109 AGRICULTURAL AND BUSINESS CONDITIONS

sued December 8, 1947, which auth- Gross Current Earnings of $9,514,000, banks distributed $4,- orized banks to set up tax-free re- 9th District Member Banks 198,000 or 44% to their stockholders. serves for future losses on loans. The Last year, stockholders received a amount of deductible reserves is (In thousands of $) 42% slice of net profits. tst Half 1 st Half based on the loss experience of the 1940 1950 Change Strengthening their capital po- past 20 years. Tax exemptions are Interest and sitions, Ninth district member banks permitted for the amount used to in- Dividends on: added $5,316,000 of retained earn- itiate the reserve, as well as for addi- Government ings to surplus in the first half of this tions in following years until the re- Securities _413,324 $13,484 + 1% year. A year ago, retained earnings, serve is equal to three times the 20• Other Sec 2,023 2,346 + while representing a larger portion of year annual loss experience. Interest and Discounts on net profits, were 10% less than this By mid-year 1950 many of the Loans 18,626 20,568 +10 year. END banks which adopted the reserve for Service Charges .bad debts method had reached the on Deposit nnum limit to tax-free reserve Accounts 2.705 2,909 + 8 September Banking accumulations. As a result, transfers Other Developments to reserves for bad debts were con- Earnings 5,150 5,259 + 2 siderably lower in the first half of Total $41,828 $44,566 + SINCE mid-year 1950, Ninth dis• this year than a year ago. trict member banks have rapidly expanded loans to private borrowers Gross Current Expenses of RESERVE FOR BAD DEBTS r; and to state and local •governments. METHOD ADOPTED BY HALF 9th District Member Banks During September and the first half OF DISTRICTS MEMBER BANKS an Thousands of $) of October the expansion of business There has been little change in the 1st Half Is Half loans was especially marked and past year in the number of banks l4H-9 1955 Chinas loans to real estate owners and con- using the reserve for bad debts Salaries and sumers continued to show sizeable method of handling loan losses. Wages $12,921 $13,932 + 8% increases. Interest on Between 1947, when the method Time Deposits 4,329 4,324 Waging its battle against current was first authorized, and 1949 all of Other 9,133 9,840 inflationary pressures, the Board of the nine reserve city banks in the ± 8 Governors of the Federal Reserve Ninth district and 222 of the dis- Total $26,382 $28,096 + 6% System during September and the trict's 468 country member banks had first half of October instituted con- switched from the specific charge-off Disposition of Ninth District trols over consumer credit and real A method of handling loan losses to Member Bank Earnings estate credit. the bad debt reserves method. By (In Thousands of $) Total loans in Ninth district mid-year 1950 the number of country member banks were at a record high member banks using the reserve le Half 1st Half 1049 1050 Chang of $1,050 million at the close of method had increased to 225. Gross Current September. Increasing $45 million While roughly half of the Ninth Earnings ....$41,828 $44,566 + 6Tot during the month-$33 million in the district's member banks currently Gross Current %,h; 20 reporting city banks, and $12 carry some balance in a valuation Expenses 26,383 28,096 + 6 million in the country member banks reserve for bad debt losses, far more Net Current --loans staged the sharpest monthly n half of the loan volume of the Earnings ....$15,445 $16,470 • 7% increase so far this year. rict is covered by these reserves. Net Losses, In the 20 reporting banks, the This is because the reserve method Chargeoffs, gain in total loans stemmed largely is more prevalent among the larger and Trans- from increased commercial, industrial, banks. fers to Reserve and agricultural loans. During In addition to smaller transfers to Accounts 3,041 1,768 -42 September and the first half of reserves for bad debts, net miscella- Taxes on Net October, business loans rose 14 % to neous losses decreased considerably in Income 4,196 5,188 +24 a high of $265 million. In addition, the first half of this year. Slightly investments in securities other than offsetting these developments was an Net Profits..$ 8,208 $ 9,514 +16% Dividends 3,414 4,198 +23 U. S. Government issues rose sharply increase in net losses on. securities. in September. Retained As a result, net nonrecurring losses Profits 4,794 5,316 +11 Nationally, business loans in week- of $1,768,000 in the first half of 1950 ly reporting banks scored rapid in- were roughly 42% lower than net of 1950 creases, marking the sharpest ad- losses, charge-offs, and transfers to than in the 1949 half- vances so far this year. reserve accounts of a year ago. year period. Taxes on net income amounted to $5,188,000 in the first U. S. government security DIVIDEND PAYMENTS UP 23% six months of this year as against portfolios dropped considerably this In line with the increase in taxable $4,196,000 a year ago. month, down $40 million in city income, Ninth district member banks Dividend payments remained con- banks and $18 million in country set aside more funds for state and servative but continued their post- banks. Presumably, banks liquidated federal income taxes in the first half war growth, Of total net profits of government securities in order to

Si NINTH FEDERAL RESERVE DISTRICT 110 meet the increased demand for bank ,10, Assets and Liabilities of Twenty Reporting Banks credit. (In Million Dollars) In the 20 reporting banks, holdings Change of bills, CI's, and notes showed Aug. 36, 1950 Sept. 27, 1950 Oct. 11, 1950 Aug. 30-Sept. 27 practically no change, while bonds bore the brunt of the declines in ASSETS total portfolios. Comm., Ind., and Ag. Loans $ 232 $ 258 $ 265 + 26 Real Estate Loans 91 94 96 + 3 Demand deposits, other than Loans on Securities 10 12 11 + 2 + 2 inter-bank, declined $16 million in Other (largely consumer) Loans 161 163 165 city banks, while increasing $2 Total Gross Loans Discounts $ 494 $ 527 $ 537 + 33 million in country member banks. Less Reserves 7 7 7 The decline in the city banks was due partly to a drop in deposits of Total Net Loans &P Discounts $ 487 $ 520 $ 530 + 33 individuals, partnerships, and corpo- U. S. Treasury Bills 19 19 23 rations, reflecting September 15 in- U. S. Treasury C. of Ls 34 31 29 — 3 come tax collections. U. S. Treasury Notes 143 144 144 + 1 U. S. Government Bonds 417 379 379 — 38 In addition, U. S. government deposits dropped sharply in response Total U. S. Govt Securities 1 613 $ 573 $ 575 — 40 to calls on these accounts from the Other Investments 133 140 140 ± 7 Treasury. The U. S. Treasurer drew Cash and Due from Banks 443 440 491 — 3 on his deposits in commercial banks Miscellaneous Assets 18 17 16 -- 1 in order to meet interest payments $1,752 — 4 on the national debt due September Total Assets $1,694 $1,690 15 and to pay off the cash redemp- LIABILITIES tions of the unexchanged September Due to Banks $ 272 $ 283 $ 324 + 11 Demand Deposits, Ind., Part., Corp. 839 834 874 -- 5 15 maturities of government securi- Demand Deposits, U. S. Govt 65 56 56 — 9 ties. Other Demand Deposits 131 129 119 — 2 In country banks, the factors decreasing deposits were overshadowed Total Demand Deposits $1,307 $1,302 $1,373 — 5 by the seasonal inflow of funds in- Time Deposits 248 247 246 — 1 cident to crop marketings. Total Deposits $1,555 $1,549 $1,619 — 6 Credit controls instituted by the Borrowings 14 15 8 + 1 Federal Reserve Board during Miscellaneous Liabilities 20 20 19 September and the first half of Capital Funds 105 106 106 + 1 October were authorized under the Total Liabilities Es? Capital $1,694 $1,690 $1,752 — 4 Defense Production Act of 1950. On September 18, the Board reinstated Regulation W, stipulating minimum and Liabilities of All Ninth District Member Banks down payments and maximum time Assets periods for instalment sale credit and (/n Million Dollars) instalment loans by banks and other Change Change Aug. 30, 1950 Sept. 28. 1949 lenders. On October 16, the Board Aug . 30, Sept. 27, 1950 Sept. 27, 1950 Sept. 27, 1950 announced a tightening of the terms 1950 of Regulation W. ASSETS Regulation X, a new instrument of Loans and Discounts $1,005 $1,050 + 45 .4- 171 U. S. Government Obligations 1,556 1,498 — 58 — 249 credit control which stipulates mini- Other Securities 267 274 • ± 7 + 45 mum down payments and maximum Cash and Due from Banks fi? Res 817 821 + 4 45 time periods on mortgage loans, be- Other Assets 33 33 .... ± 2 came effective October 12. END Total Assets $3,678 $3,676 — 2 — 76

LIABILITIES AND CAPITAL This table in part estimated. Data on loans Due to Banks $ 310 $ 325 + 15 — 55 and discounts, U. S. government obligations Other Demand Deposits 2,191 2,177 -- 14 -- 25 and other securities are obtained by reports directly from the member banks. Balances with domestic banks, caah items, and data on de- Total Demand Deposits $2,501 $2,502 + 1 — 80 posits are largely taken from semi-monthly reports which member banks make to the Fed- Time Deposits 914 910 — 4 22 eral Reserve bank for the purpose of com- puting reserves. Total Deposits $3,415 $3,412 — 102 38. Reserve balances and data on borrowings Borrowings 15 15 + 8 from the Federal Reserve banks are taken Other Liabilities 26 26 + 4 directly from the books of the Federal Reserve -I- 14 bank. Data on other borrowings are estimated. Capital Funds 222 223 4- 1 Capital funds, other assets, and the other liabilities are extrapolated from call report Total Liabilities Capital $3,678 $3,676 — 2 — 76 data.

CONSTRUCTION Residential Real-Estate FinenciIlg by Commercial Banks BOOM FOSTERED in the Ninth District

BY CREDIT Reserve City Banks Country Natl Banks State Member Ranks M Ell ions MIlflens Continued from Page 103 of dollars of dollars % or dollars % Type of Loan Outstanding the near future. Many retired farm- I. Residential real-estate loans ers and others who had been waiting secured by for a break in building costs decided A. One to four family properties to proceed with their plans this year. 1. FHA insured $26,243.7 50 $ 35,280.3 30 $10,293.2 34 Most of these individuals had sav• 2. VA first lien 14,050.0 27 32,778.1 28 7,133.5 23 ings in some form of liquid assets set 3. VA junior lien 687.8 1 655,8 1 333.0 1 aside for this purpose; consequently, 4. Conventional amortized._ 10,159.4 19 40,058.9 34 9,958.9 32 5. Conventional they needed practically no credit. nonamortized 172.4 5,955.4 5 2,037.9 7 A second group of individuals who Total loans secured by one do not have large amounts of accumu- to four family properties 51,313.3 98 114,728.5 99 29,756.5 97 lated savings are purchasing houses. B. Five or more family properties They recently have established fami- 1. FHA or VA insured or lies of their own or have been living guaranteed 572.1 1 190.4 460.6 2 in rented quarters. No doubt high in- 2. Conventional amortized 467.8 1 1,259,9 1 384.0 1 3. Conventional comes and prospects for continued rionamortized 151.6 49.2 employment had a bearing on their Total loans secured by five decisions, but more important was or more family properties 1,039.9 2 1,601.9 1 893.8 3 the accessibility of mortgage credit Total guaranteed or insured which was tailored to their budgets. loans 41,553.6 79 68,904.6 59 18,220.3 59 47,425.8 41 12,430.0 40 tS In the large and medium-sized cities Total conventional loans 10,799.6 21 C. Loans secured by vacant lots 70.2 of this district, these individuals con- Total mortgage loans 52,353.2 100 116,330.4 100 30,720.5 100 stituted the mass market for low- II. Loans for construction of resi- priced houses. dential properties 1,083.0 3,110.8 783.3 A Federal Reserve System survey III. Loans to nonbank mortgage of consumer finances sheds some light lenders 143.2 342.6 22.5 Total residential real-estate on the financial status of individuals financing 54,579.4 119,783.8 31,526.3 in this nation who purchased houses in 1949. Of the actual purchasers of • Leas than one-half of one per cent. new and existing houses, slightly over one-fourth, or about 27%, had an, portant lenders of real estate credit. No doubt the most significant fact nual incomes of less than $3,000, Ap• To secure basic information for a revealed by the statistical data gath- proximately a comparable proportion study of the type of loans held by ered from banks on the supplement is of the house buyers had incomes be- banks, a supplement was added to the large proportion of loans which tween $3,000 and $4,000, and less the June 30 call report. Information are insured or guaranteed by one of than one-half, or about 4U %, had in- was requested in regard to the num- the federal agencies and which are comes of $4,000 and over. ber and amount outstanding on the held by banks. Of the total amount A large proportion of those pur- several types of real estate loans of residential real estate credit out- chasing houses were veterans of secured by residential properties, on standing at the reserve city banks, World War II. Of the number pur- loans for construction of residential 80% was FHA insured or VA in- chasing houses in 1949, about 40% properties, and on loans to nonbank sured or guaranteed. Of the loans had veteran status. In many instances, mortgage lenders. held by the national banks outside of the preference given veterans on in- This information on residential real the reserve cities and by the state surance or guarantee of mortgage estate financing was obtained from all member banks, approximately 60% loans brought the prices of houses banks. At present, the results are was insured or guaranteed. within the range of their budgets. available only for member banks of The reserve city banks held a larger According to this survey, roughly the Federal Reserve System. proportion of loans FHA insured as four out of every five purchasers of In the statistical compilation of the compared with those held by either houses secured some borrowed funds. data, the member banks of this dis- the national banks outside of these trict were divided into three groups: In almost every case, the borrowers cities or by the state member banks. reserve city banks, which include the took out mortgages on their proper, This coincides with the long known correspondent banks in Minneapolis, ties, but a large number of purchasers fact that a relatively larger number obtained other credit as well. St. Paul, and Helena, Montana; na, tional banks outside of these cities, of residential mortgages is insured LARGE PROPORTION OF and state member banks. The amount in the larger cities. The proportion of LOANS HELD BY BANKS outstanding on the several types of loans outstanding with first liens VA INSURED BY U. S. AGENCIES loans and the per cent of the total similar among the three groups of Among the private financial in, were compiled, by the three groups of banks. A small amount was outstand- stitutions, commercial banks are jm, banks, in Table I. ing on loans with junior liens VA NINTH FEDERAL RESERVE DISTRICT 112

guaranteed. of this district had nearly $5 million has assumed the risk with high loan While a large proportion of FHA outstanding on loans for the con- values, long terms, and low interest insured loans are held by reserve struction of residential properties and rates. These terms have brought city banks, in the smaller communities $1.4 million for the construction of many families into the housing mar- both the national banks and the state other kinds of properties. In addi- ket. member banks held more loans of the tion, $500,000 was outstanding to Also, through the Federal National conventional amortized type. Al- nonbank mortgage lenders, such as Mortgage association, the federal though the conventional nonamor- savings and loan associations, mort- government has provided a market tized loans are fast disappearing, gage companies, mortgage brokers, for insured and guaranteed mortgage these banks had over 5% of their mortgage loan correspondents, or loans. As a result, private lending in- total residential mortgage credit out- others primarily engaged in residen- stitutions holding FHA and VA loans standing on this type of loan. tial real estate financing. Nearly $5 have had a ready market for them. In the state member banks, the million, mostly at the reserve city The federal government also has average amount outstanding on FHA banks, was outstanding to nonbank engaged in direct lending on real es- mortgage lenders who were engaged insured loans ranged from $4,269 to tate. The Public Housing administra- primarily in the financing of business $4,788 in the reserve city banks. At tion grants loans to local housing and the state member banks, the average properties. redevelopment authorities for low amount outstanding on VA insured This information provides a brief rent public housing, such as is pres- or guaranteed loans was $3,650 and picture of the role assumed by the ently under construction in St. Paul. at reserve city banks, $5,976. At the member banks in this district in the Loans are also granted for planning national banks outside of the reserve financing of residential properties and and preliminary architectural work. cities, these loans averaged $3,920. in the construction of such properties Such loans have been granted in Min- The average amount outstanding on as well as of business properties. nesota to Duluth, Chisholm, Fergus conventional amortized loans was Falls, Hibbing, Minneapolis, and Wi- much smaller; $2,180 at the national FEDERAL GOVERNMENT PLAYS nona. banks outside of the reserve cities, PROMINENT ROLE IN The Federal Home Loan banks are $2,216 at the state member banks, and REAL ESTATE FINANCING in a position to extend loans to their $3,889 at the reserve city banks. The federal government has as- members, which are mostly savings The residential real estate loans sumed a dominant role in the financ- and loan associations. They are em- were secured largely by single dwell- ing of residential properties. The in- powered to extend long-term loans up ing units and some two, three, and surance and guarantee of mortgage to 10 years, secured by first mort- four family units. Less than 10% of loans by the Federal Housing admin- gages or government securities, or the credit outstanding was secured by istration and by the Veterans admin- short-term loans up to one year, apartments consisting of five or more istration have had far-reaching ef- which may be insecured. family units. fects on lending practices. As was In the present objective to con- Furthermore, b a II k s extended pointed out above, the largest share tract real estate credit, the controls credit for the construction of resi- of the loans held by commercial cover both credit extended directly dential and business properties and banks were FHA insured or VA in- or indirectly by the federal govern- granted a line of credit to nonbank sured or guaranteed. Through the in- ment and that extended by private mortgage lenders. The member banks surance or guarantee, the government lending institutions. END 113 AGRICULTURAL AND BUSINESS CONDITIONS National Summary of Business Conditions COMPILED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, OCTOBER 27, 1950

NDUSTRIAL activity, employ- nounced more stringent measures to materials levelled off as buying be- I' ment, a n d payrolls increased curtail consumption of rubber in came less urgent, and increases in somewhat further in September and civilian products. finished goods were less numerous. early October. Business and con- Output of crude petroleum ad- The consumers price index rose sumer demands for goods were less vanced further to a new record rate .5% from mid-August to mid-Sep- active after mid-September a n d in mid-September but subsequently tember, reflecting mainly marked in- wholesale commodity prices showed levelled off. Coal output showed creases in retail prices of apparel and little change. Retail prices continued little change and production of iron housefurnishings. Since that time ad- upward, reflecting in part earlier ad- ore was maintained in record volume ditional advances in these and other vances in wholesale markets. Credit over this period. goods have been announced. to business, consumers, and real estate owners expanded considerably CONSTRUCTION — Contracts BANK CREDIT — Total loans further. Consumer credit regulations, awarded in September for most and corporate and municipal security which became effective on Septem- types of private and public construc- investments of commercial banks ber 18, were tightened on October tion declined more than seasonally showed further sharp increases dur- 16 and housing credit restrictions from the record summer level. The ing September and the first half of were put into effect October 12. number of housing units started in October. The expansion at banks in September was estimated to be 115,- leading cities totalled $1.8 billion INDUSTRIAL PRODUCTION 000. This was 28,000 fewer units and brought the total rise at these —Industrial production showed a than the average number started banks since June to almost $4 bil- small further increase in September during the summer months but 12,- lion. Business loans increased much and early October, following the 000 more than in September 1949. more than seasonally, while loans to real estate owners and consumers sharp advance in August. Reflecting EMPLOYMENT —The total mainly continued gains in output of continued to rise substantially. number employed in non-agricultural Treasury deposits at Federal Re- iron and steel and their products, industries was at an all-time high of machinery, and crude petroleum, the serve banks, which were large in about 45 million in September, 2 late September owing to tax collec- Board's seasonally adjusted index million more than in September rose from 209 in August to 211 in tions, were drawn down in the first 1949. Unemployment declined mod- three weeks of October, thus supply- September. In October, a further erately further to 2.3 million and small increase is likely, as a result ing a substantial volume of reserve was at the lowest level since late funds. Outflows of currency into chiefly of expanded output of steel 1948. and of producers durable goods and circulation and of gold and cash re- military equipment. DISTRIBUTION — Consumer demption of part of the maturing Steel production increased in Sep- buying showed less than the usual Treasury bills held by the Reserve tember to a level slightly above the seasonal increase in September and banks absorbed some of these funds. June rate, and in October has ad- early October from the peak rates Commercial banks, however, contin- vanced about 3% further to a new reached during the summer. Value ued to sell government securities, in record. The gain in activity in ma- of purchases, however, remained part to the Federal Reserve System, chinery industries in September was substantially above year-ago levels, and built up their excess reserve much smaller than in August, mainly reflecting in part higher prices. Pur- balances. because labor disputes curtailed op- chases of durable goods continued An increase in interest rates to erations in some important plants. above the high levels reached dur- bank customers, initiated in New Automobile production continued ing the first half of this year. Dis- York City in late September, became close to the high level of recent tributor stocks of most goods have more widespread in early October. months. In view of the growing increased further in this period following a reduction in July. At de- SECURITY MARKETS — Com- volume of defense production and mon stock prices, after rising some- the limited supply of metals and cer- partment stores value of stocks by the end of September was about what further in the first two weeks tain other industrial materials, the of October to the highest levels National Production Authority has one-fifth above the relatively low level reached a year ago. since September 1930, showed little established a priority system for de- change during the following 10 days. fense orders. COMMODITY PRICES -- The Yields on most bank eligible Treas- Output of textile, paper, rubber, average level of wholesale prices ury securities increased further in and petroleum products in Septem- changed little from mid-September the first three weeks of October, ber was maintained at the exception- to the third week of October, as while yields on Treasury bills de- ally high levels reached in August. livestock and meat prices showed clined somewhat. Meat production rose much more seasonal declines and increases in There was little change in yields than seasonally. In mid-October, the prices of nonfood commodities on long-term Treasury and high- National Production Authority an- slowed down. Prices of industrial grade corporate bonds.