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Economic Activity Continues Unchanged 2 Movements in Time and Savings Deposits, 195L l 962 5 Changes in Rates on Time Deposits at District Banks Ml! Spending in Six Medium-Size District Cities Volume 45 • Number 3 FEDERAL RESERVE BANK OF ST. LOUIS P. O. Box 4 4 2 • St. Louis 66, Mo. Economic Activity Continues Unchanged Business Activity I N J A N U A R Y A N D F E B R U A R Y key measures of economic activity—industrial production, employment, and unemployment—remained at levels little changed from those in the preceding six months. Prices also have continued essentially unchanged in recent months. Industrial production edged down slightly in Jan uary and appears to have changed little in February. Output in the steel industry was up while automobile production moved down slightly. The Federal Re serve index of industrial production, seasonally ad justed, was 119.0 per cent of the 1957-59 average in January. Between last July and December, the index fluctuated within the narrow range between 119.2 and 119.8 per cent of the base period. Output of both final products and materials has shown little movement since about the middle of last year. cent compared with a rate of 1.8 per cent in the pre ceding year. About one-third of the gain in employ ment over the past two years has occurred in the Government sector of the economy. The seasonally adjusted unemployment rate rose to 6.1 per cent in February compared with 5.5 per cent in December and 5.8 per cent in January and is now at the highest level since November 1961. The wholesale price index increased from 100.4 (1957-59 = 100) in December to 100.6 in January, but fragmentary information suggests that wholesale prices edged down again in February. Since 1958 the wholesale price index has been virtually unchanged. Wholesale prices in most other leading industrial countries have increased since 1958. For example, from 1958 to 1962 wholesale prices increased 6.7 per cent in the United Kingdom, 3.0 per cent in Germany, 12.4 per cent in France, and 7.5 per cent in Japan. Status of the N a tio n a l Lab o r Force In d u strial Production 1 9 5 7 -5 9 = 1 0 0 1 9 5 7 -5 9 = 1 0 0 M illio n s o f P e rso n s M il lio n s o f P e r s o n s Seasonally Adjusted 1 Civilian / Labi)r Force \ js, /. [ -- f^ ,_|" L There has been some increase in the number of persons employed in recent months. Total civilian employment, seasonally adjusted, averaged 68.3 mil lion in January and February. Last year employment totaled 67.7 million in February and 67.9 million in September and October.1 The rate of increase in em ployment since last February has been about 1.0 per 1 Employm ent figures prior to April 1962 have been adjusted for the change in the estimating procedure. Page 2 Total Emjployment . .. 1956 1957 1958 1959 1960 S o u r c e : U n i t e d S ta te s B u r e a u o f L a b o r S t a t i s t i c s Latest d a t a plo tted : F e b r u a r y 1961 .^ -------- ( 1962 1963 195 8=100 Changes in Cost of Living on three-month Treasury bills have risen from a little A n n u a l A v e r a g e s of M o n t h l y D a ta over 2.80 per cent in mid-November to almost 2.90 125 per cent in late February. In the early months of 1962 yields on Treasury bills averaged about 2.75 per cent. Yields on long-term Government issues aver aged about 3.90 per cent in February, slightly higher than in the November to January period. However, long-term interest rates in late 1962 and early 1963 averaged about 20 basis points lower than in the same months last year. 105 Stock Prices* 1941 -4 3=10 1941 -43=10 M o n th l)i A v e r a g e : s of D a i ly Fi gu re s 1958 1959 1960 1961 1962 A 70 S ou rc e : In te rn a ti o na l M o n e t a r y Fu n d a n d O r g a n i z a t i o n for Eco nom ic C o-operatio n a nd D evelopm ent. Consumer prices averaged 106.0 per cent of the 1957-59 average in January. Consumer prices have 60 been essentially unchanged since last September but during the past 12 months have risen about 1.3 per 50 cent. The United States consumer price index has increased 4.7 per cent since 1958. M uch larger price increases have occurred in other leading industrial 40 yv/V A / J /Mw / 70 \VIj 60 50 40 countries. From 1958 to 1962 consumer prices rose 9.4 per cent in the United Kingdom, 8.6 per cent in Germany, 18.4 per cent in France, and 17.8 per cent 30 La tes t d a ta p lo tt ed : F e b r u a r y 1956 ♦Standard 1957 1958 1959 1960 1961 1962 1963 30 & P o o r's 5 0 0 Stocks in Japan. Stock prices moved up in early 1963. The Standard and Poor's stock price index for 500 common stocks Interest Kate Developments increased from an average of 62.64 (1941-43 = 10) Yields on short-term Government securities, which in December to an average of 65.90 in February. normally decline in the first half of the year, worked Accompanying the rise in stock prices, credit extended up during January and early February and then on stocks increased from $4.9 billion last July to $5.6 edged down during the last part of February. Rates billion at the end of January. measure the rise in stock prices, common stock yields Yields on U.S. Government Securities Per Ce nt 5.i )\ J \ Per Cent drifted lower in January and February. As a result, 0 the spread between the returns on corporate bonds and the returns on stocks has widened appreciably \ \ y\ \ 1 since last autumn. The spread between the yields of Long-Term Bonds * ) \ v \ l \ . ) \ ,-w / \ ... these two types of assets is now wider than at any time \ r ' x / since the stock market decline in the early summer V of 1962, and wider than in most other recent years. In 3-5 Yea r Bonds )\ : \ \ V \ \ February 1963, the dividend price ratio on common 3-MonlHi Treasury Bills / stocks (expressed as a yield) was estimated at 3.23 j A per cent, and yields on A A A corporation bonds aver )_ aged 4.19 per cent, a spread of .96 percentage points. \ In January 1962, the spread was 1.45 percentage points _ _ L a t e s t d a t a pl ot te< d: F e b r u a r y m Reflecting in large i 1 ! i 1 i i 1 i i 1 II 1 J 1 1 1 1 1 1 1 i i 1 i i 1 i i 1 i i 1960 1961 1962 1 1 1 1 1 1 1 1 11 I 1963 T but declined to .50 percentage points last June. Page 3 Bank Reserves, Bank Credit, and Money Supply Total member bank reserves, seasonally adjusted, increased at an annual rate of 0.7 per cent from Total Reserves of M e m b e r B a n k s , M o n th ly A v e r a g e s o f D a ily F ig u re s B illio n s o f D o l l a r s B illio n s o f D o l la r s crease early in the year. averaged $525 million. averaged $135 million compared to under $100 During 1962 excess reserves Member bank borrowings in January and February, million during most of 1962. Bank credit, seasonally adjusted, increased at an annual rate of 6.3 per cent in January and, at weekly reporting banks, increased further in February. From January 1962 to January 1963 total bank credit ex panded about 8 per cent. The increase in the past two months has centered largely in investments, whereas in the latter part of 1962 loan expansion ac counted for most of the credit rise. The seasonally adjusted money supply, demand deposits plus currency, decreased at an annual rate M o n e y S u p p ly M o n th ly A v e r a g e s o f D a ily F ig u re s B illio n s o f D o l l a r s B illio n s o f D o lla r s requirements, reserves previous to Novem ber 1, 1962 were reduced by 1 per cent of time deposits (for the week ot October 25-31, 1962, I per cent of country banks only). L a te s t d a t a p lo tte d : F e b ru a ry e s tim a te d January to February. Since January 1962 total re serves have increased at an annual rate of 3.1 per cent, with most of the reserve expansion utilized to support a rapid growth in time deposits. Since Jan uary 1962 reserves available to support private de mand deposits have declined slightly. B y comparison, these reserves rose at an average annual rate of 2.0 per cent in the previous decade. Excess reserves averaged $470 million in January and February, somewhat lower than the average of other recent months. Excess reserves normally inExcess Reserves & Borrow ings of M e m b er Banks B illio n s o f D o l l a r s B illio n s o f D o lla r s M o n th ly A v e r a g e :t o f D a ily F ig u re s - - L otest d a t a p lo tte d : F e b r u a r y p r e li m in a r y of 1.6 per cent from January to February. Since January 1962 the money supply has increased at a 1.6 per cent rate, with the bulk of the increase occurring from September to January. Time deposits in commercial banks increased at an annual rate of 17 per cent from December to February, and since January 1962 these deposits have risen at an annual rate of 18 per cent. Fiscal Developments and Debt Management - \ \¥ 1 1 1 ' V 1 i #*< / \ / / i / - Excess 1Reserves gJ y A %/ u \ i Borrowings at Federal Reserve Banks \ ft " \ % y A i i 1 i i 1t i 1 i i i , r , 1960 A , ,r ,> r ., 1961 L a te s t d a t a p lo tte d : F e b r u a r y e s tim a te d Page 4 i' / 1111 111t 1 11 i i 1 i i 11i 1i i 1962 1963 The U. S. Government operated at an estimated seasonally adjusted cash deficit of about $8 billion (annual rate) during the fourth quarter of 1962. This followed upon an almost balanced budget during the previous two quarters. It is estimated that the cash deficit is increasing further from the fourth quarter of last year to the first quarter of this year. The deficit in the income and product accounts budget also increased from the third to the fourth quarter of last year and is expected to increase further in the first quarter of this year. The income and product accounts budget is often used as a measure of the (Continued on page 11) Movements in Time and Savings Deposits 1951-1962 Introduction T i m e A N D S A V IN G S D E P O S IT S of commercial banks have increased at very rapid rates since mid1960. From June 1960 to December 1962 they rose at an annual rate of 17 per cent. D uring a brief span within this period, from December 1961 to June 1962, the rate of increase accelerated to 20 per cent.1 These rates of increase may be compared with the average annual rate of increase of 9 per cent from early 1951 to mid-1960. This article examines the behavior of commercial bank time and savings deposits over the past decade. The accompanying analysis seeks to provide some insight into the factors which have produced changes in the quantity of time and savings deposits held by the public. Growth in these deposits is compared with the growth in savings and loan shares and deposits in mutual savings banks. Also, changes in rates of in crease of time and savings deposits in commercial banks are compared with changes in interest rates and with changes in the level of business activity. In order to understand the behavior of time and savings deposits over the past decade, it is desirable to distinguish developments with respect to time de posits on the one hand, and savings deposits on the other.2 However, these two types of deposits have not been reported separately on a continuing basis during the 1951-1962 period. Since April 1961 there has been a separate reporting of passbook savings deposits at weekly reporting member banks, banks which currently hold about one-half of all time and savings deposits. The remainder of total time and savings deposits (consisting largely of other time ac counts of individuals, partnerships, and corporations) includes the time certificates component. Chart 1 Public Holdings of Selected Ratio Scale B illio ns o f D o lla rs Seasonally A dju sted Liquid Assets Ratio Scale Billions of D o lla r s ilOO From 1951 to the end of 1962 liquid asset holdings of the public increased substantially. Tim e and sav ings deposits of commercial banks, shares in savings and loan associations and deposits in mutual savings banks increased at average annual rates of 13, 33, and 6 per cent, respectively ( see Chart 1). W hile time and savings deposits of commercial banks increased markedly in the past decade as a whole, the rate of increase varied cyclically. The rate of increase tended to rise just preceding and during a recession and to fall during periods of recovery and expansion (see Chart 1). O n the other hand, the rate of growth of deposits of mutual savings banks and savings and loan shares did not show an observable relationship to cyclical changes in economic activity. xThis rise in the rate of increase of time and savings deposits was affected to a significant extent by an upward revision in the maximum rates which banks could pay on tim e and sav ings deposits and a subsequent increase in rates paid by many banks. 10___ I___ __11111 ___ I___ __ ____ ___ I---------- 1----- 10 1952 1954 1956 1958 1960 1962 Last W e d n e s d a y of m on th . S h a d e d a re a s r e p r e s e n t p e r i o d s of b usiness recessio n. 2 Both tim e and savings deposits of com m ercial banks are inter est-bearing liabilities. Savings deposits do not have a specified maturity, and, although notification prior to withdrawal may be required, in practice these deposits can usually be w ith drawn on demand. Only individuals and nonprofit associations may hold savings deposits. Tim e deposits have a contract for a specified maturity or a required period of notice and may be held by business firms. Page 5 Time deposits held at weekly reporting member banks have behaved differently from the savings de posits held at these banks (Chart 2). The savings C hart 2 Time and Savings Deposits W e e k ly Reporting M e m b e r Banks Ratio Scale M illio n s of D o lla rs Ratio Scale M illio n s of D o lla rs L as t W e d n e s d a y o f m o n t h . Latest d a t a plo tted : J a n u a r y 30 , 1963 deposit component moved up steadily during the en tire April 1961-January 1963 period. In contrast, time deposits rose from April to September 1961, declined through December, and then ( after the change in Regulation Q ) increased steeply from D e cember 1961 to June 1962. Since mid-1962 time deposits have continued to grow, but the rate of increase has moderated. Intermittent surveys of all member banks conducted over the 1945-1962 period have also shown that developments with regard to time deposits have not been identical with those of savings deposits (Table I). Time deposits have grown greatly in relative importance. Table I Time D eposits of M e m b e r Banks as a Per Cent of Time and Savings Deposits 1962 New York Reserve City Banks All Other Member Banks Total— All Member Banks 55 23 27 June Call Dates 1961 1958 1957 58 19 23 65 19 24 63 16 20 1945 30 6 7 While time and savings deposits have not been reported separately on a continuing basis over most of the 1951-1962 period, figures for New York Re serve City3 Banks may serve as roughly representative of all time deposits. The series for all other commer cial banks may serve as roughly representative of sav ings deposits. A n analysis of the 1962, 1961, 1958, 1957, and 1945 June condition reports shows that for 3 Prior to July 28, 1962 these New York Reserve City Banks were designated as Central Reserve City Banks. Page 6 New York Reserve City Banks the time deposit cate gory constituted the larger share of the total of time and savings deposits (see table). For member banks other than New York Reserve City Banks, time de posits represented a small, though growing, share ( see table). Moreover, it is believed that many of the time certificates held in small banks are regarded by their holders as being very similar to savings accounts. Assuming that the proportions which existed in 1957, 1958, 1961, and 1962 are somewhat representa tive for the 1951-62 period as a whole, it seems likely that cyclical movements in the time and savings deposits series for New York banks were dominated by shifts in the time certificates category. O n the other hand, it seems likely that the time and savings deposits series for other commercial banks was little affected by cyclical changes in the time deposit com ponent. Even though about one-fifth of the total of time and savings deposits in other member banks is time certificates it seems likely that these certificates are largely a savings medium. In any case, time de posits are dominant in the New York City series and savings deposits are dominant in the series for other member banks. The time and savings deposits series for New York Reserve City Banks (consisting primarily of time de posits rather than savings deposits) displays pro nounced cyclical movements (see Chart 3). O n the other hand, movements in the series consisting of time plus savings deposits at all commercial banks except New York Reserve City Banks are similar to move ments in mutual savings deposits and savings and loan shares, the other two major savings-type series (com pare upper tier of Chart 3 with Chart 1). In the next section, several possible explanations are presented of the differences between movements in time deposits as distinct from savings deposits. These explanations are then examined in the light of expe rience during the 1951-62 period. In this examina tion the time and savings deposit series for New York banks is used as a proxy in reviewing the cyclical movements in time deposits. Influences on Time and Savings Deposits Savings deposits are held almost entirely by indivi duals. These deposits, along with deposits at mutual savings banks and share holdings in savings and loan associations, are not subject to fluctuations in market price, and offer a yield to the saver. Moreover, rela tively small amounts may be invested at intervals and at locations convenient for savers. In addition, Chart 3 Com parison of Movem ents in Time and Savings Deposits R atio S c a le N e w Y o rk B a n k s-A ll O th e r B a n k s Ratio S c a le " P rior to July 2 8 , 1962 these banks w ere d e s ig n a te d as C e n tra l Reserve C ity Banks. Last W e d n e s d a y o f month. because these assets can be converted into cash readily they are especially attractive for individuals, who, therefore, do not have to plan carefully the timing of the maturity of their investment portfolios. In view of these considerations it seems reasonable to expect that movements in savings deposits and other savings-type assets would have been dominated by the steady growth in personal income. This appears to be the case with respect to the savings deposits of mutual savings banks and the shares held in savings and loan associations (Chart 1). It appears reason able to infer that it is also true of the savings-type deposits held at commercial banks (see upper tier of Chart 3). Time certificates of deposit are held largely by corporations, foreign institutions, and state and local governments. Businesses as a matter of careful plan ning hold time deposits and other liquid assets in order to be in a position to meet short-run obligations such as expected capital expenditures, dividends, and tax payments. In addition, holdings of short-term liquid assets are related to changing business conditions, tending to rise during a business downturn (as busi nesses allow current sales to trim stocks). Later, dur ing a business recovery, inventory liquidation ceases and accumulation begins. In the expansion phase of the business cycle, production costs rise and inventory accumulation continues; at the same time, the cost of borrowing tends to increase. During these periods businesses begin drawing down cash and liquid asset positions. Because businesses have large sums for short-term investment, minor differentials in rates of return on alternative types of liquid assets may involve very large differences in total returns. Hence, those who have large sums to manage are usually sensitive to small shifts in alternative yields among various in vestment media. While many individuals hold time certificates the total dollar volume of their holdings is quite small. Individuals do not, in general, face the same range of alternative assets at the same prices as do corporations and other institutions. Because of the large minimum size of a transaction, and because of other transactions costs, for most individuals Treas ury bills and other high-grade, short-term marketable instruments are not effective alternatives to savingstype deposits. In light of these considerations it seems reasonable to expect that variations in the rate of expansion in Page 7 C h a rt 4 Proxy Time Deposits at A n n u a l Rates of C h a n g e * Per Cent 8 0 1-------- Per Cent 80 W e e k ly R e p o rtin g M e m b e r Banks Chart 5 Alternative Yields Per Cent 5 Per Cent 5 ( Time rate) Yie ld s on 3-M on ( S a v i n g s rat e) P a y a b le posits Ne w York In te re st on Time a nd S a vin g s ( A n n u a l d a ta ) 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1962 ♦Time an d S a v i n g s D e p os i ts at N e w Yo r k Reser ve Ci ty Banks. Last W e d n e s d a y of m on t h. time deposits have reflected changes in the rate paid on such short-term instruments as Treasury bills rela tive to the rate paid on time deposits. When the rate paid on time deposits improves relative to the yield on Treasury bills, tipne deposit growth tends to accelerate (and conversely). The rate of expansion in time de posits has also shifted in response to adjustments by businesses to changing business conditions. Cyclical Movements in Time Deposits4 The rate of increase of time deposits of commercial banks has been relatively high during each of the 4 Rates of change in the time and savings deposits series for New York Reserve City Banks is used as a proxy in reviewing the cyclical movements in time deposits during the 1951-1962 period. Since April 1961 passbook savings deposits have been reported separately from other time deposits (which consist largely of time certificates) at weekly reporting member banks. Rates of change in other time deposits at weekly reporting member banks is also used as a proxy for total time certificates during the April 1961-D ecem ber 1962 period. Page 8 three most recent recessions (see Chart 4). These accelerated rates of increase have closely paralleled decreases in interest rates on short-term marketable securities relative to rates paid on time deposits.5 Short-term interest rates began to decline around the July 1953 and July 1957 peaks in business activity (see Chart 5). Accompanying the decline in market rates relative to rates paid on time certificates, the rate of increase of time deposits began to rise (see Chart 4). Market interest rates declined sharply in early 1960, several months before the M a y 1960 business cycle peak. At about the same time that interest rates 5 There is no continuous series for the 1951-1962 period show ing rates paid on time certificates by New York banks; there fore, it has been necessary to use other series which approxi mate the range within which rates paid on time deposits have moved. T h e solid green line shows the maximum rates which banks were perm itted to pay on time deposits, and the dotted line shows the costs of New York banks stemming from payments on tim e and savings accounts (expressed as a per centage of their holdings of these deposits). began to fall time deposits began to expand; these deposits continued to expand rapidly during the 196061 recession. In the prosperity period of 1951-53 the growth of time deposits was less than in the subsequent reces sion. During this 1951-53 period the yield on 3-month Treasury bills was considerably above the rates which New York banks were paying on time deposits. In the recovery and expansion which occurred during the 1954-57 period the growth in time deposits was nominal, and in th6 1958-60 recovery there was actually a decline. These declines in the rate of growth in time deposits occurred during periods when rates paid on time deposits were less than the yield on short-term securities (compare Charts 4 and 5). The recovery of 1961-63 has been exceptional in that time deposits have continued to grow rapidly (Charts 2 and 4). For about eight months following the trough month of the 1960-61 recession (February 1961) short-term interest rates were substantially be low prevailing rates on time deposits. In addition, the attractiveness of large denomination time certif icates for short-term investments was enhanced by the development and expansion of a secondary market for these instruments.0 Consequently, the rate of time deposit expansion continued to be rapid during this period. However, when rates on Treasury bills moved up during the last two months of 1961, the rate of 6W ith the development of a ready market in which time cer tificates can be sold the holder no longer must await the ma turity of the instrument before he can have access to his funds. Instead, he may readily shift from a time certificate into cash. F o r a discussion of these developments see “Trends in Banking and Finan ce—Negotiable Certificates of Deposit,” in the F e b ruary 1963 issue of Business Conditions, a publication of the Federal Reserve Bank of Chicago. growth in time deposits slowed (see Charts 5, 4, and 2). As of January 1962 the maximum allowable rate on time and savings deposits was raised. Following this change in regulation, and the increases in rates paid by many commercial banks, there was an acceleration of the rate of growth in time deposits. From January to June 1962 time deposits at weekly reporting mem ber banks grew at a 24 per cent annual rate. Since June of 1962 the rate of growth in time deposits at weekly reporting member banks has been rapid, but has moderated. During this latter period the spread between rates paid on time certificates and the yield on short-term Treasury obligations appears to have narrowed somewhat. Chart 6 throws additional light on the rapid growth in time deposits during the 1961-1963 period. This chart presents manufacturing corporations’ holdings of U. S. Government securities, including Treasury savings notes, and the accrued tax liabilities for these same corporations. The swings in accrued tax liabil ities reflect largely the changes in before-tax profits of manufacturing corporations. D uring a business recession there is a deterioration in profits; during the early recovery there is sharp improvement. Profits tend to decline during the last phases of expansion as production costs rise, the rate of increase in sales de clines, unwanted inventory accumulation occurs, and downward pressures on prices tend to develop. There is a close correspondence between changes in accrued tax liabilities and changes in manufactur ers’ holdings of Government securities (see Chart 6). Corporate treasurers have found it advantageous to fund for future tax payments by purchasing Govern Cha rt 6 H o l d i n g s o f G o v e r n m e n t S e c u ritie s a n d A c c r u e d T a x L ia b ilitie s 1956 S o u rc e : F e d e r a l T ra d e Coi Page 9 ment securities during periods when tax liabilities are accrued. Thus, during the recoveries from the 195354 and 1957-58 recessions both accruals of tax liabil ities and manufacturers’ holdings of Government se curities rose sharply. D uring both of these periods the yield on short-term instruments was considerably above rates paid on time deposits. The 1961-63 recov ery period presents a different picture. During this period yields on Treasury bills have remained below rates paid on time deposits. Hence, the buildup of security holdings which was in evidence during the two previous recoveries has not occurred. Sum m ary Time and savings deposits at commercial banks include both passbook savings accounts and time certificates of deposit. The evidence presented in this article suggests that during the 1951-62 period pass book savings in commercial banks behaved much like such other savings-type deposits as savings and loan shares and deposits at mutual savings banks. In con trast, the rate of increase in time deposits varied cyclically. The rate of increase tended to rise at or prior to the beginning of downturns and continued at a rapid pace during the recessions. Later, as the recessions reached their troughs, the rate of increase in time deposits declined and continued at a nominal pace during the periods of business expansion. The data also suggest that changes in the rate of increase in time deposits have been responsive to in terest rate differentials between such short-term assets as Treasury bills and rates paid on time deposits. When short-term interest rates fell below rates paid on time deposits, as usually happened during reces sions, the rate of increase in time deposits tended to accelerate. Conversely, when short-term interest rates rose above the rates paid on time deposits, as usually happened during recovery and expansion pe riods, the rate of increase in time deposits moderated. These observations may throw some light on the significance of the rapid rate of increase of time de posits during the past two years, a period of business recovery and expansion. The great growth since Feb ruary 1961, at an average annual rate of 16 per cent, has been unusual for a recovery period. It contrasts with rates of 7, 6, and 5 per cent during the 1951-53, 1954-57, and 1958-60 periods of business expansion. The rapid growth in time deposits is only partly explained by the increase in rates paid on time de posits beginning in January 1962, since growth in the preceding ten months of recovery had already been unusual. The factor apparently explaining this rapid growth has been that Treasury bill rates and other short-term money market rates have remained below rates paid on time deposits. In an early stage of other recoveries bill rates rose above rates paid on time deposits. The increase in rates paid on time deposits in early 1962 partly explains why the relation between bill rates and time certificate rates during the past few years has been so different from previous recov eries. However, the unusual relationship seems to have resulted much more from the failure of the bill rate to rise in this recovery in a manner comparable to the increases of earlier recoveries. Changes in Rates on Time Deposits at District Banks IN G R E A S E in the maximum permissible rate payable on savings accounts and other time deposits became effective on January 1, 1962.1 In the middle of that month, the Federal Reserve System conducted a survey of interest rates paid by member banks on time deposits and subsequently published the results in the February 1962 Federal Reserve Bulletin. The System repeated the survey in February 1963, using approximately the same sample of banks. The sample included all banks with total deposits of $50 million or more and 10 per cent of all other banks selected at random. In the Eighth District, the sample included a total of 72 banks. Data for the smaller banks were expanded to provide estimates for 1 See "'Recent Growth of Time Deposits" in the April 1962 issue of this Review. Page 10 all member banks in the district. Thirteen per cent of the total number of member banks in the Eighth District had raised their interest rates payable on savings accounts or other time de posits since the last survey. In each of the two bank size groups, the percentage of banks increasing inter est rates was the same— 13 per cent. O f the total number of banks, 2 per cent raised rates applicable to savings accounts while 11 per cent raised other time deposit rates. The median interest rate increase was /2 of 1 per cent. The survey also revealed that 2 per cent of the total number of banks reduced interest rates paid on these deposits. No bank reported that it contemplated any rate changes between mid-February and July 1, 1963. E c o n o m ic A c t iv it y C o n t in u e s U n c h a n g e d - C o n t i n u e d from page 4 impact of the Federal Government s taxing and spend ing on incomes. The budget developments in late 1962 and early 1963 have probably been stimulative to economic activity. result of this operation was an increase in the average maturity of the publicly held debt, i.e., a decline in the volume of short-term securities and an increase in long-term securities. U.S. G o v e rn m e n t Fiscal O p e ra tio n s The Treasury followed up this operation with an an nouncement in late February that it would offer holders of $29.0 billion of outstanding Treasury securities, of which $20.3 billion are held by the public, the oppor tunity to extend their holdings at higher yields. H o ld ers of these securities were given the choice of ex changing them for a 3% per cent four-year note, a 3Is per cent eight-year bond, a 3% per cent 11-year bond, or a 4 per cent 17-year bond. B illio n s o f D o l la r s 10 (+ )S u rp lu s ; (-)D e fic it S e a s o n a l l y A d j u s t e d A n n u a l Ra te s B illio n s o f D o l la r s 10 -10 1955 1956 1957 1958 1959 1960 1961 -20 1962 S o u r c e : U.S . T r e a s u r y D e p a r t m e n t & D e p a r t m e n t o f C o m m e r c e The increase in the cash deficit requires an increase in the Federal debt. Thus, debt management opera tions in 1963 involve not only the normal operations of managing a publicly held debt of $217 billion but also the problem of raising new money. On January 30, the Treasury announced plans for refunding $9.5 billion of securities ($5.5 billion of which was held by the public) maturing February 15. The public exchanged the maturing issues for about $2.8 billion of 33£ per cent one-year certificates and $2.5 billion of 3/4 per cent five-year bonds. The SU BSCRIPTIO N S to this hank's R e v ie w Debt management policies, along with the economic policies of other Governmental agencies, have focused on two problems, the deficit in the balance of pay ments and the sluggish growth of the economy. In addition, decisions have had to take into considera tion the ordinary problems associated with managing the public debt. Debt management actions can play an important role in solving the broad economic problems facing the nation. Increasing the quantity of short-term debt instruments puts upward pressure on short-term rates. This permits the Federal Reserve to expand reserves and the money supply with a minimum effect on short term interest rates. Such action also implies lower long-term rates which tend to stimulate domestic private investment. In addition, an increase in the quantity of short-term securities, because they are near to cash, may itself be stimulative to the economy. are available to the public without charge , including bulk mailings to banks , business organizations, educational institutions, and- others. For information write: Research Department , Federal Reserve Bank o f St. Louis, P. O. Box 442, St. Louis 66, Missouri. Page 11 Spending in Six Medium-Size District Cities S ea s ona lly A d ju s te d 19 5 7 -5 9 = 1 0 0 O n e B R O A D M E A S U R E o f lo cal eco n o m ic activ ity is th e vo lu m e o f c h e c k pay m en ts and o th er d ebits to d em an d d ep o sit a c co u n ts.1 S in ce m ost consum er, b u si ness, and lo ca l go v ern m en t expen ditures are m ad e b y ch e ck , b an k d eb its are con sid ered a u sefu l in d icato r of o v er-all e co n o m ic a ctiv ity in an are a.2 T h is n o te review s d eb its figures d uring 1 9 6 2 fo r six of th e larg e r c itie s o f th e E ig h th F e d e ra l R eserv e D istric t o th e r th an th e sev en m etro p o litan areas. A ll o f the d ata hav e b e e n seaso n ally ad ju sted . A th re e m on th m ovingav erag e has b e e n used to red u ce th e irregu lar fluctuations c h a ra c te ristic o f d eb its d ata. In P in e B lu ff, A rkansas, G reen v ille, M ississippi, O w ens boro, K e n tu ck y , and Ja c k so n , T en n e sse e , b a n k d ebits fo r 1 9 6 2 w ere a b o u t te n p e r c e n t h ig h er th an in 1 9 6 1 . Q u in cy , Illin o is, and P a d u ca h , K en tu cky , had increases of arou nd five p e r c en t. A n exam in atio n o f th e acco m p an y in g charts in d icates th a t m o v em en t o f d eb its o v er th e cou rse o f 1 9 6 2 v aried am on g th ese cen te rs. D e b its in Q u incy d ecreased from la te 1 9 6 1 to F e b r u a ry 1 9 6 2 . S u b seq u en tly , th ey in creased ab o u t 11 p e r c e n t to th e end o f 1 9 6 2 . O w en sb oro d eb its rose sligh tly d u rin g th e first q u arter o f 1 9 6 2 , and th e n ad v an ced ap p rox im ately 1 2 p er ce n t in th e last n in e m on ths o f th e y ear. In P ad u cah , d ebits ch an g ed little d uring th e first h a lf o f th e y ear, b u t th en rose m o d erately Quincy, III. 140 140 130 130 120 120 iDebits to demand deposit accounts of individuals, partnerships, and corpo rations, and states and political subdivisions. ^Debits, when used as an indicator of local business conditions, should be interpreted carefully and in conjunction with other local economic data. Debits as a local economic indicator are subject to the following limitations. Debits may reflect large and varying amounts of transactions unrelated to current activity (such as security purchases). They include transactions from outside the area. Some expenditures do not result in debits, while other outlays are recorded several times. Finally, some individuals and businesses bank outside their local areas. Agricultural employment during the autumn in the Greenville, Mississippi, area (W ashington County) was approximately 1,000 under the usual level of previous harvest seasons. Page 12 i i 1i i 1i i 1i i 110 1 1 1 1 i 1 1 ! 1 1 1 -J, ,l,.l..1. i,_L.J_.1 1 Owensboro, Ky. 130 130 120 120 110 110 i.i 1 i i 1 i i 1 i i 100 .1 1 1 1 1 1 ±..1., 1 1 1 1 1 1 1 1 1 I 1 100 Paducah, Ky. 140 140 130 130 120 120 to y e a r end . B a n k d eb its in P in e B lu ff, Jack so n , and G reen ville fo l low ed a com m o n p a tte rn d u ring 1 9 6 2 , w h ich d iffered con sid erab ly from th e p a tte rn o f th e th ree m ore north ern citie s. In e a ch o f th e se sou th ern cities d ebits rose sharply d uring th e first h a lf y e a r an d th e n fe ll d uring the fa ll m onths. P a rt o f th e s e d ecreases w ere offset b y gains la te in 1 9 6 2 . T h e s e d eclin e s in d ebits d uring autum n, th e co tto n -h arv e stin g season, h av e b e e n attribu ted to a la rg e s h ift from h an d h arv e stin g to m ach in e harvestin g of cotto n . T h is ch a n g e in m eth od s resu lted in a red u ctio n in th e n u m b er o f a g ricu ltu ral w orkers hired during this seaso n .3 T h e resu ltin g d ec re a se in w ag e paym ents w as reflected in th e d ec lin e o f d eb its. A sim ilar d eclin e in d ebits o ccu rre d in M em p h is, an im p o rtan t cotto n m arket ing cen te r. In ad d itio n , m u ch o f th e early cotto n harvest was acq u ire d b y th e F e d e ra l G o v ern m en t in th e p rice su pport p ro g ram , and th e s e acqu isition s are n ot reco rd ed as b an k d eb its. I n th e fo u rth q u arter, som e o f this G o v ern m en t-sto red c o tto n m ov ed to th e m arket, acco u n tin g fo r p a rt o f th e rise in d eb its arou nd th e end o f 1 9 6 2 . 1 9 5 7 -5 9 = 1 0 0 Three-M onth M oving A verages 110 i i 1 i i 1 i i 1 i i i i 1 i i 1 i i 1 i i , i i 1 i i Lj i 1 ii Pine Bluff, Ark. 140 140 130 130 120 120 110 i i 1 i i 1 i i 1 i i i i 1 i i 1 i i 1 i i . i i ! i i 1 i i 1 i i 110 Jackson, Tenn. 140 140 j 130 Jf r^ \ 130 120 120 110 1 1 1 1 1 1 1 1 1 1 1 1 l 1 1 1 1 1 1 1 1 I 1 1 1 1 1 1 1 1 1 1 1 110 Greenville, Miss. 140 140 130 130 120 120 110 i i 1 i i 1 i 1961 i 1 i i i i .i i i i i i i i i i i 1962 L a t es t d a t a p l o t t e d : A v e r a g e o f D e c e m b e r a n d J a n u a r y i i i i.i 1963 i.i i i 110
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