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February 1965

FEDERAL RE

ANK OF ST. LOUIS

eview
1964 Operations

CONTENTS

of the Federal Reserve Bank of St. Louis
Page

1964 Operations of the
Federal Reserve Bank of
St. Louis ..................

1

Federal Debt Lengthened 12
Trends in Government
E xpenditures .............

15

T h i s BANK’S SUMMARY of 1964 developments consists of
three parts. A summary of national monetary developments was
included in the December 1964 issue of this R eview . Economic
developments in the Central Mississippi Valley were discussed in
the January 1965 issue. This article presents the operations
of the Federal Reserve Bank of St. Louis, including the three
branches at Little Rock, Louisville, and Memphis.
The Federal Reserve Bank of St. Louis is a part of the Federal
Reserve System, which includes the Board of Governors in Wash­
ington, the 12 Federal Reserve Banks, and the 24 branches. The
primary function of the Federal Reserve System is to foster that
amount of credit and money which will facilitate orderly eco­
nomic growth and a stable value of the dollar.

Volume 47

*

Number 2

FEDERAL RESERVE B A N K
O F ST. LO U IS
P.CX Box 442, St. Louis, Mo. 6 3166




In addition to its role in System monetary policy administra­
tion, each Federal Reserve Bank performs a variety of functions
which contribute to greater efficiency in the economic system.
These functions include service operations, bank supervision and
examination, and policy making. Principal service operations in­
clude receiving and distributing currency and coin, collecting
checks and noncash items, extending credit to member banks,
transferring funds, performing fiscal agency operations for the
Government, securities safekeeping, and conducting economic
research. The principal policy function of an individual Reserve
Bank is the establishment of its discount rate (subject to review

and determination by the Board of Governors). The
discount rate is the rate of interest charged by the
Federal Reserve Banks on loans to member banks.
A report on these functions during 1964 follows.

Coin handled at the St. Louis Federal Reserve Bank
declined from 436.5 million pieces in 1963 to 226.8
million in 1964, a drop of 48 per cent.2 Coin received
Coin Received and Counted
M illio n s of D ollars

M illio n s o f D ollars

Service Operations
Money H andling
Just as an individual or business obtains currency
(paper money) or coin (metallic money) from commer­
cial banks by withdrawing deposits, member banks
obtain currency and coin from Reserve Banks by with­
drawals from their accounts at the Reserve Banks.
Nonmember banks obtain coin and currency from
member banks. When member banks receive an ex­
cess of coin or currency from depositors, it is sent to
the Federal Reserve Bank, where it is sorted and
counted and the usable money held for redistribution.
Operations in the Money Department of this bank1
showed diverse trends in 1964. During the year cur­
rency handling rose, while coin handling dropped to
the lowest level in recent decades.
1 Including Little Rock, Louisville, and Memphis branches.

2 In this report coin handled (received and counted) includes
that deposited by or to the accounts of member banks plus
any coin received from the mint which required counting.

VOLUME OF OPERATIONS1
Number
(Millions)
1952
Coin received and counted ..............
Currency received and counted ........
Checks handled2 ............................
Noncash collection items ................
U. S. Government coupons p a i d ........
U. S. Savings Bonds handled3 ...........
Other Government securities handled3 .
Transfers of fu n d s...........................

1956

1960

332.8
217.9
116.6
.378
.721
5.939
.195
.106

355.4
204.6
138.9
.489
.626
7.012
.246
.133

426.6
201.4
170.7
.560
.872
7.534
.457
.152

1962

1961
490.1
190.5
181.4
.593
.857
7.269
.444
.159

455.8
194.7
194.6
.603
.845
7.584
.446
.170

1963
436.5
191.1
206.4
.559
.795
7.564
.460
.174

1964
226.8
201.2
226.1
.528
.791
8.155
.554
.188

Dollar Amount
(Millions)
Coin received and counted ..............
Currency received and counted.........
Checks handled2 ........................
Noncash collection items .................
U. S. Government coupons p a i d ......
U. S. Savings Bonds handled3 ...........
Other Government securities handled3 . ,
Transfers of fu n d s ..................
Loans to member banks—
daily average outstanding.............

1952
28.8
1,288.8
47,934
365.5

1961

1963

1964

594.3
6,808.5
28,067

1956
32.2
1,187.8
56,661
340.1
70.4
757.7
7,933.9
41,410

1960
43.3
1,186.0
68,537
391.1
123.1
685.9
10,933.3
61,434

48.3
1,143.2
71,037
373.6
129.9
639.2
12,033.4
69,379

1962
46.6
1,169.0
77,030
472.7
135.7
635.1
14,563.5
80,747

45.9
1,179.1
83,656
553.9
137.6
594.7
15,365.1
90,433

24.5
1,300.2
91,837
466.7
144.9
615.5
16,015.5
94,453

40.8

22.3

17.4

3.5

3.7

6.9

5.8

Number as of December 31
Officers and employees ...................

1,256

1,164

1,156

1 Total for the St. Louis office and the Louisville, Memphis, and Little Rock branches.
2 Excludes Government checks and money orders.
3 Issued, exchanged, and redeemed.

Page 2



1,157

1,180

1,162

1,163

and counted reached a plateau in the first quarter of
1961, drifted slowly down until the third quarter of
1963, and then declined rapidly through the fourth
quarter of 1964. The number of pieces received and
counted declined from 129.0 million in the first quar­
ter of 1961 to 41.6 million in the fourth quarter of
1964, a decline of 68 per cent. The dollar amount
declined from $11.3 million to $3.6 million during the
period. A similar decrease in coin handling has been
experienced throughout the Federal Reserve System.
Coin Counted
1960=100

(Pieces)

1960=100

While the amount of coin in circulation3 has risen
rapidly since the early 1950's, demand has risen even
faster, resulting in shortages in all Federal Reserve
Districts. Coin in circulation has been rising at an in­
creasing rate. During the seven-year period from
1952 to 1959 the rate of increase was 3.6 per cent per
year, while in the last five years the rate of increase
was 8.1 per cent per year. This great increase in coin,
which has taxed the facilities of the Philadelphia and
Denver mints, failed to satisfy the rapidly growing
demands. Member banks seldom had excess supplies
to return to the Federal Reserve Bank because of the
general shortage, and rationing of coin was necessary.
The rapid increase in demand for coin probably
arises from a number of causes, including the higher
level of economic activity, increased use of coin ma­
chines, sales taxes, and additional demands by coin
collectors.

The St. Louis office showed a greater decline in the
dollar amount of coin received and counted than did
the Little Rock, Louisville, and Memphis branches.
This corresponds to a tendency throughout the nation
for the larger commercial and industrial centers to
have greater difficulty in obtaining sufficient coin sup­
plies. The greatest percentage declines were at the
New York, Philadelphia, Boston, and Chicago Fed­
eral Reserve Banks.

Currency handled in 1964 rose to 201 million pieces
from 191 million pieces in 1963, an increase of about
5 per cent. The dollar volume of currency handled
rose to $1.3 billion, an increase of 10 per cent. Cur­
rency handling has shown little net change since the
early 1950’s. Both number and dollar value of pieces
handled declined slightly from 1952 to 1960 but had
recovered most of the loss by 1964. The amount of
currency in circulation in the nation rose 28 per cent
from 1952 to 1964.
C urrency Received a n d Counted
B illio ns o f D o lla rs

B illions o f D ollars

The decline in coin handling since 1961 is counter
to the trend in earlier years. From 1950 to 1959, prior
to the coin shortage, the number of coins handled by
this bank rose 33 per cent. The number handled by all
Federal Reserve Banks rose 38 per cent, roughly pro­
portional to the increase of coin in circulation.
Coin in Circulation b y Type
B illions o f D o lla rs




United States

B illio n s o f D ollars

3 Coin in circulation means coin in the hands of the public and
the commercial banks (coin outside the Treasury and the Fed­
eral Reserve Banks).
Page 3

Check Collections
The Federal Reserve Banks collect checks and pro­
vide a mechanism through which commercial banks
settle for the checks. This facilitates the use of de­
mand deposits by individuals and businesses in making payments. This bank may receive checks from
each of the 481 member banks in the Eighth Dis­
trict, from other Federal Reserve Banks, from Gov­
ernment agencies, and from others. In order to in­
crease the promptness of collections, the Reserve
Bank in some cases receives checks directly from
member banks in other Federal Reserve Districts.
Checks may be sent to each of the member banks and
the 759 nonmember par remitting banks4 in the Eighth
District and to other Federal Reserve Banks for col­
lection.
The number of checks cleared through the Federal
Reserve Bank of St. Louis, including the branches,
rose from 68.6 million in 1945 to 116.6 million in 1952,
170.7 million in 1960, and 226.1 million in 1964, an
increase of 6.5 per cent per year compounded for the
19-year period. The increase from 1963 to 1964 was
almost 10 per cent (see table, page 2 ).
Checks Collected4
1
Billions of Dollars

Billions of Dollars

The success of the electronic system depends upon
the cooperation of commercial banks in preparing
checks for high-speed handling. Prior to such han­
dling, checks must have routing symbol transit num­
bers, which are the payee bank’s electronic address,
preprinted in magnetic ink and dollar amounts mag­
netically encoded. The routing symbol transit num­
bers are preprinted as checks are prepared for com­
mercial bank customers. If amounts are encoded early
in the collection process, checks can flow rapidly and
efficiently through the banking system for collection.
About 88 per cent of the checks received at the St.
Louis office during recent months were preprinted
with routing symbol transit numbers. Only about 35
per cent of all checks received, however, contained
the preprinted routing symbol numbers plus the en­
coded amounts, fully qualifying them for electronic
handling at this bank. These fully-qualified checks
are all handled on the electronic equipment. In addi­
tion, part of the checks received which lack only the
encoded amounts are prepared for electronic handling
at this bank. At present about 12 per cent of all
checks received have neither the preprinted routing
symbol transit numbers nor the encoded amounts, and
none of these checks are afforded electronic process­
ing.
The electronic check processing system consists of
three components: a central processor-sorter-reader,
a printer, and a card read-punch. The sorter-reader
endorses and sorts the checks at speeds up to 1,600
items per minute. In the same operation it reads the
amounts into the central processor or computer, where
they are totaled and stored for the various balancing
operations.

*Excludes Government check* and postal money orders.

Electronic Check Handling
Rapid growth in volume of check collections in
recent years has led to a need for improvement in the
check collection system. The bank took a major step
in 1964 toward increased efficiency in check opera­
tions with the installation of electronic equipment at
St. Louis and Louisville.
4All checks collected and cleared through the Federal Reserve
Banks must be paid in full by the banks on which they are
drawn, without deduction of a fee or charge; that is, they must
be payable at par.
Page 4



The printer prints out the amounts, routing symbol
transit numbers, and totals of checks being forwarded
to banks on which they are drawn. Printing is done
at speeds up to 1,285 lines per minute. The card readpunch unit punches totals of checks on the various
drawee banks and various control figures which can
be fed back into the machine for balancing purposes.
At the present time about 275,000 checks per day
(about two-thirds of the checks received) are com­
pletely sorted through the high-speed equipment at
the St. Louis office and mailed to drawee banks. On
the average, each check passes through the sorterreader 2.8 times before it is finally sorted to the ap­
propriate addressee. In comparison with electronic
processing, about 7,000 item passes per day can be
handled on each of the proof machines which are
being replaced by the high-speed equipment.

Development of electronic data processing machines
for check collection grew out of studies of a committee
appointed in 1955 by the Bank Management Commis­
sion of the American Bankers Association in coopera­
tion with the Federal Reserve System and others. A
major problem was the development of a common
language that could be read by both humans and elec­
tronic machinery. The magnetic ink coding system was
approved in 1958. Banks began to implement the rec­
ommended encoding system in late 1959, and by
late 1964 significant progress had been made. As
indicated earlier, 88 per cent of checks received at
the St. Louis office have routing symbols preprinted.
The percentage is somewhat larger for the Federal
Reserve System as a whole. By 1961 a number of the
Federal Reserve Banks had installed pilot electronic
check collecting systems to test the various manufac­
turers’ equipment. At least one system has now been
installed in each of the Federal Reserve Banks, and
large numbers of commercial banks have similar in­
stallations.

V o lu m e o f C h e c k H a n d lin g in t h e S y s t e m
Check collections through the Federal Reserve
System as a whole have increased at about the same
rate as at the St. Louis bank. Such collections rose
from 2.3 billion items in 1952 to 4.1 billion in 1963,5
an annual rate of 5.4 per cent, compared with 5.3
per cent at the St. Louis bank. The dollar amount col­
lected during this period rose from $840 billion to
$1,364 billion, or 4.5 per cent per year. Contributing
to this increase has been both an increase in number
of par remitting bank offices and an over-all gain in
the size of the economy. The number of par remitting
banking offices in the nation rose from 17,274, or 89.1
per cent of all banking offices, in 1952 to 25,190, or
92.9 per cent, in 1963. Over the years check writing
per capita has increased with rising incomes. Check­
ing accounts probably number in excess of 60 million,
about the same as the number of households in the
country, with payments by check probably account­
ing for more than 90 per cent of the dollar value of all
transactions in the nation.
Despite the rapid increase in volume of checks col­
lected through the Federal Reserve System, such col­
lections apparently are a smaller proportion of total
check collections than in the early 1950’s. In the three
years 1951-1953, the dollar volume of checks collected
through the System averaged about 50 per cent of all
checks and other charges to demand deposits at all
Federal Reserve reporting centers. In comparison,
System collections averaged only 37 per cent of such
5Excluding Government checks and postal money orders.




checks and charges in the three years 1961-1963. An
increase in the area covered by local clearing ex­
changes where checks are exchanged directly from the
paying bank to the bank on which the check is drawn
and the installation of automation procedures which
encourage interbranch clearings are probably major
factors in the relative decline of System collections.
One exception to the generally consistent increase in
check collections through the Federal Reserve System
in recent years was a decline at the San Francisco
bank in 1964. During the first nine months of the year
the number of checks collected was down 14 per cent
compared to the corresponding period a year earlier.
This exception apparently resulted from establishment
of automated regional clearing centers by commercial
banks.

N o n ca sh C o llectio n s
In addition to checks, the Federal Reserve Banks
handle other items for collection. Included are drafts,
promissory notes, bonds and bond coupons (other than
obligations of the United States Government and its
agencies), and other documents. These noncash collec­
tions in the Eighth District offices were down 6 per
cent in 1964 from 1963. Dollar volume was down
16 per cent (see table, page 2 ).
Noncash Collection Items
Millions of Dollars

Millions of Dollars

T r a n s fe r s o f F u n d s
Interbank transfers of funds are largely movements
of bank balances between Federal Reserve Banks,
many of which result from Federal funds transactions.
Such transfers by this bank in 1964 totaled 188,000,
Page 5

Transfers of Funds
Billions of Dollars

Billions of Dollars

exchanged, and redeemed 8.2 million United States
Savings Bonds in 1964, compared with 7.6 million in
1963. The value of such bonds redeemed was up 3
per cent in 1964. Other Government securities issued,
serviced, or retired in 1964 totaled 554,000, valued at
$16 billion. This was a 20 per cent increase in number
Other Governm ent Securities Issued, Serviced,

Thousand Transfers
180

1952

1954

Thousand Transfers
180

1956

1958

1960

1962

1964

up 8.0 per cent from a year earlier. The dollar value
of transfers, totaling $94.5 billion, was up 4.4 per cent.
F isca l A g e n c y O p era tio n s

1952

Each Federal Reserve Bank acts as a fiscal agent for
the United States Government. In close cooperation
with the Treasury Department, the Reserve Banks car­
ry the principal checking accounts of the Govern­
ment, issue and redeem Government obligations, and
perform various other Governmental financial duties.
The Federal Reserve Bank of St. Louis issued,

1954

1956

1958

1960

1962

of items and a 4 per cent increase in dollar value from
1963. United States Government coupons paid were
down 1 per cent in number, but dollar volume was
up 5 per cent (see table, page 2).
U.S. Governm ent Coupons Paid
Millions of Dollars
150

Millions of Dollars

140

140

U.S. S a v in g s Bonds Issued, Exchanged,
and

Millions of Dollars
900

Redeem ed

1964

130
Doiler Volumle

Millions of Dollars
900

120
110
100

850

850

800

800

90

750

80

Dollar Volane

750

100

70
700

700

650

650

50

600

600

: 0

T'

i

i

i

~r

i

~r

i

~r

i

n

Million Pileces

ion Pieces

8.0

60

Thousand Cou pons

Thousand CouDons

850

850

800

800
Nurnbiir of Coupons

Number <1 Pieces
>

/

7.5

750

750

7.0

700

700

6.

6.5

650

650

6.

6.0

600

600

0 *^ 1952

0 ^ — J1954

Page 6



\1 9 5 6

1958

1960

1962

1964

1952

1954

1956

1958

1960

1962

1964

0

Other Operations

Loans to M e m b er Banks
M illions of D ollars

T h e D is c o u n t R a te a n d
L e n d in g O p era tio n s

<
Dai,y Avera0e O"»»t0nding)

M illions of D ollars

The Federal Reserve Banks extend credit to member banks. The interest rate charged on loans to
member banks was changed only once during 1964.
being raised from Sfi to 4 per cent in November.6 The
previous change in this rate was in July 1963 when
it was raised from 3 to 3H per cent. The rate has been
in the 3-4 per cent range throughout the past five years.
Discount Rate
Per Cent

Federal Reserve Bonk of St. Louis

Per Cent

slightly above the average since early 1961. In com­
parison, average daily borrowings were more than
$18 million for the six years 1955-1960 (see table,
page 2).
S u p e rv is io n a n d E x a m in a tio n

One function of the Federal Reserve System is to
maintain effective supervision of commercial banks.
The objective of such supervision is to foster and
maintain a sound banking system.

Federal Reserve credit is generally extended on a
short-term basis to a member bank to enable it
to adjust its asset position when necessary because
of developments such as a sudden withdrawal of de­
posits or seasonal requirements for credit beyond
those which can reasonably be met by use of the
bank’s own resources. Federal Reserve credit is also
available for longer periods when necessary in order
to assist member banks in meeting unusual situations
resulting from national, regional, or local difficulties
or from exceptional circumstances involving only par­
ticular member banks.
Except in extremely unusual cases, applications for
credit by member banks at the Federal Reserve Bank
of St. Louis are granted without delay.
Lending operations by the Federal Reserve Bank
of St. Louis have been at relatively low levels for
the past four years. Average daily outstandings of
$5.8 million to member banks in the Eighth District
in 1964 were somewhat less than a year earlier but
6The rate charged under Sections 13 and 13a of the Federal
Reserve Act on advances secured by U. S. Government secur­
ities and discounts of and advances secured by eligible paper.




A major supervisory responsibility is evaluation of
assets, operations, policies, and the effectiveness of
management of the banks subject to review. Exam­
inations provide the basic information which enables
supervisory authorities to contribute to prevention or
correction of situations that might adversely affect the
economy or the general public interest.
Supervision by the Federal Reserve Bank of St.
Louis is exercised principally through examination of
the 143 state member banks.7 The major objective of
these examinations is to develop information that will
disclose the current financial condition of each bank,
to ascertain whether the bank is complying with
applicable laws and regulations, and to indicate the
banks future operating prospects. Examinations were
made of all state member banks in the district in 1964.
The number of member banks in the Eighth Fed­
eral Reserve District increased by six in 1964—
from
475 to 481. This was the net result of an increase of
ten national banks and a decrease of four state mem­
ber banks. The number of banks remitting at par
increased by 22 during the year, while the number
of nonpar banks declined by 15 (see table, page 10).
7Number as of December 31, 1964.
Page 7

Directors and Officers
Directors
Chairman of the Board and Federal Reserve Agent

Chairman of the Board
Rebsamen & East, Inc.
Little Rock, Arkansas

R aym ond R ebsam en,

Deputy Chairman of the Board
S m ith D. B ro a d b e n t, J r .

Broadbent Hybrid Seed Co.
Cadiz, Kentucky
H.

President, Ohio Valley National Bank of
Henderson, Henderson, Kentucky
H a r r y F. H a r r in g to n , Chairman of the Board and
President, The Boatmen’s National Bank of St. Louis,
St. Louis, Missouri
H a r o ld 0 . M c C u tc h a n , Senior Executive Vice President,
Mead Johnson & Company, Evansville, Indiana
L e e C o o p er,

W. R ic h a rd s , Vice President and Secretary,
Laclede Steel Company, St. Louis, Missouri
it
r ^
. m p. . -ly .. i
i
r
i t
H RRy E; ? ° G
A
IER’
The First Natlonal Bank of
Vandalia, Vandalia, Illinois
W illia m K ing S e l f , President, Riverside Industries,
Marks, Mississippi
R o la n d

Chairman of the Board
Townsend Lumber Company, Inc.
Stuttgart, Arkansas

M a rk T ow n send ,

Member of Federal Advisory Council
P. H ick o k , Chairman of the Board
First National Bank in St. Louis
St. Louis, Missouri

Jam es

Officers
H a rry

A.

S h u fo rd ,

D a r r y l R . F r a n c is ,

Vice President
Vice President
E . F r a n c is D eV os, Vice President
D o n ald L . H e n ry , Vice President
H o m er Jo n e s, Vice President
D a le M. L ew is, Vice President
H o w ard H . W e ig e l, Vice President and Secretary
Jo se p h C. W o ta w a , Vice President
O r v i l l e 0 . W y ric k , Vice President
G eo rg e W . H irsh m a n , General Auditor
G e ra ld T . D unne, General Counsel and
Assistant Secretary
M arvin L . B e n n e tt ,
F re d B u r to n ,

Page
 8


President

First Vice President
Assistant Vice President
Assistant Chief Examiner
G e o rg e W . D ennison, Assistant Vice President
J. M . G e ig e r, Assistant Vice President
W o o d ro w W . G ilm o re , Planning Officer
J o h n J. H o f e r , Assistant Vice President
W ilb u r H . I s b e l l , Chief Examiner
W i l l i s L . Jo h n s , Assistant Vice President
R ic h a r d 0 . K a l e y , Assistant Vice President
S te p h e n K o p tis , Assistant Vice President
F . G a r la n d R u s s e l l , J r . , Assistant Counsel
P a u l S a lz m a n , Assistant Vice President
W . E . W a l k e r , Assistant Vice President
Jo se p h C. W e lm a n , J r ., Assistant Chief Examiner
N o rm an N. B o w s h e r,
E a r l H. C h ap in ,

LITTLE ROCK BRANCH
Directors
H. C. Adams, Executive Vice President, The First National
Bank of DeWitt, DeWitt, Arkansas
Ross E. A n d erso n , Chairman of the Board, The Com­
mercial National Bank of Little Rock, Little Rock,
Arkansas
F re d e rick

P.

B la n k s ,

Planter, Parkdale, Arkansas

W. Cupp, President & Chairman, Arkansas Bank
and Trust Company, Hot Springs, Arkansas
R. M. L a G ro n e , J r ., President, The Citizens National
Bank of Hope, Hope, Arkansas
R eev es E. R i tc h ie , President, Arkansas Power & Light
Company, Little Rock, Arkansas
C a re y V. S t a b l e r , President, Little Rock University,
Little Rock, Arkansas

C e c il

Officers
F re d B u r to n ,

Vice President and Manager

J o h n F . B re e n ,
H o w ard J . Jen sen ,

Cashier

Assistant Cashier

Jo h n

K.

W a rd ,

Assistant Cashier

LOUISVILLE BRANCH
Directors
Executive Vice President & General
Manager, The Courier-Journal & Louisville Times
Company, Louisville, Kentucky

L is le B a k e r , J r .,

R ay

A. B a r r e t t , President, The State Bank of Salem,
Salem, Indiana

W m,

G. D e a t h e r a g e , President, Planters Bank & Trust
Co., Hopkinsville, Kentucky

C.

Vice President and General Manager,
Southern Bell Telephone and Telegraph Company,
Louisville, Kentucky
J o h n H. H a rd w ick , President, The Louisville Trust
Company, Louisville, Kentucky
J . E. M i l l e r , Executive Vice President, Sellersburg State
Bank, Sellersburg, Indiana
R ic h a rd T. S m ith , Farmer, Madisonville, Kentucky
H u n te r G reen ,

Officers
D o n a ld

L.

H e n ry ,

Vice President and Manager

J o h n W . M enges,

Louis

A. N e ls o n ,

Cashier

Assistant Cashier

C la r e n c e J . W o e r t z ,

Assistant Cashier

MEMPHIS BRANCH
Directors
President, First National Bank at
Marianna, Marianna, Arkansas

L e o n C. C a s tlin g ,

President, National Bank of
Commerce of Corinth, Corinth, Mississippi

C h a r l e s R . C avin ess,

President, HumKo Products Division,
National Dairy Products Corporation, Memphis,
Tennessee

Sam C o o p e r,

B. L e M a s te r , President, Edward LeMaster Co.,
Inc., Memphis, Tennessee
A l l e n M o rg an , President, The First National Bank of
Memphis, Memphis, Tennessee
Con T. W e l c h , President, Citizens Bank, Savannah,
Tennessee
Edw ard

S. W illia m s , Plant Manager, American Greetings
Corporation, Osceola, Arkansas

Jam es

Officers
E . F r a n c is D eV os,

Vice President and Manager

B en ja m in B. M on aghan ,
Paul

I.

B la c k , J r .,




Assistant Cashier

Cashier
Jo s e p h

P.

G a rb a rin i,

Assistant Cashier
Page 9

BANKS IN THE EIGHTH FEDERAL RESERVE DISTRICT
State1

State Member
1964

Arkansas .............. .........
Illin o is................. .........
Indiana .........................
Kentucky.............. ........
Mississippi ........... ........

20
26
18
9
1

Missouri .............. .........
Tennessee ............. ........

Change
1963-1964

67
2

— 1
0
— 1
0
0
— 2
0

(December 31)
National
Nonmember Par
1964
63
120
36
35
15
58
11

Change
1963-1964
+
+
—
+

1964

Change
1963-1964

67
133
45
155
23
302
34

+ 5
___0

— 4
338
+ 10
143
i Includes all of Arkansas but only portions of the remaining states.

+ 6
+ 1
—2
+ 1
+ 6

759

3
1
1
0
2

+ 16

+

4

Total

Nonmember Nonpar
1964

Change
1963-1964

1964

96
0
0
0
65
47
47

5
0
0
0
— 6
— 4
0

246
279
99
199
104
474
94

255

— 15

1,495

—

Change
1963-1964
+3
+2
— 4
+ 1
+2
+3
0
+7

for metropolitan areas in the
Central Mississippi Valley.

R e s e a rc h

Research operations are designed to aid the policy­
making functions of the bank and the System.

P e rs o n n e l

Research at the Federal Reserve Bank of St. Louis
is directed toward national business and financial
problems along with economic developments in the
Eighth Federal Reserve District. Such analyses are
used to assist the President in discharging his respon­
sibilities as a participant in the Federal Open Market
Committee deliberations and in formulating his rec­
ommendations to the bank’s Board of Directors. In
response to requests from outside the bank, the re­
search staff also engages in public information activ­
ities.

Officers and employees of the bank, including the
three branches, numbered 1,163 at the close of 1964,
about the same as a year earlier. The number declined

Largely as a by-product of its background studies
for policy formulation, the bank continued to publish
the monthly Review . The Review contains current fi­
nancial and business articles and other materials per­
tinent to Federal Reserve operations. The Research
Department also publishes a semi-monthly release on
“Bank Reserves and Mo n e y a weekly release on
"Financial Data,” and a monthly release of "Selected

somewhat from 1952 to 1956 as a result of a reduction
in some operations performed relative to the Korean
War effort and efficiencies achieved in other functions.
While the number of employees in some departments
has increased and in others has decreased since 1956,
the total number has remained relatively stable, with
increased efficiencies through mechanization in the
larger operations generally offsetting the greater vol­
ume of work (see table, page 2).

S UBSCR1PTIONS to this bank's

Officers and Em ployees
Number

R e v ie w

and its statistical releases, “Financial

Data ” “Bank Reserves and Money ” and “Selected Economic Indicators ” are
available to the public without charge. Requests should b e directed to: Research
Department , Federal Reserve Bank of S t Louis , P. O. Box 442, St. Louis ,
Missouri 63166.

Page 10



Number

Statements
Net earnings of the Federal Reserve Bank of St.
Louis during 1964, before payments to the United
States Treasury, were $41.6 million, up $5.7 mil­
lion from 1963. Dividends to stockholders (member
banks in the Eighth District) were $1.1 million, 6
per cent of paid-in capital. Payments totaling $56.9
million were set aside for the Treasury as interest on
Federal Reserve notes. These funds represent the
remainder of current earnings and a withdrawal of
$16.3 million from surplus. The bank’s total capital
accounts declined from $51.4 million at the end of
1963 to $35.9 million at the end of 1964. This decline

resulted from the withdrawal from surplus and the
net effects of issue and redemption of capital stock.
COMPARATIVE STATEMENT OF CONDITION
(Thousands of dollars)
December 31,
1964

December 31,
1963

Gold certificate reserves.....................

$ 636,030

$ 693,507

Federal Reserve notes of other banks ...

32,033

21,923

6,401

13,417

Discounts and advances ...................

1,220

3,088

Assets

U. S. Government securities................

1964
Total earnings ........................

$

1963

52,073

45,618

$

298,295

26,543

21,620

$2,548,469

$2,376,899

$1,409,903

$1,340,343

694,156

651,848

56,288

82,828

11,497

(Thousands of dollars)

1,325,049

409,868

Other assets .................................

COMPARATIVE PROFIT A N D LOSS STATEMENT

1,436,374

Uncollected ite m s.............................

8,707

Deferred availability cash items ..........

318,377

238,588
3,213

Total

Change

assets

.............................. .

$ + 6,455
Liabilities and Capital Accounts

Net expenses ........................

10,488

9,713

+

775

Current net earn in gs.............

41,585

35,905

+

5,680

Net additions or deductions . . . .

+

Federal Reserve notes (net) ..............
Deposits:

27

+

28

—

1
Member banks— reserve accounts . ..,

Net earnings before payments
to U. S. Treasury..............
Distribution of net earnings:
Dividends .........................

$

$

$

35,933

986

$ + 5,679

$+

68

U. S. Treasurer— general account

$

32,406

+24,457

Other liabilities and accrued dividends ..

22,362

-16,305

Transferred to surplus...........




1,054

$

56,863

Interest on Federal Reserve notes

Total....

41,612

2,541

— 18,846

Total capital accounts ......................

35,886

51,372

Total liabilities and capital accounts ...

$2,548,469

$2,376,899

41,612

$

35,933

$

5,679

Page II

Federal Debt Lengthened
E
<

jCONOMIC ACTIVITY continued to move up­
ward strongly in December and January, following a
hesitation in the fall because of strikes in the auto
industry. The nations money supply continued to
increase at a moderate rate, and interest rates re­
mained relatively steady. In January the United States
Treasury conducted an advance refunding of a sizable
portion of the public debt.

Debt M anagem ent
The Treasury’s January advance refunding1 was the
eleventh offering of its kind since June 1960. The
operation was one of the largest, and, from the Treas­
ury’s viewpoint, one of the most successful since this
technique was introduced (see table).2 A large amount
1Advance refunding is the technique whereby holders of an
outstanding Federal Government security (as selected by the
Treasury) are offered an opportunity to exchange it, in ad­
vance of maturity, for a new security of longer maturity.
2 The Treasury conducted advance refundings on two occasions
in 1951 and 1952, but the terms and objectives of the offer­
ings were somewhat different than those more recently. For
a discussion of this early experience with advance refunding,
see “Debt Management and Advance Refunding,” U. S. Treas­
ury Department, September 1960.

Date
June 1960
October 1960
March 1961
September 1961
March 1962
September 1962
March 1963
September 1963
January 1964
July 1964
January 1965

of short-term debt was removed, reducing refinancing
necessities for coming years and lengthening the
average maturity of the Federal debt. Although the
volume of short-term liquid instruments (other than
Treasury bills) was reduced, the level and structure
of interest rates changed only slightly.
The offering was announced December 30, and
holders of eligible securities had until January 8 to
effect exchanges. Over $33 billion of outstanding is­
sues maturing within three years were eligible for the
exchange. About $22 billion of these issues were held
by the public—
i.e., outside Government investment
accounts and Federal Reserve Banks. The public's
holdings of these issues represented about 13 per cent
of its total holdings of marketable debt. About $9
billion of the eligible issues held by the public were
exchanged for the three issues offered in the refunding,
maturing from 1970 through 1992.

Compared with previous advance refundings, the
January operation produced a relatively high rate of
response by the public (40.7
per cent), exceeded only by
TREASURY ADVANCE REFUNDINGS
the 51.1 per cent exchange
June 1960-January 1965
of a September 1961 offering
(Dollar figures in billions)
(see table). A high rate of
Amount of Eligible Issues
Amount of Exchanges
exchange generally reflects
Per Cent of
Average Maturity
confidence by private inves­
Held by
Public Holdings
of Marketable
Total
Exchanged
tors in the stability of the
Public
Debt2
the Public1
Total
long-term market.
$11.2
$4.1
$4.2
0.8 months
$11.0
37.1
12.5
19.4
7.6
18.7
26.8
29.0
32.1
24.7
41.7
33.1

10.8
17.9
5.5
16.9
19.1
20.3
23.0
15.3
26.6
22.1

4.0
6.0
3.8
5.2
7.9
8.0
6.7
3.0
9.3
9.7

3.4
5.4

31.4
30.3

2.8
4.2
7.5
7.7
6.5
2.7
9.2
9.0

51.1
24.7
39.4
37.8
28.4
17.4
34.6
40.7

1 Excludes holdings of U. S. Government investment accounts and Federal Reserve Banks.
2 T he average maturity is computed for total outstanding marketable debt.

Source: U. S. Treasury Department.

Page 12




6.3
1.6
4.5
4.1
2.9
3.1
4.3
1.6
4.8
5.5

The January refunding in­
creased the average maturity
of the debt by 5.5 months.
This increase was exceeded
by only one previous advance
refunding. At the end of Jan­
uary the average maturity of
the debt was an estimated 5
years and 4 months, 3 months
longer than a year earlier.

Objectives of Advance Refunding. The advance re­
funding technique provides added flexibility to the
Treasury in the conduct of debt management opera­
tions. As a means for debt lengthening it minimizes
interference with the flow of funds into long-term pri­
vate investment.
This idea is based on the assumption that most
of the new long-term bonds taken in the refunding
will be substituted for shorter-term issues held by
investors who are essentially long-term holders. Since
only a relatively small change in ownership is in­
volved, little new savings will be absorbed, and the
impact on the long-term investment market will be
slight.
Advance Refunding and Economic Activity. The
impact of advance refunding operations on economic
activity is not certain. Debt operations generally
have an impact on the economy by influencing 'li­
quidity” and the level and structure of interest rates.3
Any such effects from the recent refunding remain to
be demonstrated.
An advance refunding changes the liquidity of in­
vestors' assets by substituting securities generally con­
sidered to be less liquid for those previously out­
standing. However, it has been argued that the shift
resulting from an exchange does not cause any in­
vestor, because of the terms of the refunding, to lose
liquidity he did not desire to relinquish.4 According to
this view, both the supply and the demand for liquid­
ity decline, and the net effects on economic activity
may be slight. Furthermore, empirical studies have
not produced clear evidence that over-all liquidity
is an important determinant of aggregate spending.5
3For discussions of the economic effects of debt operations, see
Warren L. Smith, Debt Management in the United States,
Study Paper No. 19 for the Joint Economic Committee (Wash­
ington, D. C.: Government Printing Office, 1960), and James
Tobin, “An Essay on Principles of Debt Management,” Fiscal
and Debt Management Policies, prepared for the Commission
on Money and Credit, 1963.
4For an exchange of views on this subject, see Thomas R.
Beard, “Counter-Cyclical Debt Management— Suggested In­
a
terpretation,” Southern Economic Journal, January 1964, and
Robert J. Lawrence, “Counter-Cyclical Debt Management:
Comment,” and Beard’s reply, both in Southern Economic
Journal, January 1965.
;)For a discussion of the influence of liquid assets on private
spending, see Daniel B. Suits, “The Determinants of Consumer
Expenditure: A Review of Present Knowledge,” and Edwin
Kuh and John R. Meyer, “Investment, Liquidity, and Mon­
etary Policy,” both in Impacts of Monetary Policy, prepared
for the Commission on Money and Credit, 1963.




In addition to liquidity effects, there are also inter­
est rate effects associated with Treasury debt opera­
tions. It is widely believed that an exchange of long­
term bonds for short-term debt will tend to force up
long-term interest rates and lower short-term rates.
An increased supply of long-term securities, with un­
changed demand, will lower prices and thereby in­
crease yields. Reduction of the supply of short-term
securities will result in a bidding up of prices of
those remaining outstanding and thereby lower yields.
The actual impact of a particular debt operation on
the structure of interest rates is difficult to assess,
however. Because of this difficulty, conflicting theories
of interest rate structure have developed.6 Depending
on which theory is accepted, the secondary readjust­
ments to the debt operation will be expected to give
different results.
The assessment of the impact of debt operations
on interest rate structure is complicated by the in­
fluence of other factors. Observed rates reflect private
supply and demand for funds and the actions of the
monetary authority. To ferret out the precise effects
of debt operations on rate structure by looking at ob­
served rates is difficult.
An attempt to evaluate the effects on private spend­
ing of changes in the level and the structure of inter­
est rates introduces additional complications.7 A rise
in the long-term rate tends to be contractionary, and
a fall in the short-term rate, expansionary. The net
effect on spending depends on which of these two
effects is greater.
Evaluation of January Advance Refunding. A meas­
ure which approximates the contribution of Treasury
debt management to liquidity in the economy is the
6 The two leading theories of interest rate structure are the “ex­
pectations” theory and the “liquidity preference” theory. Ac­
cording to the expectations theory, maturity choices of borrow­
ers and lenders are determined by their expectations as to fu­
ture rates, and the behavior of market participants will cause
long-term rates to equalize with the average of short-term
rates expected over the future. The liquidity preference
theory, on the other hand, stresses that interest is paid to
compensate holders of securities because securities entail a risk
of loss in capital value and a cost of portfolio administration.
Thus interest rates tend to be high on the least liquid securi­
ties and low on those nearest to money in character. For results
of recent research on term structure theory, see the references
cited in Harry G. Johnson, “Major Issues in Monetary and
Fiscal Policies,” Federal Reserve Bulletin, November 1964,
p. 1413.
7There are many studies of the relationship between interest
rates and economic activity, too numerous to list here. Helpful
references in this connection are Impacts of Monetary Policy
and Stabilization Policies, both prepared for the Commission on
Money and Credit, 1963.
Page 13

total volume of short-term Government securities held
by the nonbank public.8 By this measure debt man­
agement during 1964 was somewhat restrictive in its
impact on the liquidity of the economy. Nonbank
holdings of short-term marketable securities declined
from about $48 billion in late 1963 to $46.4 billion
in December 1964. The January advance refunding
contributed to a further decline, but this decline was
more than offset by increases in short-term Treasury
bills during the month.
Recent changes in the structure of yields are sum­
marized in the chart below. December 11, 1964 is
representative of the yield structure before the an­
nouncement of the January advance refunding but
after the increase in the Federal Reserve discount
rate on November 24, 1964. The curve for January 14,
1965 is shown to indicate the yield structure after the
recent refunding operation.

Yields on U.S. Government Securities

B u s in e s s D e v e lo p m e n ts
Business activity rose sharply in December and
January, rebounding from levels in October and No­
vember which had been slightly depressed because of
strikes in the strategic auto industry. Total employment,
retail sales, and industrial production all rose to levels
surpassing September. Largely because of December
gains, the increase in gross national product from the
third to the fourth quarter was $5.1 billion. The lull
in activity during the fall caused the rise to be more
moderate than previous quarterly changes in the year.
GNP in the fourth quarter of 1964 was $633.5 bil­
lion, up 5.8 per cent from a year earlier. Real prod­
uct, i.e., GNP adjusted for price changes, was 3.9 per
cent above a year earlier.
Gross National Product
Billions of Dollars
700

Quort. r| Tofa|$ af Annuo, Rat## Billions of Dollars
y
700

600

500

400

Per C en t

600

500

Per Cent

400

q

l a t e s t d a t a p lo tte d : 4th Q uarte r prelim inary

1957

1958

1959

1960

1961

1962

1963— 1964

Source: U.S. Department of Commerce

The rate structure was altered to some extent by
the January refunding; the amount of the "twist”
was small, however. The impact of the refunding
may have been offset by (1) other Treasury actions,
(2) actions of private investors, (3) actions of the mon­
etary authority or (4) the over-all interaction of sea­
sonal factors. It is also possible that the magnitude of
the operation was not large enough to have a sub­
stantial impact on the structure of interest rates.
8The series referred to here includes marketable securities
maturing within one year. The “nonbank public” excludes
Government investment accounts, Federal Reserve Banks,
domestic commercial and mutual savings banks, and savings
and loan associations.
Page 14



Most of the increase of GNP from the third to the
fourth quarter reflected expansion of inventories. Pro­
ducers apparently tried to regain production lost be­
cause of work stoppages earlier in the fall; also,
there was some precautionary stockpiling of steel.
Inventories in the fourth quarter were accumulated
at a $6.0 billion annual rate, well above the $2.8 bil­
lion rate in the third quarter but below the $6.4
billion rate a year earlier.
Industrial production rose to 137.0 per cent of the
1957-59 average in December from 134.8 per cent in
November. The December level of production was 8
per cent above a year earlier. Gains from November
to December were largest in the auto industry. Pre­
liminary data for January indicate that production
continued to increase.
Retail sales, particularly of durable goods, rose
sharply after November. Resumption of automobile
production gave consumers an opportunity to increase
their purchases. It was this component of retail sales
that had pulled down the total from September to
(Continued on Page 16)

Trends in Government Expenditures

J l HE FEDERAL BUDGET for fiscal 1966 was pre­
sented to Congress on January 25. The budget pro­
vides, on a consolidated cash basis, for an increase of
Government expenditures to $127.4 billion, up 4.9 per
cent from fiscal 1965. Total cash receipts are esti­
mated at $123.5 billion, 5.2 per cent higher than 1965.
This article summarizes trends in government ex­
penditures since 1948. All measures of government
finances referred to in the text and charts are on a
consolidated cash basis.
Relative to gross national product, it is estimated
that total Federal expenditures (cash budget) will de­
cline from 20 per cent in fiscal 1964 to about 19 per
cent in 1965 and 1966. Expenditures were equal to
about 15.5 per cent of GNP in 1948-51, 18 per cent in
1956, and 20 per cent in 1962-64.
Expenditures for national defense, international
affairs, and space are expected to decline from an
amount equaling 10 per cent of GNP in 1964 to 9
per cent in 1966. Federal nondefense domestic ex­
penditures relative to GNP are expected to remain at
about 9.5 per cent, about the same as since 1959. In
Federal G o v e rn m e n t Exp end iture s
Per Cent of G N P
24

(Fiscal Years 1948-66)

22
20

Per Cent of G N P
24

22
20

Total

j
/
16
--Sf *
14
1
12
/
10
f
8 / V
18

6

Defense, International* and Space

14

\

12
10
8
6

A

Noindef ensii Dcimej tic

4

2
0

18
16

1948 1950

1952 1954

1956

1958 1960

4

1962

FISCA L YE A RS
1965 and 1966 Estimated

1964

2
0

1966

FISCAL YEARS

‘ B eginning with 1954, includes paym ents to domestic agriculture for Food for Peace.

1951-54 these expenditures averaged about 6 per cent
when related to GNP.
State and local expenditures1 increased rather
steadily from an amount equal to 5.5 per cent of GNP
in 1948 to about 8.5 per cent in 1964. If recent trends
continue, state and local government spending may be
at a level equal to about 9 per cent of GNP in fiscal
1966.
Adding together the expenditures of governments
at all levels, total government expenditures relative to
GNP in 1964 were about 28.5 per cent. Approximately
the same percentage seems likely to continue in fiscal
1966. These total government expenditures rose from
amounts averaging 21.5 per cent of GNP in 1948-51
to 25 per cent in 1956 and on up to the present 28.5
per cent level.

G overnm ent Expenditures
Per Cent of GNP (Fiscal Years 1948-64] Per Cent of GNP
------------------------- '-------------- — 30
™ ------------------ 5
30
28 l— I I I h ik ri— M r l — L / l v U
— ——
Total

I "128
2 6 --------------t -------------------------------------------- 26
2 4 ----------- J - ----------------------------------------------- 24
------------- '— I------------------------------ 22
22 —
/
'I
W«nl
ll
20 — ---------- 7
5xT"T------- — 1 20
—
18----------- - j- ----------- — ------------------------------- 18
16 —
------------------------------------------------ 16
14 — ---------------------------------------------------------- 14
1 2 ---------------------------------------------------------- — 12
Slate and Local*_

______ ____

4 -------------------------------------------------------------- 4
2 -------------------------------------------------------------- 2
Q— ^ 1 | | 1 | 1 ^ I I I I I I I I 0
| — ———————— ——————
1948 1950 1952 1954 1956 1958 1960 1962 1964
FISCAL YEARS
FISCAL YEARS
^Excludes Federal grants-in-aid to state and local governments.
Sources: Bureau of the Budget and Council of Economic Advisers

1Excluding Federal grants-in-aid to state and local governments.

Sources: Bureau of the Budget and Council of Economic A d v ise rs




Page 15

Government expenditures other than for defense,
international, and space have been trending upward.
Such expenditures for all governments combined "were
equal to 13 per cent of GNP in 1948 and 12.5 per cent
in 1951-54. They then rose to 18 per cent in 1959-64.
This percentage appears to be likely in fiscal 1966.
The course of the relation of government expendi­
tures to GNP in fiscal 1965 and 1966 is dependent
upon the assumptions which were made in the budget
regarding GNP and Federal expenditures. If realized
GNP should be less than anticipated, Federal expendi­
tures would probably be somewhat larger than antici­
pated, and the relation of expenditures to total product
would be greater. Also, revenues would be less than
estimated, and the cash deficit would be greater than
forecast.

Nondefense Domestic Government
Expenditures

F IS C A L Y E A R S
F IS C A L Y E A R S
♦E xclu d e s F e de ra l g ra n ts -in -a id to state a n d lo ca l governm ents.
S o u rce s: B u re a u of the Bu d ge t an d C oun cil of Eco n o m ic Advisers

F e d e r a l D eb t L e n g t h e n e d —
(Continued from Page 14)
November. Total retail sales in December were up
at a 10 per cent per year rate from September, and
it appears that retail sales remained at a high level
or increased in January.
Employment conditions continued to improve. Pay­
roll employment was up at a 4.4 per cent annual rate
from September to December. During the past year
total employment increased 2.4 per cent and payroll
employment 3.2 per cent. These increases were sig­
nificantly greater than the estimated increase in the
number of people of working age. The number of
people aged 20 to 64 increased 1.1 per cent, and the
number aged 18 to 64 is estimated to have grown
1.4 per cent. Employment has increased more rapidly
than population of labor force age over the past year;
it has also increased more rapidly since 1960 and over
the longer period since 1948.9

15, compared with a 4.1 per cent rate since September
1962. Reserves available for private demand deposits,
however, decreased at a 0.6 per cent rate from Octo­
ber, reflecting a rise in reserves required to support
Government demand deposits, net interbank deposits,
and time deposits.
Money supply rose at a 3.6 per cent annual rate
from October to the month ending January 15, com­
pared with a 4.2 per cent rate since September 1962.

M o n e y Supply
D o lla r Am ounts
Billions of Dollars

Ave,<,s,*‘ °J!?a![r

S e a s o n a lly A d ju ste d

Billions of Dollars

M onetary D evelopm ents
Continued expansion of bank reserves and money
in December and January accompanied the rise in
business activity. The rates of expansion from Octo­
ber to the month ending January 15 were about the
same as since September 1962, the date of the last
marked and sustained change in the rate of expansion
of the money supply.
Member bank reserves rose at an annual rate of 4.4
per cent from October to the month ending January
9 For further discussion of these trends, see “Recent Employ­
ment Trends/' in the October 1964 issue of this Review.
Page 16




1962

1963

1964

1965

Dotted straight lines represent periods of no marked and sustained changes
in the rates of change.
Percentages are annual rates of change between months indicated.
Latest data plotted: Month ending January 15, preliminary.

The rise in money from October to the month endjjig
January 15 consisted of an increase of demand de­
posits of $800 million and a $400 million increase in
currency.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102