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DEPOSITS
IN NEW ENGLAND

[jy__

FEDERAL RESERVE BANK OF BOSTON

1962 ANNUAL REPORT




Annual Report
Federal Reserve Bank of Boston

Time Deposits in New England




To

the

M e m b e r B anks of the F ederal R eserve B ank of B o st o n :

It is a pleasure to send you the 1962 A nnual R eport of the Federal Reserve Bank of Boston.
This year, as in the past, we devote much of our Report to an analysis of an im portant phase
of the New England economy.
One of the most significant developments in the nation’s recent banking history is the phenom­
enal growth of the savings and time deposits held by the commercial banking system. This growth
has provided the additional funds that banks need to serve their customers and assist in the
continuing expansion of the national and New England economies. But the growth has radically
altered the deposit structure of commercial banking and confronted the banks with difficult policy
problems in the field of loans and investments.
The following pages show how time and savings deposits have evolved historically, and how
competitive forces have molded the characteristics of these deposits in New England. The case for
time deposits at commercial banks is presented, along with a detailed description of time deposit
banking in each of the region’s m ajor banking areas. The appendix outlines the com ponent instru­
ments of the time and savings function, and shows how a functional cost program can clarify the
profitability of these deposits.
During 1962 the Reserve Bank continued its efforts to increase the efficiency of its operations
while broadening its services to the region. The final pages present a measure of our success. Our
Directors join me in extending gratitude to our officers and staff for their continued dedication,
and to New England's bankers and other business leaders for their generous cooperation.

February 15, 1963

TIME DEPOSITS IN NEW ENGLAND
F orew ord
The Story o f T im e D eposits
Savings D eposits in N ew E ngland — 1962
R egional R a te Changes and D eposit G row th
W hy C om m ercial B anks Seek T im e D eposits

PAGE

3

6
27
34
46

A P P E N D IX
A C om parative A nalysis o f T im e D eposit C om ponents
T im e D eposit Incom e and E xpense R elationships

50
57

F E D E R A L R E S E R V E B A N K S U M M A R IE S

62




two

Foreword

D uring 1962 total time deposits in the n ation’s
com m ercial banks increased by som e $15 billion.
This gain of m ore than 18 percent over 1961 was
the greatest grow th recorded for any year since
the end of W orld W ar II. T he increase follow ed
several years of controversy and action in a con­
tinuing com petition for tim e deposits betw een com ­
m ercial b anks on the one hand and savings banks
and a variety of nonbank financial institutions on
the other.
The 1962 expansion of time deposits becam e
possible w hen, on the first of the year, the F ederal
R eserve System and the F ederal D eposit Insurance
C orporation jointly raised the ceilings on the in­
terest rates which com m ercial banks m ay pay on
tim e deposits. It was som ew hat assisted later in
the year when the R eserve System ’s B oard of
G overnors low ered the reserve requirem ent on
tim e deposits held in m em ber banks, and an act of
C ongress exem pted certain foreign tim e deposits
from R egulation 0 . A nd even certain of the n a ­
tion’s econom ic circum stances contributed to the
time deposit g ain — the sluggishness of the business
advance, the relative position and stability of rates
of com peting investm ent opportunities, the b ro a d ­
ening of the m arket for negotiable certificates of
deposit.
A t the end of 1962 the com m ercial banking
system held $97 billion of tim e deposits. New
E ngland’s share of the national total approxim ated
$3 billion. F o r both the nation and the region,
these figures set all tim e highs.
The drive for tim e deposits so successfully co n ­
ducted during 1962 began nearly a decade earlier.
It grew o u t of a persistent dilem m a which first
becam e a p p are n t in the early 1950’s — the com ­
m ercial b an k s’ steadily increasing need fo r lo an ­
able funds with which to service their custom ers,
three




and their inability to secure these funds by sig­
nificantly expanding th eir dem and deposits. Next
to dem and deposits, tim e deposits are the largest
sources of funds for com m ercial banks.
T he b a n k s’ counterbalancing cam paign for time
deposits accelerated throughout the second half of
the 1950’s. It was given a special assist at the
end of 1956 when the R eserve System and the
F D IC granted the first upw ard revision in 20 years
in the ceilings established on tim e deposit interest
rates.
In 1957 tim e deposits in the natio n ’s com m ercial
banks w ere m ore than triple their 1940 levels.
Over that period the pro p o rtio n of tim e to total
deposits rose from 24 to 28 percent. Tim e deposit
grow th continued to gather speed during the next
five years, ending with the above-m entioned sprint
of 1962. In these five years the volum e of deposits
doubled and the ratio of time to total deposits rose
to about 38 percent. T he perform ance of New
E ngland’s banks paralleled th at of the nation.
T oday’s com petition for tim e deposits is p ro b ­
ably m ore intense than in any past period. ■*The
direct com petitors include m ore than 13,000 com ­
m ercial banks, 500 m utual savings banks, 6,000
savings and loan and cooperative banks, and 21,000 credit unions. T he interbank com petition fol­
lows a generally com m on p attern throughout m ost
of the country. In New E ngland and the M iddle
A tlantic seaboard, how ever, — traditional “m utual
territory” — com m ercial banks m ust reckon with
the special com petitive pressures exerted by savings
banks. F urtherm ore, com petition am ong banks has
greatly expanded geographically, som etim es be­
com ing nationw ide. F o r certain kinds of tim e
deposits it even com es from abroad, w here rates
on tim e deposits have frequently exceeded those
of the U nited States. T hus no h ard and fast lines
can be draw n around geographic m arkets.

Time Deposits in New England

In addition to the direct com petition which the

Public Holdings of Selected Liquid Assets

above financial institutions carry o n am ong them ­
selves, centralized and integrated investm ent m ar­
kets offer further com petition with a variety of
attractive investm ent form s such as U.S. govern­
m ent securities, m utual funds, equity shares, life
insurance and pension funds.
Tim e deposits at com m ercial banks have ex­
perienced periods of rapid grow th in the past, p a r­
ticularly in the 1920’s; but in those days the
com petition was confined chiefly to a m uch larger
num ber of com m ercial banks and, in some areas,
betw een them and m utuals. It did not cross re­
gional lines to an appreciable extent. A n o th er sim i­
larity betw een the 1920’s and the 19 5 0 ’s is th at in
both periods tim e deposits grew m uch m ore rapidly
than dem and deposits — three tim es as fast in
the 1920’s and twice as fast in the 1950’s.
T he structure of the tim e deposit total has also
undergone change. A round the turn of the cen­
tury these deposits were said to be largely the
simple investm ent accounts of small savers and
possessed a relatively perm anent character. D u r­
ing the 1920’s however, an increasing portion of
the deposits were the liquidity or contingency re ­
serves of individuals and the funds of corporations
and other large holders, which were available for
short o r m edium term investm ent. This character­
istic was carried still further during the 1950’s.
T hese elem ents of change and growth, and p a r­
ticularly the sharply altered ratio of tim e to total
deposits, confront com ercial banks with difficult
problem s in the fields of loans and investm ents.
To cover the accelerated inflow of interest-bearing
time deposits, com m ercial banks are seeking
higher-yielding long term investm ents such as
m ortgages and state and local governm ent securi­
ties. The volum e of m ortgages acquired by the




1952

1954

1956

1958

1960

1962

Last Wednesday of month.
Colored areas represent periods of business recession.

banks reached a postw ar high in 1962, and the
year also set a new record for th e addition of state
and local governm ent securities to the b an k s’ p o rt­
folios. In order to equalize com petitive positions
with m utual savings banks and savings and loan
associations, com m ercial banks are pressing for
reform of federal tax laws. T hey also argue for
fu rth er reduction in o r rem oval of time deposit
reserve requirem ents, or the im position of sim ilar
requirem ents on their com petitors.
As the controversy continues over the relation­
ships and regulation o f com m ercial and savings
banks and nonbank financial institutions, assorted
study groups are offering a bro ad range of sug­
gested changes in laws relating to tim e deposits.
These groups include the P resident’s Com m ittee on
Financial Institutions (the H eller C om m ittee), the
Com m ission on M oney and C redit, and the A d ­
visory C om m ittee on B anking (the Saxon C om ­
m ittee). T heir recom m endations range from the
rem oval of interest rate ceilings and reserve re­
quirem ents on tim e deposits in com m ercial banks
four

Foreword

to the im position of both on savings accounts in
other thrift institutions. A m ong m ore radical sug­
gestions offered by others is one which would p ro ­
hibit acceptance of time deposits by com m ercial
banks, leaving all form s o f savings to specialized
savings institutions.

d em onstrated th at these are high-cost funds and
th at careful consideration needs to be given in
each specific situation as to w hether, and how, to
com pete for this type of business. Some of the
m ore technical aspects of the profitability of time
deposits are discussed in the appendix.

T he following pages exam ine the m atter of time
deposits from a num ber of view points — their his­
torical developm ent, their current situation and
profitability — with special em phasis on conditions
in New E ngland. T he regional picture varies
considerably from state to state, and even w ithin
states, according to such factors as the size and
location of banks, the nature, num ber and p rox­
imity of o th er thrift institutions, the extent of
branch banking and the reliance placed upon
features other than rates.

In describing the developm ent, nature, and be­
havior of tim e and savings deposits the term “ time
deposits” will generally be used to include all non­
dem and deposits and will correspond to the
caption show n on the Call R eport. W here the
discussion refers to “savings deposits” proper
qualification will be m ade and the term will gen­
erally be lim ited to deposits of individuals and non­
profit corporations as defined in Regulation Q,
In the detailed analysis of the current situation in
New E ngland in p a rt two of this study, the ref­
erences are to “ savings deposits” only unless other­
wise indicated. F u rth e r discussion of definitions
will be found on page 50.

T he advantages and disadvantages accruing to
banks from tim e deposits are also studied. It is

five




Time Deposits in New England

A lthough com m ercial banks h ad becom e accepted

The Story of
Time Deposits




institutions in the U nited States soon after 1800,
they differed m arkedly from the com m ercial banks
of ou r time. T hey were not, in the beginning,
essentially banks of deposit but rather banks of
note issue. T h eir liabilities consisted largely of
bank notes and their assets of discounted cus­
tom ers’ notes. T h eir lim ited deposits were m ainly
the accounts of a few large m erchants and com ­
m ercial enterprises.
T he attitude o f the early com m ercial bank to ­
w ard deposits is perhaps typified by the M assa­
chusetts Bank, which was ch artered in B oston in
1784 and was the first independent joint stock
bank established in the new nation. W hen it began
operations the bank accepted deposits “free of
charge.” W ithin 18 m onths, how ever, its stock­
holders voted a change of policy which established
a charge of .1 percent on all deposits. Five years
later this ruling was repealed and once again the
bank accepted deposits w ithout charge. Along
with this change it was voted th at only “large”
deposits w ould be accepted and only “large”
checks would be paid. A lthough this latter regu­
lation was soon rescinded, it is obvious from the
records that in the beginning th e M assachusetts
Bank attached m uch less im portance to deposits
than to its ow n capital and its b a n k note issue.
This general attitude tow ard deposits continued
until after 1850 w hen deposit banking clearly
began to supersede note issue in im portance. A c­
cording to available records, in 1820 the nation’s
com m ercial banks had outstanding $40.6 m illion
of circulating notes and $31.2 m illion of deposits;
in 1829 the figures w ere $ 48.2 m illion in notes
an d $40.7 m illion in deposits. T hese deposits, to
a large extent, were governm ental deposits, the
deposits of country banks in city correspondents,
those of such o ther financial institutions as savings
six

The Story of Tim e Deposits

banks and life insurance com panies and of large
m erchants and o th er businessm en. M ost banks
were not interested in and refused to accept de­
posits of relatively small size.

E a rly S avin gs Institutions
In such a schem e of things there w as no p rovi­
sion for wage earners and others of m odest m eans
who wished to save for em ergencies, for the p u r­
chase of hom es and other costly goods, for old
age security, and sim ilar purposes. T he n o n ­
profit m utual savings bank was created to m eet
this need, and savings deposits in the U nited States
originated with this institution. Its creation was
delayed, how ever, until there developed a distinct
and substantial num ber of wage earners w ho had
no adequate m eans of protecting and investing
their savings.

By the early 1800’s such a group of wage e a rn ­
ers had grow n up in New E ngland. Shipyards,
sail lofts, ropew alks and other m anufacturing e n ­
terprises had becom e com m on along the region’s
w aterfront. T he im portance o f these coastal in­
dustries to the early developm ent of m utual sav­
ings banks is evident from the fact that the first
such banks in M assachusetts w ere founded at im ­
p o rtant ports — B oston, Salem and N ew buryport.

In 1816 a group of B ostonians in corporated the
first m utual savings bank in the U nited States —
The P rovident Institution for Savings in the T ow n
of B oston — although a sim ilar bank began o p era­
tions as a voluntary association w ithout a c h arter
earlier in the year in Philadelphia. B oth these
institutions, and others which follow ed, were p a t­
terned on the “ Parish B ank” established in Scot­
land in 1810 by the R everend H enry D uncan.
seven




T hese early savings banks were philanthropic
in purpose, aim ed at helping im prove the welfare
of the com m on m an by encouraging frugality and
thrift and providing safe depositories for small
savings. T h eir creation was brought about by
civic leaders willing to assum e the responsibilities
of protecting and investing w orkers’ savings.
The Provident bank, w hich at first was open
only on W ednesdays, accepted deposits as low as
$1 and agreed to pay interest of 4 percent on
deposit totals of $5 or m ore. T otal deposits were
lim ited to $1 ,0 0 0 p e r person. So successful was
the P rovident that less th an two years after its
opening the trustees, w ho served w ithout “em ol­
um ent” and only “to prom ote the interest of the
tow n,” sought to fix a lim it of $300 thousand as
the m axim um of its deposits. They voted that no
deposits should be received from any corporate
bodies and appointed a com m ittee to determ ine
if the b a n k ’s rapid grow th had resulted from de­
posits by others than the “frugal p o o r” for whom
the institution was designed.
The case of the P rovident illustrates a m utuality
of interest betw een com m ercial and savings banks
which still persists in New E ngland. T he Provi­
d e r 's first president w as also president of the
M assachusetts Bank. A n d on the P rovident’s first
board of trustees, in addition to the president,
were a founder and three current directors o f the
M assachusetts B ank.
By the m iddle of the 19th century several hun­
dred m utual savings banks had been established
throughout the industrial N ortheast, and some of
their nam es suggest the hum ble character of their
early depositors — Penny, Five C ent, Dim e,
H om e, Seam ans, M echanics, Peoples. F rom 1816
to 1890 m utuals grew greatly both in n um ber and
resources. T he 10 banks in existence in 1820 had

Time Deposits in New England

deposits of little m ore than $1 m illion; the 637
institutions of 1890 held deposits of $1.3 billion.
Although deposits continued to expand steadily
until 1930 the num ber of m utual banks increased
very little after 1890. M utuals m ade no significant
progress outside New E ngland and the M iddle
Atlantic seaboard for reasons to be discussed
later. M eanwhile, the guaranty bank — a hybrid
of m utual and stock savings form s — was devel­
oped in New H am pshire. Such institutions accept
both regular and “ special” deposits: the latter are,
in reality, capital stock, and excess of earnings
above the am ount required for savings depositors
is available to the special depositors. O f the 514
m utuals in 1961 only 26 are found in states o u t­
side the N ortheast. T he 19th century was de­
cidedly a “ clear field” for m utuals, and com peti­
tion for savings deposits was largely confined
within their ranks.
In the public and legislative m inds m utual sav­
ings banks still retain m uch of their benevolent
aspect. They continue to be favored by tax exem p­
tions and other special considerations despite their
operation today as straightforw ard business estab­
lishm ents with dividends going to depositors rath er
than stockholders.
T he investm ents perm itted to savings banks
are restricted to the “legal list” and guided by
the old investm ent m axim of safety, yield and
liquidity. M assachusetts was the first of the states
to restrict by law the field of savings bank invest­
m ents. The statute of 1834 lim ited such invest­
m ents to public funds of the U nited States, of
M assachusetts and of counties, cities and towns
therein; to stocks of any bank incorporated under
a law of M assachusetts or the U nited States; to
loans with a pledge of security of any of the fore­
going investm ents; and to loans on real estate and
personal security. O ver the years, however, the




M assachusetts “ list” and those of o th er states have
been broadened to include selected corporate
bonds and bank and insurance stocks. A fter W orld
W ar II m ost states sanctioned the acquisition of
federally-aided (F H A and V A ) m ortgages on outof-state property. In the m id-50’s some states
legalized lending against lease and m ortgage col­
lateral, thus allowing m ore flexibility in making
investm ents in a wide range of com m ercial and
industrial properties.
T he m utuality of interest first show n in the re­
lationship of the M assachusetts Bank and the
Provident Institution for Savings w as broadened
by banking laws enacted after 1834 not only in
M assachusetts but other states as well. T he effect
of these laws encouraged m utual savings banks to
acquire substantial am ounts of the com m on stock
of com m ercial banks, thus supplying in m any in­
stances p a rt of the capital needed for com m ercial
bank expansion. In a 1958 B oston Reserve Bank
survey of M assachusetts com m ercial banks, 78.5
percent of the responding banks reported a p o r­
tion of their stock ow ned by com peting m utuals.
W hile the average p o rtion of stock ow ned was 16
percent, eight com m ercial banks reported m utual
banks ow ned 30 percent o r m ore of the stock, 24
banks reported m utual ow nership of 20 to 30 p e r­
cent of their stock, and 19 banks reported that
10 to 20 percent of their stock was ow ned by
m utuals. Evidence is lacking th at this ow nership
limits com petition for tim e deposits either am ong
com m ercial banks or betw een com m ercial and
savings banks.
In 1831 a second form of thrift institution, the
building and loan association, was organized in
F ran k fo rd , Pennsylvania. L ike the m utual savings
bank, the association was p attern ed upon a British
m odel which pooled the savings of m em bers who
took turns in borrow ing funds for hom ebuilding

eight

The Story of Tim e Deposits

purposes. T he early associations w ere all voluntary
and u n incorporated, and there w as no public
supervision of their activities. In later years these
institutions becam e know n as savings and loan
associations and opened m em bership to non­
borrow ers who participated in earnings in p ro p o r­
tion to the accum ulated value of their “ accounts”
or shares. New Y ork was the first state to enact
specific m easures regulating associations, req u ir­
ing annual reports of condition beginning in 1875.
T w o years later M assachusetts perm itted the in­
corp o ratio n of sim ilar thrift institutions which are
now called cooperative banks. T here were 168
such banks in M assachusetts in 1963.

S a v in gs and Loan Grow th
T h ere are no adequate statistics covering the
first 60 years of the savings and loan business.
T he first com prehensive governm ent survey was
m ade in 1893 and reported 5,838 associations
with a total m em bership of som e 1.75 m illion and
assets of $529 m illion. T hese figures include p e r­
haps 250 associations organized on a national
rath er than a local basis. M ost o f the “natio n als”
were liquidated during the depression of 1893-97,
“victim s of their own im m oderate expenses, ques­
tionable loans and poorly controlled op eratio n s.”
T heir failures engendered a public d istrust of as­
sociations that lasted into the early 1900’s.
A s public confidence was rebuilt in the years
before an d after W orld W ar I, the nu m b er of
associations expanded steadily. G row th w as p a r­
ticularly rapid during the 1920’s and 1950’s, as
indicated in T able I.
F ed eral savings and loan associations w ere a u ­
thorized as p a rt of the H om e O w ners L oan A ct
of 1933 and today about 30 percent of the asso­
nine




ciations and m ore th an 50 percent of total assets
are un d er federal charter.
D uring the 1950’s association assets increased
m ore rapidly than those of any o th er type of sav­
ing institution. T his was the result of aggressive
cam paigns for new accounts and increased divi­
dends derived from m ortgages associated with the
high level of real estate construction in the post­
w ar period. T oday, the prim ary areas of associa­
tion activity are the M iddle and South A tlantic,
the E ast N orth C entral and Pacific states.
It is im portant to note again that both m utual
savings banks and savings and loan associations
were nonprofit in origin and were ow ned not by
stockholders b u t by the savers them selves. Savings
bank policies w ere devised and their operations
supervised by public-spirited directors o r trustees
who served in the interest of the savers either w ith­
out pay o r on a m odest fee basis. Savings and
loan directors were elected from am ong m em bers
them selves.
D uring the first th ree-q u arters of the 19th cen­
tury there was virtually no need for the establish­
m ent of m utual savings banks in the South and
W est. It was not until a fter the Civil W ar that the
M iddle W est turned strongly tow ard industrializa­
tion. T he South was still largely w ithout industry
at the turn of the century. In predom inantly agri­
cultural areas savings are usually invested in land,
stock and equipm ent.
W hen the W est and South eventually accum u­
lated surplus funds, their already established com ­
m ercial banks were available for receiving deposits.
In com m on with the com m ercial banks in New
E ngland, whose early business h ad been to dis­
count com m ercial p a p e r and issue circulating c u r­
rency, the banks in the W est and South in the post
Civil W ar period saw th eir note issue function

Time Deposits in New England

steadily decline in im portance in com parison with
deposit banking. It was n atu ral, therefore, th at
southern and w estern com m ercial banks were
prepared to receive savings as soon as they ap­
peared. In addition, there arose in these sections
a type of institution called the stock savings bank.
It differed from com m ercial banks in nam e only
since it usually received checking as well as sav­
ings accounts.
By 1896 m utual savings banks held about 70
percent of the n a tio n ’s tim e and savings deposits
as against only about 27 percent in state banks and
trust com panies and just under 3 percent in n a ­
tional banks. It was not until after 1900 that
com m ercial banks began seriously challenging sav­
ings banks for the savings of individuals and n o n ­
profit organizations.

Tim e Deposits at
Com m ercial B an k s
T he records of tim e deposits in com m ercial
banks, how ever, date back alm ost to the begin­
ning of the natio n ’s com m ercial bank history.
E arly com m ercial banking statistics do not dis­
tinguish deposits by type — that is, dem and as
contrasted with tim e — but it is certain that early
banks accepted both types from m erchants and
o ther businessm en. B ut until the latter p art of
the 1800’s tim e deposits at com m ercial banks
were seldom “ p u re ” savings in the m utual savings
sense — they som ew hat resem bled that portion of
today’s time deposits m ade by businessm en or
large investors with tem porarily surplus funds.
As has been indicated, tim e deposits constituted
but a sm all pro p o rtio n of total com m ercial bank
deposits until the closing years of the 19th cen ­
tury. U p to the tim e of the Civil W ar, bank notes




rath er than checks were the chief m eans of pay­
m ent. As a result deposits in banks outside com ­
m ercial and m oney centers w ere generally stable
and there was no necessity for distinguishing be­
tween the two classes of deposits. T he practice of
paying interest on both dem and deposits and de­
m and certificates of deposit m ade the distinction
far less significant than it is today. A nd banking
legislation, by failing to grant express pow ers, also
m ade it difficult for som e groups of banks to
develop time deposit business.
T he passage in 1863 of the N ational Bank A ct
m arked the beginning of the dual banking system
in the U nited States and established a national as
well as the state regulatory bodies, with each super­
vising its own group of banks. T he A ct m ade no
distinction betw een dem and and tim e deposits
with regard to the new national banks. A lthough
doubt existed about the right of national banks
to receive time deposits, the banks cam e to accept
them as the years passed.
New H am pshire was the first state to draw legal
distinction betw een tim e and dem and deposits. In
1874 the legislature im posed reserve requirem ents
of 5 percent on tim e deposits and 15 percent on
dem and deposits. O ther states follow ed b u t so
slowly that by 1914 only 11 states had such laws.
M eanwhile, periodic inquiries were made of the
C om ptroller regarding the legality of time de­
posits. In 1903 he ruled th at there appeared to
be nothing in the N ational Bank A ct which either
authorized o r prohibited the operation of a sav­
ings departm ent by a national bank. M any banks
paid interest on deposits, in com petition with
m utuals and state banks, as evidenced by entries
in depositors’ pass books or by issue of certificates
of deposit. Certificates were particularly popular
in the M iddle W est and som e parts of the South.
ten

The Story of Tim e Deposits

By 1913, w hen the F ed eral R eserve A ct was
passed, com petition for these deposits was com ­
m on am ong n ational banks as well as state banks
and trust com panies.

T he F ed eral Reserve Act
Passage of the Federal R eserve A ct greatly
clarified a num ber of issues related to tim e de­
posits in com m ercial banks and stim ulated time
deposit grow th. F o r the m ore than 7 ,500 national
banks for which R eserve System m em bership was
m andatory, the A ct defined for the first tim e the
n ature of both dem and and tim e deposits; it ex­
plicitly authorized the banks to receive time
deposits; it ordered n ational banks throughout
the 48 states to m aintain separate classifications
of dem and and time deposits and it stipulated a
low er level of required reserves on tim e than on
dem and deposits. It was silent regarding the pay­
m ent of interest on both tim e and dem and de­
posits. T he act also granted lim ited pow er to
national banks outside the three C entral Reserve
Cities to invest tim e deposits in farm , and sub­
sequently residential, m ortgages.
C onsiderable discussion an d debate in the C o n ­
gress had preceded the final enactm ent of the
lower reserve requirem ent on tim e deposits. E arly
drafts of the A ct had required the sam e reserve
level for both classes of deposits, b u t eventually
the low er level on tim e was agreed on as necessary
in order to place national banks on a com petitive
footing with state banks operating un d er m ore
liberal state legislation.
T he F ederal R eserve A ct thus recognized the
increasing im portance of tim e deposits and p ro ­
vided a strong stim ulus to national b anks to expand
eleven




service and com pete in this area of banking. As
noted elsew here, those state legislatures which had
m ade no specific provisions regarding tim e deposits
soon at least m atched the pow ers of state banks
with those given to nationals. As a result the expan­
sion of tim e deposits at com m ercial banks rapidly
exceeded the grow th of savings deposits at m utuals.
By 1930 the percentage held by m utuals dropped
to 31 from the 70 percent of 1896, while state
banks held 40 and nationals 29 percent. A nd
in 1930 savings and loan association accounts
am ounted to alm ost tw o-thirds the dollar volume
of savings in m utual banks.
A b ro a d er question th an that of the relative dis­
placem ent of one form of savings institution by
a n o th er involves the grow th of com m ercial bank
tim e deposits in the years follow ing passage of
the R eserve A ct. T o m any observers th at growth
is not so rem arkable as statistics at first suggest
when prices o r increases in national incom e are
considered. A fter 1920 some savings which m ight
have been expected to flow into banks were
diverted by the expansion of instalm ent selling,
by real estate developm ent, by em ployee and other
stock ow nership plans, by the stock m arket and,
m ore closely related, life insurance and savings
and loan associations.
D espite this intense com petition, the period from
1900 to 1930, particularly after 1914, saw a vast
“ institutionalization” of savings, with the savings
dollars of individuals p oured into banks, savings
and loan associations and life insurance com panies
rather than into direct business ow nership o r own­
ership of m ortgages. The ratio of the liquid savings
of individuals to gross national pro d u ct rose from
29 to 51 percent during these three decades.
In the first decade of the 1900’s tim e deposits
at com m ercial banks becam e the largest com-

Time Deposits in New England

ponent of total liquid savings. A nd in the period
1913 to 1930 they grew faster than to ta l liquid
savings, quadrupling over those years while m utual
savings deposits little m ore than doubled. Sav­
ings and loan shares, how ever, expanded trem en ­
dously, m uch as they have in recent years. From
1913 to 1930 they show ed a sevenfold rise. B ut
even in 1930 they totaled less th an $7 billion as
com pared to $20 billion for com m ercial tim e de­
posits and $9 billion for m utual savings deposits.
T he relative grow th of com m ercial ban k tim e
deposits was m ore rapid in N ew E ngland than in
the nation. It should be noted, how ever, th at New
E ngland started from a sm aller base because of
the existence of so m any m utual savings banks. In
New E ngland in 1913 tim e deposits were 5 p e r­
cent of the nation’s total, close to the region’s 7
percent of the n a tio n ’s population. By 1930 they
had increased to 8 percent o f the national aggre­
gate. D uring this period com m ercial tim e deposits
grew m ost rapidly in C onnecticut, M assachusetts
and New H am pshire, b u t despite this grow th, by
1930 they had still failed to overtake m utual saving
deposits in those states.
A t the end of 1914 tim e deposits in the n ation’s
com m ercial banks w ere 27 percent of total de­
posits. In the succeeding 16 years the expansion
of tim e deposits was practically the sam e as de­
m and deposits — $15.4 billion for dem and and
$15.5 billion for tim e — b u t by 1930 the ratio of
tim e to total deposits had clim bed to 40 percent.

T im e Deposits, 1913-1930
T he causes of the rapid grow th in tim e deposits
at com m ercial banks in the period 1913-1930, the
rising proportion of these deposits to total deposits,




and the failure of dem and deposits to grow as
rapidly during the 1920’s have been widely de­
bated by bankers, supervisory authorities and fi­
nancial historians. T here is no agreem ent as to a
single cause, and different weights are assigned to
the differing causes advanced by varying groups.
T o a substantial degree, the increase in tim e
deposits seem s a genuine expansion of savings
brought about through aggressive solicitation by
an increasing num ber of com m ercial banks. These
banks introduced new m ethods of soliciting sav­
ings and offered a variety of new services such as
vacation clubs, C hristm as savings, special invest­
m ent accounts and other program s. Convenience
of facilities — one stop banking — was also im­
portant, and the receipt of tim e deposits served
as a feeder for other types of business.
C hanges in definition of deposits also contrib­
uted to tim e deposit grow th. U ntil 1914, legisla­
tion and bank practice in m ost states did not
differentiate betw een tim e and dem and deposits,
but after the Federal R eserve A ct the banking laws
of m any states were am ended to distinguish be­
tw een and carefully define these deposits.
A third stim ulant was the grow ing practice of
both corporations and individuals during the
19 2 0 ’s of shifting from dem and to tim e such funds
as were not im m ediately needed. D espite the
higher interest costs, which were n o t wholly offset
by low er reserve requirem ents, m any banks ac­
cepted these deposit shifts as a m eans of holding
accounts in the face of aggressive com petition. O f
course, the higher interest rate paid on tim e a p ­
pealed to the depositor. C ertain tim e deposits,
open accounts and certificates o f deposit thus
really reflected non-savings, although they swelled
total tim e accounts. In N ew E ngland certificates
of deposit w ere used alm ost exclusively by busitw e lv e

The Story of Tim e Deposits

TABLE I

T IM E D E P O S IT S IN ALL. C O M M E R C IA L B A N K S , M U T U A L
S A V IN G S B A N K D E P O S IT S A N D S H A R E A C C O U N T S O F
S A V IN G S A N D L O A N A S S O C IA T IO N S , 1900-1962

(D ollar amounts in millions, proportions in percent)
1900

1913

1930

1933

1940

1951

1962

Commercial bank time deposits
N ew England

$

49

$ 246

$ 1,470

$ 1,073

$ 1,016

$ 1,897

$

United States

$1,087

$4,925

$20,192

$1 1,734

$15,608

$36,801

$ 89,551

4.5

5.0

7.3

9.1

6.5

5.2

3.3

N ew England proportion

2,994

Mutual savings bank deposits
N ew England

$

932

$1,481

$ 3,303

$ 3,229

$ 3,438

$ 5,597

$ 11,116

United States

$2,129

$3,712

$ 9,088

$ 9,603

$10,605

$20,383

$ 39,573

43.8

39.9

36.3

33.6

32.4

27.5

28.1

593

$ 1,261

$

N ew England proportion

Savings and loan share accounts
$

84

$

552

N ew England

$

33

United States

$

422

$ 904

$ 6,583

$ 5,926

$ 4,862

$16,073

$ 74,790

7.8

9.3

8.4

8.7

12.2

7.8

4.6

N ew England proportion

$

515

$

3,415

Totals of above
N ew England

$1,014

$1,811

$ 5,325

$ 4,816

$ 5,047

$ 8,755

$ 17,525

United States

$3,638

$9,541

$35,863

$27,263

$31,075

$73,257

$203,914

27.9

19.0

14.8

17.7

16.2

12.0

8.6

7.3

7.1

6.6

6.5

6.4

6.2

5.7

N ew England proportion

N ew England proportion of
U. S. population

Note — Most of the above data is for June dates. Commercial bank time deposits
exclude interbank and U.S. government deposits. Share accounts of savings
and loan associations for New England partly estimated from 1900 to 1940-

th irteen




Time Deposits in New England

ness firms and large investors as tem porary invest­
m ent havens. In certain areas o f the W est, how ­
ever, the certificate of deposit was a p referred form
o f genuine savings.

D E M A N D & TIME DEPOSI TS
A L L CO MM ER C IA L BANKS
1 9 1 0 -1 9 3 4

T he grow th of tim e deposits w as also fostered
in some banks during the 1920’s by perm itting
depositors to write checks against th eir tim e de­
posits as though they w ere dem and accounts, a
practice which h ad prevailed earlier in a lim ited
form . T he changing habits of individuals as they
increasingly “ institutionalized” their savings con­
tributed to still fu rth er grow th, as did corporate
enterprises intent on shrinking idle dem and bal­
ances. D uring the 1920’s tim e deposits thus took
on a kind of “ interm ediate quality” — interm edi­
ate betw een the orthodox, interest-bearing deposits
of the m utual banks of the early period and the
older, non-interest-bearing checking accounts. This
interm ediate quality was discussed by Frederic H.
C urtiss, F ederal R eserve A gent a t the Boston
R eserve Bank at the Fifth A nnual M eeting of the
Stockholders of the F ederal R eserve B ank of
B oston in 1927. H e stated:

$ Billions

R a t io ( P e r c e n t )

“I see evidence of a large am ount of this in­
crease in savings deposits com ing from conversion
of accounts w hich w ould ordinarily go into de­
m and o r com m ercial departm ents of banks. I
refer especially to the large sums of m oney that
are p u t either into savings deposits o r certificates
of deposits w ithout definite m aturity — deposits
th at are really subject to im m ediate dem and and
represent unem ployed w orking capital.
“ O f course all these deposits and certificates are
supposedly subject to 30 days notice but you and
I know th at no bank w ould take advantage of this
provision except under very unusual circum stances.
T his conversion has com e about in order that the
banks m ay have advantage of the 3 percent




reserve provision for tim e deposits instead of the
higher reserve called for against dem and deposits.
T hese large deposits are com peted fo r even m ore
keenly th an the sm aller ones, an d the fact that
fourteen

The Story of Tim e Deposits

such deposits m ay constitute a dem and liability

1820 the U nion Bank in B oston agreed to pay 5

should be given m ost careful consideration by the
m anagem ent of every bank. I am led to believe
th at com petition in this D istrict, for this class of
account, is fully as keen as, if not keener than, in
o th er sections of the country. T he only exception
perhaps is the San Francisco D istrict where,
through rather unusual circum stances, there have
been large increases in such accounts.”

percent on a $50 thousand tw o-year deposit from
the Provident. W hile the M assachusetts Bank
seems generally to have opposed the paym ent of
interest as a m eans of stim ulating deposit growth,
in 1825 it accepted from a life insurance com pany
a $100 thousand deposit that was subject to 30
days notice of w ithdraw al and earned 4.5 percent.

The forces affecting tim e deposits from 1913 to
1930 are obviously com plex. In addition to those
noted above, deposit grow th was also influenced
by such factors as em ploym ent levels, decisions to
save o r consum e, the differing opportunities for
investing savings, and the confidence of savers in
banks. T he increasing presence of com m ercial and
investm ent funds in tim e accounts, how ever, m akes
generalizations about individual savings decidedly
questionable.

The Interest Rate Controversy
T he wisdom of paying interest on com m ercial
bank deposits was vigorously debated in the
U nited States for over a century. F rom the 1830’s
to the 1930’s sporadic attem pts were m ade to limit
o r to prohibit such paym ents. As the banking sys­
tem developed, the practice of paying interest
gradually becam e m ore w idespread and included
both dem and and time deposits. B ut interest was
paid on “ deposits” before there w ere distinctions
in the statutes betw een classes of deposits.
T he earliest paym ents of interest on deposits
was recorded in 1804 by the F arm ers B ank of
M aryland. B oston’s Suffolk B ank in 1819 was
willing to pay 6 percent on a $ 10 thousand deposit
from the P rovident Institution for Savings, and in
fifteen




M ost observers couple the developm ent of in­
terest paym ent with the grow th in b an k ers’ b a l­
ances kept in m oney centers like B oston and New
Y ork. Such paym ent appears to have been used
by the m ore aggressive banks to m eet com petition
rath er th an as a routine device. It was not always
offered to all depositors, either bank or individual,
but was used rath er as an inducem ent to obtain
new accounts or to attract an account from a rival.
Interest paym ents were m ade m ore frequently to
out-of-tow n depositors than to local custom ers, and
trust com panies and private banks seem to have
follow ed the practice m ore often th an incorporated
banks. Some banks, how ever, refused to pay in­
terest even before w idespread opposition to interest
paym ents developed.
By the early 1830’s paym ent of interest by
com m ercial banks was sufficiently com m on to p ro ­
voke criticism and disapproval by som e state regu­
latory authorities. T his disapproval was based in
p a rt on the view th at interest-bearing deposits
were, in effect, “borrow ed” funds, that banks ought
ra th e r to be operating with their own capital and
note issues, and th at paym ent of interest m ight
force banks into lending on high risk assets in
ord er to m eet interest paym ents due their depos­
itors. T he bank com m issioner of N ew Y ork state
criticized interest paym ents in his first report in
1831, and in 1834 M assachusetts enacted a law
curtailing interest paym ents by com m ercial banks.
In terpreting the law, M assachusetts banks argued

Time Deposits in New England

th at it prohibited interest paym ents only on the

rates by adm inistrative ruling, the general objec­

tim e deposits of individuals and corporate e n te r­
prises o th er than banks, since it specifically p e r­
m itted interest on deposits of the C om m onw ealth,

tive being “to avoid ruinous com petition betw een
individual institutions such as to lead them to offer
rates not justified by the regular yields on invest­
m ents they can m ak e.”

on those of any M assachusetts savings institution,
and on “ all debts due to any bank from any other
ba n k .” A fter the crisis of 1837 the bank com ­
m issioners held th at the law prohibited interest
paym ents on all com m ercial bank deposits except
for those specifically exem pted. In 1842 the law
was revised to add deposits by the city of B oston
to the exem ptions. In contrast, New Jersey in
1834 enacted a law allowing paym ent of 3 p e r­
cent on deposits not w ithdraw n for 60 days. In
1854 C onnecticut lim ited interest paym ents by
com m ercial banks to a rate of 4 percent, b u t the
law was soon repealed.
Prohibition and lim itation of interest paym ents
did not result in elim ination of the practice, but
it did reduce the intensity of com petition sub­
stantially in some areas. By 1844 only 6 percent
of com m ercial deposits in M assachusetts bore in­
terest as against som e 60 percent 10 years earlier.
W hile the M assachusetts law was n o t form ally dis­
carded until after 1900, it was increasingly ignored
after the 1850’s. A nd of course its provisions did
not apply to the national banks created in and
after 1863 by the N ational B anking Act.
N evertheless, the controversy over the paym ent
of interest on deposits in com m ercial banks con­
tinued, both within the banking industry and
am ong bank regulatory authorities. A n early ver­
sion of the N ational B anking A ct w ould have for­
bidden interest paym ents by national banks, but
this proposal was deleted from the A ct as finally
passed because of the belief th at it w ould h a n d i­
cap national banks in their com petition with state
chartered banks. Subsequently a num ber of
southern and western states set m axim um interest




In 1918 G overnor W. P. G . H arding com ­
m ented: “ T he F ederal Reserve B oard regrets ex­
ceedingly to learn of the disposition evidenced by
banks in various sections of the country to in­
crease rates of interest allowed on deposits. It is
unfortunate that any bank o r group of banks should
undertake, especially at the present tim e, to in­
crease deposits by offering unusual inducem ents in
the way of interest, and it follows th at any aggres­
sive steps w hich m ay be taken by any bank to
increase its deposits at the expense of other banks
will doubtless be met by protective m easures on
the p a rt of banks whose business is subjected to
atta ck .”
T he argum ents over interest paym ents usually
intensified after financial crises, with such pay ­
m ents frequently cited as helping provoke the
crises because they drained funds from country
banks and encouraged concentration of balances
in banks in the larger cities. In terest paym ents, in
the opinion of m any observers, also added to the
investm ent problem of the banks since they were
spurred to seek returns — frequently in an in­
creased proportion of investm ents and collateral
loans — sufficient to cover a growing interest b u r­
den. W hen a bank paid interest on both dem and
and tim e deposits the paym ents m ade increasingly
large claim s on gross operating incom e.
A s com m ercial banks expanded their tim e
deposit business, obviously th eir total interest pay­
m ents also increased. D uring the 19 2 0 ’s such p a y ­
m ents becam e the largest single expense item of
m ost banks. T his largely reflected the sim ple dollar
sixteen

The Story of Tim e Deposits

expansion of tim e deposits and their increased
p ro portion of total deposits. B ut m ounting in­
terest costs also reflected higher rates paid on
both dem and and tim e deposits as well as some
widening of the practice of paying interest on
dem and balances.

Interest Rates and
B a n k Costs in the 1920’s
In New E ngland in 1921 interest paym ents on
deposits at System m em ber banks consum ed about
one-third of gross operating earnings. T his rose
to 36 percent in 1926 and 39 percent in 1927
before leveling off a t about 40 percent in 1929
and 1930. T im e deposits during the late 1920’s
com prised a bout 45 percent of total deposits as
com pared with 33 percent at the beginning of the
decade.
K een com petition am ong some of the largest
banks for dem and balances rather than for larger
time deposit com ponents resulted in a higher rate
paid for dem and deposits and consequently a
heavier interest expense burden at those banks. In
the late 1920’s the larger B oston banks paid out
about one-third of their gross operating incom e
in the form of interest on dem and balances — due
to o th er banks and individual depositors — ex­
clusive o f additional interest on tim e deposits.
It w as also generally true th at the banks in the
region which c arried a large volum e of tim e
deposits had the low est capitalizations. T he p ro ­
portion of capital funds to gross deposits fell
steadily during the 1920’s at heavy tim e deposit
banks, an d tow ard the end of the period am ounted
to betw een 10 and 12 p ercent for m any banks in
the D istrict. T he percentage of capital funds to
deposits tended to rise as the p roportion of tim e
s e v e n te e n




deposits declined at various groups of banks when
classified by p ro p o rtio n of tim e deposits.
In general, banks with a large ratio of time
to dem and deposits held bonds in portfolio which
yielded an average of 5.2 percent. In contrast,
banks doing m ainly com m ercial business received
only 4.5 percent on their portfolio of securities
investm ents. T his suggests the possibility that the
banks paying heavy interest on deposits needed
higher yielding securities than the strictly com m er­
cial banks deem ed desirable. T able II, which is
based on B oston R eserve B ank incom e and ex­
pense studies for representative groups of its m em ­
ber banks, classified by ratio of tim e to dem and
deposits, clearly shows these developm ents.
B ank profit ratios during this period declined
from their post-W orld W ar I highs and the spread
betw een deposit rates paid by the banks and re­
turns on loans and investm ents narrow ed consid­
erably before leveling off in the late 19 2 0 ’s —
indicative of both “defensive” com petition to hold
position and “ aggressive” com petition to im prove
position. R a th e r than reduce interest rates, with
the accom panying risk of deposit losses, some
banks sought higher yields and risk assets such as
m ortgage loans and low er-rated corporate bonds;
others raised rates and at the sam e tim e reached
out for higher yielding assets. T he experience of
New E ngland com m ercial banks in the 1920’s was
paralleled elsew here in the nation.
T here is no evidence that a high ratio of time
to dem and deposits and a heavy interest burden
were prim ary factors in the com m ercial bank
failures which characterized the 1920’s. But cer­
tainly the com bination of com m ercial and savings
business in a single institution considerably com ­
plicated the problem s o f banks in periods of eco­
nom ic uncertainty and difficulty. In the late 1920’s

Time Deposits in New England

T A B L E II

IN T E R E S T R A T E S P A ID O N D E P O S IT S A T
R E P R E S E N T A T IV E G R O U PS O F M E M B E R B A N K S
I N N E W E N G L A N D 1927 and 1930

(Banks Grouped According to Percentages of Tim e Deposits)
1927
Boston Banks

% Time to total deposits
Typical bank in group
Rate of interest paid
A. Balances due to domestic banks
B. Other demand balances
C. Tim e deposits
Total Interest paid on deposits as % of
current income
A. Balances due to domestic banks
B. Other demand balances ..............
C. Tim e deposits
Total

14%
(7 banks)

Country Banks

under 25.1% 25.1% to 50% over 50%
6%
43%
65%
(38 banks)
(38 banks)
(43 banks)

Country
totals
Common
figures
(119 banks)

2.0
1.7
3.3

1.5
1.1
3.0

1.5
1.4
3.7

1.1
1.0
3.8

1.4
1.2
3.7

5.7
26.3
8.0

1.4
18.5
5.5

1.1
11.9
27.9

.2
5.0
42.5

.7
9.4
30.5

40.0

25.4

40.9

47.7

40.6

1930

% Time deposits to gross
deposits typical bank in group

Boston Banks

Country Banks

20%
(8 banks)

Country
totals
Common
under 25.1% 25.1% to 50% over 50%
figures
68%
41%
3%
(61 banks) (106 banks) (224 banks)
(57 banks)

Rate of interest paid
A. Balances due to domestic banks
B. Other demand balances
C. On savings deposits
D. Other time deposits

1.7
1.5
3.7
3.3

2.0
.9
N o Dept.
2.9

2.0
1.1
3.8
2.6

1.9
.7
3.9
1.8

2.0
.9
3.8
2.3

Total Interest paid on deposits as % of
current incom e
A. Balances due to domestic banks
B. Individual demand deposits
C. Tim e deposits

2.0
20.1
11.6

1.9
13.9
2.0

1.2
10.7
25.3

.2
4.6
43.4

.7
8.7
30.5

33J

17.8

37.2

48.2

39.9

Total




eighteen

The Story of Tim e Deposits

and early 1930’s such a com bination of business
undoubtedly accentuated w eaknesses — for exam ­
ple, high loan ratios, investm ent in m ortgages and
low er quality bonds, and inability to bring high
interest expenses under control. O f course, a num ­
ber of factors o th er than those associated w ith time
deposit business contributed to the banking diffi­
culties of the tim e. B ut when tim e deposits proved
as volatile as dem and deposits, it was difficult to
liquidate readily the “ slow er” assets held against
them . A n d as the general econom ic clim ate de­
teriorated, efforts at liquidation depressed asset
prices and intensified price declines, thus diffusing
the effects over w ider and w ider areas.

M ethods of handling savings deposits in the
com m ercial banking system h a d n o t becom e stand­
ardized at the close of the 19th century. In gen­
eral, only the m ore progressive banks recorded
tim e accounts in separate ledgers and grouped
time open accounts and tim e certificates of de­
posits so th a t they could be readily distinguished
from o th er classes of accounts if carried in the
sam e ledger with checking accounts. N o legal
lim it existed as to the am ount the ban k m ight re­
ceive from any one person. C om plete dep art­
m entalization was generally absent and tim e funds
w ere not segregated n or were they invested in
special ways. G eneral co-m ingling of deposits and
assets at com m ercial banks left savings open to all
the risks of com m ercial banking.

Protecting the Depositor
Betw een 1919 and 1929 tim e deposits in com ­
m ercial banks increased by m ore than $10 billion
while dem and deposits increased by half that
am ount. T his grow th was accom panied by a
rapid acceleration in the rate of bank failures,
which w orked a particu lar h ardship on the savings
depositor. Protests on his b ehalf claim ed th at he
was entitled to preferential treatm en t over the de­
m and depositor. It was argued that he usually had
no know ledge as to the soundness of his bank and
was unlikely to be aw are of danger until it was
too late for effective action. In crises the dem and
depositor frequently w ithdrew his funds by check
through the clearing house while the tim e de­
po sito r stood in line at the teller’s w indow or
w aited uneasily for 30 to 60 days. In case of
liquidation the tim e depositor generally received
less proportionately than the dem and depositor,
although his account was considered relatively
m ore im portant to him than a dem and account was
to his business counterpart. T his situation p ro ­
voked the question of providing legal protection
for the time depositor.
nineteen




T he m ovem ent to provide special p rotection for
savings depositors began in the 1890’s. In 1891
N ew H am pshire required segregation of time
deposits and investm ents. In 1893 M ichigan p re ­
scribed separate investm ents for savings accounts.
F u rth e r action follow ed the panic of 1907. C on­
necticut in 1907, R hode Island and M assachusetts
in 1908, an d C alifornia and T exas in 1909 passed
laws calling eith er for segregation of deposits and
investm ents o r for restrictions on investm ents simi­
lar to those required of m utual savings banks.
C alifornia was the m ost stringent, requiring the
bank to be com pletely departm entalized with as­
sets segregated in each d epartm ent and a separate
capital and surplus assigned to each departm ent.
A som ew hat sim ilar plan was proposed to the N a ­
tional M onetary Com m ission in 1908 to be applied
to national banks. A bill along these lines was
introduced in Congress in 1909. A nd som e of the
early drafts of the F ederal R eserve A c t w ould have
required segregation of assets and em pow ered the
R eserve B o ard to prescribe investm ents for time
deposits, but these provisions w ere elim inated from
the R eserve A ct as finally passed.

Time Deposits in New England

T he need and m eans of protecting the savings

banking com m unity and p rovoked a nation-w ide

depositor at com m ercial banks were debated inter­

dem and for bank regulation reform , especially

m ittently betw een the end of W orld W ar I and the
close of the 1920’s. D iscussion was stim ulated by
opinions expressed by the C om ptroller of the C u r­
rency and by others at m eetings of the savings
bank section of the A m erican B ankers Association.
Views w ere also developed during Congressional
hearings on legislation th at w ould affect the invest­
m ent pow ers of Reserve System m em ber banks.
In general, however, there w as only passive in­
terest in the m atter. C ountry bankers as a whole
opposed any change in regulations, and o th er com ­
m ercial banking groups were divided in their
opinion. M utual savings bankers, as would be
expected, usually favored restrictive action.

with regard to protecting the sm all savings de­

B a n k F ailu res and N e w
L egislation - The 19 30’s

positor. Legislative am endm ents to the F ederal
Reserve A ct considered by the C ongress in 1933
called for setting higher reserve requirem ents for
tim e deposits, prohibiting tim e deposits in m em ber
banks, and investm ent of tim e deposits in specified
segregated assets.
O pponents of these proposals argued th at the
adoption of any of them w ould seriously handicap
m em ber banks in com petition with nonm em ber
banks and other financial institutions. The C on­
gress accordingly rejected all of them , and in the
Banking A cts of 1933 and 1935 required the
B oard of G overnors to:
1.
2.

As the depression becam e acute in the years
im m ediately following 1929, the already high rate
o f com m ercial bank failures soared still m ore
sharply. O ver 5,000 banks h ad closed th eir doors
in the nine years from 1921 to 1929. M ore than
9 ,0 0 0 others failed in the next four years alone.
T im e deposits of com m ercial banks fell by $8.2
billion o r 41 percent from June 1929 to June
1933. In the sam e period dem and deposits di­
m inished by $9.7 billion o r 33 percent, while
deposits in m utual savings banks actually regis­
tered an increase. F ailures w ere especially high in
som e parts of the n ation am ong banks with a
heavy proportion of tim e deposits. It is estim ated
th a t the loss to all depositors in banks suspended
from 1921 to 1933 was in excess of $2 billion.
T he fact that com m ercial bank time deposits
proved m ore volatile th an dem and deposits in the
banking crisis of the early 1930’s shocked the




3.
4.

Define savings, o th er time and dem and de­
posits for regulatory purposes.
L im it and regulate the interest rates payable
by m em ber banks on savings and o ther tim e
deposits, and prescribe rates on tim e de­
posits which would differ according to dif­
fering m aturity dates.
P rohibit interest paym ents by m em ber banks
on dem and deposits.
R egulate within specified lim its the reserves
required against both tim e and dem and de­
posits in m em ber banks.

T he intent of Congress in lim iting interest pay­
m ents, according to S enator C a rte r G lass, was to
prevent banks from com peting for deposits so ag­
gressively as to lead to unsound banking.
In 1933 the Congress created the F ederal D e­
posit Insurance C orporation tem porarily to p ro ­
tect both tim e and dem and deposits. T he insurance
system thus established was m ade p erm anent by
the B anking A ct of 1935. T he A ct also gave the
tw e n ty

The Story of Tim e Deposits

IN T E R E S T R A T E C E IL IN G S
A U T H O R IZ E D B Y R E G U L A T IO N Q
Oct. 31,
1933

Feb. 1,
1935

Jan. 1,
1936

3%

2i/a %

21/2 %

3

2Vl

2Vl
2
1

Type o f deposit
Savings deposits ...................................................................
Other time deposits payable in:
6 m onths-1 year or more .........................................
90 days-6 m o n t h s .......................................................
Less than 90 days

F D IC the pow er to establish a parallel regulation
of interest rates paid by insured com m ercial banks
th at were not m em bers of the R eserve System.
T he rates set by the FD IC parallel those of the
R eserve System, placing both m em ber and n o n ­
m em ber insured banks on the sam e com petitive
footing. T he pow ers given the F D IC obviated the
need fo r m easures earlier p roposed for protecting
savings depositors. T hese acts also significantly
strengthened the ability of m onetary authorities to
control credit.

time deposits, the B oard in 1935 reduced the
blanket ceiling to 2.5 percent.
The shifting of funds from country banks to
large city banks in the form of interbank balances
had long been of concern to som e m em bers of the
Congress. In the 1935 revision of the Fed eral R e ­
serve A ct, the C ongress directed the B oard of
G overnors to provide differential regulation of
interest on savings and other tim e deposits and to
establish m axim um rates on tim e deposits in term s
of m aturities. Such a schedule becam e effective at
the beginning of 1936, as is show n in T able III
above. A t the sam e tim e the F D IC issued a parallel
schedule of rates applying to insured banks which
were not m em bers of the Reserve System.

T he constant publicity given to deposit insur­
ance by the F D IC has greatly reduced the likeli­
hood of a recurrence of bank runs like those of
the early 1930’s. O ther stabilizing influences
include broad adoption of real estate am ortiza­
tion, im proved bank exam ination procedures and
liberalization of discounting practices by F ederal
Reserve banks. These and o th er m easures and
policies m ake highly im probable another banking
crisis of the m agnitude of 1929-1933.

R egulating interest paym ents had little practical
effect until well after W orld W ar II because
m ark et rate levels were low and rates p aid by
com m ercial banks were generally under the m axi­
m um prescribed by the regulation.

In accordance with the Banking A ct of 1933
the Reserve System ’s B oard o f G overnors in th at
year issued R egulation Q, which set a blanket 3
p ercen t interest ceiling on tim e deposits in m em ­
ber banks. As general interest rates subsequently
declined, together with the average rate paid on

A s com petition sharpened am ong an increased
variety of savings institutions in the 1950’s, the
rate regulation altered to a considerable degree
the term s of com petition both am ong banks them ­
selves and am ong banks and other savings outlets
not subject to regulation. T o some extent, the

tw e n ty -o n e




Time Deposits in New England

prohibition of paym ent of interest on dem and de­
posits m ay be said to have em phasized the distinc­
tion betw een tim e and dem and deposits. M any
banks were thus reluctant to raise rates on savings
to m eet com petition as m ark et rates rose.

The Quiet Y ears, 1933-1951
A fter the banking holiday of M arch 1933 the
banking system gradually returned to an operating
basis. In the depths of the depression tim e d e ­
posits in com m ercial banks fell to $21.3 billion.
In m utual banks deposits rem ained stationary at
$9.5 billion, w hich reflected the excellent record
of m utuals during the crisis. T he decade of the
1930’s was unique in th a t savers placed first em ­
phasis on security, with rates of retu rn playing a
secondary role. T hroughout this period com m er­
cial and m utual savings banks continued to be the
dom inant savings institutions and the lim ited com ­
petition was chiefly am ong the banks.
D uring the last half of the 1930’s dem and de­
posits grew rapidly, rising by alm ost 40 percent
from 1935 to 1939. T im e deposits rose only 15
percent. B ut an increasing p roportion of these
dem and deposits were idle and could have been
transferred to tim e deposits. D em and depositors,
how ever, did not seem anxious to put their funds
to w ork, nor were they encouraged to do so by
the banks. A verage rates on tim e deposits, less
than 2 percent annually during the last half of
the decade, were not sufficiently attractive to w ar­
rant the switch.
F o r their part, banks w ere not anxiously seek­
ing deposits. They h ad am ple funds for any
use. D em and deposits, alm ost costless because of
their slow turnover, were growing rapidly. A s a
result som e banks refused tim e deposits entirely




while others paid a nom inal 1 p ercent rate and
lim ited deposit am ounts.
D uring the w ar and the early postw ar years the
time deposit situation rem ained largely unchanged.
Effective rates paid on tim e deposits continued the
decline which began in 1931, eventually dropping
to below 1 percent during the w ar and rem aining
there until 1947, adjusting with a slight lag to a
falling earning ratio. T he very large rise in de­
m and deposits resulting from w ar financing by
com m ercial banks was accom panied by a sm aller
grow th in tim e deposits. B ut this reflected the gen­
eral im provem ent in econom ic conditions rath er
than any special interest in tim e deposits by either
savers o r banks.
From 1941 through 1945, com petition within
the private sector for savings continued to lack
vigor. W ith only a lim ited supply of m ortgages
available, the traditional outlet for savings and
loan associations and m utuals, these organizations
curtailed their prom otional activities. Savings in­
stitutions helped to prom ote the sale of the T rea s­
u ry’s savings bonds and increased their own
holdings of U.S. governm ent securities.
F ro m these years em erged a new p attern of
savings habits. C om m ercial banks lost the dom ­
inant position which they had achieved by 1920.
A t th at tim e they held 61.1 percent of liquid
savings. A t the end of 1940 total liquid savings
aggregated $34.8 billion. The share of com m ercial
banks dropped to 44.3 percent; m utuals held 30.5
percent; savings and loan associations held 12.4
percent; and postal savings, credit unions and sav­
ings bonds accounted for 12.4 percent. T he war
vigorously spurred a relative new com er in the
national savings race. By the end of 1947, savings
bonds accounted for 41 percent of the natio n ’s
$ 1 12 billion liquid savings pool.
tw e n ty -tw o

The Story of Tim e Deposits

T im e Deposit R esurgence,
1951-1962
T he natio n ’s m onetary environm ent w as changed

rivalry for tim e deposits w as no longer confined
largely to banks but becam e m ore and m ore a
com petition of banks with o th er financial institu­
tions. C redit dem ands and rates of return on loans

from the w artim e pattern of ease and pegged rates
to m ore norm al conditions as a result of the F e d ­
eral R eserve-T reasury “A c co rd ” of 1951, which
discontinued the support program for governm ent
securities. Some signs of changes w ere visible,
how ever, even before the “A c co rd .” W hile tim e
deposits, dem and deposits, and currency had each
m ore th an doubled from 1941 to 1946, they in­
creased by only small percentages during the next
five years. This co n trast in grow th rates was
m ainly the result of differences in m onetary ex­
pansion. T he slow-dow n accom panied the cessa­
tion of m assive deficit financing through com m er­
cial bank purchases of U . S. securities. It was not
until the end of 1956 th a t the grow th of time
deposits began to accelerate significantly.
A lthough m arket rates m oved u p slightly in the
early postw ar period, strong pressure on the R egu­
lation O ceiling did not develop until 1955 and
1956, w hen rising dem ands for credit resulted in
rate increases at a n um ber of savings institutions.
Strongly expanding business activity brought a
widely diffused dem and for funds by private b o r­
rowers. H om e purchasers becam e the largest b o r­
rowing group and the institutions m ost closely
related to the hom e m ortgage m arket — savings
and loan associations — began to seek funds ag­
gressively. T heir share accounts had grow n m ore
rapidly from 1946 to 1955 than during the war
years, in contrast to the m uch slow er grow th of
tim e and savings deposits at com m ercial and m u­
tual savings banks. A long with the general rise
in interest rates, tim e depositors becam e in­
creasingly conscious of dividend rates and began
to sw itch deposits from one institution to another
or from banks to the investm ent m arkets. The
twenty-three




D E M A N D & TIME DEPOSI TS
A L L C O MM E R CI A L B AN KS
1 9 4 0 -1 9 6 2
NEW

ENGLAND

Total

Deposi

ill

15
a t i o ( P e r c e nt)

U N IT E D

STATES
Dema
Time
Depos

10<

40

Time Deposits in New England

and investm ents m ade it more profitable for banks
to seek tim e deposits than at any other period in

short-term tim e deposits representing essentially
liquid balances.”

the last qu arter century.
In 1956, although m ost com m ercial banks were
not paying the 2.5 percent m axim um rate p e r­
m itted by R egulation Q, a num ber of bankers were
convinced th at an increase in the ceiling was neces­
sary. A t the T hirty-seventh A nnual M eeting of
Stockholders of the Boston Reserve B ank held in
O ctober, 1956, the question of a higher m axim um
rate w as discussed and a m ajority of the m em ber
bank representatives present voted in favor of a
resolution requesting a higher m axim um . Sim ilar
opinions were expressed elsew here in the nation. It
was under these conditions that the ceilings au­
thorized by Regulation Q were raised for the first
tim e in 20 years. T he details of the changes,
effective on January 1,1957, are show n in T able IV.

D uring 1957 expanding investm ent o p p o rtu n i­
ties and a n um ber of other factors provoked greater
sales efforts by alm ost every institution seeking
tim e and savings deposits. T he new m axim um rate
gave the com m ercial banks added leeway in com ­
peting for savings. Posted rates w ere increased
and supplem entary sales devices were adopted
such as m erchandise prem ium s and m ore liberal
com putation of interest on new accounts. In the
year 1957 tim e deposits at com m ercial banks in
the nation rose about 1 1 percent, reaching a total
of $ 5 6 .1 billion.
T im e deposits continued to rise sharply —- about
12.5 percent — in the recession year of 1958,
when the 3 percent rate com pared favorably with
m ost m arket rates.

In com m enting on the ceiling changes the B oard
stated in its A nnual R eport for 1956: “A fter
extended consideration of this m atter, during
which the views of the F ederal Reserve B anks
and the Federal A dvisory C ouncil were obtained,
the B oard concluded th at in a period of heavy
dem ands for funds and a relatively high struc­
ture of interest rates generally, it would be de­
sirable to perm it individual m em ber banks greater
flexibility than was available under the existing
m axim um perm issible rates. It also appeared to
the B oard that there was insufficient reason to pre­
vent banks, in the exercise of m anagem ent dis­
cretion, from com peting actively for time and sav­
ings balances by offering rates m ore nearly in line
with o ther m arket rates. By increasing the rate
lim itations only on savings deposits and on time
deposits with m aturities longer than 90 days, the
Board continued to recognize the special thrift
ch aracter of savings accounts and to preserve a
differential betw een longer term tim e deposits and




M em ber banks in the Boston Federal R eserve
district paid effective rates on time deposits only
slightly below the national average. D espite the
substantially higher rates of interest paid by m u­
tual savings banks the region’s m em ber bank time
deposits grew at the sam e rate as the n a tio n ’s from
1955 to 1958.
W ith the recovery from the 1958 recession,
m arket rates again began rising. A nd once again
com m ercial banks argued th at they were h am pered
in com peting for savings by the ceiling im posed by
R egulation Q. W hile m onetary authorities con­
ceded th at a fu rth er increase in the rate would
attract additional deposits, they h ad serious doubts
that a 3.5 or 4 percent rate could be adequately
covered by asset yields.
T he m axim um was not raised in 1959 and tim e
deposits of com m ercial banks rose only 4 percent
tw e n ty -fo u r

The Story of Tim e Deposits

T A B L E IV

IN T E R E S T R A T E C E IL IN G S
A U T H O R IZ E D B Y R E G U L A T IO N Q

Type of deposit
Savings deposits held for:
1 year or more
Less than 1 year

)
...... |

Other time deposits payable in:
1 year or more
6 m onths-1 year
90 days-6 months
Less than 90 days
.........

during the year. In contrast, share accounts at
savings and loan associations rose by 14 percent.
M utual savings, like com m ercial banks, did not
fare well either, show ing only a 3 percent rise in
savings deposits.
D uring 1960 business activity slowed and in­
terest rates declined. T im e deposits quickly began
to show the grow th w hich characterizes recession
periods. Several factors contributed to the sus­
tained rise which occurred after the F ebruary,
1961, low point in the business cycle. O pen m ar­
ket rates show ed relatively little increase as recov­
ery progressed, w hereas in com parable postw ar
recoveries they had risen ra th e r sharply. A nd a
substantial volum e of deposits resulted from offer­
ings early in the year of negotiable certificates of
deposit by the large m etropolitan banks. T otal
tim e deposit grow th at com m ercial banks for 1961
was 13 percent.
E arly in D ecem ber, 1961, the F ederal R eserve
B o ard and the F ed eral D eposit Insurance C o r­
poration took action w hich significantly stim ulated
fu rth er grow th. T hey announced, effective Ja n u ­
ary 1, 1962, th at m em ber and insured com m ercial
banks would be perm itted to pay a m axim um of
twenty-five




)
j

Jan. 1,

Jan. 1,

Jan. 1,

1936

1957

1962

2Vi %

3%

jSv* %

21/2

3

4
3 ^2

2

21/2

2Vi

1

1

1

3.5 percent on all savings deposits; and 4 percent
on all savings and tim e deposits held for a term
of one year o r m ore. See T able IV .
In announcing the increase, the B oard of Gov­
e rnors com m ented:
“T he 6,100 m em ber banks of the F ederal R e­
serve System have approxim ately 50 m illion sav­
ings and tim e deposit accounts, am ounting at pres­
ent to som e $67 billion. M ore th an three-fourths
o f the total am ount is in savings accounts owned
by individuals. T he tim e deposits and certificates
are ow ned by business concerns and o ther private
o r public institutions as well as by individuals.
“ F o r som e tim e, a nu m b er o f com m ercial banks
have contended th a t the 3 percent m axim um rate
has restricted them in their efforts to com pete for
savings and tim e deposits. O ne effect of the action
will be to increase freedom of com petition and to
enable each m em ber bank to determ ine the rates
of interest w hich it will pay in the light of the
econom ic conditions prevailing in its area, the type
of com petition it m ust m eet, and its ability to pay.
“A nother effect of im m ediate significance will

Time Deposits in New England

be to enable m em ber banks so desiring to com pete
m ore vigorously to retain foreign deposits th at
m ight otherw ise m ove abroad in search of higher
returns and thereby intensify an outflow of capital
o r gold to o ther countries. T hus, to d ay ’s action is
in line with previous steps taken to m oderate p re s­
sures on this c ountry’s international balance of
paym ents.
“ A further, long range effect should be to give
m em ber banks all the scope th at m ay be needed
for a considerable period ahead to provide an
added incentive for the savings th at will be re ­
quired in financing the future econom ic grow th
th at will be essential to expanding job o p p o rtu n i­
ties for a growing p opulation.”
T he results of this action were described in the
opening pages o f this study. In 1962 about 50
percent of the natio n ’s com m ercial banks raised
interest rates on savings deposits, and m ore than
tw o-thirds of the banks on o th er tim e accounts.
T otal tim e deposits increased by m ore than 18
percent to a record high of $97 billion.
T he expansion of tim e deposits was especially
rapid during the first q u a rte r of 1962, w hen net
inflows w ere 25 percent at an annual rate. A fter
th at it slowed to a rate a little above 1961, but




rose again tow ard the end of the year.
A p a rt of the increase in tim e deposits re p re ­
sented additional regular savings accounts. A nd
this portion of tim e deposits rose steadily through­
out the year. M uch of the increased inflow during
the first quarter resulted from changes in p ref­
erence by individuals, partnerships and c o rp o ra ­
tions for other tim e deposit accounts, w ith business
funds accounting for a substantial portion of the
total. Such funds m ight otherw ise have been left
in dem and accounts o r invested in short term
m oney m arket instrum ents. D irectly com peting
institutions — m utual savings banks and savings
and loan associations — also experienced substan­
tial increases. Savings and loan association shares
rose by $9.5 billion, about 9 percent m ore than in
1961. M utual savings deposits increased by $3
billion — a 43 percent rise over the increase of
the previous year. Indirect com petitors such as life
insurance and pension plans also continued their
upw ard trend. T his evidence suggests th at little
if any of the increase at com m ercial banks re p re ­
sented diversion of funds from these other institu­
tions. T o the extent th at individuals shifted tim e
deposits from one asset to another it would appear
to have been a m ovem ent away from m arketable
securities and possibly som e dem and deposits.

tw e n ty -s ix

1962 Savings Deposits

Savings
Deposits in
N ew England
1962

A t th e close of 1961, national regulatory a uthori­
ties announced an increase in the m axim um
perm issible interest rate for tim e deposits at com ­
m ercial banks. T hroughout the country, bank
m anagem ents faced the need to reassess interest
rate policies in the light of several factors which,
taken together, w ould m arkedly affect their grow th
and profits.

T he ability to absorb increased costs is cer­
tainly a key d eterm inant of interest rate decisions.
B anks m ust cover their interest expense by loan
and investm ent incom e. In New E ngland, how ­
ever, rates on all three m ajor types of loans —
business, m ortgage and consum er — are lower
than the national average. R ates on tax exem pt
obligations of state and local governm ents — an
im portant source of bank incom e — are also lower
on the average than in m ost o ther regions of the
nation. L ow er investm ent returns tend to dis­
courage rate increases and produce generally lower
rates on tim e deposits in New E ngland.

A nother factor contributing heavily to interest
rate decisions at New E ngland com m ercial banks
is the large nu m b er and w idespread distribution of
m utual savings banks and, in som e areas, of sav­
ings and loan associations and cooperative banks.
Savings banks and savings and loan associations
are generally able to pay higher rates than com ­
m ercial banks because of their concentration on
high-yield m ortgage loans, because they are not
subject to legal reserve requirem ents, and because
they receive favorable treatm ent un d er federal in­
come tax laws. M ost m utuals in New E ngland are
paying 4 percent, a higher rate than m any com ­
m ercial banks feel they can profitably offer. Sav­
ings and loan associations generally m eet or exceed
this rate. T his situation tends to discourage rate
com petition by com m ercial banks.
twenty-seven




Time Deposits in New England

A m ong factors w hich often precipitate rate com ­

All these factors seem to be involved in New

petition by com m ercial banks is the extension of
branching. T he opening of a new branch in a
com m unity or the m erger of an old unit bank into
a branch system disturbs old patterns of opera­
tions, and one of the results is likely to be increased
rates paid on tim e deposits. In the nation, the lead
in these rate rises is usually taken by branching
systems seeking new business. B ut in New E ng­
land, the initiative is often taken by unit banks to
discourage branch entry or, once the branch is
established, to retain its old custom ers and to
attract custom ers away from the branch.

E n g la n d ’s reaction to the higher allow able rates
on tim e deposits. In 1962 a slightly low er p ro­
p ortion of New E ngland banks raised rates than
did banks throughout the n ation — about 40 p e r­

T here is some evidence th at suggests New E ng­
landers in general are financially b etter inform ed
than residents of som e o th er regions. As a rule,
New E nglanders are m ore rate conscious and m ore
flexible in the investm ent of their liquid funds. F o r
exam ple, there was less currency hoarding in New
E ngland during W orld W ar II than elsewhere,
indicating that m ore savings here were put into
savings institutions and savings bonds in order to
earn interest. Since the w ar, how ever. New E ng­
landers have been liquidating their savings bonds
and transferring their funds into other form s at a
faster rate than the national average. T hus New
England com m ercial banks can expect their cus­
tom ers to react strongly to rate differentials.

A nother factor influencing rate decisions is the
hard-to-define characteristic of general com peti­
tive zeal. If bank m anagem ent possesses it, rates
are likely to be raised as a com petitive move d e­
spite the possibility of som e decline in profits.
The factor may be the only explanation when, for
exam ple, two cities th at are generally sim ilar with
respect to branching and m utual savings bank
com petition diverge on rate decisions, with one
going up and the o th er standing firm.




cent here versus 50 percent in the country as a
whole. Only 25 percent of the Bay State com ­
m ercial banks raised their rates in 1962. T he chief
d eterrent seems to be m utual savings bank com pe­
tition, especially in M assachusetts, which has the
heaviest concentration o f m utual savings banks of
any state in the nation,
T he incidence of rate increase is m arkedly lower
am ong large banks in the region than it is am ong
the region’s sm aller banks. T his is a locational
phenom enon that can also be traced prim arily to
the presence of m utual savings banks. As noted
above, com m ercial banks are frequently not able
to engage in a rate com petition with m utuals and
savings and loan associations with any degree of
financial success. Since m utuals and associations
tend to be prevalent in large cities, the n atural h a b ­
itat of large com m ercial banks, rate increases have
been m ore frequent am ong sm aller banks in out­
lying cities and towns. In the nation, the reverse
was true.
A lthough proportionately fewer New E ngland
com m ercial banks raised rates on tim e deposits in
1962, a larger share went to the 4 percent m axi­
m um (26 percent here as opposed to about 20
percent in the n a tio n ). A m uch larger proportion
of banks in the nation stopped at 3.5 percent. New
E ngland’s action probably reflects the com petition
of o th er savings institutions. If the region’s com ­
m ercial banks were to engage in rate com petition,
they felt that it was necessary to go to 4 rather
than 3.5 percent.
C onsidered in term s of the proportion of time
tw e n ty -e ig h t

1962 Savings Deposits

TABLE V

D IS T R IB U T IO N O F S A V IN G S H E L D IN S E L E C T E D
T Y P E S O F F IN A N C IA L IN S T IT U T IO N S IN N E W
E N G L A N D , D E C E M B E R 31, 1945, 1959 A N D JU N E , 1962
(In percent)
1945
Savings
Mutual and loan Com­
savings associa­ mercial
banks
tions
banks

Maine

1959
Savings
Mutual and loan Comsavings associa­ mercial
banks
tions
banks

1962
Savings
Mutual and loan Com­
savings associa­ mercial
banks
tions
banks

53.6

0.8

45.6

53.4

10.4

36.2

52.7

12.5

34.7

76.9

3.8

19.2

66.1

16.4

17.5

65.2

17.3

17.3

Vermont

36.5

2.9

60.6

28.7

9.4

61.9

33.2

10.8

55.9

Massachusetts

76.4

4.3

19.4

70.1

20.8

9.1

67.8

21.6

10.5

Rhode Island

55.1

1.1

43.7

45.0

20.8

34.2

46.1

20.7

33.1

N ew Hampshire

Connecticut

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

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

73.5

4.0

22.4

67.8

15.8

16.4

68.0

15.6

16.3

Total N ew England

70.2

5.8

24.0

65.5

18.5

16.0

64.5

19.2

16.2

All Mutual Savings Banks States .

47.8

5.4

46.8

40.7

26.2

33.2

36.9

28.1

34.9

Data includes total deposits of mutual savings banks, savings shares (excluding mortgage pledged shares) of
member savings and loan associations of the Federal Home Loan Bank Board and time deposits of individuals,
partnerships, and corporations of insured banks.
Source: National Association of Mutual Savings Banks. Federal Deposit Insurance Corporation, and Federal
Home Loan Bank Board.

to total deposits, the difference betw een New E ng­
land and the nation is again significant. In the
nation, increases in interest rates w ere alm ost
evenly balanced betw een banks w ith m ore than
25 percent of total deposits in tim e departm ents
and those with less than 25 percent in tim e de­
p a rtm e n ts — slightly m ore th an 50 percent of
the “heavy tim e” banks raised interest rates, and
slightly less than 50 percent of the “light tim e”
banks did so. In New E ngland, how ever, only 10
percent of the com m ercial banks w ith less than
25 percent of their deposits in tim e dep art­
m ents raised interest rates, while alm ost 50 p e r­
cent of the region’s “ heavy tim e” banks did so.
A rate rise is m ore costly, of course, for “heavy
tw e n ty -n in e




tim e” banks so they understandably are m ore re ­
luctant to take such action. T he fact th at a much
greater p roportion of these banks in New England
did so seems to reflect the region’s financial so­
phistication. New E nglanders are sensitive to
rates and flexible in choosing their savings insti­
tutions. A “heavy tim e” bank often could not
afford to stand pat when rate rises were occurring.
G reater rate sensitivity in New England probably
also explains why a sm aller proportion of “heavy
tim e” banks currently pay rates below 3 percent.
Of banks with over a qu arter of their total deposits
in tim e, over 15 percent in the nation pay rates
below 3 percent, while less than 10 percent of
New England banks in this category do so.

Time Deposits in New England

T he advance in the m axim um perm issible rate

banks are paying higher rates than justified. We

gave com m ercial banks m ore room for m aneuver­

will be satisfied if we can m aintain our approxim ate
position until the present cycle has run its course.”

ing. In D ecem ber of 1961, 85 percent of D is­
trict I com m ercial banks (an d 90 percent of
banking offices) were at the old m axim um of 3
percent. In O ctober of 1962, only 26 percent
of al! com m ercial banks (a n d only 18 percent of
all banking offices) were at the new m axim um of
4 percent.
In January and F ebruary of 1962, and again in
O ctobcr of the sam e year, the F ederal Reserve
Bank of Boston surveyed the reactions of New
E ngland’s com m ercial bankers to the increase of
m axim um rates. D uring the course of the year, the
com m ents of bankers changed in em phasis. In
F ebruary a large num ber expressed strong con­
cern about the future of banking. M any feared
the higher rates would lead to deterioration of
bank assets, with the subsequent danger of wide­
spread failures. But by O ctober, tim e, experience
and m ore considered judgm ent modified initial
fears. A fter 10 m onths’ operating experience with
the new regulations, coupled with careful obser­
vation, m any fewer bankers felt com pelled to com ­
m ent on the topic at all — and those who did saw
the problem as one involving bank profitability,
rather than national catastrophe. A m ong the com ­
m ents reflecting strong feelings were the following:

T here was considerable opinion expressed early
in 1962 th at the spotlight of publicity throw n on
interest rates pressured m any banks into raising
rates against their better judgm ent. It is too early
as yet to tell w hether this body of opinion is c o r­
rect, but som e prelim inary indications seem to sug­
gest that it is not. F ro m F ebruary to O ctober, 9
percent of the com m ercial banking offices in the
F irst D istrict raised their rates (in addition to the
28 percent that had already raised their rates by
F e b ru a ry ), while only two banks, each with one
office, were recorded as having reduced rates (after
previously having raised th em ). T his appears to
indicate that even after the initial excitem ent there
was com petitive pressure to raise rates.
Sim ilarly, it m ight have been expected th at as
1962 progressed, increased com petition would
force m ore of the banks paying below 3 percent
to raise their rates. This has not been evident,
however. Am ong the banks that raised their rates
after F ebruary, only one out of six had been paying
below 3 percent. In the earlier surge of increases,
the p roportion was one out of seven.
O ne o f the interesting features revealed by these

“C om petition is acute.

It is fortunate that a 4

percent lim it is in effect.”
“ As long as m utuals and associations are not
taxed at the sam e rate, com petition is unfair.”
“ This higher rate is one m ore exam ple of the
econom ies of large operations which squeeze
small banks and make m ergers alm ost inevitable.”
“ In o ur judgm ent com petition has becom e ex­
cessive. Both com m ercial and m utual savings




surveys is the rapid grow th rate of savings at those
banks which had a relatively small proportion of
time deposits. M ost of these banks either opened
a tim e departm ent recently o r reinvigorated it
after having kept it sim ply as an accom m odation
to depositors.
A m ong banks with less than 10 percent of their
D ecem ber, 1961, deposits in savings, the average
growth rate of savings deposits from D ecem ber,
1961, to Septem ber, 1962, was 17 percent. This
th irty

1962 Savings Deposits

Maximum rate paid on savings de­
posits September 1962

Average change in savings deposits
December 1961 — September 1962

Number of surveyed banks
paying rate

-

8.6%

17

2

-

1.8

16

2'/2

-

0.1

7

7 .0

102

8.5

54

13 .0

72

1, W 2 %

3
3V 2 *
4
'"Includes one bank paying 33A percent.

m arkedly exceeded the average over-all rise of
8 percent. H ow ever, m ost of these banks w ere
in g reater B oston w here the over-all average
grow th of 13 percent was higher than for New
E ngland as a whole. But even within the B oston
area the “ light tim e” banks did relatively well —
their gain averaged 18 percent as com pared to an
11 percent average increase fo r all other banks in
the region.
T he relation betw een rates paid and changes in
the volum e of savings deposits at the district’s
com m ercial banks during the first nine m onths of
1962 is shown in the table above.
T he average relation betw een rates paid and
deposit grow th percentage is about w hat m ight
have been expected. P erhaps a som ew hat greater
decline m ight have been anticipated for banks pay­

Banks paying a maximum of:

ing below 3 percent, b u t these banks m ay already
have lost m ost of the savings m oney th at was sub­
ject to transfer. The banks paying 3.5 percent
had only slightly m ore of an inflow than banks
paying 3 percent. B u t m any 3.5 percent banks
either raised their rates late in 1962 or were in
areas where rates of 4 p ercen t were paid by other
com m ercial banks.
T here is considerable variation am ong the
grow th rates of individual banks at the different
rate levels. T he largest percentage increases were
shown by banks paying a 3 percent rate. N o bank
paying less th an 3 percent show ed substantial
growth. O ne technique to a ttrac t savings deposits
is the paym ent of daily, “ instan t,” “ full,” portalto -p o rtal.” o r “ exact days” interest. T his appears
to have been successful, as indicated below.

Average increase in savings, Decem ber 1961 — September 1962
Banks paying semi-annual interest
Banks paying daily interest
(Number of banks)
(Number of banks)

3 %

6.5%

(1 3 0 )

31/2

5.8

( 47)

10.8

( 6)

1 1 .2

( 73)

2 8 .6

( 5)

4

rhirty-one




7.4%

(1 3 )

Time Deposits in New England

Instant interest adds alm ost .25 percent to in­

These investm ent funds played an im portant role

terest costs. F o r exam ple, a b ank paying 3 p e r­

in the grow th of com m ercial bank savings in 1962.

cent sem i-annually generally has effective interest
costs of betw een 2.75 an d 2 .80 percent, because

T hey often go to com m ercial banks fo r several

deposits w ithdraw n before the sem i-annual date
earn no interest fo r the tim e that has elapsed d u r­
ing the cu rren t interest period. Daily interest
brings the effective rate up to the stated rate. W hile
the com parison of savings grow th suggests that
daily interest is effective in attracting deposits, it
m ay be a little m isleading. T he daily interest
banks generally offer several other favorable fac­
tors, including location in areas w here over-all
deposit grow th is high. M any of them also have
reinvigorated tim e departm ents.

institutions (as there are also in state-chartered

T here is some question concerning the relative
am ounts of different types of deposits attracted by
daily interest. It w ould not seem to be im portant
to the depositor w ho is not thinking of w ithdraw ing
his m oney w ithin a year or two. B ut it would be
an attraction for the saver planning to purchase
an autom obile o r household appliance. It is also
a definite inducem ent to the depositor of large
am ounts o f tem porary investm ent funds.




reasons.

T here are deposit size lim its in other

com m ercial banks in M assachusetts and, to a lesser
extent, in C o n n ecticu t).

In stan t interest is also

an attraction to the depositor w ho will shift his
funds the m om ent a m ore advantageous invest­
m ent opportunity arises.
New E ngland’s com m ercial b anks show ed good
grow th in savings deposits in 1962. O ver the first
nine m onths, the period covered in the following
analysis, these savings deposits grew by 8 percent.
This exceeded the N ew E ngland m utual savings
bank deposit grow th of 7 percent over the same
period, and was close to the 9 percent grow th of
the region’s savings and loan associations.

T he

grow th at com m ercial banks w as the m ore rem ark­
able in view of the fact th at their m ost com m on
rate paid was only 3 percent, while the other two
m ajor types o f savings institutions paid an average
of 4 percent.

thirty-two

1962 Savings Deposits

BANKING REGIONS

MA N E

IN NEW ENGLAND

BangorAroostook

ERMONT
Portland
Augusta

North

South

Worcester-Lowell

SpringfieldBerkshires

/

Greater

m ass.

Boston

CONN
Southeastern
H a rtford
New

thirty-three




Haven

Area

Time Deposits in New England

Regional Rate Changes and Deposit Growth
A lthough N ew E ngland enjoys a g re ater degree of
social and econom ic hom ogeneity th an m ost other
regions of the nation, there still rem ain prom inent
areas of significant diversity. B anking law and
practice differ m arkedly am ong the six states.
State-wide banking system s, for exam ple, are sanc­
tioned in R hode Island, C onnecticut and V erm ont,
while M assachusetts’ bankers are restricted to
county boundaries. M aine allows the establish­
m ent of bank branches in contiguous counties, but
branching is prohibited in N ew H am pshire,

the C anadian border on the east. T he northern
area is com posed principally o f A ro ostook County.
M ost bran ch systems are located w ithin one of
these four econom ic units, although som e over­
lapping of branches occurs betw een the A ugusta
area and the adjoining areas o f P o rtlan d and
B angor. B ecause there are relatively few banks in
each, the southern and central areas and the n o rth ­
e rn and eastern areas are com bined in the accom ­
panying scatter charts.

T he com petitive clim ate in each state spreads
the gap still wider. In M assachusetts, there are
six dollars of m utual savings deposits for every
one dollar of com m ercial bank tim e deposits. But
in V erm ont, tim e deposits at com m ercial banks
exceed m utual savings deposits, tw o-to-one.

Portland and Augusta

Such legal and institutional diversity, com bined
with varying com petitive pressures, has produced
strikingly different p attern s of interest rates and
savings deposit grow th am ong the six New E ngland
states. T he following pages exam ine these p a t­
terns and, with the aid of charts and graphs, a t­
tem pt to assess the effect of interest rates upon
deposit grow th during the first nine m onths of
1962. T he analysis is lim ited to “savings” deposits,
w hich com pose about 85 percent of total tim e
deposits in New E ngland. “ O ther tim e” deposits,
ow ned m ainly by businesses and governm ental
units, are not included.

A m ong New E ngland’s 19 banking areas, A u ­
gusta is second only to north ern V erm ont in the
proportion o f banking offices th at raised interest
rates higher than 3 percent at the beginning of
1962. C om petition for savings in the area is in­
tense. A s in northern V erm ont, the expansion of
branch banking from A ugusta has intensified
com petition. B ut unlike V erm ont, w here unit
banks initiated rate increases, the lead here cam e
from w ithin the branching system s.

M ain e

T he P o rtlan d area usually behaves like other
large m etropolitan areas in N ew E ngland. H ere,
m utual savings banks and other thrift institutions
abound, and com m ercial banks generally do not
engage in aggressive rate com petition. O nly onethird of the com m ercial banking offices offer rates
higher than 3 percent. B ut despite this, the P o rt­
land area show ed a 7 percent grow th in savings at
com m ercial banks in the first nine m onths of 1962,
com pared to 6 percent in the A ugusta area.

T he northernm ost state of New E ngland has
fo u r well-defined business and banking areas. T he
southern area surrounds P ortlan d , the central su r­
rounds A ugusta, and the eastern reaches from the
B angor area to the A tlantic on the south and to

T he scatter chart show s, how ever, th at the
higher the rate paid, the uniform ly higher the av­
erage grow th in savings deposits in the region as
a whole. P ortland area banks generally ranked
highest in each rate category. O ne P o rtlan d area




th irty -fo u r

1962 Savings Deposits

PERCENTAGE GROWTH IN SAVINGS DEPOSITS
OF REPORTING BANKS ACCORDING TO RATES PAID
DECEMBER 1961 — SEPTEMBER 1962
Percent
50

M A IN E
Portland & Augusta

Percent
50

50

M A IN E
Bangor & Aroostook

30

•
10---•*

•

*:*•
••♦

•

•*

.in

10

Und er 3%

3%
3.5%
Rates Paid

Under 3 X

4%

Percent
50

i0 N O R T H E R N V E R M O N T

3%
3 .5%
Rates Paid

Percent
ouS O U T H E R h

... ... 50

^1 V E R M O N T

1

20

... •

•
•
•

••

Under

•

3%
3 .5 %
Rates Paid
• i n d i v i d u a l Bonk

3%

• •
Under 3%

4%
• “ A ve ra g e




3%
3.5%
Rates Paid

increase for group

Note: In Southern V erm ont 2 banks p ayin g less
lost more than 10% of savings deposits

thirty-five

*

,s

thon

3%

^%

Time Deposits in New England

bank which paid 3 percent experienced a p articu­
larly high grow th rate since it was located in a onebank town, fairly distant from towns where higher
rates w ere paid. A nd the bank provided special
inducem ents for new custom ers.

deposits and pay rates above the savings bank
average. E ven on the local level there is greater
com petition betw een com m ercial and m utual sav­
ings banks th an is com m on elsew here in New E ng­
land. As a result, New H am pshire has the highest
p ro portion of com m ercial banks in New E ngland
paying the m axim um rate of 4 percent.

B a n go r and Aroostook County
The striking feature of the scatter chart for east­
ern and n orthern M aine is the relatively small
am ount of variation in the level of interest rates
paid for savings accounts. O f the responding
banks, fifteen pay 3 percent and the rem aining two
pay a rate of 2 percent. T here are not m any
oth er thrift institutions in these two areas, since
m ost tow ns are small, but most of those that exist
pay 4 o r 4.5 percent.
T he two banks paying a 2 percent rate are in
the B angor area and have been able to hold on to
their savings deposits fairly well. M ost of these
deposits are small savings accounts of individuals,
and convenience is a factor that helps to keep them
where they are.
All A roostook C ounty com m ercial banks pay
a rate of 3 percent. Savings deposits at com m er­
cial banks in this area showed a slight drop d u r­
ing the study period, probably due to the low
prices of potatoes (the region’s principal c rop)
prevailing over the past several years.

T here are six guaranty savings banks in the
state which are, in effect, stock savings banks.
T hey hold about $55 m illion of savings deposits
as com pared to a bout $45 million in tru st com ­
panies (state-ch artered com m ercial b a n k s) and
about $70 m illion in national banks. M utual sav­
ings banks hold about $600 m illion in deposits.
G u aran ty savings banks are frequently classified
as com m ercial banks, but they are treated like
m utual savings banks by the Federal D eposit I n ­
surance C o rporation in its adm inistration of m axi­
m um interest rates. T heir paym ents on savings
deposits are considered dividends ra th e r th an in­
terest paym ents, and are exem pt from regulation.
G uaranty savings banks pay the sam e rates, in
general, as do m utual savings banks. B ecause they
are included in the insured com m ercial bank ta b u ­
lations of the F ed eral D eposit Insurance C o rp o ra ­
tion, the effective rate paid by New H am pshire
insured com m ercial banks on tim e and savings
deposits am ounted to 3 percent in 1961, an
average equal to the m axim um allowable rate and
substantially higher than the average effective rate
of insured com m ercial banks in any o th er state in
the nation.

N e w H am psh ire
Since branch banking is prohibited in New
H am pshire, com petition am ong com m ercial banks
tends to be localized. Considerable state-wide
com petition, how ever, is provided by several m u­
tual savings banks which advertise extensively for




A lthough New H am pshire law does not allow
branching, it does allow joint operation of com ­
m ercial and savings banks by the sam e m anage­
m ent in the sam e building. Some 14 of New
H am p sh ire’s 31 g uaranty and m utual savings banks
are involved in these joint ventures. T he com m er­
th irty -six

1962 Savings Deposits

cial bank p a rtn e r m aintains no tim e departm ent,
accounting for the fact that alm ost half of New

been expanding.

H am pshire’s com m ercial banks rep o rt no savings
deposits. But m ost com m ercial banks that do
m aintain time departm ents com pete aggressively
for deposits, as indicated by the high proportion
paying 4 percent.

the state, and savings deposit interest rates are one
of the weapons used by unit banks to discourage
entry of branches into their area.

As the scatter diagram on page 43 indicates,
banks paying a rate of 4 percent averaged 12 p e r­
cent savings grow th in the first nine m onths of
1962. B anks paying 3 o r 3.5 percent enjoyed only
small increases. Some individual banks in the 3
percent category did receive large inflows, but
these banks usually faced no local com petition.

M erger possibilities are widely

discussed by alm ost every com m ercial banker in

T he branching systems are faced with a problem
in meeting high interest rates offered by unit banks
in some of their branch cities and towns. V erm ont
law requires a bank to pay the sam e rate at all
offices on the same kinds o f savings deposits. T hus,
if these systems raise their rates to m eet com pe­
tition in one location, they m ust do so at all
branch offices. A nd since there is little o r no com ­
petition in m any branch tow ns, raising interest
rates in such places brings higher costs w ithout
m uch com pensating gain.

Verm ont
A m ong the New E ngland states, V erm ont ranks
highest in com m ercial bank tim e deposits per
capita, and lowest in p e r capita m utual savings
deposits. It is the only state in the region in which
com m ercial bank tim e deposits exceed m utual
savings deposits. A s in New H am pshire, several
m utual savings banks com pete statewide through
aggressive advertising and also attract funds from
bordering states.
A lm ost all the com m ercial banks in the state
have a high p ro portion of tim e deposits to total
deposits, and com petition for the savings dollar
is generally keen. C om petition is increased by the
continued expansion of branching. W hile state­
wide branching is allowed, up to now there has
been a clear split betw een northern and southern
systems. T w o system s exist in each portion of the
state, with the north ern system s headquartered at
B urlington and the southern systems at B rattleboro. N one is large in term s of num ber of
branches — the m axim um is nine — but all have
thirty-seven




Northern Vermont
Both of the large branching systems in northern
Verm ont pay a rate of 3.5 percent. Com peting
unit banks in some cases have m et this rate, and
in other cases have raised th eir rates to 4 percent.
As the scatter chart shows, m ost banks are paying
rates of 3.5 or 4 percent, giving this area the
highest percentage of banking offices offering m ore
than 3 percent in all New E ngland. B ut despite
this, aggregate savings grow th at com m ercial banks
in this area was only 5 percent, appreciably below
the New England average of 8 percent. Conceiv­
ably, banks in this area have already exploited m ost
of the time deposit potential. M utual savings banks
here had a som ew hat larger percentage grow th,
however.

Southern Vermont
The two large branching system s in southern
V erm ont pay a rate of 3 percent on a daily interest

Time Deposits in New England




PERCENTAGE GROWTH IN SAVINGS DEPOSITS
OF REPORTING BANKS ACCORDING TO RATES PAID
D E C E M B E R 1961 — S E P T E M B E R 196 2
Percent

SO

ou M ASSACHUSETT s
Greater Boston

Percent

SO

M ASSAC H U SETTS
Worcester & Lowell

•

•

•

••
•*
•••

*•
*•

•

••
'

••

•

•

Un d er 3%

3%
3.5%
Rates Paid

Percent

su

50

M ASSACHUSETTS
Springfield & Berkshires

*

Und er 3

4%

3%
3 .5 %
Rates Paid

4%

Percent

bO

50 M A SSAC H U SETTS
Southeastern Area

.

•

•

*

• •

-

* ;

•

Under 3 %

3%

•#

••

3 5%

4%

"

Under 3 %

Rates Paid
• = Individual Bank

3%

3 5%

*%

Rates Paid
• = Average

increas e

for gr oup

banks ex cee ded 5 0 % : Boston, 3% ■ 3 Banks, 3 5 % - 1 Bank;
Worcester-Lowelt, 3 % - 2 Banks; So uth ea ste rn A re a , 4 % - 1 Bank.

Note: Growth at several

th i r t y - e i g h t

1962 Savings Deposits

basis for savings deposits, while m ost of their unit
The

B ranching in M assachusetts is allowed only
within county boundaries. T his has lim ited the

banking clim ate here is sim ilar to th at in northern
V erm ont, where the branching system s pay a rate
of 3.5 percent while m any com petitors pay .5 p e r­
cent m ore.

large Boston banks to Suffolk county — little
more than m unicipal B oston. B ranching systems
are located in other counties, but do not have the
aggregate deposit size of the large city banks.

com petitors pay 3.5 percent sem i-annually.

O nly six banking offices in southern V erm ont
pay a 4 percent rate. W ith m ost o th er banks pay­
ing either 3 or 3.5 percent, the 4 percent rate
has proved effectively attractive. T hese banks
show ed an average grow th of 20 percent in savings
deposits from January to Septem ber, 1962. In
c ontrast to greater Boston, daily interest does not
seem to be as effective in attracting savings to 3
percent banks, perhaps reflecting a relative lack
of the investm ent funds which are plentiful in the
B oston area.

M assachusetts
A n outstanding feature of the banking environ­
m ent in the Bay State is the strong influence of
m utual savings banks. T w o-thirds of all liquid
savings assets in the state are held in m utual sav­
ings banks, a share far g reater than in any other
state. Because of the num ber and w idespread
distribution of m utual savings banks, com m ercial
banks do not usually com pete actively for deposits
— outside the South, the state ranks lowest in the
nation in com m ercial bank tim e deposits per
capita.
In recent years, how ever, com m ercial banks
have becom e m ore interested in tim e deposits. As
a rule, they engage in little direct rate com peti­
tion, but by capitalizing on the convenience of
m ultiple banking services they are able to attract
savings even when the rate differential is as high
as 1 percent.
thirty-nine




Greater B oston
This region includes an area som ew hat larger
than m etropolitan B oston — it extends all the way
to the northern border of the C om m onw ealth and
thus takes in L aw rence, H averhill and N ew buryport. It has an especially heavy concentration of
such com peting thrift institutions as m utual sav­
ings banks and savings and loan associations.
Cooperative banks — sim ilar in asset structure to
savings and loan associations -— are also preva­
lent. C om m ercial banks did not aggressively seek
time deposits in the past, and m any had no time
departm ents at all. E ven today, only 45 percent
of greater Boston com m ercial banks have m ore
than 25 percent of total deposits in tim e d e p art­
m ents, com pared with 80 percent of N ew E ngland
com m ercial banks outside the area show ing a time
to total deposits ratio of m ore than 25 percent.
Most com peting institutions pay a rate of 4 p e r­
cent, while only 15 percent of the com m ercial
bank offices in the area pay m ore than 3 percent.
U nder these circum stances it m ight have been ex­
pected that greater B oston’s com m ercial banks
would rank low in savings deposit grow th. But
com m ercial bank savings deposits in this area grew
by 13 percent in the first nine m onths of 1962
— an expansion surpassed in New E ngland only
by the New Haven area.
There have been two sources o f this substantial
savings grow th in greater B oston — sm all savers

Time Deposits in New England

and individuals with large am ounts of investm ent
funds. Small savers have been attracted to com ­
m ercial banks because of their convenience de­
spite higher rates paid by com peting institutions.
C om m ercial ban k offices are num erous and welllocated, an d one-stop banking saves both tim e and
trouble. A n d w ithin the last year o r so, m any of
the banks, especially the larger ones, have added
the attractio n of daily interest. Finally, there are
m any new or reestablished tim e departm ents in
this area and at these banks dem and depositors
are to som e extent a captive m arket, generating
savings deposits if oifered even a m inim um of
inducem ent.
D epositors with substantial investm ent funds are
num erous in the B oston area. They provided a
large deposit inflow during the first nine m onths
of 1962. If m arket yields on T reasury bills were
to rise above the general com m ercial bank rate of
3 percent, how ever, a substantial am ount of these
investm ent funds m ight leave.

O f the 49 banks paying a rate of 3 percent, 27
experienced savings grow th of less th an 5 percent
during th e period analyzed. T he considerably
higher group average gain — 13 p ercen t — is due
to unusually heavy increases at a few banks.
In contrast, no responding ban k th at pays a 4
percent rate increased tim e deposits by less than
8 percent during the survey period. W hile a few
banks paying a rate of 3 percent did indeed exceed
in grow th all banks paying a ra te o f 4 percent,
the 4 percent rate was m ore uniform ly effective in
attracting new deposits. F o r the m ost p a rt, the 3
percent banks w ith extraordinary deposit grow th
had new tim e departm ents o r h a d recently begun
to prom ote these departm ents aggressively.
T he bulk of the banks paying 4 percent are
located in the w estern and n orthern suburbs of
B oston, an d in the L aw rence-H averhill area. T his
clustering of banks paying 4 percent suggests th at
com petition am ong com m ercial banks is m ore ef­
fective in raising rates th an is com petition from
thrift institutions paying the sam e rate in these
localities as elsew here in greater B oston.

M ost banks in the B oston area — 49 out of 70
— pay a rate of 3 percent, as the scatter diagram
shows. T w enty banks are above the 3 percent
level, while six banks are below. Those paying
less than 3 percent lost savings deposits on the
average from D ecem ber 1961 to Septem ber 1962.

S ou th eastern M a ssa c h u se tts

B anks paying a rate of 3 percent gained an
average of 13 percent during the first nine m onths
o f 1962, while banks paying 3.5 percent gained
an average of only 12 percent. Of the three re­
sponding banks which pay a rate of 3.5 percent,
two only recently raised the rate from 3 to 3.5 per­
cent. In these cases, the full im pact of the higher
rate cannot yet be accurately assessed. All banks
offering daily interest experienced savings increases
w hich w ere well above average even though m ost
of them p aid only 3 percent.

T his section of the C om m onw ealth has tw o dis­
tinct areas, one including the old industrial cities
of F all R iver, New B edford and B rockton, the
other em bracing all of C ape C od. Q uite early in
A m erican history, F all R iver and N ew B edford
becam e textile m anufacturing centers, while B rock­
ton specialized in shoe m anufacture. M utual
savings banks w ere established in such centers
early in the last century, and even today, com ­
m ercial banks in this area are greatly outnum bered
by o th er thrift institutions.




forty

1962 Savings Deposits

O f the 37 com m ercial bank offices in the Fall
River-N ew B cdford-B rockton area, only three —
all unit banks — pay rates higher than 3 percent.
O ne-third of the group pays interest rates of less
than 3 percent. T here is little active com petition
for savings deposits; but despite this, and the pres­
ence of other savings institutions which pay rates
of 3.75 o r 4 percent, com m ercial banks in the
area experienced savings grow th of 3 percent
from D ecem ber 1961 to Septem ber 1962.
M utual savings deposits in the area increased
about 5 percent, only slightly m ore than com m er­
cial bank deposits. T he greatest com m ercial sav­
ings grow th was at banks that had raised rates at
the beginning of the y ear from 2.5 to 3 percent.
M ost of these, however, had begun with only small
am ounts of savings. Several banks paying less
than 3 percent indicated an intent to raise their
interest rate on savings.
On C ape C od, com m ercial banks averaged a 10
percent savings grow th during the first nine
m onths of 1962. This is a relatively high rate of
grow th, since only four banking offices out of a
total of 20 in the area were paying m ore than 3
percent, and five were paying less than 3 percent.
Seasonal influences m ay explain this grow th, how ­
ever. Bank deposits on C ape C od, especially de­
m and deposits, are at their annual low point in
May. G row th begins in June, continues into Sep­
tem ber, and then subsides in a gradual decline
through the winter. D ecem ber, then, w ould ordi­
narily be a m onth of relatively low deposit levels,
while Septem ber would be high.
Largely because of the C ape C od influence, the
scatter chart shows high grow th rates for m any
banks paying a rate of 3 percent in southeastern
M assachusetts, and grow th rates well above the
average for banks paying 3.5 percent. Even so,
grow th at banks paying 4 percent was highest.
forty-one




W o rcester-L o w ell
Both W orcester and Lowell are on the periph­
ery of greater Boston, and the two are m ore
closely related to this econom ic com plex than to
each other. But since g reater B oston has so m any
banks, the larger outlying areas are here treated
separately for the purposes of analysis.
Both W orcester and Low ell are the head q u ar­
ters of branch system s. Two of these systems
account for most of the offices paying m ore than 3
percent. This area and central M aine are the only
areas in New England w here branch systems pay
above-average rates. In each case, they are m ak­
ing an aggressive drive for deposits.
A m ong M assachusetts areas, W orcester-L ow ell
has the highest proportion of com m ercial banking
offices paying rates higher than 3 percent. N ever­
theless, banks paying only 3 percent averaged a
high growth rate during the first nine m onths of
1962. Several of the latter have new tim e d e p art­
m ents, while others offer daily interest. E ven
banks paying rates of 2 and 2.5 percent were
holding deposit levels alm ost unchanged. Only
the banks paying below 2 saw any sizeable de­
posit decline.
O verall, savings deposits in this area grew 11
percent from D ecem ber 1961 to Septem ber 1962
— an am ount equal to the state average. M utual
savings banks saw grow th of only 5 percent.
One bank in the W orcester-L ow ell area raised
its interest rate from 1 to 2 p ercen t early in the
year, then returned to 1 percent during the sum ­
m er. A ccording to the b a n k ’s m anagem ent, the
early increase did not stim ulate significant deposit
growth. However, an o th er bank th at increased its
rate on savings deposits plans still an o th er raise.

Time Deposits in New England

have a few branches. T hree of the sm aller banks

S p rin g fie ld and
W e s te r n M a ssa ch u se tts

have no savings deposits, but are instead operated

In w estern M assachusetts, the city of Spring­
field serves as the m ain business center of H a m p ­
shire and H am pden counties, while Pittsfield p e r­
form s a sim ilar function for B erkshire and w estern
F ranklin counties.

G enerally, com m ercial banks

do not com pete actively for savings deposits in
either area.

m utual

savings

and

savings

banks.

C om m ercial

banks

hold

slightly less th an one-half of the state’s savings
deposits, while m utual savings banks hold slightly
m ore than one-half.

Despite the fact th a t the

average com m ercial bank in the area has alm ost
40 percent of total deposits in tim e departm ents,

Tn the Pittsfield area, several banks are paying
interest rates of 3.5 percent. T hese banks gained
savings deposits during the period of the study,
while all but one bank paying less experienced
losses.

under joint m anagem ent with

banks, as are m any New H am pshire com m ercial

Savings in this area as a whole declined

m ost of them do not choose to engage in rate
com petition.

T hey resem ble the average M assa­

chusetts bank in rate policies, although they are
closer to New H am pshire and V erm ont banks in
proportion of tim e deposits to total deposits.

slightly over the period — one of only two areas
in New E ngland to do so. This is probably due

O nly one R hode Island bank reported a rate on

to active com petition by com peting thrift institu­

savings above 3 percent.

tions which have m ore branches than do the com ­

percent, it show ed m arkedly larger deposit grow th

Paying interest at 4

m ercial banks. But m erger activity seems to be in­

than the 3 percent banks.

tensifying, and m ay bring m ore aggressive rate

experience of banks in greater B oston, the p ay ­

behavior by som e com m ercial banks.

In contrast to the

m ent of daily interest did not stim ulate aboveaverage grow th — but it m ay have prevented de­

C om m ercial

banks

in

the

Springfield

area

posit loss.

show ed a 6 percent gain in savings deposits during
the study. But since only one bank pays a rate of
m ore than 3 percent, rates alone cannot explain

Savings deposits at R hode Island com m ercial

this grow th. O ther factors include the paym ent of

banks rose by only 3 percent from D ecem ber,

daily interest, which appeared to be fairly effec­

1961, to Septem ber, 1962 — a m uch sm aller in­

tive in attracting substantial am ounts of investm ent

crease than in any other New E ngland state. Since

funds, and the establishm ent of additional branch

deposits in the state’s m utual savings banks rose

offices. As in the Pittsfield area, banks paying less

at a slightly g reater rate than in the other states,

than 3 percent frequently lost deposits.

it is obvious th at com m ercial banks in R hode
Island have not been able to com pete as effec­
tively as com m ercial banks elsew here in N ew E n g ­

Rhode Island

land. The explanation probably lies in the lower
level of rates paid by R hode Island com m ercial

T here are two large branch systems in R hode
Island and seven sm all banks, several of which




banks, com pounded by the absence of any new
o r re-established tim e departm ents.
forty-tw o

1962 Savings Deposits

PERCENTAGE GROWTH IN SAVINGS DEPOSITS
OF REPORTING BANKS AC CORDING TO RATES PAID
DECEMBER 1961 — SEPTEMBER 1962
Percent

Percent

iU N E W

^>0

HAMPSHIRI

30

iU RHODE ISLAND

•
4U

J U
•

•
1o
•••

• •

••
•*

•
-10 " i..
U n der

3%

3.5%

Under 3%

4%

3%
3.5%
Rates Paid

Rates Paid

-10
4%

Percent

Percen t

5U

^C O N N EC T IC U T
Hartford

3U

ouCONNECTICU T
New Haven

•

y

30.....
•
•

•

•
•

.

•*

o

..
Und er 3 %

3%

3.5%

Note: Growth
Hartford, 4 %

forty-three




at several

v Under 3%

4%

Rates Paid
* = Ind iv idu al Bank

# =Average
Ha ven , 4 %

4%

ncrease for group

banks ex ceeded 50^ : New Hampshire,

2 Banks; New

3%
3.5%
Rates Paid

1 lan k.

3%

1 Bank, 4 % - 1 Bank

Time Deposits in New England

Connecticut
In the F irst Federal Reserve District, H artford
and New H aven are C onnecticut’s principal busi­
ness and financial centers. State-wide branching is
allowed, and the two most extensive branch sys­
tem s have headquarters at H artford. Branches of
these two system s are established in alm ost every
pa rt of the state in the F irst District. New H aven
and W aterbury contain the m ain offices of several
sm aller branching systems that cover the New
H aven C ounty area. As in R hode Island, no re­
sponding C onnecticut bank pays a rate of interest
lower th an 3 percent on time deposits.

H a rtfo rd
F o r the purposes of this study, the H artford area
includes all of C onnecticut outside the New H aven
area and Fairfield County.
R ate levels in specific localities seem to depend
largely on the presence or absence of branches of
the large system s. One of the systems is currently
paying 3.5 percent interest, the other pays 3.75
percent. Both com pute interest on a daily basis.

R ate (p ercen t)

3
3 Vi
3 -3 3A
4

L ocal banks in
branch tow ns non-branch tow ns

0
5
2
6

7
5
2
4

savings banks and savings and loan associations
are num erous, they probably would have rem ained
— as did B oston banks — at the 3 percent level.

N e w H aven
D uring the study period, New H aven enjoyed
the greatest percentage gain in com m ercial bank
savings of any New E ngland area. As the chart
indicates, not a single responding bank show ed a
decline in deposits. Banks paying 3 percent av­
eraged 9 percent grow th, banks paying 3.5 p e r­
cent averaged 14 percent, and banks paying 4
percent averaged grow th of 31 percent. F o r the
entire New H aven area, grow th during the study
period averaged 15 percent.

T he tabulation at the top of the next colum n
lists the rates paid by unit banks or small branching
systems th at com pete with branches of the large
systems, and com pares these with the rates paid
by sim ilar banks in towns and cities that do not
contain branches of the large systems.

This striking increase was encouraged by all
the factors that are usually associated with savings
deposit growth. Several banks have re-established
tim e departm ents, several pay daily interest,
branch locations are convenient, and the personal
incom e level of the a rea ’s residents has been
steadily rising. In addition, banks in the area are
em ploying wide advertising and prom otion.

T he presence of a large-system branch appears
to insure th at high rates will be paid. But inter­
estingly, in large-system branch towns the sm aller
local banks w ere usually the leaders in raising
rates. T he large systems were obliged to follow.
If the large branching systems were entirely gov­
erned by the situation in H artford, where m utual

M utual savings banks and o th er thrift institu­
tions are plentiful in New H aven, and the prevail­
ing interest rate at these banks is 4 percent or
higher. B ut despite this, m utual savings in the area
grew by only about 7 percent during the sam e
period. T he difference seems to be explained by
the convenience of one-stop com m ercial banking.




fo r ty - fo u r

1962 Savings Deposits

T A B L E VI

S E L E C T E D S A V IN G S D E P O S IT D A T A
S U R V E Y E D C O M M E R C IA L B A N K S , D IS T R IC T 1, 1 9 6 2

Percent o f
B anking O ffices
R aisin g R ate
Paid in 1962

Percent o f Banking Offices
P aying V arious M axim um Rates,
Septem ber 1962

B elow 3%

3%

3 Vi %

4%

Percen tage
P ercent o f
reporting banks
G row th in
Savings D ep o sits
w ith o v er Va
o f total deposits
D ec. 1961in tim e
Sept. 1962

6 6 .0

0

3 4 .8

4 8 .9

1 6 .3

1 2 .7

56

H a r tfo r d

7 8 .6

0

2 2 .5

6 7 .5

1 0 .1

1 1 .3

65

N ew

4 4 .2

0

5 5 .7

1 7 .3

2 6 .9

1 5 .0

42

4 6 .0

3 .3

5 7 .9

3 .3

3 5 .5

5 .0

98

6 8 .7

0

4 0 .4

5 .1

5 4 .5

6 .6

96

3 .8

9 .4

9 0 .6

0

0

1 .4

100

2 5 .7

14 .0

7 0 .0

5 .3

1 0 .6

1 0 .6

43

5 .4

7 8 .3

3 .4

12.9

13.1

46

6 .9

4 .0

52

13.1

1 0 .0

52

C o n n e c t ic u t

H aven

M a in e
P o r tla n d -A u g u s ta
B a n g o r -A ro o s to o k

M a s s a c h u s e tts

...........

B o s to n -M e tr o p o lita n

3 0 .5

F a ll R iv e r -C a p e C o d

1 9 .0

3 1 .0

5 5 .2

6 .9

W o r c e s te r -L o w e l 1

2 6 .2

2 1 .3

5 2 .5

13.1

7.1

3 7 .5

5 7 .2

5 .4

0

4 .6

17

6 7 .9

1 0 .7

2 1 .4

3 .6

6 4 .3

8 .9

81

0

9 6 .8

0

3 .2

3 .3

100

7 4 .4

2 .6

2 5 .6

4 7 .4

2 4 .4

5 .6

100

N o rth

9 3 .5

2 .2

8 .7

6 0 .9

2 8 .3

5 .0

100

S o u th

4 6 .9

3.1

5 0 .0

28.1

18.8

6 .5

100

3 8 .9

9 .0

59.1

14.1

1 7 .8

8 .0

6 6

S p r in g fie ld -B e r k sh ir e s

N e w H a m p s h ir e

R h o d e Isla n d

V erm ont

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

T o t a l D is tr ic t 1

forty-five




3 .2

Time Deposits in New England

W hy Commercial Banks Seek Time Deposits
so th at depositors are usually willing to accept a
low er rate of interest on their savings deposits at

“M ixed banking,” or the acceptance and the invest­
m ent of both tim e and dem and deposits by com ­
m ercial banks has been a com m on practice in
com m ercial banking for well over a century.
N evertheless, because this “m ixed banking” con­
tinues to be challenged, a review of the practice
seems desirable. T he challenge has two facets:
(1 ) is it in the public interest for comm ercial
banks to seek tim e deposits, and ( 2 ) are tim e
deposits desirable for com m ercial banks?

If, then, one can accept the thesis th a t tim e de­
posits at com m ercial banks are in the public in­
terest, w hat is to be said about the desirability of
tim e deposits from the view point of bank m anage­
m ent? Surely, profitability of tim e deposits ought
to be a m ajor consideration.

A s fa r as the public is concerned, a balanced
answ er m ust alm ost certainly be affirmative.

Functional Cost A n a ly sis

M anagem ent of com m ercial banks is at least on
a p a r with th at of m utual institutions. W ith pres­
ent strict standards of bank supervision, it would
be h ard indeed to argue th at tim e deposits would
be less safe in com m ercial banks than they would
be in strictly savings institutions.
M any supervisory authorities agree that, far
from having an adverse influence upon com m ercial
banks, tim e deposits have a stabilizing effect. They
are less volatile th an dem and deposits, which are
often draw n dow n unexpectedly and in large
am ounts. T hey are less seasonal in nature and are
less subject to contraction in a period of economic
adjustm ent or business pause. T hus, com m ercial
banks can better and m ore safely serve the needs
of the com m unity if, in addition to dem and de­
posits, they can lend from a pool of funds that
includes a stable floor of time deposits.
In addition, because the offices of com m ercial
banks in the U nited States outnum ber the offices
of all m ajor thrift institutions com bined, the con­
venience of the depositor is frequently increased
significantly if his savings deposit can be m ade at
the sam e office w here he m akes his checking ac­
count deposit. T his convenience is real. So m uch




com m ercial banks.

F o r m ore than 30 years the F ederal R eserve
Bank of B oston has sponsored a program of in­
com e and expense analysis for m em ber banks in
the F irst F ed eral Reserve D istrict. Participating
banks are g rouped by percentage of tim e deposits.
In a rep o rt covering the 1924 o perations of 415
N ew E ngland m em ber banks, the F e d e ral R eserve
A gent com m ented as follows:
. . n et earnings
decline as the p ro portion of tim e deposits rise on
account of the greater cost of handling tim e de­
posits in banks equipped to do a com m ercial b a n k ­
ing business. C hief am ong these is interest paid on
deposits. Such charges are negligible in banks
doing exclusively a com m ercial business but con­
sum e tw o-thirds of all current expenses in banks
handling prim arily savings accounts. T he clerical
cost of an organization intended to handle com ­
m ercial deposits is so heavy that, w hen added to
the interest costs incident to handling savings de­
posits, little balance is left fo r profits.”
Such an analysis of over-all ban k incom e and
expense has value in a general w ay but is n o t as
precise as an analysis of incom e and expense for
each operating function. T he latter furnishes in­
form ation on the profitability of the tim e deposit
function.
forty-six

Functional Cost Analysis

U nfortunately, functional cost accounting is not

These banks paid an average effective ra te of 2.55

as com m on as w ould be desirable am ong smalland m edium -sized banks. T o com plicate the p ro b ­
lem further, functional cost accounting is an in­
exact procedure and the resulting data depends
heavily upon the assum ptions used. B ecause these
assum ptions can vary widely am ong various cost
accountants, cost com parisons betw een banks or
groups of banks lack validity to the degree that
assum ptions and procedures differ. T hus, no large
body of com parative d a ta is available.

percent on time deposits in 1961. E arnings on
capital assigned to tim e deposits averaged 5.5
percent.

Prim arily to help banks ob tain basic cost data,
the F ederal R eserve B ank of B oston has cooperated
with those of its m em ber banks whose total de­
posits range from $3.5 m illion to $50 m illion in
developing a sim plified functional cost study. T he
project started in 1958 and borrow ed freely from
a pioneer pro ject in this field previously un d er­
taken by the F ed eral R eserve B ank of New Y ork.
M axim um p a rticipation has been a prim ary goal,
and for the study of 1961 operations, 80 banks
supplied functional cost data which the R eserve
B ank analyzed. A b o u t half of the banks in the
eligible deposit range p articipated. T he project has
som e recognized lim itations b u t is, nevertheless,
the only source of d ata th at covers as m any as
80 banks and uses identical assum ptions for all.
A lthough intended prim arily fo r the internal use
of the m em ber banks them selves, the d a ta has
collateral research values fo r a paper such as this.
T hose students of the field w ho are interested will
find in the appendix descriptions of the assum p­
tions and procedures used.
O f the 80 banks w hich com pleted the study, 20
either had no tim e deposits o r only sm all am ounts.
T he rem aining 60 banks, w hich provide the basis
for the following discussion, averaged $6.3 m illion
in tim e deposits — this am ounted to about a third
of total deposits on the average in the group.
forty-seven




H ad the posted rate been 3.5 percent with a
presum ed effective rate of 3.25 percent, the after­
tax return on capital w ould have been 1.9 percent.
W ith a 4 percent posted ra te and a presum ed
effective rate of 3.7 percent, th e retu rn on capital
would have been a m inus .6 percent.
Proponents of tim e deposits for com m ercial
banks would probably concede th at the average
bank which paid m ore than 3 percent on tim e
deposits did so at the expense of an acceptable
return on the capital assigned to the function. But,
they ask, why rest the case on the perform ance of
an average bank? W hat can banks expect to earn
if they do a top job of generating high portfolio
incom e and if they do an equally fine job of con­
trolling expenses? A lthough such a favorable
com bination of factors is rarely present it re p re ­
sents a desirable goal, o r an ideal.

A ssum e, then, that the to ta l incom e of this ideal
bank is the actual average total incom e of the 10
banks with the highest incom e, and th a t its ex­
penses are those of the 10 banks with the lowest
expenses, both in processing tim e deposits and in
making each type of loan. U nder these ideal cir­
cum stances, the net earnings a fter federal taxes
would pay a return on capital assigned to time
deposits of 8.6 percent, assum ing a posted rate of
3 percent and an effective rate of 2.8 percent. W ith
a 3.5 percent posted rate an d an effective rate of
3.25 percent, the retu rn on capital w ould have
been 6.2 percent. A nd w ith a 4 percent posted
rate and a 3.7 effective rate, the re tu rn on capital
would have been 3.9 percent.

Time Deposits in New England

T he disparity betw een the capital earnings from
tim e and dem and deposits is best indicated by com ­
paring the foregoing data with the earnings on the
capital allocated to dem and deposits in the com ­
posite bank o f the 60 included in the findings of
the study. W hile the com posite bank earned 5.5
percent on capital assigned to tim e deposits, it
earn ed 8.5 percent on capital assigned to dem and
deposits.

W ith a 4 percent rate of interest, the return on
capital is obviously unsatisfactory. The conclu­
sion m ust be draw n that high rates are such a
depressant on earnings that even under ideal con­
ditions a satisfactory rate of return on capital is
unlikely w hen rates exceed 3.5 percent. T he over­
all desirability of tim e deposits for com m ercial
banks cannot be established, however, w ithout ref­
erence to several other aspects of the problem .

T he first aspect relates to the differing effects
upon banks w hen high time deposit rates are paid,
depending upon the percentage of time deposits to
total deposits. Banks with a small percentage of
tim e deposits can attract new deposits by paying a
m axim um interest rate and can probably invest
these new funds to advantage. Banks with a high
percentage of tim e deposits already in existence
feel them selves m aneuvered into paying high rates
at least as m uch to hold old deposits as to gain
new ones. T hese old deposits have usually been
invested at low er interest rates. U ntil the p o rt­
folio can be recast into higher earning assets, the
effect of increased rates on time deposits is to
depress earnings. How long this would continue
would depend on loan dem and, on the degree to
which the m aturities of low -earning assets perm it
liquidation and reinvestm ent at higher rates, and
on the determ ination with which m anagem ent p u r­
sues the recasting program .




Some banks accept low returns on tim e deposits
as being p a rt of w hat they regard as a tem porary
“holding” operation. P erhaps they anticipate a
rise in loan rates, or a shift of low -earning assets
into higher-earnings assets in the n ear future. T hey
may be building a deposit base from w hich they
soon expect to m ake loans when dem and picks up.
O ther banks recognize th at dem and deposits would
earn m ore m oney than tim e deposits but th at there
is a lim it to w hat presently can be developed in the
way of additional dem and deposits. T his low-return philosophy reflects som ething akin to the “ loss
leader” approach of the superm arkets. A nd,
finally, som e banks welcom e m ore tim e deposits,
even at high interest rates, because they believe
that local com petition o r a present o p portunity to
invest in high-yielding consum er loans justifies
such a course.
A willingness to accept lower returns on tim e
deposits th an on dem and deposits seems justified
unless the effort and the floor space devoted to
tim e deposits can yield significantly greater returns
if applied to another function.

T he factors w hich argue in favor of seeking
time deposits even at the cost of below -average
profitability include these:
1. T im e deposits generate other business. It
is alm ost axiom atic that savings deposits help to
develop consum er loans, m ortgage loans, checking
accounts, rental of safe deposit boxes, and the like.
C ustom ers respond to com prehensive service.
2. “H e profits m ost w ho serves best.” C om ­
m ercial banks are uniquely able to offer broad
and inclusive services. H ow ever, their grow th de­
pends as m uch upon m eeting com m unity needs as
the grow th of the com m unity depends upon avail­

/ or ty-eight

Functional Cost Analysis

ability of all types of bank credit. T o m eet the
needs of a growing econom y banks m ust increase
their capacity to lend. T im e deposit departm ents
are a m eans of acquiring funds to m eet th at need.
3. Capitalizing on convenience. O ne-stop b a n k ­
ing is an advantage which com m ercial banks pos­
sess over their noncom m ercial com petitors. M any
b ankers feel th at this convenience is sufficient to
overcom e at least a one-half p ercent higher rate
paid by com petitors. A dvocates for com m ercial
banks argue that this factor of convenience is a
distinct com petitive advantage.
4. A bsorption o f overhead. T he tim e deposit
function itself absorbs p art of the overhead o th er­
wise attributable to dem and deposits. M ore im ­
p ortantly, the loans and investm ents arising out
of the tim e deposits absorb additional overhead.
E arnings on capital and on dem and deposits are in­
creased to the degree th at they are relieved of
this overhead.




Im plicit in all of these favorable considerations
is the cost to the bank in term s of reduced rate of
earnings associated with tim e deposits. A com ­
prom ise m ust be reached in the selection of a rate
th at will hold old deposits, will a ttrac t new de­
posits to the degree these are needed to m eet
present and near-future loan dem and, and which
will still be within the capacity of the b ank to
m eet, all factors being considered. In sound long­
term planning it is difficult indeed to distinguish
between unim aginative conservatism and im pru­
dent expansion. But in a com petitive and chang­
ing econom y the need to m ake such decisions is
the reality constantly facing the m anagem ent of
banks and other businesses.
In conclusion, com m ercial banks seek tim e de­
posits either because they see present o r n ear­
future opportunity to em ploy them profitably or
because m anagem ent is content to accept a m od­
erate return on tim e deposits in the hope th at this
will be offset by certain favorable factors.

Time Deposits in New England




Appendix

A Com parative A n alysis
of T im e Deposit Com ponents
Since the end of W orld W ar II the increased
detail in the published tabulations of tim e and
savings deposits a t F ed eral R eserve System m em ­
b er com m ercial banks has revealed the diverse
n ature of these accounts and has p ointed up the
continuing shifts in deposit structure.
T he accom panying table show s the various
classes of tim e and savings accounts at m em ber
banks for selected dates betw een 1940 and 1962.
T hese accounts range in n ature from tem p o rary
deposits to stable and long-term investm ent d e ­
posits. T he low level of activity in m ost savings
and tim e accounts suggests that they are princi­
pally used as liquidity o r contingency reserves, as
investm ents, o r as accum ulations of funds for
lum p-sum expenditures for durable consum er
goods. Inevitably, these shades of difference in
tim e and savings accounts com plicate any expla­
nations of grow th in th e total.

R e g u la r S a v in g s A cco u n ts
O nly individuals and nonprofit institutions are
p erm itted to hold regular savings deposits, and
notice m ay be req u ired p rio r to w ithdraw al.
T hese accounts have been traditionally, and are
now, the largest com ponent of total tim e deposits.
T hey are held alm ost entirely by individuals.
D uring m uch of the postw ar p eriod they consti­
tuted roughly 80 percent of the n a tio n ’s total, but
declined after 1960 as the tim e deposit com ponent
rose. A t the end o f 1962, regular savings accounts
constituted about 72 percent o f to tal savings and
tim e deposits. A bout 47 m illion savings depositors
a t m em ber banks held regular accounts am ounting
to $58.3 billion. I t is estim ated th at these accounts
fifty

A ppendix

T A B L E V II

T IM E D E P O S IT S A T A L L M E M B E R B A N K S (U .S .)

S e le c te d D a te s ( M illio n s o f D o lla r s )

H older, or typ e o f deposit

June 29

June 30

June 30

1940

1945

1950

June

June 15

June 30

D ec. 28

1957

1960

1962

1962

3 5 ,7 3 7

4 4 ,4 0 2

5 5 ,2 1 3

5 8 ,3 0 2

434

521

570

581

6

I n d iv id u a ls, p a r tn e r s h ip s an d
c o r p o r a tio n s:
S a v in g s

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

A c c u m u la t e d fo r p a y m e n t o f
p e r s o n a l lo a n s ...............................

9 ,9 8 5

2 0 ,1 9 0

52

35

_

C h r is tm a s s a v in g s a n d s im ila r a c ­
c o u n ts ..................................................

113

159

_

C e r tific a te s o f d e p o sit

671

483

—

O p e n a c c o u n ts o f b a n k s ’ o w n
tru st d e p a r tm e n ts *

—

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

D o m e s tic b a n k s

_

1 ,2 2 1

1 ,3 9 7

1 ,5 0 0 * *

1 ,5 7 0 * *

1 ,0 3 3

983

3 ,0 9 4 * *

3 ,6 3 1 * *

1 1 ,4 5 9

2 1 ,2 5 4

2 8 ,3 2 8

4 0 ,8 8 3

5 0 ,5 3 4

.

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

F o r e ig n c e n tr a l b a n k s a n d g o v e r n ­
m en ts ........................................................

6 7 ,6 3 6

7 1 ,9 1 4

59

102

182

302

234

274

243

410

392

1 ,1 1 5

2 ,1 2 8

2 ,7 6 8

5 ,0 9 6

5 ,1 3 5

134

44

26

46

98

223

235

8

16

178

1 ,3 2 3

1 ,2 0 7

128

123

_

_

2 ,1 5 6

2 ,4 2 4

611

554

1,5 0 1

3 ,7 9 9

4 ,3 0 7

7 ,8 7 7

8 ,1 6 0

1 2 ,0 7 0

2 1 ,8 0 9

2 9 ,8 2 9

4 4 ,6 8 2

5 4 ,8 4 1

7 5 ,5 1 3

8 0 ,0 7 4

2 3 .3

1 8 .4

2 4 .3

2 8 .4

3 0 .5

3 6 .6

3 6 .5

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

TOTAL

085**
7 ,7 4 5 * *

—

F o r e ig n b a n k s

T o ta l

580**
6 ,6 7 9 * *

388

U . S. g o v e r n m e n t a n d p o sta l s a v in g s
S ta te s an d p o litic a l s u b d iv is io n s

557
2 ,6 7 4

637

O th er o p e n a c c o u n ts
T o ta l

—

498
1,9 6 1

T im e d e p o s its a s a p e r c e n ta g e o f
to ta l d e p o s its .......................................

_

_

__

* Prior to 1949 th ese accou n ts w ere included in dem and deposits.
* * D a ta for C hristm as savings, etc., certificates o f d ep osit, o p en acco u n t trust de­
p artm ents and oth er op en accounts for the dates in 1962 is estim ated . A t
June 30 and D ecem b er 28 the total for these a cco u n ts w ere sh ow n in the call
reports as “other tim e deposits o f individuals, corporation s, and p artnerships.”
T h ey aggregated $11 ,8 5 3 b illion and $13,031 billion o n these d ates respectively.
N o te:

fifty -o n e




D eta ils m ay not add to totals because o f rounding.

Time Deposits in New England

T IM E D E P O S IT S A T M E M B E R B A N K S
IN N E W E N G L A N D

T A B L E V III

S e le c te d D a t e s ( M illio n s o f D o lla r s )

H old er, or typ e o f deposit

June 29

June 3 0

June 30

1940

1945

1950

601

1 ,0 4 2

June 6
1957

June 15

June 30

D ec. 28

1960

1962

1962

1 ,2 4 3

1 ,4 5 5

1 ,6 9 3

1 ,7 7 2

4

3

4

4

I n d iv id u a ls , p a r tn e r sh ip s and
c o r p o r a tio n s :
S a v in g s
A c c u m u la t e d fo r p a y m e n t o f p ers o n a l lo a n s
C h r is tm a s s a v in g s an d sim ila r a c ­
c o u n ts .......................................................
C e r tific a te s o f d e p o sit

9
21

O p e n a c c o u n ts o f b an k s' o w n trust
d e p a r tm e n ts *
...........................
O th e r o p e n a c c o u n ts
T o ta l

_

—

10

_

27

31

37**

3**

—

20

18

128**

134**

6

—

42

44

45**

4 7

9

4

—

34

19

57**

59**

640

1 ,0 6 2

1 ,2 4 1

1 ,3 7 0

1 ,5 7 1

—

1 ,9 6 4

2 ,0 1 9 * *

U . S. g o v e r n m e n t a n d p o sta l sa v in g s

3

5

9

14

8

9

8

S ta te s a n d p o litic a l su b d iv isio n s

4

1

5

11

17

54

72

D o m e s t ic b a n k s

1

F o r e ig n b a n k s

—

F o r e ig n c e n tr a l b a n k s and g o v e r n ­
m e n ts ...............................................................

—

T o ta l
TOTAL

T im e d e p o s its a s a p e r c e n ta g e o f total
........................
d e p o s its




_* * ❖

__***

6

_* * *

4

5

—

—

8

14

7

4

_

_

**

48

54

7

6

14

39

39

122

143

647

1 ,0 6 9

1 ,2 5 5

1 ,4 0 9

1 ,6 1 0

2 ,0 8 6

2 ,1 6 3

2 2 .4

17.1

2 1 .7

2 0 .3

2 1 .2

2 5 .0

2 4 .2

* Prior to 1949 th ese accoun ts w ere in clud ed in d em an d d ep osits.
* * D ata for C hristm as savings, etc., certificates o f d ep o sit, op en accoun t trust d e­
partm ents and o th er op en accou n ts fo r th e dates in 1962 is estim a ted at June 30
and D ecem b er 28. T h e total fo r th ese acco u n ts w ere sh o w n in th e ca ll reports as
“other tim e d ep osits o f in d ivid u als, corporation s and p artn ersh ip s.” T h ey aggre­
gated $267 m illio n and $243 m illio n on th ese d ates resp ectively.
* * * L e s s than $ 5 0 0 thousand.
N o te:

D etails m a y not add to to ta ls b ecau se o f rounding.

fifty-two

Appendix

averaged about $1,240 in 1962 — representing
alm ost triple the average am ount in 1940. The
1962 average regular account in m utual savings
banks is estim ated by the N ational A ssociation of

notice is given, are often used fo r the sam e p u r­
pose as savings deposits as noted above. A sub­
stantial portion of total tim e certificates, how ever,
are of quite a different nature.

M utuals Savings Banks at $2281.
In New E ngland, regular savings deposits re p re ­
sent a larger percentage of total tim e deposits than
in the nation as a whole. A t the end of 1962 they
com prised about 85 percent, while the num ber
of depositors was estim ated at a little over two m il­
lion and the size of the average account was esti­
m ated at $824. T he average savings account at
New England com m ercial banks has characteris­
tically been below the national average because of
the com petition of other savings institutions, p a r­
ticularly m utual savings banks.
C hristm as savings and sim ilar accounts, and de­
posits accum ulated for the paym ent of personal
loans, have definite savings characteristics. The
p art of savings represented by certificates of
deposit and other open accounts held by individ­
uals also qualify for this category. T hese several
classes of accounts have increased in im portance
at com m ercial banks in m ost regions in recent
years. In 1962, with the new ceiling perm itted on
deposits held for one year, there undoubtedly was
som e shifting of savings to certificates and other
open accounts from regular savings deposits —
the bank preferring to offer the m axim um rate in
this form of contract. T he national to ta l of savitigs
in these several classes of accounts is currently
estim ated to am ount to betw een $6 and $7 billion.
W hen added to the regular savings to ta l it sig­
nificantly increases the percentage of savings to
total tim e deposits.

C ertificates o f D ep osit
Tim e certificates of deposit, redeem able only
after a specified date o r after 30 days’ written
fifty -th r e e




In June of 1957 certificates of deposit held by
individuals, partnerships and corp o ratio n s re p re ­
sented som ew hat m ore than 4 p ercent o f to tal tim e
deposits. A t the end of 1962 it is estim ated th at
they had increased to about 12 percent. O w ner­
ship of these certificates today differs substantially
by geographical area, as has been true in earlier
periods. They have traditionally been the savings
form offered by m any banks to individuals; and in
recent years, savings plans using certificates of de­
posit have been adopted by additional banks. In
1957 a F ederal Reserve System tabulation show ed
that a large proportion of savings w ere held in this
form by individuals in the M id-W est and in some
southern states. A t country banks in the St. Louis
and M inneapolis Federal R eserve districts, certifi­
cates of deposit accounted at that tim e for 15 and
25 percent, respectively, of total tim e deposits. A
survey of a group of banks in the M id-W est, co n ­
ducted by B ank N ew s in A pril, 1962, confirm s
their continuing popularity. C urrently, it is esti­
mated that individuals hold som ew hat over threequarters of the total am ount of all certificates at
m em ber banks in the country classification, and
about half the total at city banks. C orporations,
state and local governm ents, and institutional
holders account for m ost of the rem ainder, with
foreigners and noncorporate businesses holding
relatively small am ounts.

N egotiable C ertificates o f D ep o sit —
A M on ey M a rk et In stru m e n t
Certificates of deposit m ay be issued in nego­
tiable or nonnegotiable form . In 1961 w hen com pe­

Time Deposits in New England

tition for deposits becam e intense in the m ajor
m oney centers, the large New Y ork City banks
announced th at they would attem pt to secure
short-term corporate funds that would otherw ise
be invested in such com peting m oney m arket in­
vestm ents as T reasury bills or prim e com m ercial
paper. F o r this purpose, they offered interestbearing negotiable certificates of deposit, generally
in denom inations of $100 thousand and over.
L arge deposits are usually represented by several
certificates in denom inations of $1 million. Issued
by w ell-know n banks, certificates are readily
m arketable and com petitive with other m arket in­
vestm ents. Certificates of less widely known banks
do not enjoy as broad a m arket and trad e at
higher rates. T he developm ent of this secondary
m ark et in negotiable certificates, which is centered
in dealers in U.S. securities, has added breadth to
the m oney m arket.
The outstanding am ount of negotiable certifi­
cates trad ed as money m arket instrum ents has
grow n rapidly, and was given added im petus by
the liberalization of Regulation Q at the beginning
of 1962. A survey made in D ecem ber, 1962, by
the F ed eral R eserve System, reported som e $6
billion outstanding. Of these about $2.2 billion
had been issued by New Y ork City banks, $900
m illion by C hicago banks, and $2.9 billion by
large banks distributed over the rest of the nation.
W hile the use o f these certificates has increased
sharply since their first issue in 1961, the growth
has not been proportional in all D istricts. Some of
the large N ew E ngland banks have adopted a
passive attitude tow ard the issue of certificates.
T he B oston D istrict reported only $159 m illion
outstanding in D ecem ber, 1962.
A lthough these certificates of deposit are held
m ainly by corporations, in some D istricts im por­
tan t fractions of the total are held by states,




m unicipalities, foreign entities and individual in­
vestors. Certificates were issued in negotiable form
for m any years prior to 1961, b u t were n o t traded
as m oney m arket instrum ents until th at time.
L ocal trades have occurred on occasion, how ever.

O th er O p en A cco u n ts
“O th e r” open accounts of individuals, p a rtn e r­
ships and corporations are subject to w ritten con­
tracts th at lim it w ithdraw al to a specified date o r
to 30 days after notice in writing is subm itted.
T hese accounts represented about 2.3 percent of
total tim e deposits in 1957, and are currently esti­
m ated to represent about 4 percent of the total.
C orporations and institutions held about 40 p e r­
cent of the total in other open accounts in 1957,
while foreigners held about 30 percent. H oldings
of individuals are sim ilar in purpose to regular
savings deposits and am ounted to betw een 20 and
25 percent of the total in 1957. Satisfactory esti­
m ates for holders in 1962 are n o t possible because
of lack of detailed inform ation about shifts in form
of individual savings. T he percentage held by in­
dividuals has undoubtedly increased. T he num ber
of these accounts decreased during the w ar, but
since 1945 they have expanded m ore rapidly and
have increased significantly as a pro p o rtio n of the
n atio n ’s total tim e deposits.

T im e D ep o sits o f S tates and
P olitical S u b d ivision s
T hese deposits are scattered am ong a large num ­
ber of banks. T hey result from the practice by
governm ental units of financing capital projects
in advance of actual expenditure. T he proceeds of
borrow ing in the capital m arkets are reinvested in
tim e deposits or some alternative investm ent for
the period during which the funds will be idle.
fifty-four

Appendix

T im e D ep o sits — F o re ig n B a n k s,
O ffic ia l In stitu tio n s, G o vern m en ts

— to approxim ately the level of yields of short­
term securities in the open m arket.

In a few large banks, principally in New Y ork
and San Francisco, tim e deposits of foreign banks

T he time deposits of foreign banks, official in­
stitutions, governm ents and corporations, along
with negotiable certificates of deposit, state and
local governm ent deposits and a portion of “o th er”
open accounts, are usually held as alternatives
to such short-term investm ents as T reasury bills,
banker’s acceptances or prim e com m ercial paper.
Conditions bringing about rising interest rates and
pressures on time deposit positions also occur in
conjunction with pressures on dem and deposit p o ­
sitions. Rising short-term rates cause dem and
depositors — particularly corporations — to reap­

constitute an im portant fraction of total tim e de­
posits. Boston banks, how ever, hold only a m odest
2 percent of the total of these deposits. In the fall
of 1962 the Congress passed Public L aw 87-827
exem pting fo r a period of three years the tim e de­
posits of foreign governm ents and financial insti­
tutions from the rate lim itations of Regulation Q.
Since then the am o u n t of these deposits has shown
a relatively large increase. T he banks increased
rates prim arily on foreign deposits m aturing in
three m onths — a critically com petitive category

praise standards w here m inim um positions in de­

C o m p a riso n of M ovem ents in T im e and Savings D eposits
Ratio S c a le

fifty-five




New Y ork Banks - A ll Other Banks

Ratio Scale

Time Deposits in New England

m and deposits are concerned. M arginal funds left
with the com m ercial banks on a dem and basis
under these conditions are placed in tim e deposits
o r m oney m ark et outlets.
In general, the bulk of these kinds of tim e d e ­
posits exhibits a considerable volatility and is re­
sponsive to changes in relative rates of retu rn at
banks and on liquid m oney m arket instrum ents.
C o rp o rate and foreign dollar balances are also
subject to com petition from sources abroad. The
m arket for these balances is at times international
in ch aracter. T im e deposits, then, tend to show
m ovem ents into and out of the com m ercial banks
as business conditions and interest rates change
within business cycles.
T hese m ovem ents are show n in the chart on
page 55, w hich classifies tim e and savings deposits
at all com m ercial banks outside New Y ork City
and at New Y o rk ’s R eserve City banks. In the
latter case, tim e deposits are a heavy com ponent
of total tim e and savings deposits. T heir behavior




can be considered representative of this class of
deposits. Savings deposits are d om inant in the
other group of banks.
R egular savings deposits do not show a com ­
parable p a tte rn of m ovem ent and tend to be som e­
what less responsive th an tim e deposits to changes
in interest rates. T hese deposits have, how ever,
been affected at tim es by external com petition —
that is, by the com petition of other financial insti­
tutions and investm ent instrum ents, particularly
those outside the scope of rate regulation.
W hen banks are classified by location — city o r
country — the banks falling into the country classi­
fication will be found to hold substantially larger
p roportions of savings to total tim e and savings
deposits; currently the proportion is about 80 p e r­
cent. City banks will show relatively sm aller p ro ­
portions, depending upon the size of the city. A t
principal m oney centers, such as New Y ork and
C hicago, the percentage is 45 and 63 percent
respectively.

fifty-six

Appendix

T im e Deposit Incom e and
E xpense R elationships
N et earnings on tim e deposits obviously depend
prim arily on incom e and expense relationships.
N evertheless, differing assum ptions m ade in func­
tional cost accounting projects introduce v aria­
tions in the results. Six cost accountants with six
different sets of assum ptions at w ork in the same
bank would arrive at six different sets of cost
figures. T he over-all net earnings for the bank
w ould be identical but the p roportion of earnings
assigned to capital and to tim e and dem and d e ­
posits could vary appreciably. T his fact m ust be
understood to distinguish the cost d ata below from
the cost data of o th er studies w hich have been
m ade un d er different assum ptions.
The simplified functional cost project spon­
sored by the Federal R eserve B ank of Boston has
as a prim e virtue uniform ity of assum ptions and
procedures which increase the validity of inter­
ban k com parisons. It w as designed fo r m axim um
participation. M ore th an half o f the banks in the
$3.5 to $50 m illion deposit range prep ared data
covering 1961 operations and subm itted this data
to the Reserve Bank for sum m ary and for calcu­
lation o f com parative ratios. T he following are
som e of the study’s m ore im portant assum ptions:
1. A llocation o f cash. In the 1961 study,
“C ash and due from o th er b an k s” was assigned
to the tim e deposit function to the extent of 6
percent of time deposits. T he rem aining “cash
and d u e ” was assigned to dem and deposits.
2. Portfolio. T he rem aining 94 percent of the
tim e deposits was invested as earning assets in the
portfolio, as was the balance of the dem and
deposits after deduction of its “cash and due.”

fifty-seven




T otal capital funds less fixed and “o th e r” assets
were also invested in the portfolio.
3. Tax-exem pt incom e. T ax-exem pt securities
varied widely am ong the participating banks. T o
adjust this to a uniform basis all inter-bank com ­
parisons in the functional cost project were m ade
after calculation of federal taxes applicable to net
earnings. In the present analysis, a 52 percent
federal tax was presum ed and all tax-exem pt in­
come was m ultiplied by 108 p ercent to raise its
income to a pretax base. T his m ade for before­
tax com parability.
4. Indirect costs. C hief indirect costs were
occupancy expenses and unallocable salaries and
wages (3 4 percent and 31.9 percent, respec­
tively, of total indirect co sts). A ll indirect costs
were allocated to functions on the basis of direct
costs of each function. Tim e deposit interest, F e d ­
eral D eposit Insurance C o rporation insurance
prem ium s, and investm ent counsel expense bore
no indirect expense, however.
5. Depreciation.
reports.

As listed in the federal tax

6. Capital assigned to tim e deposits. It has
been assum ed here that there is $9 in capital funds
per $100 in time deposits. T he average insured
com m ercial bank in the U nited States had an
average capital base of $9.50 per $100 of total
deposits. In actual practice banks have lower
capital ratios on the average the higher their p ro ­
portion of time to total deposits. T hus it has been
assum ed that the capital base under tim e deposits
is slightly lower than the over-all bank average
while the capital base under dem and deposits is
slightly higher.
T o help insure th at the assum ptions were carried
out uniform ly the Reserve B ank prep ared w ritten

Time Deposits in New England

T IM E D E P O S IT P O R T F O L IO C O M P O S IT IO N
A N D E A R N IN G S A V E R A G E O F 6 0 B A N K S
(A ll fig u res in p e r c e n t o f tim e d e p o s its )
Y ield

A ssets required w ith
tim e d eposits

D istribution

G ross

E xpenses

(1)

(2 )

(3 )

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

6.00

U.S. governm ent securities

27.18

C ash assets

7.03

M unicipal obligations

N et
(4 )

[co l. ( 1 ) X co l. (4 ) 1
N e t return on
in vestm en ts
(5 )

0.0
2.99
4.94*

0.16

2.83

.77

0 .16

4.78*

.34
.05

1.23

3.74

0.16

3.58

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

15.23

5.25

0 .72

4.53

.69

Installm ent loans ...............

18.59

9.08

3.58

5.50

1.02

24.74

5.22

1.17

4.05

O th er investm ents
R eal estate loans
A ll o th er loans
T otal

1.00
3.87

100.00

* Y ie ld s o n ta x -e x e m p t s e c u r itie s are ad ju sted t o m a k e t h e m e q u iv a le n t to b e fo r e - t a x y ie ld s.

instructions and sam ple worksheets covering a
m ythical bank. In one-day w orkshops held at the
Federal R eserve Bank the procedures were dis­
cussed with those who were to be in charge of col­
lecting the data. P articular stress was placed on
allocation of the tim e of officers and staff because
this usually represented around 40 percent of total
expense for a bank.
O f the 80 banks which com pleted the study, 20
had either no tim e deposits or only small am ounts.
The rem aining 60 banks averaged $6.33 m illion
in tim e deposits, 31.23 percent of total assets.
The average experience of these banks is utilized
in the follow ing analysis.
T he asset allocation of
to tim e deposits is shown in
yield of all earning assets
since only 94 percent of




the portfolio assigned
Table IX . T he average
was 4.12 percent, but
time deposits are in­

vested in the portfolio, time deposit funds earned
an average of 3.87 percent. T he sam e 4.12 p e r­
cent rate of re tu rn was allocated to the applicable
shares of dem and deposits and capital funds
un d er the “pool of funds” assum ption.
T able IX shows the gross yield on each type of
earning asset, expenses of acquiring the asset and
the resulting net yield. T he last colum n contains
the contribution m ade by each type of asset to
total incom e available to cover tim e deposit ex­
penses, dividend paym ents and profits on capital
funds.
Portfolio incom e of 3.87 percent from T able IX
is c arried to T able X , which shows the rem ain­
ing incom e and expense items of the com posite time
deposit function of the 60 banks. It was assum ed
that there was a 9 percent base under tim e d e ­
posits, and that the incom e from these capital funds
fifty -e ig h t

Appendix

1 9 6 1 T IM E D E P O S IT IN C O M E A N D E X P E N S E S
A N D R E T U R N O N C A P IT A L
(All dollar figures are per $100 of time deposits)
C om posite o f
60 Banks

Ideal
C om m ercial Bank

N et portfolio incom e ............................................................................
O ther tim e deposit incom e
T otal incom e from tim e deposit f u n c ti o n ...............................
O perating expenses of tim e d e p a r tm e n t........................................
T O T A L P O R T F O L IO A N D T IM E D E P O S IT IN C O M E

$3.87
.04
$3.91
.61
$3.30

$4.48
.05
$4.53
.45
$4.08

Tim e deposit incom e before i n te r e s t ...............................................
Earnings on capital funds assigned to time deposits
T otal tim e deposit earnings available for interest, taxes, and earnings

$3.30
.30
$3.60

$4.08
.34
$4.42

R etu rn on capital at 3 percent posted rate:
T otal tim e deposit earnings available for interest, taxes, and
earnings ...............................................................
In terest expense (presum ed effective rate of 2 .8 0 % ) .........
N et earnings before federal taxes
P resum ed 52 percent federal t a x e s .............................................
N et earnings after federal t a x e s ....................................................

$3.60
2.80
$ .80
.42
$ .38

$4.42
2.80
$1.62
.84
$ .78

4.2%

8.6 %

R E T U R N O N C A P IT A L A T 1:11 R A T IO
R etu rn on capital at 3 Vi percent posted rate:
T otal tim e deposit earnings available fo r interest, taxes, and
earnings ..........................................................................................
Interest expense (presum ed effective rate of 3 .2 5 % ) .........
N et earnings before federal taxes ...............................................
P resum ed 52 percent federal taxes
N et earnings after federal t a x e s ......................................................

$3.60
3.25
$ .35
.18
$ .17

R E T U R N O N C A P IT A L A T 1:11 R A T IO

fifty-nine




O

R E T U R N O N C A P IT A L A T 1:11 R A T IO

$3.60
3.70
- $ .10
.05
1

R etu rn on capital at 4 p ercent posted rate:
T otal tim e deposit earnings available fo r interest, taxes, and
earnings ..........................................................................................
In terest expense (presum ed effective rate of 3 . 7 0 % ) ...........
N et earnings before federal taxes
P resum ed 52 percent federal taxes ........................................
N et earnings after federal t a x e s ...................................................

1.9%

-

.6%

$4.42
3.25
$1.17
.61
$ .56
6 .2 %

$4.42
3.70
$ .72
.37
$ .35
3.9%

Time Deposits in New England

added $.30 in earnings to each $100 of tim e de­
posits. A lso show n in Table X are incom e and
expenses of the “ ideal” bank referred to on page
47. This ideal com m ercial bank is mythical and its
net earnings are com puted by using the net p o rt­
folio incom e of the 10 banks in the First D istrict
in the functional cost project having the highest
incom e. F rom these earnings are subtracted the
expenses of the 10 functional cost banks which
had the lowest expenses for each type of expense.
O bviously, such an ideal bank represents an unusu­
ally good incom e and expense relationship. This
table, after com bining the earnings of the tim e
deposit functions and the earnings of capital as­
signed to tim e deposits in the com posite bank and
in the ideal bank, then reflects the net earnings
before and after federal tax, and the return on
capital when varying rates of interest are paid on
tim e deposits.
C ost accounting is highly controversial. D if­
ferent accountants might very likely wish to use
different procedures from those used in this study.
In p articular, m any would probably like to assign
incom e from real estate m ortgages to time deposits.
Some m ight like to assign all or a portion of in­
stallm ent loans to tim e deposits. Still others w ould
assign tax-exem pt incom e to tim e deposits. All
these procedures are defensible.
Tw o points m ust now be made, however: (1 )
although each procedure referred to above is
defensible, it w ould be difficult indeed to get agree­
m ent am ong 60 banks as to what specific per­
centage of the various portfolio assets should be
assigned to tim e deposits, and (2 ) although it
w ould be clearly possible to assign income from
high yielding assets to the tim e deposit function,
and so p u t tim e deposits in a more favorable light,
this will not alter over-all bank earnings in any
way. A ny advantage thus given to tim e deposits




would be at the expense of earnings for dem and
deposits o r capital.
Because of these considerations the p rocedure
used in this study is the m iddle-of-the-road one of
according the sam e treatm ent to capital funds and
to tim e and dem and deposits. T his is done by
assigning a uniform rate of portfolio retu rn to
each. T his is the sim ple and unsophisticated a p ­
proach. It better reflects the effect of interest ex­
pense upon over-all bank earnings. T he use of
alternative allocations w ithin a bank is w holly
feasible, but it would to that degree invalidate
com parisons with o th er banks.
A frequently asked question is why the average
com m ercial bank cannot pay 4 percent on its
tim e deposits when savings banks are able to pay
4 and even 4.25 percent. N ot all savings banks
do. In 1961, for instance, all insured savings banks
paid an effective rate of 3.6 percent, which sug­
gests th at the stated rate averaged about 3.9
percent.
Table X I com pares the net earnings of the
average insured savings bank with the ideal
com m ercial bank. Study of the table indicates that
even with this exceedingly favorable relationship,
the ideal bank is unable to m atch the earnings of
the average insured savings bank. P ortfolio
incom es are com parable, so are operating ex­
penses, although in each case the perform ance of
savings banks is m ore favorable. T he wide differ­
ence in after-federal-tax earnings is caused in con­
siderable p art by the 52 percent tax on the earnings
of the ideal bank and the m uch low er tax on the
earnings of the average insured savings bank. The
ideal com m ercial bank earned .48 percent of tim e
deposits before taxes and had .23 percent left
after federal taxes. In contrast, the com parable
earnings of the com posite insured savings bank
before taxes were .6 percent of tim e deposits, of
sixty

Appendix

TABLE X I

1 9 6 1 E A R N I N G S C O M P A R IS O N B E T W E E N
"I D E A L ” C O M M E R C IA L B A N K A N D
C O M P O S IT E IN S U R E D M U T U A L S A V IN G S B A N K
(A m o u n ts in percent o f tim e and savin gs d ep o sits)
Ideal
B ank

C o m p o site Insured
S avings B ank

Portfolio incom e .............................

4.48

4.55

.07

Service charges and o th er incom e

.05

_J 0 5

.00

4.53

4 .60

.07

T otal incom e
......................

.45

O perating earnings .........................

408

420

In terest expense

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

3.60

3.60

N et earnings before federal taxes

^48

^60

O perating expenses

Federal taxes* ..................................

.25*

N et earnings after federal taxes

.23

.40

.01*
.59

M argin

.05
~A 2

.00
~A2

.24
.36

* P r e s u m e d to b e 5 2 p e r c e n t fo r id e a l b a n k ; a c tu a l ta x e s
p aid b y c o m p o s it e in su red m u tu a l s a v in g s b a n k .

which .59 percent of tim e deposits rem ained after
federal taxes.
Obviously, this disparity in taxation accounts in
the m ain for the low er earnings of the ideal bank.
A contributing factor to the disparity in earnings,
though of lesser m agnitude, is th at the ideal bank,
by regulation, carried 5 percent of its tim e deposits
as required reserve in 1961. W orking cash needs
usually increased this to 6 percent. By com pari­
son, savings banks do not have reserve require­
m ents and about 2 percent of the deposits usually
suffice to provide for w orking cash. F o r this
reason, savings banks can invest a higher percent

sixty-one




of their deposits in earning assets.
A third advantage to savings banks is their
larger average deposit. In 1960 a com parative
analysis of the savings d epartm ents of 70 banks in
the functional cost p roject and 80 M assachusetts
m utual savings banks of approxim ately the sam e
time deposit range show ed average deposits at the
savings banks to be $1,332 com pared with $743
for average time deposits at the functional cost
banks. No data is available to com pare costs p re ­
cisely but it would be a reasonable presum ption
that the larger average savings ban k deposits are
a plus influence on net earnings.

C O M P A R A T IV E S T A T E M E N T O F C O N D IT IO N

D E C E M B E R 31st

9 6 3 ,8 4 5 ,8 1 1 .8 0

$ 1 ,005,388,165.73

Federal Reserve N otes of O ther Federal Reserve Banks

4 4 ,5 2 6 ,7 7 5 .0 0

3 5 ,5 0 6 ,2 5 0 .0 0

O ther C a s h ................................................................................

2 3,865,255.63

2 0 ,345,933.27

Discounts and A d v a n c e s ......................................................

4 4 7 ,0 0 0 .0 0

9 3 5 ,0 0 0 .0 0

U.S. G overnm ent Securities — System A c c o u n t .........

1,472,91 0 ,0 0 0 .0 0

1,350,880,000.00

Cash Item s in Process of C o lle c tio n ...............................

721,1 6 8 ,4 2 3 .7 8

569,249,911.95

B ank P r e m is e s ..........................................................................

3,205,436'.31

3,554,801.61

G old Certificate R e s e r v e s ...................................................

$

F oreign C u rre n c ie s .................................................................

3,790,482.01

O ther A ssets ............................................................................

13,363,401.77

11,315,571.29

T otal A s s e ts ..........................................................

$ 3 ,2 4 7 ,1 2 2 ,5 8 6 .3 0

$2,997,175,633.85

F ederal Reserve N o t e s ..........................................................

$ 1 ,7 9 6 ,8 1 6 ,2 7 5 .0 0

$1 ,7 0 3 ,4 8 4 ,6 7 5 .0 0

D ep o sits:
M em ber Bank Reserve A c c o u n ts ...........................
U.S. T reasu rer — Collected F u n d s .........................
Foreign ............................................................................
O t h e r .................................................................................

828,816,662.81
4 5 ,8 8 4 ,2 1 5 .5 2
12,220,000.00
3,916,6 9 4 .4 6

789,011,743.51
15,720,569.36
12,985,000.00
3,742,670.65

0

L IA B IL IT IE S

T otal D e p o s its ......................................................
D eferred Availability Cash Items

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

8 9 0 ,837,572.79

821,459,983.52

4 89,0 2 9 ,2 0 3 .9 2

406,2 2 6 ,3 4 2 .5 2

O ther Liabilities .....................................................................

3,434,384.59

2,836,632.81

T otal L ia b ilitie s ...................................................

$3,180,1 17,436.30

$ 2 ,934,007,633.85

$

$

C A P IT A L ACCOUNTS
C apital P aid I n .......................................................................

2 2 ,3 3 5 ,0 5 0 .0 0

21,0 5 6 ,0 0 0 .0 0

Surplus .......................................................................................

44 ,6 7 0 ,1 0 0 .0 0

42,1 1 2 ,0 0 0 .0 0

T otal C apital Accounts .............................................

6 7 ,0 0 5 ,1 5 0 .0 0

63,1 6 8 ,0 0 0 .0 0

T otal Liabilities and Capital A c c o u n ts ..................

$ 3 ,2 4 7 ,1 2 2 ,5 8 6 .3 0

$ 2 ,997,175,633.85




sixty-tw o

C O M P A R A T IV E S T A T E M E N T OP E A R N IN G S A N D E X P E N S E S

19 62

C urrent E arnings:
A dvances to M em ber B a n k s ....................................

$

165,245.69

19 61

$

113,283.90

Foreign L oans on G o l d ...............................................

45,934.04

6,264.83

Invested Foreign C urrency B alance .......................

164,611.74

0

U.S. G overnm ent Securities — System A ccount

53,177,710.10

49,919,318.83

All O th er ........................................................................

15,310.28

20,532.37

T otal C u rren t E a r n in g s ...............................................

53,568,811.85

50,059,399.93

N et E xpenses ..................................................................

1 1,852,878.85

10,785,103.93

C urrent N et E arnings ...........................................................

41,715,933.00

3 9 ,274,296.00

Profit on Sales o f G overnm ent Securities ( n e t ) .

102,782.30

184,955.68

All O th er ........................................................................

42,532.98

842.22

T otal A dditions .............................................................

145,315.28

185,797.90

Deductions from C u rren t Net E a r n in g s .........................

208,816.44

2,835.27

A dditions to C u rren t N et Earnings:

Net A dditions (o r D eductions) ................................

(6 3 ,5 0 1 .1 6 )

182,962.63

Net E arnings before Paym ent to U.S. T r e a s u r y ...........

$41,652,431.84

$ 39,457,258.63

D ividends P a i d ........................................................................

$ 1,296,551.92

$ 1,236,205.16

Paid U.S. T reasury (In tere st on F ederal Reserve
N otes) .........................................................................

37,797,779.92

36,439,253.47

T ransferred to S u r p lu s ...........................................................

2,558,100.00

1,781,800.00

$41,652,431.84

$39,457,258.63

sixty-three




V O L U M E F IG U R E S for Y E A R S 1 9 6 1 and 1 9 6 2

V o lu m e in P ie c e s
o r U n it s
(D a ily A v e r a g e )
1962

V o lu m e in
D o lla r s
( A n n u a l T o t a l)

1961

D iscounts and A d v a n c e s .............................

1962

S

7 0 2 ,1 7 3 ,0 0 0

1961

$

4 7 5,082,000

C urrency Sorted and C o u n te d ....................

1,161,449

1,146,273

1,997,297,261

1,972,493,888

Coin C ounted and W r a p p e d ......................

4,434,637

4,317 ,4 1 4

1 09,846,400

107,248,450

C heck C o lle c tio n s ..........................................

1,370,821

1,274,662

87,14 6 ,7 2 5 ,7 7 2

82,023,632,273

N oncash C ollections:
N otes, D rafts, and C oupons (except
U.S. G o vernm ent) ...............................

4,722

4,456

4 6 9 ,466,605

499,744,025

813
1,958

848
2,020

9 ,6 3 9 ,4 7 5 ,0 3 2
4 4 ,724,787

8 ,690,605,758
46,016,761

4 2 8 ,3 7 2 ,4 5 0

2 8 4 ,961,150

Safekeeping of Securities:
Pieces Received and D e liv e re d .............
C oupons D e t a c h e d ...................................
O rders to Sell or Buy Securities
E xecuted for M em ber B a n k s ...........

11

T ransfers of F u n d s ........................................

541

482

99,40 6 ,4 1 0 ,9 2 5

8 8 ,266,639,324

Issues, R edem ptions and Exchanges:
U.S. Securities (D irect O bligations) . .
U.S. Savings B o n d s ....................................
All O t h e r ......................................................

1,276
40,117
19

1,392
38,975
17

18,859,318,903
558,6 7 8 ,9 7 2
42,1 9 1 ,7 0 0

16,363,947,852
587,250,521
51,832,500

U.S. G overnm ent C oupons Paid (D irect
O bligations) ..........................................

2,581

2,827

194,461,683

197,919,757

F ederal T axes: D epositary Receipts
and D irect R e m itta n c e s ..........................

3,255

3,071

2,2 76,449,373

2 ,076,908,509

C urrency V erified and D estroyed ...........

2 15,024

226,171

7 3,6 9 9 ,0 0 0

78 ,934,000

D eposits and W ithdraw als — T reasury
T ax and L oan A c c o u n ts ...........................

537

541

7 ,7 0 5 ,0 1 1 ,7 3 0

7,097,216,299




sixty-four

Summary of Principal Changes

Statem ent of Condition
T otal assets of this bank at the end o f 1962
am ounted to $3.2 billion — about 8 percent higher
than a year ago. T he principal assets com prised
$964 million of gold certificates and $1,5 billion
of U.S. governm ent securities. O n the liability side,
F ederal R eserve notes in circulation am ounted to
$1.8 billion and deposits $891 million.
D uring the course of the year the m ajor balance
sheet items show ed relatively m odest changes.
Interdistrict transfers by m em ber banks in several
F ederal R eserve districts in response to year end
adjustm ents were unusually large, however, and
resulted in reallocation of this b a n k ’s participation
in U.S. securities in the System O pen M arket
account and in gold certificates reserves.
U ncollected cash item s recorded a relatively
sharp rise as check float set a new record both in
the nation and the region for the year end. A
substantial increase in the volum e of checks and
processing delays, resulting in p art from bad
w eather over m uch of the nation, disrupted col­
lection schedules.
Foreign currencies, a new account, stood at
$3.8 m illion and reflected the participation of this
bank in several foreign currencies held in the R e ­
serve System ’s investm ent account. R eciprocal
currency agreem ents were m ade by the System with
a num ber of foreign central banks beginning in
F ebruary, 1962. T hese m utual credit facilities have
been used to help offset abnorm al pressures on the
dollar.
Federal R eserve notes, m em ber bank reserve
accounts and U.S. governm ent deposits accounted
for the bulk of the change in liabilities. T he in­
crease in note circulation, m oderately m ore than
in the nation, continued to reflect adjustm ent
by m em ber banks to the System ’s policy of credit­
sixty-five




ing all vault cash to required reserves. A dditionally,
this ban k ’s notes seem to be increasingly used for
trade and travel in other D istricts.
T otal capital accounts increased ab o u t 6 p e r­
cent, o r $3.8 million, and reflected both the p u r­
chase of additional R eserve B ank stock by m em ber
banks and the am ount transferred to surplus to
m aintain the account a t twice paid in capital. A t
the year end these accounts were a little more than
2 percent of total resources.

Earnings and E xp enses
Total current earnings of the bank rose $3.5
million, owing prim arily to a $3.2 m illion increase
in interest earned on the b a n k ’s share of U.S. gov­
ernm ent securities held in the System O pen M arket
account. Although the b a n k ’s holdings were higher
throughout most of the year, som e p art of the in­
crease is accounted for by a better rate of return
on the portfolio. M ost other earnings sources
showed relatively sm all increases.
Net expenses rose about $1 m illion. A lthough
virtually all expense item s were larger, the m ajor
increase — $400 thousand — was in salary and
wage paym ents. In addition the cost of new F e d ­
eral Reserve notes was about $200 thousand
higher.
Net earnings after all adjustm ents totaled $41.7
million, about $2 m illion above 1961. A bout $1.3
million was paid to m em ber banks as their statu ­
tory dividend on Federal R eserve B ank stock at a
rate of 6 percent. O f the rem ainder, $2.5 million
was transferred to surplus and $37.7 million paid
to the T reasury as an interest charge levied by the
Board of G overnors under Section 16 of the F e d ­
eral Reserve A ct on F ed eral R eserve notes not
secured by gold certificates.

Summary of Principal Changes

Volum e of Operations
In m ost departm ents of the bank, the volum e of
operations continued to expand in 1962. D uring
the year m ore th an 344 m illion checks were p ro c­
essed, am ounting to $87 billion — an increase over
the previous year of 7.5 percent in num ber and
6 percent in dollar volume. A m ount encoded
checks received for processing on electronic eq u ip ­
m ent increased from a daily average of 10 th o u ­
sand in Jan u ary to approxim ately 300 thousand
in D ecem ber. T he total volume of checks handled
by electronic high-speed equipm ent during 1962
was 31 m illion, as com pared with 7 million item s
in 1961.
The dollar volum e of currency and coin re ­
ceived, counted, and sorted by this bank also co n ­
tinued its steady increase. Shipm ents of currency
and coin to and from m em ber banks expanded
significantly, both in num ber and value. In the
course of the year arm ored car service provided by
this ban k was increased to include alm ost all New
E ngland banks th at make large shipm ents of c u r­
rency.

In 1962 the dollar volum e of m em ber bank
borrowings at th e discount window, although m od­
erately higher than the nom inal level of the p re ­
vious year, rem ained substantially below the level
prevailing th roughout the 1950’s. T his was p rin ­
cipally the result of a continuing policy of active
m onetary and credit ease, and a further reflection
of the increasing use of the federal funds m arket
by m ore of the district’s m em ber banks.
O ver the year as a w hole, the larger volum e of
w ork was c arried on with only a slight increase in
the num ber of em ployees. T he staff averaged
1,383 during 1962, of w hich 1,240 were full-tim e
em ployees and 143 w ere p art-tim e em ployees.

Changes in Directors
and O fficers
D irectors

The activities of the Fiscal Agency D epartm ent
increased considerably during 1962, both in n u m ­
ber of units handled and in dollar volume. This
is due partly to the increased needs of the T reasury
D epartm ent, and partly to the T reasury’s efforts
to extend the m aturity of the outstanding debt.
The T reasury continued its policy of advance re­
fundings as well as straight exchanges and cash
offerings, and once again m ade use of strip bills.

A t the 38th A nnual M eeting of Stockholders of
the F ederal R eserve B ank of B oston held in O c­
tober, 1962, it was announced that O strom E nders,
C hairm an of the H artford N ational B ank and
T rust C om pany, H artfo rd , C onnecticut, had been
elected a Class A D irector for a term of three years
beginning January 1, 1963. M r. E nders succeeded
W illiam D. Ireland, C hairm an of the E xecutive
C om m ittee o f State Street B ank and T ru st C om ­
pany, Boston, whose term expired D ecem ber 31,
1962.

W ire transfer of funds for m em ber banks ex­
panded beyond the record activity of 1961. D u r­
ing the year, these transfers increased by m ore
than 10 percent in both num ber and dollar volum e.
A m ajor factor in this growth is the greater p artici­
pation of m em ber banks in the federal funds
m arket.

A lso announced was the election of Jo h n R.
Newell, P resident of the Bath Iron W orks C or­
poration, B ath, M aine, as a Class B D irector for
a sim ilar term . M r. Newell succeeded M ilton P.
Higgins, C hairm an of N orton Com pany, W orces­
ter, M assachusetts, a D irecto r of the B oston R e ­
serve B ank since Jan u a ry 1, 1957.




sixty-six

Summary of Principal Changes

A t a special election held in N ovem ber, 1962,
Jam es R. C arter, President of the N ashua C o r­
p oration, N ashua, New H am pshire, was elected a
Class B D irector of the B ank. Mr. C a rte r was
elected to fill the unexpired term of the late E u ­
gene B. W hittem ore, a R eserve Bank Class B
D irector from January 1, 1959, until his death on
July 31, 1962.
In the same m onth, the B oard o f G overnors of
the Federal Reserve System appointed W ilbur H.
N orton, President of G orham C orporation, Provi­
dence, R hode Island, as a Class C D irector for a
three year term beginning January 1, 1963. M r.
N orton succeeded Nils Y. W essell, President of
T ufts University, M edford, M assachusetts, who
served as C hairm an of the Boston Reserve B ank’s
Board from Jan u ary 1, 1961 until the expiration
of his term on D ecem ber 31, 1962. Erw in D.
C anham , E ditor of the C hristian Science M onitor,
Boston, and form er D eputy C hairm an of the
B a n k ’s B oard, was designated C hairm an for 1963
by the Board of G overnors. W illiam W ebster,
President of the New E ngland Electric System,
and a D irector of the Bank since January 1, 1961,
was designated D eputy C hairm an for the same
period.

Benjam in F. G root, Vice President in charge of
the Bank Exam ination D ep artm en t since 1957,
retired on D ecem ber 31, 1962. M r. G root served
continuously in that D ep artm en t after joining the
Bank staff in 1933.
On January 1, 1962, L u th er M. H oyle, Jr., be­
came Assistant Vice President in the b a n k ’s E x­
am ination D epartm ent. In D ecem ber, Mr. Hoyle
was nam ed Vicc President in charge of bank ex­
am inations, effective Ja n u a ry 1, 1963, to succeed
Mr. Groot. Effective the sam e date, L ee J.
Aubrey, form er Senior E xam iner, was appointed
Assistant Vice President to assum e the responsi­
bilities previously held by M r. Hoyle.
On August 1, 1962, G. G ordon W atts, A ssist­
ant Vice President, was nam ed Vice President in
charge of fiscal agency operations to succeed M r.
Sawyer and with responsibilities in the em ergency
program . On the sam e date, Jarvis M .T hayer, Jr.,
Assistant Cashier, becam e A ssistant Vice Presi­
dent in charge of accounting, expense and other
functions. Eugene M. T angney, form erly M anager
of the B ank’s Planning D epartm ent, was appointed
Assistant Cashier with responsibilities in planning,
data processing, printing and files.

M em b er of A d v iso ry Council
O ffic e rs
D uring 1962 the R eserve Bank lost two senior
officers through special service retirem ent. On
July 31, D ana D. Sawyer, Vice President, retired
after alm ost 28 years of service to the Bank. M r.
Sawyer was nam ed Vice President in charge of
the B ank’s fiscal agency operations in 1956, a
position he held until his retirem ent.

sixty-seven




The Board of D irectors of the F ed eral R eserve
Bank of Boston selected L aw rence H. M artin,
President of The N ational Shaw m ut B ank of Bos­
ton, to serve during 1963 as the m em ber of the
Federal Advisory Council representing the F irst
Federal Reserve District. M r. M artin succeeded
Ostrom E nders of H artfo rd , C onnecticut, whose
third successive term as F ederal A dvisory Council
m em ber expired D ecem ber 31, 1962.

Federal Reserve Bank of Boston

E L EC TED

or
APPO IN T E D

D i r e c t o r s

D.

E rw in

C hairm an of the B oard and Federal R eserve A gent;
Editor, T he C hristian Science M onitor, B oston, M assachusetts

1959

D eputy Chairm an o f the Board; President, N ew E ngland
E lectric System , Boston, M assachusetts

1961

President, N ashua C orporation, N ashua, New H am pshire

1962

Chairm an o f the Board, H artfo rd N ational Bank and T rust
C om pany, H artford, C onnecticut

1963

President, T he H ow ard N ational Bank and T rust
Com pany, Burlington, V erm ont

1959

President, The F irst N ational B ank
B iddeford, M aine

1958

C anham,

J a n u a r y 1, 1 9 6 3

W

W

illiam

Ja m e s

R.

C arter,

O strom E

W

A

John

R.

W

ilbu r

W

illiam

nders,

M . L ockwood,

illiam

rthur

ebster,

F.
N

M

axwell,

ew ell,

H.

N

of

B iddeford,

President, Bath Iron W orks C orporation, B ath, M aine

orton,

1963

President, G orham C orporation, Providence, R hode

Island

1963

Vice P resident and Controller, U nited A ircraft C or­
poration, E ast H artford, C onnecticut

1960

R. R o bbin s,

M E M B E R OF FEDERAL ADVISORY CO U NCIL

Lawrence

O ffice rs
G

H, E

eorge

H.

M a r t i n , P resident, T he N ational Shaw m ut B ank of Boston,
Boston, M assachusetts

J a n u a r y 1, 1 9 6 3

llis,

President

E arle O. L a t h a m ,

First Vice President

L

ee

W

A

H

arry

nsgar

R.

L uther
O

C

A

M.

B

erge,

Vice President

H o y l e , J r .,

Vice President

Vice President
and G eneral Counsel

scar

A . Sch laik jer,

harles

E. T

G. G ordon W
Jo h n E. L o w

Vice President

urner

,

atts,

Vice President

e

,

Cashier

Jar vis
R

M.

ic h a rd

eston

C

harles

R

ip l e y

R

ic h a rd




T

A ssistant Vice President

hayer,

E ugene

L. B

H.

Secretary and A ssistant C ounsel

St o n e ,

A. W

M.

General A uditor
Financial E conom ist

ye,

J r .,

A ssista n t Vice President

onney,

B

A ssista n t Vice President

A ssista n t Vice President

alker,

L o u is A . Z e h n e r ,
W

E conom ic A dvisor

nderson,

A ssista n t Vice President

isenm eng er,

H.

L aurence

Parker B. W
P a u l S. A

A ssista n t Vice President

ic k so n ,

L o rin g C. N

St a n ley B. L acks,
illis,

D

W. E

obert

Vice President

ngney,

ubrey,

Industrial E conom ist and
A ctin g D irector o f R esearch

R

D.

J. A

allace

rady,

A ssistant Cashier

A ssistant Cashier

K eating ,

A ssistant Cashier

H.

R adford,

A ssistant Cashier

M.

Tangney,

A ssista n t Cashier
s ix ty -e ig h t

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