Full text of Annual Report of the Federal Reserve Bank of Richmond : 1986 Annual Report

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F e d e r a l R e s e rv e B a n k o f R ic h m o n d

1986




A n n u a l R ep ort










Contents
F e d e r a l R e se rv e B a n k

o f R ic h m o n d

S e v e n ty -S e c o n d A n n u a l R e p o rt 1 9 8 6




Message from the Chairm an and the President

3

Economic Research

4

Supervision and Regulation

5

Financial Services

6

A utom ation and Accounting

7

C om m unicating with the Public

8

T he Theory of M ultiple Expansion of Deposits:
W hat It Is and W hence It C am e

10

Directors

11

Advisory Councils

24

Operating and Financial Statistics

25

Officers

19




ISSN 0164-0798
LIBRARY OF C O N G R E SS C A T A L O G C A R D NU M BER:

Additional copies of this Annual Report
may be obtained without charge from the
Public Services Department
Federal Reserve Bank of Richmond
P. O. Box 27622
Richmond, Virginia 23261

16-7264

Message from the Chairman and the President

3

W e are pleased
to
(!;' :

fff$

| )§)
..>/

present

1986

the

A nnual

R e p o rt

of

the

Federal Reserve
Bank

of

R ic h ­

m o n d . W e h ope that you will find
it interesting and inform ative.

I

n a departure from the practice
of recent years, this annual report
includes a series of articles focus­

ing on activities at F ifth D istrict of­
fices of the Federal Reserve. Four
o f the articles describe service func­
tions; the fifth describes how the
B ank co m m u n icate s w ith various
groups in the D istrict.
he feature article outlines

T

how the banking system can
do som e th ing an individual
b an k in a m u ltib an k system cannot:
create deposits equal to a m ultiple

Robert P. Black
President

Leroy T. Canoles, Jr.
Chairmanofthe Board

of initial cash reserves. T h e article
traces the theory' of m ultiple expan­
sion o f deposits from the 1820s,
w hen

a plausible view began to

em erge, thro ug h the 1920s, w hen

O

n behalf of our directors

the theory, as refined and restated

and

by

express our appreciation to

latter-day econom ists, gained

w idespread acceptance.




staff,

we

w ish

to

all o f you for the cooperation and
suppo rt

you

e x te n d e d

thro ug ho ut the year.

Chairman o f the Board

President

to

us

4

Service Functions

E c o n o m ic R e s e a r c h

I j.jukaiti

-

n-TVi

“Just exactly w hat do they do?” is a
question often asked about persons
w ho do econom ic research. H ere at
the Bank, their m ain responsibilities
are threefold, nam ely,
to monitor national economic and
monetary developments and brief
the Bank’s president and directors
on major current policy issues;
to conduct long-term research in
areas such as monetary theory and
policy, banking regulation, and fi­
nancial markets; and
to collect and analyze data on the
District economy overall and on
local economic conditions within
the District.

Seminars andconferencesprovide opportunitiesfor staff economists to discuss results of research
withcolleaguesandvisitingprofessionals.

Regional studies yield material for
the Bank's quarterly newsletter, Cross

In addition to performing these func­

they can take refuge from ringing

Sections. Longer term research is a

tions, econom ists and supporting

p hones and other distractions that

fertile source of articles for the bi­

professionals respond to hundreds of

thw art efforts to concentrate.

m onthly periodical. Economic Review,

m ail and

telephone

requests for

and o f copy for special publications

econom ic inform ation, present pro­

produced by the research staff.

grams at meetings of civic and other

m e n t and p e rfo rm ing yet another

organizations, and assist local groups

k in d o f service is a u nit co m po sed

by

R o u n d in g out the Research D e p art­

and

o f statisticians, data analysts, and

dissem inating materials relevant to

clerical workers. T h is division col­

c o m m u n ity deve lo p m e nt and small

lects and

business lending.

financial data that D is trict financial

Serving as a resource center for

the Federal Reserve.

sponsoring

conferences

processes b an k in g and

institutions are required to report to
research

personnel — ind e ed ,

for

Bank personnel overall— is a 12,000volum e library staffed by three pro­
fe s s io n a l

lib r a r ia n s

assistants.

H ere,

users

and
find

fiv e
not

only the reference materials they
need but also secluded carrols where

Plotters, printers, personal computers, and
other automated equipment have improved
proficiency and increasedproductivity of the
researchstaff.




Service Functions
S u p e r v is io n

5

a n d R e g u la t io n

T h e E x a m in in g D e p a rtm e n t fulfills

gaging in similar activities,

have

ness exam inations and inspections.

the

also been involved in the ongoing

“T h e exam iners are here!” is now

S y ste m ’s

b an k

responsibilities

supervisory
Fifth

national debate about the extent of

heard at least once a year at banks

District by exam ining state m em ber

w ith in

the

b an kin g powers, as well as other

and

banks, inspecting bank holding co m ­

significant issues.

sound co n d itio n , and even m ore

panies, and ex am ining Edge cor­

b an k

hold ing

co m panies

in

often at institutions in less-than-

porations engaged in international

F o rtu n a te ly ,

financial activities. In addition, it

banks have largely avoided the well-

processes related b an k and h olding

publicized p roblem s o f the b an kin g

T he

co m p any applications and conducts

industry. T h e y are not as exposed

m ore institutions than it supervised

ongoing surveillance of the condition

to difficulties

in the energy and

just four years ago. Nevertheless, ex­

of D istrict financial institutions. T h e

agricultural sectors as are banks in

aminers and assistants that m ake up

d e partm e nt is also responsible for

other parts of the country, and both

the field e x am ining force have not

ad m iniste rin g consum er protection

their profitability and the adequacy

increased significantly in n u m be r in

laws applicable to state m em b e r

of their capital com pare favorably

recent years. T echniques have been

banks.

w ith national averages.

im pro ve d and additional resources

A lth o u g h this list o f activities is

As a result of difficulties experi­

d itio n, efforts are now under way to

reasonably encom passing, it doesn't

enced by som e banks, all b an kin g

au g m e nt staff.

illustrate the d yn am ic situation in

institutions under the supervision of

w h ich the de partm e nt operates. In

the Federal Reserve have becom e

recent years the departm ent’s them e

subject to m ore frequent and m ore

has been one of adapting to change.

com prehensive safety and sou nd ­

h o w e v e r,

D is tric t

satisfactory co nd itio n.
B ank now

supervises m any

have been devoted to training. In ad­

B oth the size and the com plexity of
the institutions it exam ines, as well
as the difficulty of the issues it faces,
have increased.
T h e F ifth D istrict financial c o m ­
m u nity has been experiencing m any
of the

sam e

rapid

changes

that

have occurred in the financial sector
natio nw ide . Each of the five states
an d the D istrict of C o lu m b ia has
p e rm itte d som e form o f interstate
ban k in g , p u ttin g D istrict banks at
the forefront of structural changes
and facilitating the em ergence of
several

so-called

“super-regional”

b an k in g institutions. D istrict b an k
h o ld in g

co m panies,

in

p roviding

securides-related services and en­




Seminarsandtrainingsessionsareheldseveraltimesayeartokeepexaminersuptodateoncurrent
bankingissuesas well as examinationprocedures andpractices.

6

Service Functions

F i n a n c i a l S e r v ic e s

P ro v id in g

financial

services

to

D epository

institutions

directly

to

are

the

co n­

Federal

T h e years ahead seem likely to bring
grow ing

reliance

on

inform ation

depository institutions cuts across

nected

departm ental lines and requires the

Reserve’s co m m u nic atio n system

processing and lessening reliance

tim e

on physical processing. T h e Federal

of num bers of

principally by direct computer-to-

employees. Moreover, ensuring that

com puter connections over leased

Reserve is poised to support this

provision of services is com patible

lines and m icro com puter co nnec­

e vo lu tio n, and in a m anner that
m in im ize s the im po rtance of prox­

and

efforts

re q u ir e m e n ts

tions over dial lines. U sing these

necessitates o ngoing efforts to im ­

com m unications connections, insti­

im ity to a Federal Reserve office or

prove both services and the means

tutions can order currency and coin,

location w ith in a particular Federal

of p roviding the m .

receive notice of cash letter credits,

Reserve territory.

w ith

c u s to m e r s ’

and originate and receive funds and
R eliance on autom ated solutions,

securities transfers and autom ated

w ith particular em phasis on data

clearinghouse transactions. Soon,

c o m m u n ic a tio n , is a significant part

they will also be able to m ake ac­

of the Bank’s strategy to ensure that

count

services provided keep pace w ith

balances during the day.

inquiries

to

track

reserve

services needed. T h e Federal R e ­
serve’s data co m m u n ic atio n system

Several

is a nationw ide netw ork that pro­

launched an effort to increase the use

vides connections am o n g Federal

of standardized com puter system

Reserve offices and between Federal

software

Reserve

com m ercial

uniform ity to services provided by

financial institutions. Because m any

all Federal Reserve Banks. M a n y of

Federal

utilize

the standard applications have now

the system , location of the institu­

been im plem e nte d . D ep o sitory in ­

tions

stitutions operating in more than one

offices
Reserve

being

and

services

served

is

relatively

u nim p o rtant.

years

and

ago

thus

the

bring

System

greater

D istrict will see num erous benefits
of more uniform services in the form
o f lower training requirem ents as
people transfer from one Federal
Reserve D istrict to another, m ore
com petitive balance am o ng institu­
tions

as

the

same

services

are

available from the Federal Reserve
regardless o f location, and greater
responsiveness from

the

Federal

Reserve as service changes can be
put into effect m ore quick ly and
uniform ly.

“Voiceresponse"enablescustomersusingtouchtonephonestokeycashordersdirectly into the
Bank'scomputerandreceiveimmediate, audio
verification.




Thisconsoleisthecoreofthe Bank'scommuni­
cationsystemandthekeyto efficientprovision
of on-line financial services to depository
institutions.

Service Functions
A u t o m a t io n

7

a n d A c c o u n t in g

Ensuringthat equipment essential toprovision
ofservicesisfunctional, secure, anduptodate
is a majorongoingobjective.

related daylight overdrafts. Although
com pliance w ith the policy is volun­
tary, only institutions that com plete
their self-assessment rating and re­

T h e size of the Bank's physical co m ­
m unications netw ork grew w ith the
addition of 105 new custom er co n­
nections. A pproxim ately two-thirds
of all netw ork connections are now
encrypted, and plans are b eing de­
veloped to m ak e substantial prog­
ress tow ard 100 percent encrypted
T h e A u to m a tio n D iv is io n is con­

connections by the e nd of 1987.

cerned m ainly w ith the physical
aspect

of

data

processing

and

transm issio n— that is, for planning,
d e t e r m in in g

th e

c a p a c ity

o f,

operating, m aintain ing , enhancing,
and securing the data processing and
co m m unications systems. T h e divi­
sion is also responsible for software
d e v e lo p m e n t and for the upkeep of
personal com puters installed in the
B ank, or leased by the B ank to its

A m ajor u ndertaking in the A c­
c o u nting D iv is io n involved p uttin g
into effect a p aym ents system risk
policy designed to reduce the use of
intraday credit by participants in the
paym ents

netw o rk

and

the

risk

associated w ith that credit. T h is
p o lic y

in c lu d e s

g u id e lin e s

for

depository institutions to follow in
evaluating their creditw orthiness,
and calls for voluntary restrictive

F ulfilling its responsibilities during
the 12 m onths just past involved this
division
several

of

B ank

m ajor

operations

u ndertakings,

in
in­

c lu d in g installation o f a new largescale co m p ute r, im p le m e n tatio n of
a new funds transfer application, and
d e v e lo p m e n t o f a contingency p lan
to provide reliable processing in the
event o f an em ergency expected to
last for several days.

Therecentlycompletedcontingencyplan would
beactivatedintheeventofadisasterrequiring
relocation. Lesser emergencies are covered by
plansthatcallforon-sitemeasuressuchasthose
takentoaircoolcomputerswhenthefloodof'85
threatenedtoshutdownthewater-coolingsystem.




are perm itte d to co ntinue incurring
overdrafts o n F edw ire. Experience
in the Fifth D istrict d uring 1986 in­
dicates that the level of daylight
overdrafts

has

been

significantly

reduced through co m p liance with
the policy.
Innov ation s in accounting cam e as
a result o f a m ajor System effort to

credit policies, and internal controls,

custom ers.

m ain w ithin their ow n overdraft caps

caps on the dollar value o f funds-

develop

and

install c o m m o n

ac­

co u n tin g procedures in all Federal
Reserve D istricts. T h is c o m m o n
software, or “Integrated A ccounting
S y ste m ,” is scheduled to be in use
S y stem w ide by the end of 1987.
W hen

fully im p le m e n te d ,

it will

provide a num b er of new services to
account holders, in clu d in g on-line
balance

inquiry,

im pro ve d

cash

m anagem ent aids, and transmission
o f reserve statem ents and advices.




8 Service Functions_____________________

9

C o m m u n ic a tin g w ith th e P u b lic

P e r fo r m in g its m a n y a n d v a rie d fu n c ­
t io n s b r in g s t h e B a n k in t o c o n ta c t
w it h a n u m b e r o f d iv e r s e g r o u p s
t h r o u g h o u t th e F if t h D is t r i c t . S o m e
r e la tio n s h ip s d e v e lo p as a r e s u lt o f
n a tio n a l le g is la tio n o r p o lic ie s in ­
it ia t e d b y th e B o a rd o f G o v e r n o r s .
S u c h re la tio n s h ip s a re s tr u c tu r e d a n d
o n g o in g . O th e r s a re lo o s e a s s o c i­
a tio n s , f o r m e d b y w a y o f th e B a n k 's
o u tr e a c h in f in a n c ia l, c iv ic , a n d
e d u c a tio n a l c o m m u n it ie s in th e
D is t r i c t , a n d p a r t ic ip a t io n b y B a n k
s t a f f in a c tiv it ie s s p o n s o r e d in th e s e
s a m e c o m m u n it ie s .
T h e c o n t in u in g f lo w o f c o m m u n ic a ­
t io n s t e m m in g f r o m th e s e r e la t io n ­
s h ip s b e n e fits th e B a n k in th a t it p r o ­
v id e s m a n a g e m e n t w it h a d d it io n a l
v ie w p o in t s o n m a tte r s r e la te d to
m o n e ta r y a n d fin a n c ia l p o lic y . B y in ­
c r e a s in g t h e ir k n o w le d g e o f h o w th e
F e d e r a l R e s e r v e S y s te m o p e r a te s

The Operations Advisory
Committee provides insight
into the changing needs of
Districtfinancial institutions.

a n d c a r r ie s o u t its r e s p o n s ib ilit ie s as
t h e n a t io n ’ s c e n t r a l b a n k , i t b e n e f it s
t h e o u t - o f - B a n k p a r tic ip a n t s as w e ll.
I n c e r ta in in s ta n c e s , c o m m u n ic a t io n
w it h c o n s t it u e n t s in t h e D i s t r i c t is
e s s e n tia l t o p r o v id in g t h e B a n k w it h
in f o r m a t io n n e e d e d t o f u l f i l l its r o le
in f o r m u la t in g m o n e t a r y p o lic y . T h e
m o n t h ly s u r v e y o f m a n u f a c t u r e r s ,

iT w c lo t 7 o 7 h ? r i ^ Smf BusinessandA^ u/^re Advisory Council keep Bank manage­
ment in close touch with regional economic developments.

w h o le s a le r s , a n d r e t a ile r s t o a sse ss
c u r r e n t e c o n o m ic a n d b u s in e s s c o n ­
d it io n s in t h e s ix le g a l ju r is d ic t io n s
t h a t m a k e u p t h e D i s t r i c t is a c a s e
in p o in t . T h e in f o r m a t io n g a in e d
t h r o u g h t h is p r o c e s s c o n s t it u t e s a
p a r t o f t h e e c o n o m ic in te llig e n c e f o r ­
w a r d e d b y t h e 1 2 R e s e r v e B a n k s to
t h e F e d e r a l O p e n M a r k e t C o m m it ­
te e , w h ic h u s e s i t in f o r m u la t in g
m o n e t a r y p o li c y . A n o t h e r in s ta n c e ,
c o m m o n ly r e f e r r e d t o as t h e D is t r ic t
“ g o a r o u n d , ” is t h a t p a r t o f th e
d e lib e r a t io n s a t t h e B a n k 's B o a r d o f
D ir e c t o r s m e e t in g in w h ic h e a c h
d ir e c t o r g iv e s a b r ie f d e s c r ip t io n
o f t h e m o s t r e c e n t b u s in e s s
a n d e c o n o m ic c o n d it io n s in
h is o r h e r lo c a l a re a o r
in d u s t r y .

A s id e f r o m c o m m u n ic a t in g w it h
b u s in e s s le a d e rs , fa r m e r s , e d u c a to rs ,
c o m m u n it y o r g a n iz a tio n s , o ff ic ia ls
a n d s ta ff o f f in a n c ia l in s t it u t io n s , a n d
v a r io u s o t h e r o u t s id e in t e r e s t s , t h e
B a n k is in c o n t in u o u s c o m m u n ic a ­
t io n w it h it s o w n e m p lo y e e s , p a s t
as w e ll as p r e s e n t. A f o r m a l m e c h a ­
n is m f o r t h is c o m m u n ic a t io n is t h e
Fedcaster, a w e e k ly n e w s le t t e r p u b ­
lis h e d b y B a n k e m p lo y e e s . O t h e r
o p p o r t u n it ie s a re a ffo r d e d b y
p e r io d ic m e e tin g s w it h B a n k r e tire e s
a n d b y s p e c ia l m e e t in g s w i t h
e m p lo y e e s o n b e n e f it s a n d o t h e r
p r o g r a m s t h a t a ff e c t t h e ir w e lf a r e .

More than 3,500 persons tour the Federal Reserve Bank of Richmond in a year.
Numbers of these visitors are senior-high and college students on school-sponsored
field trips.

Senior Vice President James F. Tucker, author
of “Communicating with the Public, " heads the
Bank's community affairs and economic infor­
mation section.

I n a d d it io n t o c o m m u n ic a t in g w it h
v a r io u s g r o u p s in t h e c o u r s e o f p e r ­
f o r m in g its r o le s as a s u p e r v is o r y a n d
s e r v ic e in s t it u t io n a n d a n e m p lo y e r ,
t h e B a n k h a s c o n t a c t w it h n u m e r o u s
o t h e r g r o u p s t h r o u g h a p u b lic s e r ­
v ic e s p r o g r a m t h a t p r o v id e s g u id e d
t o u r s o f its b u il d in g o n r e q u e s t.
V is it o r s t a k i n g t h e s e t o u r s a re a b le
t o g e t n o t o n ly a f ir s t h a n d d e s c r ip ­
t io n o f a ll B a n k o p e r a t io n s f r o m a
t r a in e d t o u r g u id e b u t a ls o a s p e c ia l
a n d d e t a ile d p r e s e n t a t io n o n a
s p e c if ic p h a s e o f t h e B a n k 's o p e r a ­
t io n s f r o m a B a n k o f f ic ia l, if a
r e q u e s t f o r s u c h a p r e s e n t a t io n is
m a d e f a r e n o u g h in a d v a n c e .

10
T he

'T h e o r y o f M u l t i p l e

E x p a n s io n

o f D e p o s it s :

IVhat It Is and Whence It Came
T hom as M . H um phrey




Precis
eginning students of banking must grapple with a
curious paradox: the banking system can multiply
deposits on a given base o f reserves yet none o f its
member banks can do so. Let the reserve-to-deposit ratio
be, say, 20 percent and the system can, by making loans,
create $5 of deposit money per dollar of reserves received.
By contrast, the individual bank receiving that same dollar
deposit can lend out no more than 80 cents of it. How does
one reconcile the banking system's ability to multiply loans
and deposits with the individual bank's inability to do soP
Fully answering this question required the intellectual efforts
of at least six economists writing in the period 1826-1920.
The story of their contributions is the story o f the evolution
of the theory o f the multiple expansion of deposits.

t the heart o f b an kin g theory

d e ve lo p m e nt of the theory. T h e

of the theory betw een those two

is the notion of the m ultiple

result is to convey the im pression

dates. Before d o ing so, how ever, it

expansion o f b an k deposits.

that the theory- has always existed in

reviews the essentials of the theory

T his idea consists of two interrelated

its present form , having been fully

as a prerequisite to identifying what
earlier writers had to say about them .

A

parts. T h e first explains how the

and correctly articulated from the

b an k in g system as a w hole creates

start. N o th in g , how ever, could be

deposits by m ak in g loans equal to

further from the truth. O n the co n­

a m u ltip le of its cash reserves, the

trary, as L lo y d M in ts notes in his

m u ltiplie r being the inverse of the

authoritative A History of Hanking

The Theory of
Deposit Expansion

reserve-to-deposit ratio. T h e second

Theory (1945), “T h e p ro ble m of the

shows how the individual b an k con­

m anner in which the banking system

Suppose for simplicity that the bank­

tributes to this expansion, not by

increases the total volum e of the cir­

ing

m u ltip ly in g its ow n deposits, but

culating m e d iu m , w hile at the same

m o n o p o ly b an k constrained by a

rather by m ak in g loans and losing

tim e the le nd in g pow er of the in­

required reserve-to-deposit ratio r

reserves through the clearinghouse

dividual banks is severely lim ited,

and desiring to be fully loaned up.

to other banks so that they too can

has proved to be one of the m ost

Suppose

expand. T ake n together, these co m ­

baffling

for

never wishes to convert deposits

p o n e n ts

theory”

[10,

reconcile

the

b a n k in g

writers
p.

on

39],

b an kin g
Far

from

into

system

consists

further

currency

o f a single

that

so

the

that

p ublic

no

cash

system’s ability to m ultiply loans and

u nd e rstan ding how loans generate

w ithdraw als occur w hen deposits

deposits w ith the individual b an k ’s

deposits, bankers throughout the

e x pand. Because the b an k cannot

inability to do so. For the individual

nineteenth and early tw entieth cen­

lose reserves through the clearing­

ban k, far from e x pand ing its loans

turies insisted that banks lend only

house to other banks (of which there

by

cash

the funds entrusted to their care and

are

deposits received, lends out only the

therefore could not possibly multiply

via w ithdraw al, it faces no restric­

fraction o f those deposits rem aining

deposits. E co no m ists, on the other

tion o n its ability to expand loans

after required reserves have been set

hand, often went to the opposite ex­

and deposits other than the require­

aside.

treme, arguing that individual banks

m e nt that it hold r percent of its

were sim ply small-scale versions of

deposits in reserves. T h u s upon the

he preceding ideas are fairly

the banking system at large and thus

receipt of C dollars of new reserv es

well

eco­

could m ultiply deposits per dollar of

it can instantly expand loans and

explain

reserves just as the system does.

deposits

w hy a b an k in g system having a re­

B oth views were w rong. N o t until

allow ed by the reserve ratio— that

quired reserve ratio of, say, tw enty

the 1820s did a m ore plausible view

is, up to the am o u nt D

percent can create five dollars of

start to em erge. A n d not until the

w here

deposit m o n e y per dollar of cash

1920s was it finally stated in a way

reserve ratio, is the deposit expan­

reserves w hile at the sam e tim e no

that fully co nvinced the econom ics

sion

in dividual b an k can lend m ore than

profession

sy ste m

eighty cents per dollar of deposits

theory to gain w idespread accept­

received. W h a t the texts do not

ance.

explain, how ever, is the origin and

historical perspective and to show

several tim es

T

any

kn o w n .

no m ics

new

M any

textbooks

how

In

and

thus enabled

an atte m p t

earlier writers

to

the

provide

resolved

the

paradox of a b a n k in g system doing
This article will be reprinted in the March/
April 1987 issue of this Bank's




EconomicReview.

w hat none o f its m em b e rs could
d o , this article traces the evolution

none)

D

or

up

(1/r),

a

c a s h h o ld e r s

to the

the

m ultiplie r.
as

to

full

= (l/ r ) C ,

inverse
In

lim it

of the

this way the

w h o le

m u ltip lie s

deposits per dollar of reserves.

12 Multiple Fxpansion of Deposits

N

ext suppose that the system

num ber of banks n gets large, con­

exposition of the lending, redeposit,

consists

small

verges to the lim it D = ( l/ r )C , the

and m ultiplier aspects of the expan­

banks, each of which loses

same expression that holds for the

sion m e ch an ism . N e x t appeared a

of

m any

through the clearinghouse reserves

specification of the lim its to deposit

single m o no po ly bank.

expansion and a definitio n of the

equal to the full am o u nt of loans
m ade.

Because o f these adverse

I

clearing balances, no bank can safely

n short, m ultiple expansion oc­

lim it value o f the m u ltiplie r. T here

curs in the m u ltib ank case be­

follow ed an analysis of how expan­
sion spreads from b an k to b an k in

lend out m ore than (1 —r) o f each

cause the excess reserves that

dollar of deposits received, this sum

form the basis for loans, though lost

a m u ltib an k system. T h e n cam e the

being the am o u n t rem aining after r

to the individual bank, are not lost

first

percent has been put in required

to the system as a w hole. T h e y are

theory follow ed by the first clear

algebraic

statem ent

of

the

reserve. T hu s the first individual

sim ply transferred to other banks

d istinctio n betw een the expansion

bank receiving C dollars of new cash

that use them for further expansion.

pow er o f a m o n o p o ly b an k and a

deposits

that

As the expansion proceeds from

co m p e titiv e ban k. F in ally cam e the

am o u nt after p uttin g rC dollars in

b ank to bank, each institution retains

persuasive restatement of the theory

reserve.

write

the reserves required to back the

that, by consolidating, refining, and

checks on the proceeds of the loans

new deposits that brought it the

elaborating

in favor of recipients who deposit the

extra reserves in the first place and

lished

checks in a second group of banks,

lends out the rem ainder. T h e result

analysis. Each stage saw' a different

the latter banks gain (1 - r )C dollars

is m ultiple expansion, the same as

in n o v a to r— P e n n in g to n ,

in new deposits. T h e y in turn keep

that achieved in the m onopoly case.

Jo p lin , M arshall, D a v e n p o rt, and

lends

( l- r )C

W hen

of

borrowers

it

its key

in

ideas,

m ainstream

estab­

b an kin g
T orrens,

r percent o f the new deposits in

T h e only difference is that in the

P hillips are the key nam es here—

reserve and lend out the rem aining

m ultibank case each individual bank

advance the theory.

( 1 - r ) percent so that their loans

does not m u ltip ly its o w n deposits.

equal (1 - r ) ( l - r ) C . T h is am o unt

R ather it creates the m for other

they lose through the clearinghouse

banks by m ak in g loans and allowing

to a third group of banks whose

its reserves to shrink to a fraction of

d e p o s its

the initial deposit. In a w ord, the

(1 - r ) 2C ,

a c c o r d in g ly
and

w ho,

rise

by

after setting

b a n k in g

s y s te m

c o lle c tiv e ly

Multiple Deposits Recognized
T h e initial step in the theory's evolu­
tion cam e in the eighteenth century

aside a fraction r for reserve, lend out

m ultiplies deposits per dollar of new

w h e n writers such as Jo h n

the re m aining (1 - r ) 3C . A n d so it

reserves w hile the small individual

(1 6 7 1 - 1 7 2 9 ),

goes from b ank to b an k in ever-

b ank

(1685-1753), and A lexander H a m ­

d im in ish in g am o unts until excess

dollar of new deposits.

fractionalizes

reserves

per

ilton

reserves are zero and all the new
cash reserves C

(1755-1804)

Law

B e rke le y

observed

that

b an k deposits were several tim es

are absorbed in

backing deposits in the ratio o f 1 to

B is h o p

larger than the underlying cash base

Historical Evolution

and inferred from this that banks

r. S u m m in g over the successive

create deposits (see O 'B rie n [11,

groups of banks in the d w indling ,

H aving outlined the theory itself, we

never-ending chain gives total new

are now prepared to trace its origin

not explain

deposits D for the system of D

and de ve lo p m e nt. Retrospectively,

w orks to m u ltip ly deposits. T h e y

[1 + (1 - r) + (1 - r Y + (1 - r ) 3 +

one can discern a certain logical pro­

sim p ly assum ed that m u ltip le de­

. ..

gression. First cam e the perception

posit expansion w o u ld

=

+ (1 -r)"|C w h ich, w hen the




that

deposits

are

a

m u ltip le

of

reserves, followed by a rudim entary

p. 15]). T hese writers, however, did
the

m e ch an ism

that

som ehow

13

occur for b o th the individual b ank

In his words:

In other words, reserves lost by one

and the b an kin g system as a w hole.
T h e y failed to state that deposit
m u ltiplica tio n occurs through the
successive le nd in g and redeposit of
excess reserves. N o t

until

1826

wras this p o in t m ade clear.

James Pennington (1777-1862)
It was Jam es P e nn ing to n, a British
currency expert

and

confidential

m onetary advisor to the govern­
m e n t, w ho

advanced the theory

b an k show up as new deposits in
of the money entrusted to their
[bankers'] care. . . . if a reserve of one
half were sufficient. . . the other half
would be employed in discounting bills
[i.e., making loans). . . . But the Persons
to whom these advances. . . were made,
would, for their own convenience,
deposit the money. . .in the hands of
their respective bankers, and the ag­
gregate amount of the outstanding
[deposit] balances . . . would . . . be
encreased 50 per cent. . . . T h e money
due to all the depositors would be 50
per cent more than it was previously to
the commencement of these opera­
tions. . .[12, pp. xlv-xlvi],

an oth e r.

In

this

way

deposits

gradually m u ltip ly on the given in­
crease in the reserve base as it shifts
from b an k to bank. T o illustrate, he
show ed that if the first b an k in a
system of tw o identical banks lends
and loses through the clearinghouse
half its initial cash reserve to the
second that subsequently does the
same, deposits of both banks expand
although the reserve base remains
u nchang ed.

into its second stage. H e did so

P e nnington's failure to trace the

w ith his rudim entary exposition of

expansion process to its co m pletion

the lending, redeposit, and multiplier
mechanics of deposit expansion. His
co n trib u tio n appears in his
m e m o ran d u m

to

statesm an

financier

and

th e

1826

E n g lis h
W illiam

Huskisson. T here he shows (1) that
w ith fractional reserve b an kin g cash
deposits p roduce excess reserves,
(2) that such excess reserves lead to
loans, and (3) that the proceeds of
the loans w hen redeposited in the
system

augm ent

the

vo lum e

of

deposits per dollar of cash base. T o
illustrate these points he argued that
if banks receive a cash deposit of

P ennington did not trace the expan­
sion process beyond the first round.
But he did indicate how the in­
dividual b an k contributes to expan­
sion in a m u ltib a n k system .

He

p ointe d out that as one b an k ex­
pands its loans it either recovers the
proceeds in the form o f redeposits
or else it loses reserves to other
banks so that they too can expand.
Either way, deposits increase. As he
put it in a letter published in V olum e
2 of T ho m as T oo ke ’s History of Prices
(18 38 ), if, after a b a n k receives an
initial cash deposit and makes a loan,

w h ich half m ust be held in reserve
the rest w ill go to purchase earning
assets (loans and investm ents). T h e
sellers o f these assets will, upo n
receiving the cash, redeposit it in
their

ban ks

thus

increasing

the

v o lu m e o f deposits. A t the end of
this first round of the expansion
process, the cash reserves o f the
banks will be the same as before, but
the sum total of deposits— including
the

initial cash deposit plus the

a d d itio n a l

d e p o s its

created

by

lo a n — w ill already be increased by
fifty percent.




a cheque be drawn upon the. . . banker
for the amount of the advance. . . . [and)
be paid into his hands by some other
depositor, and placed at the credit of
that other depositor. . .the whole
amount of the book credits [i.e.,
deposits) of that banker will be in­
creased to the extent of this new ad­
vance. And even if the cheque be paid
into the hands of some other banker,
the [initial] amount of the book credits
of the banker who has paid the cheque
will not be diminished, while the book
credits, as well as the reserved fund of
the banker, to whom it is paid, will be
increased by its amount [13, p. lvi|.

accounts for his failure to specify the
limit value of the multiplier. Far from
defining it as the reciprocal o f the
reserve

ratio,

he

was

c o n te n t

merely to dem onstrate that its value
was greater than one. H e also denied
that he view ed the m u ltiplie r as a
rigid m echanical relationship. T h is
view

was

attributed

to

h im

by

R o b e rt T orren s, w h o cited P e nn­
ington as the source of the notion
that L o n d o n banks always h old a
one-fifth

cash

reserve

ag ainst

deposits, resulting in a m ultiplier of

14 M ultiple b'xpanston o f Deposits

f iv e . I n c o r r e c t in g T o r r e n s m is a p ­
p r e h e n s io n , P e n n i n g t o n s a id :
It never occurred to m e, as appears to
have been supposed by C o lo n e l

Tor­

rens, that every m illio n of notes issued
by the Bank of Kngland forms the basis
o f five m illions of deposits; and that
every m illio n w ithdraw n from circula­
tion, by the B ank, occasions a five-fold
d im in u tio n of those deposits. O n the
contrary, it is perfectly consistent w ith
m y view of the subject, to suppose that
the deposit accounts o f the L o n d o n
bankers m ay be m aterially dim inish e d ,
w hile the circulation of the Bank of
Kngland is greatly enlarged, or vice
versa 113, p. Iii|.

I n c o n t e n d in g t h a t r e s e r v e r a t io s
( a n d t h u s t h e m u l t i p l e r e la t i o n s h i p
b e tw e e n d e p o s it s a n d r e s e r v e s ) v a r y
w i t h t h e s t a t e o f b u s in e s s c o n ­
f id e n c e , P e n n i n g t o n o r ig in a t e d t h e
n o t io n o f a f l e x i b l e m u l t i p l i e r .
e n n i n g t o n ’ s c o n t e m p o r a r ie s
q u i c k l y g r a s p e d t h e s ig n i f i­
c a n c e o f h is p io n e e r in g w o r k .
T o r r e n s r e f e r r e d t o i t a s “ a s u b je c t
o f t h e g r e a t e s t p r a c t ic a l im p o r t a n c e "
( 1 9 , p . 1 2 ) . T h e B a n k in g S c h o o l
lik e w is e s h a r e d t h i s o p in io n . W h ile
n o t a c c e p t in g h is d e f i n i t i o n o f
d e p o s it s a s m o n e y , t h e y u s e d h is
n o t io n o f a f l e x i b l e m u l t i p l i e r t o
a rg u e th a t th e c r e d it s u p e r s tr u c tu r e
( o f w h ic h d e p o s i t s w e r e t h e c h ie f
c o m p o n e n t ) c o u ld e x p a n d a n d c o n ­
t r a c t in d e p e n d e n t l y o f t h e n a r r o w m o n e ta ry b a se s u c h th a t c o n tro l o f
t h e b a s e d id n o t i m p l y c o n t r o l o f t h e
s u p e rs tru c tu re .

P

a s p e c ts o f b a n k c r e d i t c r e a t io n . B u t
R o b e r t T o r r e n s w a s t h e f ir s t t o
s p e c if y t h e l i m i t s t o d e p o s it e x p a n ­
s io n a n d t o d e f in e t h e l i m i t i n g v a lu e
o f th e m u lt ip lie r . T o r r e n s , a p r o fe s ­
s io n a l s o ld ie r , n e w s p a p e r p r o p r i e t o r ,
m e m b e r o f P a r lia m e n t , p r o m o t e r o f
s c h e m e s f o r t h e c o lo n iz a t io n o f
A u s t r a lia , c o - d is c o v e r e r o f t h e t h e o r y
o f c o m p a r a t iv e a d v a n t a g e , a n d o n e
o f t h e a b le s t m o n e t a r y t h e o r is t s o f
h is g e n e r a t io n , p r e s e n te d h is a n a ly s is
in h is 1 8 3 7 Letter to Lord Melbourne.
T h e r e , in a s e c t io n b e a r in g t h e c a p ­
t io n " A g iv e n a m o u n t o f c ir c u la t in g
C a s h b e c o m e s t h e b a s is o f a m u c h
g re a te r a m o u n t o f B a n k D e p o s its ,”
h e w r o t e t h a t d e p o s it s e x p a n d u n t i l
t h e y r e a c h t h a t p a r t ic u la r r a t io t o
r e s e r v e s t h a t b a n k e r s d e e m “ s a fe
a n d le g i t i m a t e " [ 1 9 , p . 1 6 J . I n o t h e r
w o r d s , t h e d e s ir e d d e p o s i t / r e s e r v e
r a t io t o g e t h e r w i t h t h e a v a ila b le
q u a n t i t y o f r e s e r v e s f ix e s t h e u p p e r
l i m i t t o e x p a n s io n . H e a ls o e x ­
p la in e d h o w d e p o s its g r o w u p t o t h is
l i m i t . S t r e s s in g t h e s u c c e s s iv e
le n d in g a n d r e d e p o s it o f e x c e s s
r e s e r v e s , h e w r o t e t h a t g iv e n

I t f o l lo w s t h a t
W hatever sums they m ay advance upon
securities in the m o rning , the same
sum s will be returned to the m in the
evening, in the form o f new deposits;
and in this w ay the a m o u n t o f their
deposits m ust continue to increase, until
they bear that pro po rtio n to the fixed
am ount of the returning cash, w hich the
experience o f the bankers m ay suggest
as safe and legitim ate [19, p. 16].

T h a t is , e x p a n s io n p r o c e e d s v ia t h e
s u c c e s s iv e le n d in g a n d r e d e p o s i t o f
e x c e s s c a s h re s e rv e s u n t il th e
d e s ir e d d e p o s i t / r e s e r v e r a t io is
a t t a in e d .
s fo r th e d e p o s it m u lt ip lie r
it s e lf , T o r r e n s e x p r e s s e d i t as
t h e in v e r s e o f t h e r e s e r v e
r a t io . H e s a w , f o r e x a m p le , t h a t a
r e s e r v e r a t io o f o n e - t e n t h w o u ld p r o ­
d u c e a m u lt ip lie r o f te n . O b ­
s e r v in g t h a t

A

in ordinary tim es, one-tenth, or even
one-tw entieth, o f the m o n e y deposited
w ith

a banker,

[reserve]

for

is a

sufficient

m e e tin g

rest

o c c a s io n a l

dem ands; and that nine-tenths, or even
a reserve. . .in c o in . . .m o re than suf­
ficient to m e e t . . . occasional dem ands
. . . . a part of this coin w o uld be again

nineteenth-tw entieths,

of

the

sum s

deposited w ith a b an k m ay be lent out
on securities |19, p. 18),

advanced u po n securities, and w ould be
again returned upon the banks, in the

h e c o n c lu d e d :

form o f new deposits, restoring their
reserve. . .to the original s u m . . . [19, p.
151.

I should not be arguing on an extrem e
case, were I to assum e that the cash
originally d e p o s ite d . . .w ith
will

be

successively

bankers,

re-issued

upo n

securities, by the b anks, and succes­
sively returned to th e m , in the form of
new deposits, u ntil the pro po rtio n b e ­
tw een the am o u n t o f the deposits, and
the a m o u n t of the cash, is as ten to one

R o b e r t T o r r e n s (1 7 8 0 -1 8 6 4 )

P e n n i n g t o n w a s t h e f i r s t t o o u t lin e
t h e le n d in g , r e d e p o s it , a n d m u lt ip lie r




[19, p p . 18-19).

H e r e is t h e f i r s t c le a r s t a t e m e n t o f
t h e m u l t i p l i e r as t h e r e c ip r o c a l o f t h e
r e s e r v e r a t io .

I n h is t h e o r e t ic a l a n a ly s is , T o r r e n s
t r e a t e d t h e m u l t i p l i e r a s a p o t e n t ia lly
v a r ia b le m a g n it u d e , f l u c t u a t i n g in
v a lu e f r o m a h ig h o f t w e n t y t o a lo w
o f f iv e d e p e n d in g o n t h e s t a t e o f
b u s in e s s c o n f id e n c e a n d it s im p a c t
o n b a n k e r s ’ d e s ir e d d e p o s i t / r e s e r v e
r a t io s . A s h e p u t i t , t h e s e r a t io s

d e p o s it c o n t r o l v ia t h a t b a s e b e c a m e
s u f f i c i e n t l y w e ll e s t a b lis h e d b y t h e
m id - n in e te e n th c e n tu r y to b e b e ­
q u e a t h e d t o f u t u r e g e n e r a t io n s o f
m o n e t a r is t s ( s e e O 'B r i e n [ 1 1 , p .
1 6 ]). In s h o rt, th e m o d e r n m o n e ­
t a r is t n o t i o n o f b a s e c o n t r o l d e r iv e s
s t r a ig h t f r o m T o r r e n s b y w a y o f t h e
C u r r e n c y S c h o o l.

w ill necessarily vary w ith the variations
o f co m m e rc ia l co nfid e nce . W h e n trade
is prosperous, w hen few failures are oc­

a ls o e x p a n d s a n d s o o n u n t i l e x c e s s
r e s e r v e s a r e e lim in a t e d a n d a ll c a s h
is a b s o r b e d in b a c k in g d e p o s it s a t
t h e r a t io d e s ir e d b y b a n k e r s . J o p lin
d e v e lo p e d h is a n a ly s is in h is 1 8 4 1
b o o k The Cause and Cure o f Our Com­
mercial Fjnbarrassments. H e s ta r ts o u t
b y e s t a b lis h in g t h e l i m i t s t o e x p a n ­
s io n a n d d e f i n i n g t h e d e p o s i t
m u l t i p l i e r a s t h e in v e r s e o f t h e
r e s e r v e r a t io .

T h o m a s J o p li n ( 1 7 9 0 - 1 8 4 7 )

curring, and w hen co m m e rc ia l bills are
p ro m p tly p aid as they fall due, bankers
m igh t consider it safe to co n tin ue to
re-issue,

upon

securities,

the

cash

returning u p o n th e m as deposits, until
the p ro po rtio n b e tw een their deposits
and their cash, becam e as fifteen to one,
or even as tw enty to one. In periods of
c o m m e rc ia l

pressure,

on

the

other

hand , bankers w o u ld be disposed to
c o ntract

their

liabilities,

until

the

d e p o s its . . . bore to their cash a propor­
tio n , no t ex ceeding seven to o ne, or
even five to one [19, p p . 17-18).

O w in g to th e s e p o te n tia l m u lt ip lie r
flu c tu a tio n s , “ a fix e d a m o u n t o f c ir ­
c u la t in g m o n e y m a y b e t h e b a s is o f
a f lu c tu a tin g a m o u n t o f c r e d it
m o n e y ” [ 1 9 , p . 1 7 ] . Y e t in h is p r a c ­
t ic a l p o l i c y a n a ly s is h e t r e a t e d t h e
m u l t i p l i e r ( o r d e p o s i t / r e s e r v e r a t io )
a s a m o r e - o r - le s s - f ix e d c o n s t a n t ,
a r g u in g t h a t c o n t r o l o f t h e r e s e r v e
b a s e c o n s t i t u t e d a u t o m a t ic c o n t r o l
o f th e d e p o s it s u p e r s tr u c tu r e .
h is la s t id e a p r o v e d e s p e c i­
a lly i n f l u e n t i a l . T h e C u r ­
r e n c y S c h o o l u s e d it t o a r g u e
th a t b a n k re s e r v e s c o n tr o lle d a n in ­
v e r t e d c r e d i t p y r a m id ( w i t h d e p o s it s
t h e c h i e f c o m p o n e n t ) r e s t in g o n a
g o ld a n d b a n k n o t e b a s e . T h r o u g h
t h e w r i t i n g s o f t h e C u r r e n c y S c h o o l,
T o r r e n s ’ s d o c t r in e s o f d e p o s it
m u ltip lic a tio n o n a re s e r v e b a s e a n d

T




E very

T h e n e x t s t e p in t h e t h e o r y 's e v o lu ­
t i o n w a s t a k e n b y 'T h o m a s J o p li n , a
B r i t i s h b a n k e r a n d c o - o r ig in a t o r o f
t h e p r in c ip le o f “ m e ta llic f lu c ­
t u a t i o n ” a r o u n d w h ic h m u c h o f
n in e te e n th - c e n tu r y m o n e ta r y c o n ­
tro v e rs y ra g e d . H e a d v a n c e d a
v ie w m a r k e d ly d iffe r e n t fr o m T o r­
r e n s 's o f t h e w a y d e p o s it s e x p a n d t o
t h e l i m i t s e t b y b a n k e r s ' d e s ir e d
r e s e r v e r a t io s . A s d o c u m e n t e d
a b o v e , T o r r e n s fo c u s e d o n th e
le n d in g - r e d e p o s it m e c h a n is m o f t h e
b a n k in g s y s t e m a s a w h o l e ; h e d id
n o t t r a c e t h e e x p a n s io n p r o c e s s
f r o m b a n k t o b a n k . H e m e r e ly
s ta te d th a t b a n k s as a g ro u p e x p a n d
lo a n s , t h e n r e c o u p t h e p r o c e e d s in
th e f o r m o f r e d e p o s its , a n d th e n
e x p a n d a g a in a n d a g a in u n t i l t h e
l i m i t is r e a c h e d . H e d id n o t id e n t if y "
i n d i v id u a l b a n k s n o r d id h e m e n t io n
th e d is t r ib u t io n o f re s e rv e s a m o n g
th e m .

b a n k e r . . . has

pow er

of

c r e a tin g

therefore
bank

the

m oney,

a n d .. . t h e r e is no other lim it to the
exercise of this pow er than his ow n
p r u d e n c e . . . . I ap p re he nd that bank
m o ney is always created by the bankers
to the full extent that prudence will per­
m it. If one-fifth of their deposits in cash
be sufficient to m eet any d e m a n d for
p ay m e n t by their depositors, for every
thousand pounds of cash deposited with
th e m , they discount to the extent of
£ 5 ,0 0 0 ,

and create £ 5 ,0 0 0 o f b ank

m o ney [7, pp. 33, as q u o te d in M in ts
10. p. 1051.

H e th e n p ro c e e d s to tra c e th e e x ­
p a n s io n p r o c e s s a c r o s s a s u c c e s s io n
o f b a n k s u n t i l t h e l i m i t is r e a c h e d .
A s s u m i n g a r e s e r v e r a t io o f 2 0
p e r c e n t, h e s ta te s th a t a b a n k
r e c e i v in g a n e w c a s h d e p o s i t o f
£ 1 , 0 0 0 w i l l im m e d ia t e ly p u t £ 2 0 0 in
r e s e r v e s a n d le n d o u t t h e r e m a in in g
£ 8 0 0 . T h e b o rro w e rs , u p o n re ­
c e iv in g th is s u m ,
pay the am ount, we shall assume, to the

y c o n t r a s t , J o p li n e x p la in e d
h o w e x p a n s io n p r o c e e d s f r o m
o n e b a n k to th e n e x t, e a c h
le n d i n g o u t it s e x c e s s r e s e r v e a n d
lo s in g i t t o a n o t h e r b a n k w h i c h

B

credit of their account w ith som e other
b an k e r,

w h o ...f in d s

his

cash

in­

creased £ 8 0 0 , and his deposits £8 0 0 ,
and he has in co nsequence £ 6 4 0 to
spare, w hich he lends accordingly. T his
again b e in g paid into another b a n k , the
sam e o pe ratio n, again occurs, and so it
goes on from b a n k to b a n k until the
tho u sa nd p o u n d s has created for itself
deposits to the extent of £ 5 ,0 0 0 |7. p p.
33-34, as q u o te d in M in ts 10. p. 105|.

16 . Multifile Expansion o f Deposits

H e r e a re a ll t h e e le m e n t s f o u n d in
m o d e rn te x tb o o k tre a tm e n ts o f th e
m u l t i p l e e x p a n s io n p r o c e s s : ( 1 ) t h e
in it ia l c a s h d e p o s it t h a t g e n e r a te s e x ­
c e s s r e s e r v e s , ( 2 ) t h e le n d in g o u t
a n d s u b s e q u e n t lo s s o f t h o s e r e ­
s e rv e s to o th e r b a n k s w h o re p e a t th e
p r o c e s s , ( 3 ) t h e r e s u lt in g d im in u t io n
o f e x c e s s r e s e r v e s a t e a c h s u c c e s s iv e
b a n k a s t h e y a r e a b s o r b e d in b a c k ­
in g t h e e x t r a d e p o s it s c r e a t e d b y
t h e i r a r r iv a l, a n d ( 4 ) t h e c u m u l a t iv e
r is e in d e p o s it s u n t il t h e y r e a c h t h e ir
l i m i t r a t io t o c a s h r e s e r v e s , a t w h ic h
p o in t e x c e s s r e s e r v e s v a n is h . A l l t h a t
w a s m is s in g w a s a m a t h e m a t ic a l
s ta te m e n t o f th e p ro c e s s .

A l f r e d M a r s h a ll ( 1 8 4 2 - 1 9 2 4 )

T h e m a th e m a tic a l s ta te m e n t r e fe r ­
r e d t o a b o v e c o n s t it u t e d t h e n e x t
s ta g e o f t h e t h e o r y . T h e k e y n a m e
h e r e is t h a t o f t h e g r e a t E n g lis h
n e o c la s s ic a l e c o n o m is t A l f r e d M a r ­
s h a ll, w h o p r o v i d e d t h e a lg e b r a ic
b a s is f o r t h e t h e o r y a n d w h o u s e d
t h e s ta n d a r d m a t h e m a t ic a l t e c h n iq u e
t o d e r iv e t h e d e p o s it e x p a n s io n
m u lt ip lie r as th e s u m m a tio n o f a
g e o m e t r ic a l s e r ie s . M a r s h a l l u s e d
th e s y m b o l n to d e n o te th e
m u l t i p l i e r , d e f in e d b y h im a s t h e
r a t io o f d e p o s it s t o r e s e r v e s ( i. e . ,
t h e in v e r s e o f t h e r e s e r v e r a t io ) .
I n a n o t e s c r ib b le d in t h e m a r g in o f




h is p e r s o n a l c o p y o f R o b e r t G i f f e n ’ s

I n t h is c o n n e c t io n i t s h o u ld b e n o t e d

Stock Exchange Securities ( 1 8 7 7 ) , h e

th a t th e te rm s

w ro te :
Let it [bankers' desired reserve/deposit
ratio) be 1/n th: L e t A be the original
am ount of deposits w ithout credit: then
credit can be spread to A [ 1 + ——
L
n
+

---

V + ... J

= A n. T his is

true if there is only one b ank, as well
as if m any, except that if there are m any
banks n cannot be very large in any one
ban k, w hile on the other hand if the
banks pool their reserves (theoretically
or practically) they co u nt as cash w hat
they have in the pool and the pool lends
m u ch of that again (quoted in Eshag 4,
pp. 9-10].

H e e la b o r a t e s t h e s u b s t a n c e o f t h is
b r ie f n o t e in h is e v id e n c e b e f o r e t h e
G o l d a n d S ilv e r C o m m is s i o n o f
1 8 8 7 . H e savs:

I

should

consider w hat

part

of its

deposits a b an k could lend and then I
should consider w hat part of its loans
w ould be redeposited w ith it and w ith

e tc .,

o f M a r s h a l l s e q u a t io n a re t h e s a m e
a s t h e t e r m s (1 - r ) , (1 - r ) 2, e t c . ,
w h ic h s h o w t h e p r o p o r t i o n o f e a c h
d o ll a r o f i n i t i a l d e p o s i t t h a t s u c ­
c e s s iv e b a n k s c a n le n d o u t a f t e r r e ­
q u ir e d r e s e r v e s h a v e b e e n s e t a s id e .
T h e r e s u ltin g m u lt ip lie r , M a r s h a ll
n o t e s , is t h e s a m e w h e t h e r t h e
s y s t e m is c o m p o s e d o f a s in g le
m o n o p o ly b a n k o r m a n y s m a ll c o m ­
p e t in g b a n k s . S e c o n d , t h e p r o p o r ­
t i o n o f it s d e p o s it s a b a n k c a n le n d
is d e t e r m in e d b y it s r e s e r v e r a t io . I f
t h a t r a t io is , s a y , o n e - f i f t h , t h e
b a n k c a n le n d o u t t h e r e m a in in g
f o u r - f i f t h s o f it s d e p o s it s . T h i r d ,
r e s e r v e r a t io s a n d t h e r e s u l t i n g
p o w e r t o le n d v a r y b y t y p e o f b a n k .
S m a ll is o la t e d b a n k s , b e c a u s e o f
th e ir p o te n tia lly g re a te r e x p o s u r e to
c a s h d r a in s a n d a d v e r s e c le a r in g s ,
w i l l o p e r a t e w i t h la r g e r r e s e r v e r a t io s
t h a n b ig b a n k s o r t h o s e h a v in g r e a d y
a c c e s s t o a c e n t r a l r e s e r v e p o o l.

other banks and, vice versa, w hat part
of the loans m ade by other banks w ould
be received by it as deposits. T h u s I
should get a geom etrical progression;

H erbert Joseph D a v en p ort

the effect being that if each b an k could

(1 8 6 1 -1 9 3 1 )

lend two-thirds of its deposits, the total
am o u nt o f loaning pow er got by the
banks w ould a m o u n t to three tim es
w hat it otherwise w o uld be. If it could
lend four-fifths, it will then be five times;
and so on. T h e question how large a
part of its deposits a b an k can lend
depends in a great measure on the
extent to w h ich the different banks
directly or indirectly pool their resources
|8, p. 37 , as quoted in Eshag 4, p. 10].

In th e s e p a s s a g e s M a r s h a ll m a k e s
t h r e e m a in p o in t s . F ir s t , t o f i n d t h e
m u lt ip lie r , o n e s im p ly a d d s to e a c h
d o ll a r o f in i t i a l c a s h d e p o s it t h e p r o ­
p o r t io n o f t h a t d o lla r t h a t s u c c e s s iv e
b a n k s c a n le n d a s i t g o e s in d w i n ­
d lin g a m o u n ts fr o m b a n k to b a n k .

T h e t h e o r y p r o g r e s s e d t o it s s ix t h
s ta g e w i t h U n i v e r s i t y o f M is s o u r i
e c o n o m is t H . J . D a v e n p o r t 's d is t in c ­
t i o n b e t w e e n t h e e x p a n s io n p o w e r
o f a s in g le m o n o p o l y b a n k v e r s u s
t h a t o f a s m a ll c o m p e t i t i v e b a n k
in a m u l t i b a n k s y s t e m . “ M o d e r n

17

d e v e lo p m e n t s , " w r i t e s F . A . H a y e k ,
“ f o llo w th e e x p o s itio n o f H . J.
D a v e n p o r t " [ 6 , p . 1 5 3 j. O n p a g e
2 6 1 o f h is Economics o f Enterprise
(1 9 1 3 ) D a v e n p o rt s h o w s th a t a
m o n o p o l y b a n k in a c lo s e d c o m ­
m u n ity c a n d o w h a t a w h o le b a n k ­
in g s y s t e m c a n d o b u t w h a t a
c o m p e t it iv e b a n k c a n n o t d o , n a m e ly
m u l t i p l y lo a n s a n d d e p o s it s p e r
d o lla r o f c a s h r e s e r v e s r e c e iv e d . T h e
m o n o p o l y b a n k , h e s a y s , lo s e s n o
r e s e r v e s t o o t h e r b a n k s ; a ll c h e c k s
w r i t t e n o n it r e t u r n in t h e f o r m o f
r e d e p o s its . C o n s e q u e n tly th e o n ly
r e s t r i c t i o n o n it s a b i l i t y t o e x p a n d is
th a t it k e e p r p e r c e n t o f c a s h
r e s e r v e s a g a in s t d e p o s it s . T h u s u p o n
t h e r e c e i p t o f C d o lla r s o f n e w
r e s e r v e s i t c a n e x p a n d d e p o s it s D
u p to th e lim it D = ( l/ r ) C .
o ill u s t r a t e , h e s h o w s t h a t a
n e w m o n o p o l y b a n k , b e in g
t h e o n l y b a n k in a n is o la t e d
t o w n a n d fa c in g a re s e r v e r e q u ir e ­
m e n t o f 15 p e r c e n t, w ill, u p o n o p e n ­
in g f o r b u s in e s s , e n g in e e r a 6 % - f o l d
e x p a n s i o n o f lo a n s a n d d e p o s it s p e r
d o ll a r o f i n i t i a l c a s h r e s e r v e s c o n ­
t r i b u t e d b y t h e s t o c k h o ld e r s . H e
t h e n a p p lie s t h i s s a m e m u l t i p l i e r t o
a c a s h d e p o s it o f $ 1 0 0 , 0 0 0 , s h o w ­
in g h o w t h e b a n k p u t s $ 1 5 , 0 0 0 in
r e s e r v e , le n d s o u t a n a m o u n t e q u a l
t o s ix a n d t w o - t h i r d s o f t h e r e m a in ­
in g $ 8 5 , 0 0 0 , a n d r e a liz e s a d e p o s i t
e x p a n s i o n ( p r i m a r y p l u s lo a n d e r iv e d ) o f $ 6 6 6 , 6 6 6 . T h e m o ­
n o p o l y b a n k , h e e x p la in s , e x p a n d s
u p t o t h e l i m i t a llo w e d b y t h e
r e s e r v e r a t io f o r o n e r e a s o n : i t lo s e s

T




n o r e s e r v e s t h r o u g h t h e c le a r in g ­
h o u s e o r t h r o u g h c a s h d r a in .
For t h e . . . customers of the b ank m ake
pay m en ts

through

checks

u p o n the

T o t h e e x t e n t t h is h a p p e n s , t h e
g r o u p o f b a n k s to g e th e r c a n ( lik e a
m o n o p o ly b a n k ) q u i c k l y e x p a n d t o
t h e l i m i t a llo w e d b y t h e r e s e r v e
r a t io .

b a n k , and these credits are deposited
in

tu r n

to

th e

c re d it

of

o th e r

cu sto m e rs. . . .A n d if som e custom ers
draw out cash, other custom ers will

C h e s t e r A r t h u r P h illip s

pro bab ly receive it and return it to the

(1 8 8 2 - 1 9 7 6 )

b a n k [3, p. 261).

H a v in g d e s c r ib e d th e m u lt ip li­
c a tiv e p o w e r o f a m o n o p o ly b a n k ,
h e t u r n s h is a t t e n t i o n t o t h e c o m ­
p e t it iv e b a n k . H e n o te s th a t a c o m ­
p e t it iv e b a n k c a n n o t e x p a n d to th e
e x t e n t o f a m o n o p o l y b a n k s in c e
it s a t t e m p t s t o d o s o w i l l r e s u lt in
r e s e r v e lo s s e s t h r o u g h t h e c le a r in g ­
h o u s e . T h e c o m p e t it iv e b a n k , h e
s a y s , c a n n o t e x p e c t th e p ro c e e d s o f
it s lo a n s t o b e r e d e p o s i t e d w i t h it .
O n th e c o n tra ry ,
W h e n the ch e ck draw n by the borrow ­
ing depositor m ay be deposited in other
banks and collected by them against the
le n d in g b a n k , its g ranting of credits
rapidly draws d o w n its reserves to swell

T h e t h e o r y o f d e p o s i t e x p a n s io n
r e a c h e d it s z e n it h w i t h t h e p u b l i ­
c a t i o n o f C . A . P h il lip s 's Bank Credit
in 1 9 2 1 . T h e r e in t h e f a m o u s
C h a p t e r I I I e n t i t l e d “ T h e P h ilo s o ­
p h y o f B a n k C r e d it " h e s ta te d th e
t h e o r y w i t h a p o w e r , p r e c i s io n , a n d
c o m p l e t e n e s s u n m a t c h e d b y h is
p r e d e c e s s o r s . I n p a r t ic u la r , it w a s
P h il lip s m o r e t h a n a n y o n e e ls e w h o
b r o u g h t h o m e t o t h e e c o n o m ic s p r o ­
f e s s io n t h e c r u c ia l d i s t i n c t i o n b e ­
t w e e n t h e r e s e r v e lo s s o f a c o m ­
p e t i t i v e b a n k t h a t e x p a n d s it s lo a n s
v e r s u s m u l t i p l e e x p a n s io n b y t h e
b a n k in g s y s t e m a s a w h o l e . I n s o
d o in g , h e a d v a n c e d t h e t h e o r y in a t
le a s t t h r e e w a y s .

the reserves of its com petitors [3, p.

T h e s e re s e rv e s , h e n o te s , g o to
o t h e r b a n k s , w h i c h a ls o t r y t o e x ­
p a n d ; in t h i s w a y t h e s y s t e m a s a
w h o l e u l t i m a t e l y e x p a n d s in t h e
s a m e r a t io a s t h e m o n o p o l y b a n k .
H e a ls o s u g g e s t s t h a t w h e n a ll
b a n k s s im u lt a n e o u s ly e x p a n d t h e i r
lo a n s a p p r o x i m a t e l y in b a la n c e ,
t h e i r r e s e r v e lo s s e s w i l l t e n d t o
c a n c e l e a c h o th e r.
Each b a n k , as it, in turn lends to its
custom ers, is losing reserves to other
ban ks, b u t is, in turn , g aining reserves
at the expense o f the other b a n k s — if at
the same tim e the b a n k in g activity of
these other b anks is m aintaine d
p. 287).

ir s t , h e r e f u t e d t h e v ie w , h e ld
b y H o ra c e W h ite , H . D .
M c L e o d , a n d o t h e r b a n k in g
w r it e r s o f t h e t im e , t h a t a n in d iv id u a l
b a n k m u l t i p l i e s it s d e p o s it s o n a
g iv e n r e s e r v e b a s e j u s t a s t h e b a n k ­
in g s y s t e m d o e s . N o t s o , s a id
P h il lip s . A n i n d i v i d u a l b a n k c a n n o t
m u l t i p l y d e p o s it s . F o r it s a t t e m p t s
t o d o s o b y m a k in g lo a n s o f s e v e r a l
t im e s t h e a m o u n t o f n e w r e s e r v e s
r e c e iv e d w i l l s im p ly r e s u lt in r e s e r v e
lo s s e s t o o t h e r b a n k s e q u a l t o t h e

F

2631.

[3,

18 M ultiple Expansion o f Deposits

a m o u n t o f t h e lo a n s m a d e ( o r s lig h t ly
le s s i f a s m a ll f r a c t i o n o f t h e lo a n s
r e t u r n s t o t h e b a n k as d e p o s it s ) . N o
b a n k , h e s a id , c o u ld t o l e r a t e s u c h
lo s s e s t h a t im p e r ile d its le g a l r e s e r v e
p o s it io n .

e x p a n d s a n d s o o n u n t i l a ll c a s h is
e m p l o y e d in s u p p o r t i n g d e p o s it s a t
t h e r a t io o f o n e t o r .
T h e sudden acquisition of a substantial
am o u nt of reserve by a representative
individual b a n k . . .te n d s to cause that

m u la s . H is f o r m u la s f o r t h e b a n k in g
s y s t e m a re s t r a ig h t f o r w a r d a n d n e e d
o n ly b e s u m m a r iz e d h e r e . A c c o r d in g
t o h i m , a s y s t e m f a c in g a r e q u ir e d
r e s e r v e r a t io r c a n , u p o n t h e r e c e ip t
o f a n e w c a s h d e p o s it C , im m e d i­
a te ly e x p a n d it s lo a n s L a n d d e p o s its

b ank to becom e out of tune w ith the
L e t us suppose that the H anover N a ­

banks in the system as a w hole. As the

tional Bank o f N ew York acquires a

individual bank increases its loans in

deposit of S i ,0 0 0 ,0 0 0 in gold im ported

order to re-establish its norm al reserve-

and lends 51 0,0 00 ,000 to its customers,

deposits ratio, reserve is lost to other

an am o u n t suggested by the approx­

banks and the new reserve, split into

im ate ratio of 1 to 10 betw een reserves

small fragm ents, becom es dispersed

and

d e p o s its . . . . Perhaps

not

m ore

am o n g

the

banks

of

the

system.

than S i 0 0 ,0 0 0 out of all the checks

T h ro u g h the process o f dispersion it

draw n against the S I 0 ,0 0 0 ,0 0 0 bor­

com es to constitute

rowed

m anifold loan expansion [14, p. 40].

w ould

be

deposited

at

the

te nd e d on the basis of the im ported

In s h o rt,

g o ld . . .w o u ld represent cash that the
b a n k w ould lose through unfavorable
M anifo ld loans are not extended by an

clearing house balances, an am ount that
w ould be scattered w idely a m o n g the

individual b an k on the basis of a given

banks of the system . It is clear that an

am o u nt of reserve. Instead, as a conse­

individual

lend

quence of lending, the reserve of the in­

greatly in excess of the am o u n t of an

dividual b ank overflows, leaving only

b an k

atte m ptin g

to

additio n to its reserves w ould do so at

the equivalent of a fractional part of the

its peril [14, pp. 37-38).

additional vo lum e of loans extended,
the overflow cash find ing its way to
other and

e c o n d , h e e x p la in e d w i t h
g r e a t e r r ig o r a n d e x a c t n e s s
t h a n h is p r e d e c e s s o r s h o w t h e
in d iv id u a l b a n k c o n t r ib u te s to
s y s t e m w id e m u lt ip le e x p a n s io n e v e n
t h o u g h i t c a n n o t it s e l f m u l t i p l y
d e p o s it s . “ H o w , ” h e a s k e d , “ c a n a
g iv e n a m o u n t o f c a s h b e c o m e t h e
b a s is o f m a n i f o ld lo a n s a n d d e p o s it s
in a b a n k in g s y s t e m i f t h e a c q u is i­
t i o n o f t h a t a m o u n t b y a n in d i v id u a l
b a n k h a s lit t le o r n o m u ltip lic a tiv e
im p o r t a n c e ? ” [ 1 4 , p . 3 4 ) . H is a n s w e r
is t h a t e x c e s s c a s h r e s e r v e s o b ­
t a in e d b y o n e b a n k w i l l , u p o n
b e in g le n t o u t , p r o v i d e a n o t h e r b a n k
w i t h e x c e s s c a s h w i t h w h ic h it

S




still other banks until

it

becomes the “residual ized,” yet shifting,
fo u n d atio n

of

m an ifold

loans

and

deposits [14, p. 73].

T o e m p h a s iz e t h e p o i n t , h e c o n ­
t r a s t e d t h e w a y t h e b a n k in g s y s t e m
a n d t h e in d i v id u a l b a n k r e a c h t h e i r
d e s ir e d r e s e r v e - d e p o s it r a t io s — t h e
s y s t e m b y e x p a n d in g it s d e p o s i t
d e n o m in a t o r ; t h e b a n k b y s h r in k in g
it s r e s e r v e n u m e r a t o r .
h ir d , h e w a s t h e f i r s t t o
p u b lis h a lg e b r a ic f o r m u la s
e x p r e s s in g t h e lo a n a n d
d e p o s it e x p a n s io n p o t e n t ia l o f b o t h
t h e b a n k in g s y s t e m a n d t h e i n ­
d iv id u a l b a n k . T h e n h e u s e d t h e
s t a n d a r d m a t h e m a t ic a l t e c h n iq u e o f
s u m m a t i o n o f a s e r ie s t o s h o w t h a t
a g g r e g a t io n a c r o s s t h e i n d i v id u a l
b a n k s y ie ld s t h e s y s t e m w id e f o r ­

T

^

- l^ C

a n d D = ( l / r ) C , w h e r e t h e la t t e r
p a r e n t h e s iz e d m u lt ip lie r is o n e la r g e r
t h a n t h e f o r m e r s in c e i t t a k e s a c ­
c o u n t o f th e in it ia l p r im a r y d e p o s it
a s w e ll a s d e p o s it s c r e a t e d b y lo a n .

the basis o f a

H anover National Bank. T h e remainder
of the m an ifold loans supposedly ex­

D b y th e a m o u n ts L -

is e x p a n s io n f o r m u la s f o r
th e
in d iv id u a l
bank,
h o w e v e r , r e q u ir e s o m e e x ­
p la n a t io n . H e n o t e d t h a t t h e e x p a n ­
s io n p o w e r o f t h e i n d i v id u a l b a n k
d e p e n d s n o t o n ly o n it s r e s e r v e r a t io
r b u t a ls o t h e f r a c t i o n k o f it s lo a n s
t h a t r e m a in w i t h it a s d e p o s it s . T h i s
fr a c tio n , h e a rg u e d , d e p e n d s u p o n
s u c h t h in g s as c o m p e n s a t in g b a la n c e
r e q u ir e m e n t s , t h e a c c u m u la t io n o f
b a la n c e s in b o r r o w e r s ' a c c o u n t s in
a n t ic ip a t i o n o f lo a n r e p a y m e n t , a n d
t h e r e d e p o s i t o f c h e c k s in t h e s a m e
b a n k u p o n w h i c h d r a w n . G iv e n
t h e s e f a c t o r s , i t is a n e a s y m a t t e r t o
t r a c e P h i l l i p s ’ s d e r iv a t io n o f t h e
b a n k ’ s lo a n a n d d e p o s i t e x p a n s io n
f o r m u la s .

H

T h u s fo r a n in d iv id u a l b a n k
h a v in g a r e s e r v e r a t io r a n d a n
i n i t i a l c a s h d e p o s i t C , le t k b e t h e
f r a c t i o n o f lo a n - c r e a t e d d e p o s it s r e ­
t a in e d b y t h e b a n k , a n d L t h e e x t r a
lo a n s m a d e . O n c e t h e lo a n s a re
g ra n te d a n d ( 1 - k ) o f th e m
w i t h d r a w n , f in a l d e p o s it s ( o r ig in a l
p lu s t h e r e t a in e d f r a c t i o n o f t h o s e

19

c r c a t e d b y lo a n ) o f C + k L m u s t ,
b e c a u s e d e p o s i t e d f u n d s a r e e it h e r
h e ld in r e s e r v e o r le n t o u t , e q u a l
lo a n s L p lu s r e q u ir e d r e s e r v e s
r ( C + k L ) o b t a in e d b y a p p ly in g t h e
r e s e r v e r a t io t o d e p o s i t s . I n s h o r t ,
C + k L = L + r ( C -(- k L ) . S o lv ­
in g t h i s e q u i l i b r i u m c o n d i t i o n f o r
lo a n s y ie ld s P h il lip s ’ s lo a n e x p a n s io n
fo r m u la

L

=

[

] C,

w h i c h , w h e n s u b s t it u t e d in t h e
p r e c e d in g d e f in it io n o f f in a l d e p o s its ,
r e s u lt s in t h e d e p o s i t e x p a n s io n
I --------------------- I C ,
Lk r + 1 - k J
w h e r e th e b r a c k e te d te r m s a re th e
lo a n a n d d e p o s i t m u l t i p l i e r s .
e x p r e s s io n D

=

U s in g th e p r e c e d in g fo r m u la s ,
P h il lip s s h o w e d t h a t i f c a s h d e p o s it s
C e q u a l $ 1 ,0 0 0 , a n d r a n d k e q u a l
1 0 a n d 2 0 p e r c e n t r e s p e c t iv e ly , t h e n
t h e i n d i v i d u a l b a n k c a n e x p a n d it s
lo a n s L a n d d e p o s it s D
by
$ 1 ,0 9 7 .2 5 a n d $ 1 ,2 1 9 .5 1 . T h e s e
s u m s a re s o m e w h a t la r g e r t h a t t h o s e
o f th e h y p o th e tic a l a to m is tic b a n k
o f th e te x tb o o k s , w h o s e k -fa c to r o f
z e r o r e d u c e s it s lo a n a n d d e p o s i t
m u lt ip lie r s t o (1 - r ) a n d 1 .0 , r e s p e c ­
t i v e l y . O n t h e o t h e r h a n d , t h e lo a n
a n d d e p o s it s u m s o f P h illip s ’s e x ­
a m p l e a r e s m a lle r t h a n t h e i r c o u n ­
t e r p a r t s in t h e c a s e o f a s in g le
m o n o p o ly b a n k , w h o s e k - fa c to r o f
1 .0 y ie ld s lo a n a n d d e p o s i t m u l t i ­
p lie r s o f ^ — — r ^ a n d ( 1 / r ) , r e s p e c ­
t i v e l y . T h u s P h il lip s ’ s k - f a c t o r , v a r y ­
in g a s i t d o e s b e t w e e n o n e a n d z e r o ,
e s s e n t ia l ly in d i c a t e s t h e e x t e n t t o
w h ic h a n y o n e b a n k c a n a c t as a
m o n o p o l y b a n k , e x p a n d in g lo a n s




a n d d e p o s its as if it w e r e th e b a n k ­
in g s y s t e m a s a w h o l e ( s e e T i m b e r la k e [ 1 8 , p p . 1 0 - 1 2 1 ) .
in a l ly , in a d e m o n s t r a t io n
s im i la r t o M a r s h a l l's , P h il lip s
s h o w e d t h a t t h e s u m m a t io n o f
t h e lo a n - a n d d e p o s it - c r e a t io n s e r ie s
a c r o s s a ll in d i v id u a l b a n k s y ie ld s t h e
m u l t i p l e e x p a n s io n f o r m u la s f o r t h e
s y s te m
as a w h o le . P h illip s ’s
d e f i n i t i v e e x p o s i t i o n e s s e n t ia l ly
e s t a b lis h e d t h e t h e o r y o n c e a n d f o r
a ll in t h e f o r m f o u n d in e c o n o m ic s
te x tb o o k s to d a y .

F

T h e T h e o r y S in c e P h illip s

S in c e P h il lip s , a t le a s t t h r e e in n o v a ­
t io n s h a v e e n h a n c e d t h e t h e o r y o f
d e p o s it e x p a n s io n . F ir s t , e c o n o m is t s
J a m e s H a r v e y R o g e r s [1 5 1 , P r o c t e r
T h o m s o n [1 7 [, a n d J a m e s A n g e ll
a n d K a r e l F ic e k [ 11 in c o r p o r a t e d in t o
t h e d e p o s i t m u l t i p l i e r t h e p u b lic 's
c u r r e n c y - t o - d e p o s i t r a t io , c , t o a c ­
c o u n t f o r c a s h d r a in s in d u c e d b y
d e p o s i t e x p a n s io n it s e lf . U s in g t h e
r e s u ltin g a u g m e n te d m u lt ip lie r e x ­
p r e s s io n

D

=

^ —

^C ,

th e y

s h o w e d t h a t both t h e c a s h a n d
r e s e r v e r a t io s c a n d r a c t t o l i m i t
d e p o s i t e x p a n s i o n , w h ic h is t h e r e ­
f o r e s m a lle r t h a n i t o t h e r w is e w o u l d
b e i f l i m i t e d b y t h e r e s e r v e r a t io
a lo n e . S t i l l o t h e r w r i t e r s h a v e in c o r ­
p o r a te d t im e d e p o s it a n d e x c e s s
r e s e r v e r a t io s in t o t h e m u lt ip lie r t h u s
f u r t h e r d i m i n i s h i n g it s m a g n it u d e .
S e c o n d , J a m e s M e a d e [9 ], M ilto n
F r ie d m a n a n d A n n a S c h w a r tz [5 ,
p p . 7 8 4 - 9 4 ] a s w e ll a s P h i l l i p C a g a n
[ 2 , p . 121 h a v e e x t e n d e d t h e id e a o f
th e d e p o s it e x p a n s io n m u lt ip lie r
in to th e b ro a d e r c o n c e p t o f th e

money multiplier, m , r e la t i n g t h e t o t a l

m o n e y s t o c k ( c u r r e n c y p lu s d e m a n d
d e p o s i t s ) , M , t o t h e s o - c a lle d h ig h p o w e re d m o n e ta ry b a s e , B , c o n ­
s is t in g o f b a n k r e s e r v e s p lu s c u r ­
r e n c y h e ld b y t h e p u b l i c a c c o r d in g
t o t h e e x p r e s s io n M = m B . T h i r d ,
P a u l S a m u e ls o n [ 1 6 , p . 2 8 3 1 h a s o b ­
s e r v e d t h a t t h e s m a ll b a n k “ e x p a n d s "
in s y m m e t r y w i t h t h e s y s t e m , n o t
b y m u l t i p l y i n g d e p o s it s o n a g iv e n
n e w r e s e r v e b u t b y f r a c t i o n a l iz in g its
r e s e r v e o n a g iv e n n e w d e p o s i t .
B u t t h e s e e x t e n s io n s , i m p o r t a n t a s
t h e y a re , a re m e r e ly r e c e n t
r e f in e m e n t s m a d e t o t h e f u n d a ­
m e n t a l c o r e o f id e a s la id d o w n b y
P e n n in g t o n a n d h is s u c c e s s o r s . T h e
k e y id e a s o f t h a t c o r e — n a m e ly
t h a t a f r a c t i o n a l r e s e r v e b a n k in g
s y s te m m u ltip lie s d e p o s its , th a t th e
m e c h a n ic s o f m u l t i p l i c a t i o n i n v o l v e
t h e s u c c e s s iv e le n d in g a n d r e d e p o s it
o f e x c e s s r e s e r v e s , t h a t s o m e c r u c ia l
r a t io o r r a t io s e x is t t o l i m i t t h e e x ­
p a n s io n , a n d t h a t t h e in d iv id u a l b a n k
c o n t r ib u t e s t o t h e e x p a n s io n p r o c e s s
n o t b y m u l t i p l y i n g it s o w n d e p o s it s
b u t b y c r e a t in g t h e m f o r o t h e r s
w h e n i t m a k e s lo a n s a n d lo s e s
r e s e r v e s th r o u g h th e c le a r in g ­
h o u s e — w e r e a lr e a d y e n u n c i a t e d
m o re th a n a c e n tu r y a g o . E v e n
t o d a y , o n e f in d s t h e s e id e a s i n ­
d is p e n s a b le t o a f u l l u n d e r s t a n d i n g
o f h o w t h e s u p p ly o f b a n k m o n e y
e x p a n d s a n d c o n tra c ts .

20 M ultiple Expansion o f D eposits

R e fe r e n c e s

1.

2.

Angell, James YV. and Ficek, Karel F. “T h e Expansion of Bank

11.

O 'B rie n,

D e n n is

P. “M one tary E c o n o m ic s.” In Economic

C re d it. I.” Journal of Political Economy 41 (February 1933):

Analysis in Historical Perspective, pp.

1-32.

C reedy and D . P. O 'B rie n. L o n d o n : Butterw orths, 1985.

C agan , P h illip. Determinants and Effects of Changes in the Stock
of Money, 1875-1960. N e w York: N ational Bureau of E c o ­

12.

3-45.

E dited

by J.

P e nning to n, Jam es. “O bservations o n the Private B anking
Establishm ents of the M etropolis:

First M e m o ra n d u m

to

H uskisson” (1826). In Economic Writings o f James Pennington,

n o m ic Research, distributed by C o lu m b ia U niversity Press,
1964.

pp. xlv-li. E dited by R . S. Sayers. L o n d o n : T h e L o n d o n
School of E conom ics and Political Science, 1963.

3.

D a v e n p o rt, H erbert J. The Economics of Enterprise. N e w York:
13.

M a cm illan , 1913.

. “Letter A ddressed to the A uth o r by Jam es
P e nning to n, E s q .,” A pp e n d ix C of V o lu m e 2 of T o o k e ’s

4.

Eshag,

E p rim e .

Erom Marshall to Keynes. O xford:

History of Prices (1838). In Economic Writings of James Penning­
ton, p p . lii-lxii. E dited by R . S. Sayers. L o n d o n : T h e

Basil

B lackw ell, 1963.
5.

F rie d m an, M ilto n and Schw artz, A nn a J. A Monetary History

of the United States, 1870-1960. Princeton: Princeton U niver­

L o n d o n School of E conom ics and Political Science, 1963.
14.

sity Press, 1963.
6.

H aye k , Friedrich A. Monetary Theory and the Trade Cycle

15.

Rogers, Jam es H . “T h e A bso rptio n of B ank C re d it.” E/:ono-

metrica 1 (1933).

(19 33 ). N e w York: Kelley, 1966.
16.
7.

Phillips, C hester A. Rank Credit. N e w York: M a cm illan ,
1921.

Jo p lin , T h o m a s . The Cause and Cure of Our Commercial Embar­

Sam uelson, Paul A . Economics. 8th ed. N e w York: M cGraw H ill, 1970.

rassments. L o n d o n , 1841.
17.
8.
9.

M arshall, A lfred. Official Papers. L o n d o n : M acm illan, 1926.
M e a d e, J. E. “T h e A m o u n t o f M o n e y and the B anking

T h o m s o n , Procter. “Variations on a T h e m e by P h illips.”

American Economic Review 46 (D e c e m b e r 1956): 965-70.
18.

T im b e rlak e , R ichard H . “A Reassessm ent o f C . A . P h illips’
T h e o ry of Bank C re d it.” U n p ub lish e d Paper.

19.

T orrens, R o b e rt. A Letter to the Right Honourable Lord Viscount
Melbourne on the Causes of the Recent Derangement in the Money
Market and on Rank Reform. L o n d o n : L o n g m a n , Rees, O rm e ,

S y ste m .” Economic Journal 44 (1934): 77-83. R e p rinted in
A m e rican E c o n o m ic A ssociation. Readings in Monetary Theory.
H o m e w o o d : Irw in, 1951, p p. 54-62.
10.

M in ts , L lo y d . A History of Ranking Theory. C hicago: U niver­
sity of C h icag o Press, 1945.




Brow n, and G re e n, 1837.

B a n k D ig e s t




21

D ir e c to r s

22

A d v is o r y C o u n c ils

24

O p e r a t in g E x p e n s e s

25

C o m p a r a t iv e F in a n c ia l S t a t e m e n t s

26

S u m m a r y o f O p e r a t io n s

28

O f f ic e r s

29

22 D irectors December 31, 1986

R i c h m o n d O ffic e

Chairman
of the
Board

Edward H . Covell
President
The Covell Company
Easton, Maryland

Leroy T . Canoles, Jr.
President
Kaufman and Canoles
Norfolk, Virginia

Deputy Chairman
of the
Board

Floyd D . Gottwald, Jr.
Chairman of the Board and
Chief Executive Officer
Ethyl Corporation

Robert A. Georgine

Richmond, Virginia

President
Building & Construction Trades Department
AFL-CIO
Washington, D .C .

Robert F. Baronner

K. Donald Menefee

Chairman of the Board and

Chairman of the Board and

Chief Executive Officer
One Valley Bancorp of West Virginia, Inc.
and Kanawha Valley Bank, N.A.
Charleston, West Virginia

Chief Executive Officer
Madison National Bank
Chairman of the Board and President
James Madison Limited
Washington, D . C.

Robert S. Chiles, Sr.

Hanne Merriman

President/Chief Executive Officer
Greensboro National Bank

Garfinckel’s

Greensboro, North Carolina

Washington, D .C .

r:




Thomas B. Cookerly
President

President

Federal Advisory Council Member

Broadcast Division
Allbritton Communications
Washington, D .C .

John G . Medlin, Jr.
Chairman of the Board and
Chief Executive Officer
Wachovia Bank and Trust Company, N .A.
President and Chief Executive Officer
First Wachovia Corporation
Winston-Salem, North Carolina

23

B a l t i m o r e O ffic e
Chairman
of the
Board

Robert L. Tate

H. Grant Hathaway

Raymond V. Havsbert, Sr.

Chairman

Chairman of the Board

President and Chief Executive Officer

Tate Industries

Equitable Bank, N.A.

Parks Sausage Company

Baltimore, Maryland

Baltimore, Maryland

Baltimore, Maryland

©
Thomas R. Shelton

Charles W . Hoff III

Gloria L. Johnson

Joseph W . Mosmiller

President and Chief

President

Chairman of the Board

President

Hutzler Brothers Company

Loyola Federal Savings and

The Resource Management

Executive Officer
Farmers and Mechanics

Loan Association

Baltimore, Maryland

Group, Inc.

Baltimore, Maryland

National Bank

Salisbury, Maryland

Frederick, Maryland

C h a r lo t t e

O ffic e

Chairman
of the
Board

James E. Bostic, Jr.

Wallace J. Jorgenson

G. Alex Bernhardt

President

President

Division General Manager

Jefferson-Pilot

Bernhardt Industries, Inc.

Convenience Products Division

Lenoir, North Carolina

Georgia-Pacific Corporation

Communications Company

Aiken, South Carolina

Charlotte, North Carolina

J. Donald Collier

James M. Culberson, Jr.

John A. Hardin

James G . Lindley

Orangeburg, South Carolina

Chairman and President

Chairman of the Board

Chairman and Chief Executive Officer




The First National Bank
of Randolph County
Asheboro, North Carolina

and President
First Federal Savings Bank
Rock Hill, South Carolina

South Carolina National Corporation
Chairman, President, and
Chief Executive Officer
South Carolina National Bank
Columbia, South Carolina

24 Advisory Councils

Two advisory groups—the Operations Advisory
C om m ittee and the Small Business and
Agriculture Advisory Council—serve as formal
channels of communication between the Rich­
mond Reserve Bank and sectors of economic ac­
tivity within the District.

The Operations Advisory Committee, formed in
1978, comprises 29 members representing banks,
savings and loan associations, and credit unions.
The Committee meets three times a year and pro­
vides a medium for discussion of mutual problems
and of changing needs of District financial
institutions.

The Small Business and Agriculture Advisory
Council, formed in 1985, constitutes a forum for
communication with small business, agriculture,
labor, and other segments of the regional
economy. The Council meets at least twice a year
with the president and senior officers of the Bank,
and representatives meet annually with the Board
of Governors in Washington, D .C .

Ronald W. Davies
Senior Executive Vice President
Maryland National Bank
Baltimore, Maryland

John J. Morales
Executive Vice President
Andrews Federal Credit Union
Suitland, Maryland

William G. Dieter, Jr.
Executive Vice President
Union Trust Company of Maryland
Baltimore, Maryland

H. Jerry Shearer
Executive Vice President and Cashier
Liberty National Bank
Charleston, South Carolina

F. M . C. Fralix
President
South Carolina State Employees Credit Union
Columbia, South Carolina

John J. Sponski
Group Executive Officer
Sovran Bank, N.A.
Norfolk, Virginia

Harrison Giles
Senior Vice President
N C N B National Bank of North Carolina
Charlotte, North Carolina

Rita A. Smith
Executive V'ice President
West Virginia Savings League
Charleston, West Virginia

Richard L. Hall
Senior Vice President and Cashier
The Riggs National Bank of Virginia
Merrifield, Virginia

Loring E. Tilton
Senior Vice President
Columbia First Federal Savings & Loan
Washington, D.C .

Clarence E. Hoover, Jr.
Senior Vice President
Dominion Bankshares Corporation
Roanoke, Virginia

F. G. Walker
President
Raleigh Federal Savings Bank
Raleigh, North Carolina

James D. King
President
Poinsett Federal Savings and Loan Association
Travelers Rest, South Carolina

Rick A. Wieczorek
President
District of Columbia Credit Union League
Washington, D.C.

Ashpy P. Lowrimore
Senior Vice President
First Union National Bank of South Carolina
Florence, South Carolina

James R. Wilson
Vice President
First Carolina Corporate Credit Union
Greensboro, North Carolina

Peter M. Martin
Executive Vice President
Equitable Bank, N.A.
Baltimore, Maryland

Michael T. Wilson
Chief Executive Officer and
Executive Vice President
South Branch Valley National Bank
Moorefield, West Virginia

Operations Advisory Committee
Chairman
Walter E. Leonard, Jr.
Group Vice President
Wachovia Bank & Trust Company
Winston-Salem, North Carolina
William E. Albert
Vice President and Cashier
The First National Bank of Bluefield
Bluefield, West Virginia
Jose Alonzo
President
West Virginia Credit Union League. Inc.
Parkersburg, West Virginia
Thomas P. Baker
President
Investors Savings Bank
Richmond, Virginia
Charles S. Brummitt
Senior Vice President
N C N B South Carolina
Columbia, South Carolina
Philip S. Chenault
Vice President
Virginia Credit Union League
Lynchburg, V'irginia
Richard T. Clarke
Vice President
American Security Bank
Washington, D.C .
Marshall N. Colebank, Jr.
Executive Vice President and Cashier
The Charleston National Bank
Charleston, West V'irginia
Edward J. Cunningham
Senior Vice President
Central Carolina Bank and Trust Company, N.A.
Durham, North Carolina
John P. Danahy
Vice President
The National Bank of Washington
Washington, D.C.

James V. McAveney
Senior Vice President
Financial Services Division
Loyola Federal Savings & Loan Association
Baltimore, Maryland

S m a l l B u s in e s s a n d A g r ic u ltu r e A d v is o r y C o u n c il
Chairman
Leon A. Dunn, Jr.
Chairman and President
Guardian Corporation
Rocky Mount, North Carolina

E. Allen Fisher
Secretary-T reasurer
West V'irginia State Building and
Construction Trades Council, A F L -C IO
Charleston, West V'irginia

Watts Auman
Manager
Auman Farm
West End, North Carolina

Cecil H. Gannon
President
Cecil H. Gannon & Sons, Inc.
Easton, Maryland

Dickie S. Carter
President and Chief Executive Officer
Urban Service Systems Corporation
Washington, D.C .

Daniel P. Henson III
Senior Developer
Struever Brothers, Eccles & Rouse
Baltimore, Maryland

Michael Clark
President
Clark Insurance Services Company, Inc.
Richmond, V'irginia

Charles H. James II
President
C. H. James & Co.
Charleston, West V'irginia




William E. Masters
President
Perception, Inc.
Liberty, South Carolina
Charles O. Strickler
President
Rocco Enterprises, Inc.
Harrisonburg, Virginia
Julia M. Walsh
Managing Director
Julia M. Walsh & Sons/Tucker Anthony
Washington, D .C .
Julian D. Wiles, Sr.
President
J. D. Wiles Farms, Inc.
Fort Motte, South Carolina




26 C om parative Fin a n n a I Statements

C o n d itio n

.............
.............
.............
Loans to depository institutions........................................................... .............
Federal agency obligations..................................................................... .............
Special Drawing Rights certificate a ccou n t.....................................

U. S. Government securities:
B ills .............................................................................................................
N o te s ..........................................................................................................
Bonds..........................................................................................................

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

Total U. S. Government securities.........................................................
Cash items in process of collection ..................................................................
Bank premises .........................................................................................................................
Furniture and equipment, net ...............................................................................

.............
.............
.............
O t h e r a s s e t s ............................................................................................................................ .............
Interdistrict settlement a cco u n t........................................................... .............
Accrued service in c o m e .......................................................................... .............
T O T A L ASSETS

D e c e m b er 31, 1985

D e cem b er 31, 1986

Assets
$

9 5 9 ,0 0 0 ,0 0 0 .0 0
4 6 1 ,0 0 0 ,0 0 0 .0 0
8 0 ,8 9 0 ,5 4 6 .7 9
2 3 1 ,0 0 0 ,0 0 0 .0 0
6 7 2 ,8 8 7 ,5 9 4 .8 1

$

9 6 9 ,0 0 0 ,0 0 0 .0 0
4 2 6 ,0 0 0 ,0 0 0 .0 0
8 7 ,6 6 3 ,6 4 9 .3 4
3 1 1 ,7 4 5 ,0 0 0 .0 0
7 2 5 ,6 6 2 ,7 8 2 .5 9

8 ,9 1 8 ,9 0 0 ,7 0 5 .4 4
5 ,8 5 5 , 0 3 1 , 8 5 0 . 6 6
2 ,2 1 0 ,8 2 4 ,5 6 9 .4 8

7 ,5 3 4 , 5 2 8 , 0 4 8 . 8 3
5 ,9 6 6 ,4 5 0 ,4 0 6 .4 3
2 ,1 8 0 ,8 7 3 ,9 2 4 .3 4

1 6 ,9 8 4 ,7 5 7 ,1 2 5 .5 8

1 5 ,6 8 1 ,8 5 2 ,3 7 9 .6 0

7 0 0 ,8 3 0 ,0 8 3 .4 9
9 9 ,6 4 0 ,3 9 9 .5 7
2 2 ,2 9 4 ,2 8 4 .8 4
7 3 6 ,5 2 6 ,9 2 0 .6 8
(1 5 8 ,0 2 1 ,9 4 3 .8 8 )
4 ,7 6 6 , 0 5 4 . 7 7

6 8 1 ,6 9 5 ,7 8 8 .2 4
1 0 0 ,9 9 3 ,0 1 5 .3 9
2 2 ,5 8 9 ,0 7 4 .4 9
6 8 3 ,9 4 0 ,6 5 4 .2 0
(4 1 7 ,9 5 1 ,2 7 3 .0 8 )
4 ,5 2 2 ,5 0 4 .7 0

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

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

$ 1 9 ,2 7 7 ,7 1 3 ,5 7 5 .4 7

F e d e ra l R e s e rv e n o t e s .................................................................................................. .............

$ 1 7 , 1 4 9 , 7 3 0 , 8 7 1 .0 0

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

Liabilities
Deposits:

D e p o s it o r y i n s t i t u t i o n s ............................................................................................
Foreign ......................................................................................................
O th e r ......................................................................................................................................

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

T o t a l d e p o s its ............................................................................................................

1 ,6 5 9 , 7 3 6 , 9 3 1 . 3 0

D e f e r r e d a v a ila b ilit y c a s h i t e m s ............................................................................
O th e r l i a b i l i t i e s ......................................................................................................

5 8 4 ,4 0 6 ,9 4 6 .9 1
1 9 5 ,6 2 7 ,7 2 7 .2 6

T O T A L L I A B I L I T I E S ............................................................................................

1 9 ,0 9 6 ,0 8 9 ,0 7 5 .4 7

Capital Accounts
C a p ita l p a id in .............................................................................................

9 0 ,8 1 2 ,2 5 0 .0 0

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

QO 81 ?

T O T A L L IA B IL IT IE S A N D C A P IT A L A C C O U N T S




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

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

no

$ 1 9 ,2 7 7 ,7 1 3 ,5 7 5 .4 7

27

E a r n in g s a n d E x p e n s e s

Earnings

______ im _____

______ i9ss

L o a n s to d e p o s ito r y in s t it u t io n s ..........................................................................................
I n te r e s t o n U . S . G o v e r n m e n t s e c u r it ie s .......................................................................
F o r e ig n c u r r e n c ie s ................................................................................................................................
In c o m e f r o m s e r v ic e s .......................................................................................................................
O th e r e a r n in g s .......................................................................................................................................

$

$

T o t a l c u r r e n t e a r n in g s ..........................................................................................................

8 ,6 8 3 , 4 1 8 . 5 4
1 ,3 9 3 ,7 9 5 ,9 3 1 .9 3
2 0 ,0 8 1 ,5 9 9 .4 6
5 2 ,0 8 2 ,1 2 2 .8 9
7 9 5 ,7 6 8 .6 8

2 2 ,5 5 2 ,1 1 6 .4 5
1 ,4 5 4 , 4 7 1 , 3 7 7 . 5 9
1 1 .1 7 3 ,9 6 1 .8 6
5 0 .1 1 6 ,7 4 4 .1 1
7 5 6 ,2 6 4 .7 0

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

1 ,5 3 9 ,0 7 0 ,4 6 4 .7 1

O p e r a t in g e x p e n s e s .............................................................................................................................
C o s t o f e a r n in g s c r e d i t s ................................................................................................................

8 2 ,4 3 2 ,1 8 2 .1 7
7 ,8 0 9 ,2 0 1 .4 1

8 1 ,4 4 1 ,7 3 7 .4 4
8 ,1 1 7 , 2 9 0 . 5 3

N e t e x p e n s e s ................................................................................................................................

9 0 ,2 4 1 ,3 8 3 .5 8

8 9 ,5 5 9 ,0 2 7 .9 7

C U R R E N T N E T E A R N I N G S .............................................................................................

1 ,3 8 5 , 1 9 7 , 4 5 7 . 9 2

1 ,4 4 9 . 5 1 1 . 4 3 6 . 7 4

5 ,7 9 7 , 5 3 6 . 0 6
1 0 0 ,5 0 2 ,1 5 0 .5 7
1 9 1 ,3 8 2 .7 0

8 ,4 8 1 , 4 2 7 . 4 2
5 9 .2 9 2 ,1 2 0 .6 6
1 0 8 ,9 6 7 .3 1

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

6 7 ,8 8 2 ,5 1 5 .3 9

0
4 ,3 4 6 ,6 0 4 .5 4

0
5 7 1 ,1 4 8 .9 9

Expenses

Profit and Loss

A d d it io n s to c u r r e n t n e t e a rn in g s :
P r o fit o n s a le s o f U . S . G o v e r n m e n t s e c u ritie s ( n e t ) ....................................
P r o fit o n f o r e ig n e x c h a n g e t r a n s a c t io n s ....................................................................
A ll o th e r .................................................................................................................................................
T o t a l a d d it io n s ..............................................................................................................................
D e d u c t io n s f r o m c u r r e n t n e t e a r n in g s :
L o s s e s o n fo r e ig n e x c h a n g e t r a n s a c t io n s ................................................................
A ll o th e r .................................................................................................................................................
T o t a l d e d u c tio n s .......................................................................................................................

4 ,3 4 6 , 6 0 4 . 5 4

5 7 1 ,1 4 8 .9 9

N e t a d d itio n s o r d e d u c tio n s ..........................................................................................

+ 1 0 2 ,1 4 4 ,4 6 4 .7 9

+ 6 7 ,3 1 1 , 3 6 6 . 4 0

A s s e s s m e n t f o r e x p e n s e s o f B o a rd o f G o v e r n o r s ...................................................
F e d e ra l R e s e r v e c u r r e n c y c o s t s .............................................................................................

5 ,0 1 9 , 1 0 0 . 0 0
1 6 ,5 9 5 ,0 1 7 .7 6

3 ,8 4 9 , 2 0 0 . 0 0
1 5 ,9 2 3 ,5 0 4 .1 2

$ 1 ,4 6 5 ,7 2 7 ,8 0 4 .9 5

$ 1 ,4 9 7 ,0 5 0 ,0 9 9 .0 2

D iv id e n d s p a i d .......................................................................................................................................
P a y m e n ts t o U . S . T r e a s u r y ( in te r e s t o n F e d e ra l R e s e r v e n o te s ) . . .
T r a n s fe r r e d t o s u rp lu s ....................................................................................................................

$

S

TO TAL

$ 1 .4 6 5 ,7 2 7 ,8 0 4 .9 5

S 1 ,4 9 7 ,0 5 0 ,0 9 9 .0 2

B a la n c e a t c lo s e o f p r e v io u s y e a r ..........................................................................................
A d d it io n o f p r o fit s fo r y e a r ..........................................................................................................

$

9 0 ,8 1 2 ,2 5 0 .0 0
1 0 ,3 3 9 ,2 0 0 .0 0

S

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

B A L A N C E A T C L O S E O F C U R R E N T Y E A R ................................................

$

1 0 1 ,1 5 1 ,4 5 0 .0 0

s

9 0 ,8 1 2 ,2 5 0 .0 0

s

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

N E T E A R N IN G S B E F O R E P A Y M E N T S T O T R E A S U R Y
Distribution o f N et Earnings

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

5 ,7 9 8 ,9 7 4 .8 3
1 ,4 4 9 ,5 8 9 ,6 3 0 .1 2
1 0 ,3 3 9 ,2 0 0 .0 0

5 ,1 4 9 , 8 1 7 . 3 8
1 ,4 8 1 ,4 4 8 ,4 8 1 .6 4
1 0 ,4 5 1 ,8 0 0 .0 0

Surplus Account

Capital Stock Account ( R e p r e s e n tin g a m o u n t p a id in , w h ic h is 5 0 % o f a m o u n t s u b s c rib e d )

B a la n c e a t c lo s e o f p r e v io u s v e a r ...........................................................................................

S

9 0 ,8 1 2 ,2 5 0 .0 0
1 2 ,1 6 6 ,1 0 0 .0 0
1 0 2 ,9 7 8 ,3 5 0 .0 0
1 ,8 2 6 ,9 0 0 .0 0

B A L A N C E A T C L O S E O F C U R R E N T Y E A R .................................................




$

1 0 1 ,1 5 1 ,4 5 0 .0 0

9 1 ,3 5 4 ,9 0 0 .0 0
5 4 2 ,6 5 0 .0 0
$

9 0 ,8 1 2 ,2 5 0 .0 0

28 Summary o f Operations

N um ber

A m o u n t ($000)

1986

1985

( C u rre n c y a n d c o in p ro c e s s e d :
C u r r e n c y re c e iv e d a n d v e r if ie d .............
C u r r e n c y v e r ifie d a n d d e s tro y e d . . . .
C o in r e c e iv e d a n d v e r ifie d ......................

1 ,5 3 1 ,7 6 3 ,0 0 0
5 9 8 ,2 6 6 ,0 0 0
3 ,3 8 3 ,0 0 0 ,0 0 0

1 ,4 9 3 ,8 7 8 ,0 0 0
5 8 4 ,6 4 2 ,0 0 0
3 ,1 8 0 ,2 7 3 ,0 0 0

1 9 ,3 6 5 ,7 5 4
4 ,7 8 8 , 9 1 9
5 1 3 ,8 1 6

1 8 ,4 4 3 ,1 4 4
4 ,7 7 2 , 1 5 0
4 8 2 ,4 1 7

C h e c k s h a n d le d :
C o m m e r c ia l— p r o c e s s e d * ............................
C o m m e r c ia l— p a c k a g e d i t e m s ................
U . S . G o v e r n m e n t .........................................

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

1 ,2 4 5 ,4 2 9 ,0 0 0
2 1 1 ,0 0 7 ,0 0 0
7 3 ,7 2 8 ,0 0 0

8 3 1 ,6 7 4 ,0 2 4
9 5 ,4 6 3 ,0 0 0
1 1 9 ,5 7 1 ,1 0 3

7 9 8 ,4 7 1 ,3 3 5
8 3 ,6 8 9 ,0 0 0
9 8 ,0 0 9 ,8 3 4

C o lle c t io n s ite m s h a n d le d :
LJ. S . G o v e r n m e n t c o u p o n s p a id . . .
N o n c a s h it e m s ......................................................

1 5 4 ,0 0 0
1 7 4 ,7 3 6

1 0 5 ,0 0 0
1 8 9 ,5 4 5

8 8 ,5 0 4
5 4 9 ,1 5 5

7 2 ,4 0 2
6 4 4 ,1 4 7

U .S . G o v e r n m e n t s e c u ritie s is s u e d ,
re d e e m e d , a n d e x c h a n g e d :
D e f i n i t i v e ..................................................................
B o o k - E n t r y ...............................................................

1 1 ,1 3 4 ,8 2 7
3 5 8 ,2 4 6

1 0 ,6 3 8 ,0 6 1
3 6 8 ,3 8 4

3 ,2 1 6 , 6 0 7
2 ,2 5 0 , 0 4 0 , 4 1 3

2 ,4 1 3 , 5 7 4
1 ,7 3 8 ,1 1 6 ,7 9 0

F u n d tra n s fe rs s e n t a n d r e c e iv e d .............

4 ,2 2 8 ,9 2 2

3 ,9 4 3 ,3 0 6

6 ,3 5 4 ,2 1 7 ,0 0 0

5 ,6 2 8 ,2 6 6 ,0 0 0

F o o d s ta m p s r e d e e m e d ......................................

1 9 0 ,6 7 6 ,0 0 0

2 0 5 ,8 1 3 ,0 0 0

8 8 7 ,4 8 3

9 6 7 ,4 2 0

L o a n s a d v a n c e d ......................................................

2 ,7 9 2

5 ,0 9 2

2 8 ,5 9 4 ,2 0 0

6 7 ,1 8 2 ,0 0 0

' kxcluding checks on this Bank.




1986

1985

29

Officers (January I, 1987)
Richmond
Robert P. Black, President
Jimmie R. Monhollon, First Vice President
Welford S. Farmer, Executive Vice President
J. Alfred Broaddus, Jr., Senior Vice President and Director of Research
Roy L. Fauber. Senior Vice President
Arthur V. Myers, jr.. Senior Vice President
James D . Reese, Senior Vice President
Bruce J. Summers, Senior Vice President
James F. Tucker, Senior Vice President
J. Lander Allin, Jr., Vice President
Fred L. Bagwell, Vice President
Dan M . Bechter, Vice President
Lloyd W . Bostian, Jr., Vice President
Timothy Q . Cook, Vice President
William E. Cullison, Vice President
Donna G . Dancy, Vice President
Wyatt F. Davis, Vice President
John M . Denkler, Advisor
George B. Evans, Vice President
William C . Fitzgerald, Associate Genera/ Counsel
Marvin S. Goodfriend, Vice President
Robert L . Hetzel, Vice President
David B. Humphrey, Vice President
Thomas M. Humphrey, Vice President
William D . Martin III, Vice President and General Counsel
Joseph C . Ramage, Vice President
John W . Scott, Vice President
R . Wayne Stancil, Vice President
Andrew L. Tilton, Vice President
Walter A. Varvel, Vice President
Jack H. VV'yatt, Vice President

Kemper W . Baker, Jr., Assistant Vice t'rendrnt
William H. Benner, Assistant lice President
Jackson L. Blanton, .Assistant Vice President
William A. Bridcnstine, Jr., Assistant General Counsel
Bradford N. Carden, .Issistant Vice President
Michael Dotsey, Research Officer
Betty M . Fahed, Assistant Vice President
H. Lewis Garrett, Assistant Vice President
Sharon M . Haley, .Assistant Vice President and Secretary
Anatoli Kuprianov, Research Officer
Harold T . Lipscomb, Asststanr Vice President
Yash F. Mehra. Research Officer
David L. Mengle, Research Officer
Joseph F. Morrissette, .Issistant Vice President
Michael W . Newton, Assistant Vice President
Virginius H. Rosson, Jr., .Assistant Vice President
G Ronald Scharr. Assistant lrtce President
Gary W . Schcmmel. .Assistant Vice President
Jesse W . Seamster, .Assistant Vice President
James R. Slate, Assistant Genera! Counsel
Roy H . Webb, Research Officer
Bobby D . Wynn, .Assistant Vice President
Floyd M . Dickinson, Jr., Fx<mining Officer
Eugene W . Johnson, Jr., Examining Officer
Edgar A. Martindale III. Budget and Control Officer
Lawrence P. Nuckols, Examining Officer
Marsha S. Shuler, Planning Officer
William F. White, Examining Officer
Howard S. Whitehead, Cash Operations Officer
Arthur J. Zohab, Jr.. Examining Officer

David B. Ayres, Jr.. Genera! Auditor
Thomas P. Kellarn. Audit Officer

B a ltim o re

Charlotte

Robert D . McTeer. Jr., Senior Vice President
Ronald B. Duncan, Via President
W illiam F.. Pascoe III. Vice President
Gerald L . Wilson. Vice President
John S. Frain. Operations Officer
William J. Tignanelli, Operations Officer
John I. Turnbull II. Financial Services Officer

Albert D . Tinkelenberg. Senior Vice President
Samuel W . Poweil. Jr., Vice President
Robert F. Stratton, Vice President
Jefferson A. Walker. Vice President
Woody Y. Cain, Assistant Vice President
Marsha H. Maiarz, .Assistant Vice President
Francis L. Richbourg. Assistant Vkc President
Harrv B. Smith, Assistant Vice President

Charleston
Richard L. Hopkins. Vice President

C o lu m b ia
Boyd 7

Eubanks. Vue President




C ulpeper
John G . Stoides, Senior Vice President
James G . Dennis. .Assistant Vice President
James J. Florin III, Assistant lice Pn’sident