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Operations of the Federal Reserve Bank of St. Louis — 1970

I HE FEDERAL RESERVE BANK OF ST. LOUIS
is one of the t\velve Federal Reserve Banks which,
along \vith their branches and the Board of Governors,
make up the Federal Reserve System. In addition to
its participation in the formulation of monetary policy, the Bank perfonns a variety of regular services
and functions for member banks, the public, and the
United States Covernmnent, Its service functions or operations include collecting checks, transferring funds,
distributing currency and coin, maintaining member
bank reserve accounts, and fiscal agency and depository operations for the United States Government.

Coin and paper currency operations at this Bank
increased in 1970 from year-earlier levels. The pieces
of coin counted and sorted totaled 716 million, up 12
per cent from a year earlier, and the value totaled $80
million, up 13 per cent (Table I). Pieces of paper
currency counted rose from 2.37 million in 1969 to 240
million in 1970, and the value rose from $1.7 to $1.8
billion.

This report will review most of the 1970 operations
and functions of the Federal Reserve Bank of St. Louis
and its three branches at Little Rock, Louisville, and
Memphis. Federal Open Market Committee deliberations in which the Bank participates will be covered
in other issues of this Review.

The volume of coin and paper currency handled
has increased over the years with the growth in economic activity. Pieces of paper currency handled rose
from 199 million in 1950 to 201 million in 1960, and to
240 million in 1970. The value of paper currency handled rose from $1.1 billion in 1950 to $1.2 billion in

Conversely, if a bank has excess currency on hand,
it may deposit currency in the Federal Reserve bank
and receive credit in its reserve account.

Table I

Governments generally play a large
role in supplying coin and currency
used by their citizens. Prior to the acceptance of paper money, the role
consisted primarily of minting operations and maintenance of established
standards with respect to quality and
weight of coin. With the more extensive use of paper money, the necessities
of maintaining a ready supply of
amounts and kinds of money that
people demand, and of removing unfit
money from circulation, have become
major functions of coin and currency
supervision. These functions are performed in the United States by the
Federal Reserve banks.
When a member bank desires to
replenish its currency supply, it orders
the funds from the Federal Reserve
bank which charges the amount to the
member bank’s reserve deposit account.
Page 8



1
VOLUME OF OPERATIONS
DoI~arAmount
millions)
1970

1969

Per Cent
Change

checks coI!ecIed~
Noncasi, col!ect,ons item:
coin caunted

138,945.2
434 3
79.6

140,34 8.6
450.7
70.5

1
36
12.9

cvr,ency counted
Transfers of hinds
U.S. Savngs Bands handled’
Othor Gove’nrr,ent sec,rtien handIed~
U.S. Government coupors paid

1,8162
287,467.1
5/9.4
21,706 2
202.1

1,715.9
24e,648.5
595.4
71,8 39.0
172.3

5.8
17.5
2.7
0 6
17.3

N timber
Ithousandsl
Checks collec’Ld’

1970
307,304

1969
344.068

p . cent
0
chancjc’
15.5t

Noncash collection items
ca:n counted
currency counted
Transfers of tunds
S Savings Bondr handleda

855
715,505
2t0452
31 /
10.943

914
636,317
236,842
300
11.219

6.5
12.4
1.5
5.7
2.5

978
814

953
736

2.6
10.6

u

Otirer Government secur.ties har.d’ea~
U.S. Government coupons paid
Tnrr.l

.

P

f.uui—.,i:ic.: ‘nd rh,

lit.:..

R,,rk, L,,’rrc,.iIlr., .,vd M,’r.ph~ t,runrh,

ms si ‘EM. er’S n,.n’’~..r,l,’r,.
‘—i.c.r. ,‘‘,,‘I,~,r.g..J. 5:5 r’”J.’,ni. .5.

FEDERAL

RESERVE BANK OF ST. LOUIS

1960, and to $1.8 billion in 1970. Number of coins
handled rose from 293 million in 1950, to 427 million
in 1960, to 716 mnillion in 1970, and the value of the
coins rose from $25 million in 1950, to $43 million in
1960, to $80 million in 1970.

Studies by this Bank indicate that changes in the
demand for a hand-to-hand medium of exchange are
primarily responsible for the varying growth rates of
currency. %Vhen sales which typically utilize currency
have risen, currency in circulation has usually increased. When such sales have declined, currency has
declined. Actions by the Federal Reserve to supply
reserves to the banking system have had little direct
influence on the volume of currency outstanding.

The largest operation of the Federal Reserve Bank,
as measured by number of employees, is collecting
checks and transferring funds. Most large (and many
small) obligations of individuals, businesses, and governments are settled by transferring bank deposits.
Over 95 per cent of the value of all financial transactions represent checks drawn on commercial banks.
This use of checks by individuals and businesses is
facilitated by the collection facilities of the Federal
Reserve banks. In addition, the Federal Reserve
banks provide wire transfer services for transferring
funds to bank customers’ accounts’ in other Federal
Reserve districts and a mechanism through which
commercial banks settle for the funds transferred.
The number of checks collected by the Bank in 1970
totaled 398 million, up from 344 million a year earlier;
the dollar volume was $139 billion, down from $140
billion. The volume of checks collected has trended
up over the years, rising from 134 mnillion in 1950, to
171 million in 1960, and to 398 million in 1970. In
dollar amount the cheeks totaled $47 billion in 1950,
$69 billion in 1960, and $139 billion in 1970.
The sharp increase in number of checks collected
by the Bank last year reflected both the long-mn uptrend in cheek usage and a change in cheek collection
services provided member banks in the St. Louis area.
In mid-1970 the Federal Reserve Bank of St. Louis
inaugurated a new program of sorting cheeks drawn
on St. Louis area banks which are deposited by member banks. Prior to this time, these banks sorted and
cleared cheeks on each other through the Check Exchange Division of the Collection Department. This
change in procedure, along with the long-mn uptrend
in cheek usage, caused the sharp increase in the num-




FEBRUARY

1971

ber of cheeks collected through the Federal Reserve
System.
The reduced dollar volume of check clearings by
this Bank in 1970 reflects largely a difference in
method by which banks settle for cheeks. Prior to
1970, most banks paid for checks drawn on themselves
with a draft on their correspondent bank which was
included in the dollar volume of check clearings.
Now most of these banks pay for such cheeks through
an automatic charge arrangeinent whereby their account or their correspondent bank’s account is charged
for the checks. This process eliminates the use of
drafts which were included in the clearings, thereby
reducing the dollar volume. However, the change had
little impact on the number of cheeks cleared.
Over the years the efficiency of collecting checks
has been increased by innovations such as the conversion to electronic equipment. The St. Louis Federal
Reserve Bank in 1970 processed through high-speed
computers about 97 per cent of all cheeks received.
The telegraphic transfer of funds is another growing service which the Federal Reserve provides to
member banks in order to speed the movement of
funds around the country. In 1970 wire transfers of
funds by this Bank totaled $287 billion, an increase of
18 per cent from a year earlier. The dollar volume of
funds transferred by the St. Louis Federal Reserve
Bank in this manner increased about fourfold during
the past decade.

The Federal Reserve banks carry the general accounts of the U.S. Treasury, handle much of the work
entailed in issuing and redeeming Government obligations, and perform numerous other fiscal duties.
When the Treasury offers a new issue of Government securities, the Federal Reserve banks send out
subscription forms, receive applications from those
who wish to buy, make allotments of securities in accordance with instrnctions from the Treasury, deliver
the securities to the purchasers, receive payment for
them, credit the amounts received to Treasury accounts, and make exchanges of denominations. In addition, the Federal Reserve banks pay interest on
coupons by charging the Treasury’s account and redeem securities as they mature.
Excluding the marketing of short-term Treasury
bills which are sold through auction, all Government
securities until last year had been marketed at fixed
Page 9

FEDERAL

RESERVE

BANK OF ST. LOUIS

yields. This system of debt marketing required the
Treasury to estimate rates and terms at which the
securities would sell. In 1970 the Treasury expanded
the use of the auction method of debt marketing. In
November $2 billion of 6% per cent, one and onehalf year notes were marketed successfully through
the auction system.
The four offices of this Bank issued, exchanged, or
redeemed 11 million United States Savings Bonds
valued at $579 million in 1970. The number and value
were each about 3 per cent less than in 1969. Other
Government securities issued, serviced, or retired totaled 978 thousand, 3 per cent above a year earlier,
while dollar volume, totaling $21.7 billion, was down 1
per cent.

The rate charged on loans to member banks by the
Federal Reserve Bank of St. Louis was reduced twice
during 1970. At the turn of the year a rate of 6 per
cent was in effect on discounts under Sections 13 and
13a of the Federal Reserve Act. It was reduced to 5%
per cent on November 11 and to 5½per cent on
December 11.
The discount rate reductions followed rather than
led the decline in market interest rates. Average
monthly yields on three-month Treasury bills, for example, peaked at just under 8 per cent in December
1969, but they had declined to about 5½ per cent
when the discount rate was reduced to 5% per cent
in November 1.970. After the market yield on threemonth Treasury bills had dropped below 5 per cent
later in the year, the discount rate was reduced to 51,/2
per cent.1
Borrowing from the Federal Reserve Bank of St.
Louis and its three branches declined sharply in 1970
fromn the previous year. Daily borrowing averaged
only $12.7 million in 1970, compared with $41.8 million in 1969. The proportion of member banks that
borrowed from the Federal Reserve Bank during the
year declined from 22 per cent in 1969 to 17 per cent
in 1970.
In late 1970 the Federal Reserve Board announced
some major changes in procedures designed to simplify lending operations of the Federal Reserve banks.
The new procedures eliminate the necessity for submitting a note in connection with each loan, permit
~
reductions occurred in both market mates amid the
discount mate in early 1971.

Page 10



FEBRUARY

1971

the use of continuing lending agreements, permit the
Federal Reserve banks to collect interest on loans to
member banks at the time of repayment rather than
on the borrowing date, and make changes in the discount rate applicable to all outstanding Federal Reserve bank loans. Thus the rate will cease to be a
discount rate once the announced procedures become
effective.

The Federal Reserve Bank of St. Louis, along with
the respective state supervisory authorities, exercises
supervision over state chartered member banks in the
Eighth Federal Reserve District which includes portions of seven states (Table II). Such supervision ineludes annual examinations for evaluating the assets,
operations, policies, and management of the banks.
table It

Number of Banks by Type
In Eighth Federal Reserye District
12/31 69

Pc Cent
change

348

348

0.0

111

flY

51

h058

1,047

1.1

1517

1,512

03

12/31 70

Nntnoytaf
StateMen,ber
Slate Nenesember
Total

Through such evaluations and the resulting recommendations, the authorities attemnpt to contribute to a
more “sound” banking system. All of the 111 state
member banks in the district were examined by Federal Reserve examiners in 1970, The 348 national
banks in the district, which are required by law to be
members of the Federal Reserve System, are examined by the staff of the Comptroller of the Currency.
State nonmcmher banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are examined by both the FDIC and their respective state
supervisory authorities. The few noninsured banks are
examined only by the state banking authorities, The
nonmember banks, although numbering 1,058 in the
district at the close of 1970, are smaller on the average
than member banks and hold only about two-fifths of
the total district bank deposits.
In addition to the examnining function, the Federal
Reserve bank exercises supervisory functions in admission of state banks to membership in the System,
approval of branches and mergers of state chartered
member banks, and of acquisitions by registered bank
holding companies. Also, late in the year the “Bank

FEDERAL

RESERVE BANK OF ST. LOUIS

FEBRUARY

Holding Company Act Amendments of 1970” was
passed, and will place most one-bank holding companics in about the same category as registered bank
holding companies with respect to supervision and
pennissible activities. This amendment will greatly
enlarge the supervmsomy actmvmtmes of the examination
function.

Table IV

COMPARATIVE STATEMENT OF ~ONDIT~ON
December 31, 1970 Compared with
December 31, 1969
~Doiior Amounts in Thousands)

ASSETS
Decembe’

Research activities at the Bank include, first and
foremost, the gathering and analyzing of national and
regional data with a vmew to the fonnulatmon of monetary policy recommendations. These recommendations are used by the President of the Bank in Federal
Open Market Committee deliberations, and are also
used to provide economic information to the public
through the monthly Review and other recurnng releases, available upon request.
The research department has in recent years taken
a more active part in decision-making relative to bank
mergers and bank holding company acquisitions. The
recent amendments to the bank holding company act
are expected to enlarge research department activity
with respect to bank holding company analyses.

1971

31 1970
$ 468,866

Gold certificate account

December
S

31, 1969
345,289

Spcca5 drawing rights
certificate account

15,000

Federal Reserve notes of other banks
Othe, casts .

32.102
12,279

29,347
9,828

380

15.200

Discounts and Advances

.

.

.

.

Acceptances

—

—

U.S. Government securities.
Bills
Certsticates
Notes
Bands

.

—

952,157

.
.

820,240

—

—

1,218,810
107,825

1,156,476
128,808

TOTAL U S GOVERNMENT
SECURII ES

$2,278,792

TOTAL LOANS AND SECURITIES
Cash items in process at collection

S2.105,324

52,279.172

52.1 20,724

671.121

621,658

.

Bank premises (net)

12.125

9.592

28.468
$3,519,! 33

Othes assets
Total Assets

84.373
33,220,811

Statements
LIABILITIES AND CAPITAL ACCOUNTS

The Federal Reserve Bank of St. Louis participates
in the System’s earnings and expenses. Preliminary
figures indicate that during 1970 gross current earnings of the System amounted to $3,877 million and
expenses totaled $321 million, leaving net current
earnmgs of $3,5a6 millmon. With an $11 million net
addition to the profit and loss account, net earnings

LIABILITIES

December

December

‘.3 ?!9

31, 1969

COMPARATIVE PROFIT AND LOSS STATEMENT
(Thousands of Dollars)
1970
.

Per (ens
Change
—.

5138,738

Tatol earnings

1969
$117,877

17.7’

Net expenses

18288

15,515
102.362

73.887
4,250

67,998
4.550

Other

10.906

11,316

Member banks — reserve occounts
u. S. Treasurer——

.

Deferred availability cash items
Totel Deposits

.

525.050
73,804

.

Other Isabilities and accrued
dividends

$

449,575
907594

20,972

21,021

53.47.1,04?

Totol Liabilities

53,! 75,129

.

$120,906

2

$102,360
:

Capitol paid in

5
.
.

.

1.406

$

24,043

22,841

Surplus

__.~

24,043

22,841

18.1
Other capital accounts
Total Capital Accounts

Distribution of Net Earnings:




824.090

.

17.7

416

Net earnings before paymants
to U.S. Treasury . . .

Total

8 b4,761

.

CAPITAL ACCOUNTS

Net adertians (-s ) or
deductions ( )

Dividends
Interest on Federal
Reserve nates . .
T’annfarsed to surplus

$1,796,579

.

17.6

120,490

Cur’ent net earnings

$1,951,221

generoi account
Foreign

Table lit

Federal Reservt notes (net)
Deposits:

1.351

4.1

118,298
1.202

100.168
841

18.1
42.9

SI 20,906

$102,360
rs’s

I 8.1

Total Lsabilsties and
Cap;tal Accounts

.

.

.

$

—

48.086

53.519.133

5

45,682

S3,220,811

~1 (itt A), VA : ri., ti “gent ii~b ti’s c’r,r.rc. Its sicst—
EM
Cs
rctssLs ii f s~
£.‘r’4gst r.irrs..Iss.s’.ils.r.t.. ii.CTs’itriI I r.nss $&. 117 ,s)iiis s.c D ,renih rrii.
h.sui.Ot’u us. Otis-snEer ~1, ]57iJ

Page 11

FEDERAL RESERVE BANK OF ST. LOUIS

before payments to the United States Treasury were
$3,567 million. Under the policy adopted by the Board

of Governors at the end of 1964, all net earnings,
after the statutory dividend to member banks and additions to surplus to bring it to the level of paid-in
capital, were paid to the United States Treasury as
interest on Federal Reserve notes. Payments in 1970
to the United States Treasury as interest on Federal
Reserve notes amounted to $3,493 million; statutory
dividends to member banks, $41 million; and additions to surplus accounts, $33 million.
Compared \vith 1969, gross earnings of the System
were up $504 million, or 15 per cent. Earnings on Gov-

ernment securities increased $591 million, but earnings
on foreign currencies and discounts and advances decreased $73 million and $15 million, respectively. Expenses in 1970 were up $46 million, about 17 per cent,

and dividends on member bank stock rose $2 million.
The St. Louis Federal Reserve Bank’s share of System net earnings in 1970, before payments to the U.S.
Treasury, totaled $120.9 million (Table III). This was




FEBRUARY 1971

18 per cent above earnings of a year earlier, reflecting
both the higher rates received on earning assets and
the larger volume of assets. The St. Louis Bank’s portion of System earnings paid to the U.S. Treasury rose
18 per cent, a rise from $100 million to $118 million,
while additions to surplus rose froln $841,000 to $1.2
million.
The Bank’s portion of System assets rose to $3.5
billion at the end of 1970 from $3.2 billion a year
earlier. Most of the assets, $2.3 billion, are investments in U.S. Government securities, largely shortterm Treasury bills and notes. The Bank’s portion of
the System Gold Certificate Account totaled $0.5 billion, and other assets including the Special Drawing
Rights Certificate Account, notes on other Reserve
banks, other currency, discounts to member banks,
cash items in the process of collection, and the Bank
premises totaled about $0.8 billion. The gain in assets
from a year earlier largely reflects an increase in holdings of Government debt and the Gold Certificate
Account. These items rose about $200 million and $100
million, respectively.

di