Full text of Business Conditions (Federal Reserve Bank of Chicago) : July 1969

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A review by the Federal Reserve Bank of Chicago

Business
Conditions
July 1969

Contents
Trends in banking and finance

Customers view a bank
merger—before and
after surveys

Important stake in
free trade

Measures of money
and credit

Federal Reserve Bank of Chicago

in banking and finance
policy of monetary and credit restraint
has been in effect for some months. Demands
for credit have continued strong, as indicated
by the rise in interest rates and the further
rapid growth of debt. As the policy of mon
etary and credit restraint has “pinched” here
and there, there have been some outcries that
the impact is inequitable. What has been the
impact on various groups of banks and their
customers?
One comprehensive indicator is the change
in total loans and investments for all commer
cial banks in the United States. During the 12
months ended May 28, 1969, these increased
9.6 percent, and during the 6 months ended
the same date—2 percent. Increases for the
member banks of the Federal Reserve System
were relatively smaller while the increases for
nonmember banks were relatively larger,
especially during the recent 6 months.
Total loans
and investments

May 29, 1968
to
May 28, 1969

All commercial banks
Member banks
Nonmember banks

9.6%
9.1
11.6

November 27,
1968to
May 28, 1969
2.0%
1.8
3.1

Restraint has been somewhat greater at the
large banks in the major cities than at other
banks. This is demonstrated in information
from banks with $ 100 million or more of total
deposits that report certain balance sheet in
formation weekly to the Federal Reserve
Banks. Even with a strong demand for loans,
the large banks in New York and Chicago
have been unable to increase their total loans

and investments in the past 6 months, even
though they have acquired large amounts of
Eurodollars—and Federal funds along with
lesser amounts of funds from varied other
non-deposit sources. The major reason is the
Total loans
and investments

May 29, 1968
to
May 28, 1969

Weekly reporting banks
New York City
Chicago
Other
Country member banks

8.7%
8.0
8.5
8.9
9.0

November 27,
1968 to
May 28, 1969
1.3%
— 0.5
0.1
1.9
3.0

large run-off of time certificates of deposit
(CDs). With the maximum permissible inter
est rates provided in Regulation Q well below
the yields available on other money market
instruments, many of the holders of large time
deposits have not been renewing their CDs at
maturity. Owners of large CDs are primarily
customers of large banks and total time de
posits, therefore, have declined much more at
the large weekly reporting banks in New
York and Chicago than at the smaller banks.
While demand deposits have increased re
latively more at the large banks in the large
cities, especially in New York, this has not
offset the relatively large declines of time
deposits at these banks.
Changes in banks’ holdings of U. S. Treas
ury securities provide another indication of
the impact of monetary restraint, especially
when viewed in relation to changes in loans
and other investments. At the weekly report
ing banks in New York and Chicago, U. S.

Business Conditions, Ju ly 1969

Treasury securities at the end of May had
declined 29 and 24 percent, respectively,
from the levels 6 months earlier. The declines
at nonmember banks and country member
banks were 6 percent and 8 percent, respec
tively, during the same period.
The changes in bank holdings of other
securities, largely municipals and U. S. Gov
ernment agency obligations, varied substan
tially but generally holdings continued to
increase at the smaller banks, although at a
reduced pace, and to level off or decline at the
large banks in major cities. Other securities
rose 9 percent at nonmember banks in the 6
months ending May 28, and 6 percent at
country member banks. At weekly reporting
banks they declined nearly 2 percent, with de
clines concentrated at the large banks in New
York City.
Total loans, however, increased in all
groups of banks in this period with the gains
ranging from about 4.5 percent at nonmem
ber banks and at large banks in New York
and Chicago to 6 percent at large banks in
other large cities. Loan growth at country
member banks was about 5.5 percent.
Loans outstanding to most of the major

Loan-deposit ratio s- -Seventh District

classes of borrowers have increased. Accord
ing to information from the weekly reporting
banks, loans to purchase and carry securities
was the only category that was smaller at the
end of May than either 6 months or 12
months earlier. But the rate of increase had
slowed for most categories, with loans to
commercial and industrial establishments and
loans to domestic banks the outstanding ex
ceptions. The former reflects the strong de
mand for credit by business firms and the
difficulty banks have had in curtailing loans

Seventh District

6 6 .1 %

6 2 .9 %

705yo

R eserve c ity — C h icag o

8 0 .3

7 1 .9

88 8

W e e k ly rep o rtin g

6 4 .4

6 3 .7

O th e r

5 5 .5

55.1

583
53.6

Illinois, e xclu d in g C h ic a g o

5 1 .2

5 2 .0

In d ia n a , e xclu d in g In d ian ap o lis

5 4 .3

5 4 .4

5 6 .9

Io w a , e xclu d in g Des M oines

5 5 .8

5 3 .6

56-1
67,2

66.1
5 9 .4

G ro ss loans an d discounts d ivid e d b y to tal d ep osits.

14.4
13.5
9.8
15.9

7.7
5.3
4.0
17.4

12.1
2.5
12.6

4.8
— 10.1
4.2

1969 ’

Co untry

6 4 .6

5.2%

large volume of loans of excess reserves
(Federal funds) among banks
that has built up as the banks
generally have striven to utilize
their funds as fully and continuAay 28
ously as possible.

N ov. 2 7 ,
1968

5 7 .7

12.6%

to such borrowers. T he latter reflects

M ay 29,
1968

W iscon sin , e xclu d in g M ilw a u ke e

November 27,
1968 to
May 28, 1969

Total loans
Commercial and
industrial
Consumer instalment
Real estate
To domestic banks
To other financial
institutions
To securities dealers
Other loans

M e m ber banks

M ich ig an , e xclu d in g D etroit

May 29, 1968
to
May 28, 1969

In th e S e v e n th District

Changes in loans outstanding at
banks in the Seventh Federal Reserve District have been very
similar to those for the United
States. However, the increase in
total loans has been somewhat
smaller than for the nation, largely
because of a smaller rise in loans
to domestic banks and to con-

Federal Reserve Bank of Chicago

sumers. Real estate loans at the
Changes in loans, investments,
district’s banks have increased
and deposits, member banks in
somewhat more than at banks
Seventh Federal Reserve District*
throughout the country.
Illinois
In d ian a
Iow a
M ich ig an W isconsin
In the states of the district (ex
M a y 2 9 , 1 9 6 8 to M a y 2 8 , 1 9 6 9
(p e rcen t chang e)
cluding those banks located in the
Loans an d investments
8 .3 %
7 .5 %
7 .6 %
9 .6 %
8 .9 %
major city in each state) changes
Loans
1 2 .8
1 2 .0
7 .2
1 3 .8
16.1
during the past year have been
U. S . Governm ents
- 5 .3
- 8 .6
2 .3
- 1 0 .4
- 1 2 .4
broadly similar but with certain
O th e r securities
1 3 .8
1 7 .5
1 5 .4
1 3 .8
1 1.8
important differences. Loan
Dem and deposits
4 .2
4 .2
4 .8
5 .7
5 .0
growth in Iowa was relatively
Time deposits
1 0 .7
9.1
8 .4
1 1.1
9 .4
T o tal deposits
7 .8
6 .8
weak, while in Wisconsin it was
6 .6
9 .4
7 .8
relatively strong with increases in
N o vem b er 2 7 , 1 9 6 8 to M a y 2 8 , 1 9 6 9
loans outstanding of 7 and 16 per
Loans an d investments
3 .3 %
4 .6 %
1 .6 %
3 .2 %
3 .0 %
Loans
5 .3
cent, respectively. For the 63 .4
7 .9
4 .9
6 .2
U. S . G overnm ents
- 7 .5
- 7 .6
- 7 .8
- 7 .5
- 9 .7
month period, loan growth at the
O th e r securities
1 1 .2
11.1
7 .9
6 .7
6 .8
banks in Wisconsin was exceeded
Dem and deposits
- 1 .7
0 .4
- 5 .8
- 1 .3
- 3 .3
by growth at the banks in Indiana,
Time deposits
5 .3
5 .4
3 .5
5.1
4 .4
but seasonal influences may have
T o tal deposits
2.1
3 .0
- 1 .2
3.1
1.4
affected interstate comparisons
‘ E xclu d in g b a n k s in la rg e s t citie s—C h ic a g o , In d ia n a p o lis , Des M o in es,
for this period. The relatively
D e tro it, a n d M ilw a u k e e .
small increase in loans at Iowa
banks does not appear to have
been caused by greater stringency
of funds at the banks there, since the increase
relatively strong competitive position of
in deposits (6.6 percent), while the smallest
Michigan banks, with their fairly well devel
for any of the five states, was only moderately
oped branch networks, in the market for time
and savings deposits.
less than in Wisconsin (7.8 percent). Further
more, the ratios of loans to deposits at these
The run-off of U. S. Treasury securities
Iowa banks at the end of May 1969 was the
was relatively greater at the Wisconsin banks,
lowest for any district state except Illinois
where the increase of loans was the greatest.
and had increased less than one-half per
Moreover, the net acquisition of other securi
centage point from the year-earlier level.
ties, while substantial in all district states in
both the 12 and 6-month periods, was small
Meanwhile, increases in loan-deposit ratios
est at the Wisconsin banks.
for the other district states ranged from 2.4
percentage points in Illinois to 4.5 in Wiscon
This cursory review of changes in bank
sin. The loan-deposit ratios for these groups
assets and deposits during the past year
of banks ranged from 56.1 percent in Iowa
indicates loan demand generally has been
to 67.2 percent in Michigan.
strong, although apparently stronger for some
Deposit growth was stronger at the Michi
types of borrowers than for others; that rates
gan banks (9.4 percent) than at banks in the
of increase in total bank credit and bank loans
other district states, especially during the 12have been much smaller in recent months
month period, possibly reflecting in part the
than earlier, and smaller at the large banks in

Business Conditions, Ju ly 1969

large cities than at other classes of banks even
though the large banks have been able to
acquire substantial amounts of funds from
sources other than deposits; that banks have
made their customary response to their en
vironment in the recent period of monetary
restraint and generally strong demand for
credit, namely, by selling holdings of U. S.
Treasury securities and permitting maturing
issues to run-off, by liquidating or slowing

their net acquisition of other securities, and
increasing loans relative to deposits; and that
the smaller banks in centers other than the
major cities generally have had better avail
ability of funds relative to demands for bank
credit than have the large banks in large
cities, as indicated by their continued net ac
quisition of securities, their large sales of
Federal funds, and their relatively smaller
increases in ratios of loans to deposits.

Customers view a bank merger —
before and after surveys
^JLwo of the three banks in Elkhart, Indiana,
were merged at the end of 1966, leaving that
community of about 45,000 people with two
banks. Prior to the approval of the merger,
the Federal Reserve Bank of Chicago con
ducted a survey of firms and households in
the area to obtain their views on the quality
and convenience of banking services and in
formation on where they banked and the
kinds of financial services they use.1

posits have been faster than in nearby cities,
or Indiana as a whole.
Although the number of local banks was
reduced by the merger, the number of bank
offices was not affected. All the offices of the
merged banks were continued in operation.
(Banks in Indiana are permitted to operate
branches in the same county as their head
office.) At the time of the survey, there were

In September 1968, almost two years after
the banks were merged, the community was
surveyed again, using the same procedures
and asking many of the same questions but
emphasizing any changes in the quality of
banking services or the types of services
used. The major findings are summarized in
this article.2
Elkhart is a dynamic manufacturing center
in north central Indiana, 100 miles east of
Chicago. It has grown rapidly in recent years,
largely as a result of continued expansion in
the manufacturing of mobile-homes. Since
1960, its growth in population and bank de

'Business Conditions, May 1967.
‘Reports of these surveys are available on request
from the Research Department, Federal Reserve
Bank of Chicago.
The survey questionnaires were mailed to 500
randomly selected households in the Elkhart area
and to some 425 business firms stratified by size and
industrial classification. In addition, questionnaires
were sent to all households and businesses that had
responded to the earlier survey in 1966.
Responses were returned from 149 randomly
selected households and 175 randomly selected
firms, plus 89 households and 168 businesses that
had responded to the earlier survey. Except where
specifically noted, this article reports responses from
the randomly selected samples, which are believed
to be representative of all households and businesses
in the area.

Federal Reserve Bank of Chicago

10 bank offices in Elkhart. In ad
dition, there were 11 other bank
offices in Elkhart County, includ
ing five other banks, and there
were an additional 33 offices of
seven banks 15 miles to the west
in the South Bend-Mishawaka
metropolitan area.

Deposit and loan
services viewed favorably
Businesses
Q u a lity o f
se rvice

Households

D eposit se rvices Loan se rv ice s Deposit se rv ice s Loan se rvices
1966 1968

1966 1968

1966

1968

1966 1968

(p e rcen t o f respondents)

Custom ers sa tisfie d

Excellen t

79%

73%

69%

59%

70%

60%

66%

49%

Good

26
17

Ad equ ate

The large majority of firms and
Poor
households appeared well satisfied
with banking services in Elkhart,
both before and after the merger.
Almost half the respondents considered ser
vices to be better in 1968 with only two banks
than in 1966 when there were three banks.
Less than 10 percent described services as
being poorer.
Although generally satisfied with the qual
ity of services, some households and busi
nesses rated particular services less favorable
in 1968 than in 1966. For example, 18 per
cent of the firms and 25 percent of the house
holds rated loan services as adequate or poor,
compared with 10 percent of each group in
1966. In view of the high ratings given bank
services in 1966, however, this deterioration
in satisfaction may to some extent be more
apparent than real. By far the largest number
of respondents in 1966 considered banking
services excellent. For that reason, there was

100

little opportunity to indicate any improve
ment in rating on particular services in 1968.
About a fourth of both the households and
businesses thought more than two banks were
needed to serve the community effectively.
Most of the other three-fourths thought two
was “just right.”
More respondents thought there were too
many banking offices than too few, but again,
the overwhelming number thought the num
ber of offices was just right.
The proportions of respondents using var
ious bank services had not changed greatly.
In 1968, as in 1966, demand deposits were
by far the most frequently used service. Loans
were the second most frequently used service
for business firms, and time deposits were
second for households.
Local b a n k s used p re d o m in a n tly

Q uality of bank services
considered better after the merger
Q u a lity in 1 9 6 8
co m p are d with 1 9 6 6

Businesses

Households

(p e rc e n t o f resp ond ents)

B e tte r
U n ch a n g e d
P o o re r

T o ta l

47%
47

39%
52

100

Banking was done predominantly at the
Elkhart banks both before and after the
merger. Ninety-five percent of both the firms
and households use Elkhart banks as their
primary bank, and almost as large a propor
tion of those using more than one bank use
an Elkhart bank as their second bank. Ninety
percent use only Elkhart banks. These per
centages were almost the same as those two

Business Conditions, Ju ly 1969

years before. Only the largest business firms
reported obtaining any significant amount of
banking services from banks outside Elkhart.
However, the merger appears to have af
fected two other aspects of local banking. The
number of firms and households using more
than one bank had declined—doubtless be
cause the number of banks had been reduced.
In 1968, more households considered
banks in neighboring towns to be convenient
alternatives to their Elkhart banks than in
1966, probably because of the smaller num
ber of banks available locally. More than 30
percent of the households viewed out-of-town
banks as alternatives to local banks, com
pared with only 10 percent two years earlier.
Forty percent of the businesses also con
sidered out-of-town banks convenient alter
natives, but because this question was not
asked businesses in 1966 any effects of the
merger could not be measured.
One-fifth of the firms, about the same pro
portion as in 1966, reported having used
credit from financial institutions other than
commercial banks in the last five years. Fi
nance companies, factors, and acceptance
houses were mentioned most frequently in
this report. Longer maturity was the reason
cited most often for using nonbank credit,
with lower interest rates a close second. Some
of the firms had increased their use of non
bank credit since the previous survey. They
attributed the increase to greater credit needs,
not to the bank merger.
H ousehold s visit b a n k s fre q u e n tiy

Almost 60 percent of the households re
ported that some member of the household
visited their primary bank at least once a
week. Another 38 percent reported visits less
than once a week but more often than once
a month. Secondary banks were visited some
what less frequently. Two-thirds of the house

Number of banks and
banking offices considered
"just right" by most customers
E valu atio n
b y resp on d ent

Businesses
Banks

O ffic e s

Households
Banks

O ffic e s

(p e rc e n t o f respondents)

T o o fe w
T o o m any
Just right
T o ta l

25%

22%

100

holds that used more than one bank visited
their second bank at least once a month.
The high frequency of visits to banks
underscores the importance of convenient lo
cations to households. The survey conducted
in 1966 showed that fully 75 percent of all
households in Elkhart used the bank most
convenient to their residence or place of
employment as their primary bank.
One-fifth of the households banked by
mail, slightly fewer than in 1966. As might be
expected, these households did not visit their
banks as often as other respondents. Onethird of the households banking by mail
visited their primary bank weekly.
In summary, customers’ evaluations and
use of banking services in 1966 and 1968—
before and after the merger—were very
similar. Only a small proportion of the cus
tomers viewed the decline in number of banks
as having an unfavorable effect on either the
quality of banking services or the number of
competitors. However, even minority views
warrant consideration in evaluating the im
pact of a bank merger on the community. The
changes in banking patterns—use of fewer
banks and greater willingness to consider outof-town banks as alternatives— probably can
be attributed to the smaller number of local

Federal Reserve Bank of Chicago

alternatives, irrespective of any change in
quality of services.
The banking services used by businesses
and households in Elkhart and the relation
ships between customers and their banks

were remarkably similar to those found in
other surveys. There is a growing body of
evidence that banking patterns are quite
similar, even in communities with widely dif
ferent characteristics and bank structures.

Important stake in free trade
^^L idw est producers have a very real stake
in the continued growth of world markets—
so much that any movement toward increased
protection (whether initiated abroad or in
this country) could pose a serious threat to
their further development of overseas mar
kets.
Fast g ro w in g e x p o r t reg io n . . .

The north-central states—the 12 Midwest
states making up the nation’s industrial and
agricultural heartland—accounted for more
than 30 percent of the nation’s manufactured
exports in 1966 (the latest year for which
complete estimates are available) and be
tween 40 and 50 percent of agricultural ex
ports.1 The five states of the Seventh Federal
Reserve District—which make up the core of
this highly productive region—shipped a
fourth of the nation’s manufactured goods
and a fourth of its agricultural goods. Illinois
led the nation in the value of both manufac
tured and agricultural goods sold in export
markets. Michigan ranked fifth in manufac’Illinois, Indiana, Iowa, Kansas, Michigan, Min
nesota, Missouri, Nebraska, North Dakota, Ohio,
South Dakota, and Wisconsin.

tured exports and Wisconsin ninth. Iowa
ranked fourth in agricultural exports and
Indiana sixth.
Not only are these states important ex
porters—especially states of the Seventh
District—but their growth in exports has
been much faster than for the nation as a
whole. The value of manufactured exports
from the United States expanded 46 percent
between 1960 and 1966—an average annual
increase of about 6 percent. During that time,
exports from the north-central states grew 57
percent— 8 percent a year. And exports from
states of the Seventh District increased 61
percent—9 percent a year.
Within the district, Wisconsin made the
greatest percentage gain in manufactured ex
ports. Illinois—with its large export base—
made the smallest percentage increase but
had the largest absolute gain, shipping 37
percent of the district’s manufactured exports
in 1966. Michigan followed close behind,
shipping nearly as many manufactures as
Indiana, Iowa, and Wisconsin combined.
The district’s relative gain in agricultural
exports was even greater. Between 1960 and
1966, the nation increased exports of farm
products 48 percent—an average annual in

Business Conditions, Ju ly 1969

crease of 7 percent. Exports from the northcentral states rose 87 percent—about 12 per
cent a year. And exports from states of the
Seventh District soared 107 percent—about
15 percent a year.
With this high rate of growth, states of the
district have become steadily more important
in the nation’s export trade, increasing their
shipments from 22 percent of U. S. exports in
1960 to 24 percent in 1966.
Agricultural exports have clearly slumped
since 1966—mainly because of record pro-

Seventh District leads the nation
in growth of manufactured exports . . .
M an u factu re d
e xp o rts
1960

P e rce n tag e
chang e

1966

1 96 0 -66

(m illions o f d o lla rs)
United States

$14,546

$21,299

N o rth -ce n tra l states

4,804

7,568

D istrict states

3,138

5,041

1,227

1,885

Illinois

4 6%
57

Indiana

395

620

Io w a

222

353

M ichigan

927

1,553

W isco n sin

367

630

S O U R C E : Based on F .O .B . plant d ata from the
U .S . Departm ent o f C o m m erce.

duction of food and feed grains overseas and
fresh competition (including restricted entry)
from European Common Market countries.
Despite these setbacks, however, the Mid
west has outpaced the nation in agricultural
exports so far in the 1960s.
Meanwhile, the uptrend in manufactured
exports has continued, doubtlessly pushed
along by rising world demand for goods in
corporating high degrees of technology and
requiring large plant investments. Goods of
this kind—such as heavy machinery and
equipment—are typical of much Midwest in
dustrial output. In 1966, for example, 37
percent of the manufactured exports from
the Seventh District were nonelectrical ma
chinery and 23 percent were transportation
equipment.
But like American farm products, these
high-cost goods also face increasing foreign
competition—competition already strength
ened by the rise in costs and prices in this
country and the spread of technical compe
tence and industrial capacity abroad. To
gether with these changes, the weight of
additional protectionism could slow the rise
in exports from the Midwest, cutting deeply
into the region’s future economic gains.
. . . is also h ig h ly d iv e rsifie d

. . . and growth of agricultural exports
Agricultural exports*
195 9-6 0

1965-66

Percentage change

1967-68

1960-66

1966-68

196 0-6 8

(millions of dollars)
United States

$4,517

$6,681

$6,315

4 8%

- 5 %

40%

1,701

3,181

784

1,603

2,761

— 13

1,381

104

— 14

303

666

585

120

— 12

N o rth -ce n tral
states
D istrict states
Illinois
Indiana

135

317

251

135

— 21

Io w a

211

426

392

102

— 8

M ichigan

110

— 16

W isco n sin

— 29

*F isca l y e a r, July 1 through June 30.
S O U R C E : U .S . Departm ent o f A g ricu ltu re.

The highly productive Midwest
is also highly diversified. This fact,
which helps account for much of
its export gain, makes it hard to
envision any increase in protec
tionism that would not have a
significant impact on the region.
Illinois is a major producer of
machinery, shipping nearly a fifth
of the nation’s exports of non
electrical machinery and nearly a
tenth of its electrical machinery.
Illinois also ships more than a tenth

Federal Reserve Bank of Chicago

of the processed food
Illinois leads Seventh District
and fabricated metal
in exports of manufactured goods
sent abroad. Michigan,
Seventh
District
Percent of district ex p o rts f
which produces nearly
Iowa
(1966)
Illinois
Michigan Wisconsin
Indiana
Export category
a fourth of the trans
(millions o f dollars)
portation equipment
N o n e le c tric a l m achinery
$1,855
49%
16%
18%
10%
7%
shipped abroad, is also
♦
Tran sp o rtatio n equipment
1,186
12
67
6
15
an important exporter
9
14
438
47
11
19
Processed food
of processed food,
14
E le c tric a l m achinery
366
41
12
15
18
machinery, chemicals,
C h e m icals
245
35
47
3
3
11
and fabricated metals.
14
5
240
37
31
F ab ricate d metals
13
The relative impor
O th e r g oods
711
41
14
5
26
13
tance of these goods is
7
A ll m anufactures
5,041
37
12
31
13
further emphasized
*Less than 0.05 p erce n t.
when viewed in rela
fP e rc e n ta g e s m ay not add to 100 due to rounding.
S O U R C E : Based on F .O .B . plant d ata from the U .S . Departm ent o f Co m m erce.
tion to total U. S. ex
ports. Of the nation’s
nonelectrical machin
and wearing apparel.
ery exported, the district states account for
40 percent. Transportation equipment and
The th re a t of protectio n ism
parts account for 34 percent; fabricated
Although total exports from the Midwest
metals, 25 percent; processed foods and
have almost certainly continued to rise in the
electrical machinery, 23 percent each; and
last two years—despite the decline in agri
chemicals, 10 percent.
cultural sales—pressures for new trade bar
Seventh District states contribute between
riers and stricter maintenance of old barriers
10 and 20 percent of the nation’s exports of
have been mounting. Because of the impor
instruments, leather goods, rubber and plastic
tance of exports to almost every state of the
products, printed material, primary metals,
Midwest and the rapid increase in
productive capacities abroad, any
changes in international trade
Michigan strong in transportation equipment
relations
must be viewed as hav
Seventh
ing potential significance for this
District
Percent o f U.S. exports
Iow a
Export category
(19 6 6 ) Illin o is M ichig an W isco n sin In d ian a
region.
N o n e le c tric a l m achinery
39%
19%
6%
7%
3%
4%
Discussions of possible internal
*
4
23
2
T ran sp o rtatio n equipment 3 4
3
taxes
on vegetable oils and meals
3
2
4
23
11
3
Processed food
in
Europe
provide a case in point.
4
9
3
3
23
3
E le ctric a l m achinery
*
*
5
10
3
1
The possibility of such taxes has
C h em icals
9
25
8
3
3
1
F ab ricate d metals
been a legitimate concern in the
*
O th e r good s
5
2
1
1
1
Midwest, where most soybeans
24
9
3
3
A ll m anufactures
7
2
are grown and where farmers have
*Less than .05 p erce n t.
already been hard hit by the loss
S O U R C E : Based on F .O .B . plant d a ta from the
of foreign m arkets. Of even
U .S . Departm ent o f Co m m erce.

Business Conditions, Ju ly 1969

greater concern would be any serious sug
gestion that the United States might retaliate
by restricting imports of industrial goods.
Such a move could be one in a succession
of steps taken first by one country then

another toward greater restrictions on inter
national trade, with the result that exports
from the United States and its highly pro
ductive, well diversified Midwest would be
severely hampered.

Measures of money and credit

major function of the Federal Reserve
System is to foster a flow of credit and money
that will facilitate orderly growth, a stable
dollar, and long-run balance in the nation’s
international payments. In this conception of
the central bank’s responsibility both credit
and money are channels through which mon
etary policy works.
Much of the ongoing debate about mon
etary matters— although by no means all of
it—centers on the question, what specific
credit and money flows should be influenced
in order to achieve the desired economic
goals? Views differ sharply on which magni
tudes are the most meaningful both as targets
for monetary action and as indicators of what
policy is accomplishing. It may be helpful,
therefore, to compare the various available
statistical series or measures and to note cer
tain aspects of their behavior.
Over the past 16 years, major changes in
the growth rates of two of the measures most
widely watched—bank credit (loans and
investments) and money (private demand
deposits and currency outside banks and the
Treasury)—have followed broadly similar
patterns. Both measures have been closely as
sociated with the pace at which the Federal

Reserve has supplied reserves to the banking
system. Shifts in growth rates of these meas
ures have tended to be followed by shifts in
the same direction in total credit and total
spending—a pattern indicative of the time
lags between policy actions that are taken
and the economy’s responses to those ac
tions and, thus, the need for policy makers
to focus on prospective economic develop
ments.
M o ney v e rsu s cre d it

Credit and money, being “two sides of the
same coin,” are often lumped together in dis
cussion of the monetary process. When credit
is extended, money or purchasing power is
acquired by borrowers. Because people sel
dom borrow merely to hold larger cash bal
ances, borrowing is usually associated with
spending. While credit growth often reflects
only the transfers of existing funds from one
group of holders to others, borrowers pre
sumably will spend them for goods or serv
ices, increasing the rapidity with which the
existing money stock is used.
The accompanying chart shows the relative
magnitudes and growth rates of six common
measures of money and credit and how they

Federal Reserve Bank of Chicago

have changed in relation to gross national
product, a broad measure of total spending.
Outstandings currently range from about
$200 billion for the money stock to more than
$ 1,500 billion for total credit. Annual growth
rates over the past 16 years have ranged
from 2.5 percent for money to 6.4 percent for
bank credit.
M o ney

Those who consider money the most signif
icant financial variable emphasize that it is
the only asset used as a medium of exchange.
None of the others can be spent directly, they
first have to be converted into money. It is
contended that total spending can be reduced
by restricting the growth of money to a less
rapid rate than the public wants. In this cir
cumstance, it is believed, holders are induced
to curtail their expenditures in order to in
crease their money balances to the levels
desired. Conversely, spending can be in

creased if money supply growth is more rapid
than the rate at which the public wants to
increase holdings for transactions and pre
cautionary reasons. The management of
money, in order to achieve desired effects,
calls for some judgment on the level of hold
ings desired by the public.
Total spending has been increasing more
rapidly than the money stock since World
War II, causing the turnover, or velocity, of
money to increase. This tendency for a given
volume of expenditures to be associated with
a diminishing stock of money reflects many
influences, including greater efficiency of the
payments mechanism and the effect of rising
interest rates, prices, and expectations on the
public’s desire to hold cash balances.
The stock of money is approximately
doubled if it is defined to include commercialbank time deposits in addition to private de
mand deposits and currency in circulation.
The inclusion of commercial-bank time de-

Money, credit, and GNP compared
billio n d o lla rs

ratio

1.8
1.4
1.0

credit-m arket debt

net public and
private debt

liquid assets

.6
jrio n e y plus time deposits

.4
m oney

supply

.1 L I ■ 1,1 l l
1950 52

1,1 I ,
56

I, I I, I l, I I, I I,
60

Business Conditions, Ju ly 1969

posits in the money stock logically leads to
the question of whether to include similar
obligations of other financial institutions and
certain other forms of short-term liquid assets
and redeemable securities, such as U. S.
savings bonds. A monthly Federal Reserve
series on “liquid financial assets” includes, in
addition to the broadly conceived money
stock, mutual savings bank deposits, savings
and loan shares, U. S. savings bonds, and gov
ernment securities maturing within a year.
This series marks a middle ground between
the narrow money supply and the total
amount of all credit outstanding. It is about
$300 billion larger than the broad money
supply, but has about the same stability rela
tive to gross national product.

Monthly changes in bank
credit and money vary greatly
percent change, annual rate

C r e d it

A still broader measure of credit outstand
ing is provided by the annual Department
of Commerce compilation of net public and
private debt. This series includes all types
and maturities of debt other than that owed
between divisions of the same firm or govern
ment. Year-to-year changes in this series pre
sumably reflect the net effects of credit trans
actions by all spending units.
Somewhat narrower in scope, smaller in
magnitude, but similar in trend, is the cate
gory of credit-market debt, for which esti
mates are provided in the Federal Reserve’s
data on flows of funds. This series measures
net new funds raised by the nonfinancial
sectors of the economy through the credit
markets. Although about $300 billion smaller
than the Department of Commerce series,
credit-market debt appears to move in about
the same relation to total spending and the
data are available quarterly, providing more
current readings.
Bank credit—total loans and investments
of commercial banks—makes up approxi

mately a fourth of total debt and is of special
interest since it can be influenced rather
directly by the Federal Reserve through its
control over bank reserves. It is largely
through its operations on bank reserves that
the Federal Reserve is able to influence bank
credit, the money stock, and total credit.
Largely the counterpart of commercial-bank
demand and time deposits, bank credit is
roughly comparable in both magnitude and
flows to the broad money measure. When
ceilings on interest rates that banks are per
mitted to pay on time deposits cause banks to
seek funds from non-deposit sources—such
as borrowings from other banks, the Federal
Reserve, and the Eurodollar and commercial
paper markets—the money and bank credit
measures may diverge.

Federal Reserve Bank of Chicago

C o n flic tin g g u id e s ?

Does it matter whether the focus of policy
is on money or credit? They move consis
tently year to year, and the correlation be
tween changes in their aggregates is very high.
But this pattern strongly reflects the influence
of trends affecting the two similarly and has
little usefulness in formulating judgments on
policy. To be used in making policy, informa
tion is needed on how changes in money and
credit are associated on a shorter term basis,
as from quarterto quarter or month to month,
as well as on their influence on the rate of
economic activity both now and later.
Statistics on the money stock, time de
posits, and bank credit are available weekly.
However, projections for weeks or months
ahead are complicated by large and irregular
fluctuations and large differences in behavior
over short periods. These erratic movements
also complicate interpretation of current fig
ures. Within any single month, money—de
fined as currency and demand deposits only
—and bank credit often move in opposite

Relationships between selected
monetary aggregates
S im p le c o rre la tio n
co e fficie n ts o f re la tiv e
p e rce n ta g e ch a n g e s,
1953 to 1968

Monthly

Quarterly

Bank reserves a n d m o n e y
s u p p ly

.3 2 5

.5 4 6

M o n e y s u p p ly a n d b a n k c re d it .4 0 8

.6 7 0

Bank reserves a n d b a n k c re d it .5 3 8

.8 5 2

M o n e y s u p p ly p lu s tim e
d e p osits a n d b a n k c re d it

.6 4 2

.8 6 7

.7 3 4

.9 4 6

M o n e y s u p p ly p lu s tim e
plus T re a s u ry de p osits
a n d b a n k c re d it

directions and this can result in inconsistent
conclusions on the prevailing direction of
financial influence on the economy. More
over, the two measures may respond differ
ently to any given change in bank reserves—
the key factor subject to control by the
Federal Reserve.
Frequently temporary but nevertheless
sizable monthly fluctuations in money and
bank credit reflect uneven demand, includ
ing such factors as major Treasury finan
cings that follow no regular time patterns.
Other reasons for differences in the move
ments of these measures range from such
technical matters as difficulties encountered
in making allowance for seasonal influences
to the effects of shifts in the structure of bank
liabilities induced by policy actions, such as
changes in Regulation Q deposit interest
ceilings.
During the past 16 years, monthly rates of
change in money—private holdings of cur
rency and demand deposits—have shown
relatively weak association with those for
such other aggregates as bank reserves and
bank credit. As could be expected, the cor
respondence between movements in the
various money and credit series becomes
stronger the more inclusive the measure of
money and as quarterly rather than monthly
data are compared. Fluctuations in U. S.
Government balances are a major source
of the variation between changes in money,
as narrowly defined, and bank credit. Because
these balances are not defined as money, tem
porary shifts between private deposits and
Treasury deposits affect the money stock but
have little effect on total bank credit. Such
shifts may, of course, alter the distribution
of deposits among banks.
Differences in the statistical bases of the
series provide another source of variation
between changes in money and changes in

Business Conditions, Ju ly 1969

Reserves, money, and bank
credit show similar patterns
percent change, 3 quarter moving average

bank credit: money is calculated and re
ported as an average of daily figures and
credit is based on end-of-month data. To re
duce the variability associated with figures for
a single day, total deposits of member banks
are sometimes used as a proxy for daily aver
age bank credit. But deposits of nonmember
banks are not included in this proxy measure
nor are non-deposit sources of funds that
support bank credit growth.
The exclusion of time deposits from money
is the biggest source of difference between the
money stock and bank credit. Relative growth
rates are distorted when the ability or willing
ness of banks to increase their time deposits
changes, as for example, when yields on
money-market instruments rise above the
regulatory ceilings on the rates that banks are
allowed to pay on CDs.

Another difference relates to the currency
component of the money supply, for which
there is no counterpart in bank credit.
Despite substantial conceptual differences
and large short-run variations, money and
bank credit tend to show consistent patterns
of change that in turn are closely related to
changes in bank reserves when comparisons
are based on information averaged over long
time periods. Statistics measuring the associ
ation between quarterly averages of reserves,
money, and bank credit show much closer
relationships than do the monthly data. As
the accompanying charts show, the major ex
pansions and contractions in growth rates of
total bank reserves, bank credit, and money
—when moving averages of quarterly data
are used for comparison—have been coinci
dent for the past 15 years.
Comparison of bank credit—or reserves or
money—with total credit and total spending
also reveals a fairly consistent relationship.
When sustained over several quarters, growth
in bank credit, whether exceptionally rapid
or unusually slow, tends to be followed by
similar changes in the credit-market debt
series and by even stronger changes in the
growth of total spending. This pattern sug
gests that policy measures, working through
the stimulation or restraint of bank credit
growth, have perceptible effects after a time
lag on total spending and income and that
this in turn feeds back to influence total de
mand for credit.
Furthermore, comparisons of growth in
money and credit with growth of total spend
ing in the past 15 years suggest that growth
in bank credit of less than about 4 percent
annually and growth in money of less than
about 2 percent tend to be associated with
substantial slowing in the growth of total
spending. Conversely, periods of excess de
mand—indicated by accelerated increases in

Federal Reserve Bank of Chicago

the general price level—have tended to follow
substantial expansions in bank credit at an
nual rates exceeding roughly 8 percent and
expansions in money of 4 percent or more.
Policymakers must act on the basis of
current economic forecasts and readings of
recent and prospective changes in money and
credit. The perspective gained from averages
of past periods is instructive, but cannot be
controlling in any given situation. Current
data must be evaluated and interpreted as
reliable and consistent indicators of current
and prospective developments or, alterna
tively, as being temporarily distorted and of
little or no use.
The monetary authorities have considered
it inappropriate to focus on any one monetary
or credit measure because of both conceptual
and statistical problems. In retrospect, it
seems clear that given enough time for ran
dom changes to be averaged out and after a
lag both money and credit, however defined,
have tended to follow a common pattern and

to be associated with similar accelerations
and slowings in gross national product. A
“once and for all” choice of measure may be
unnecessary and undesirable.
Furthermore, a specific range of monetary
and credit growth rates may not be appro
priate for all times and circumstances. His
torical relationships must be reassessed con
tinuously in light of structural changes in the
financial mechanism and shifts in financial
flows. The current situation is an example.
With a cumulative runoff of certificates of
deposit during the past six months, there un
doubtedly has been a substantial shift from
bank to nonbank credit. This raises a ques
tion whether slowing in the growth of bank
credit under these conditions can be expected
to hold its usual historical relationships with
other financial measures and total spending.
Under these circumstances, the money stock
may be a preferable policy target as well as
indicator of policy influence. But this need
not be the case in other circumstances.

BUSINESS CO N DITIO N S is published monthly by the Federal Reserve Bank of Chicago.
George G . K aufm an w a s p rim a rily responsible for the article "Custom ers v ie w a bank
m erger—before and a fte r su rv e ys," Ja c k L. H ervey fo r "Im portant stake in free m arkets,"
and Dorothy M. Nichols fo r "M easures of money and credit."
Subscriptions to Business Conditions are a v a ila b le to the public w ithout charge. For in fo rm a
tion concerning bulk m ailin g s, address inquiries to the Federal Reserve Bank of Chicago,
Box 834, Chicago, Illinois 60690.
Articles m ay be reprinted provided source is credited.

A new one-page release, Banking Briefs, reports b iw e e kly some of the highlights gleaned
from the continuous flo w of inform ation received from com m ercial banks in the Seventh
Federal Reserve District. The release m ay be obtained without charge from the bank's Research
departm ent.

Full text of Business Conditions (Federal Reserve Bank of Chicago) : July 1969

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