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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW
Bank A ffiliates and T heir R equlation:
P a rt I I
Tim e and Savings D eposits in the
F ifth D istrict
The D istrict E con om y in P ersp ective
Spotlight on A griculture




T he

M o n th ly

R e v ie w

is produced by the R esearch

D epartm ent of the F ederal R eserv e Bank of Richm ond.
Subscriptions are available to the public w ithout charge.
A d d ress inquiries to Bank and Public R elations, F e d ­
eral R eserv e Bank of R ichm ond, P . 0 . B o x 27622,
R ichm ond, Virginia 23261. A rticles may be reproduced
if sou rce is given. P lease provide the B ank’s Research
D epartm ent with a copy of any publication in which an
article is used.

2




M ONTHLY REVIEW, APRIL 1973

BANK AFFILIATES AND THEIR REGULATION*
PART II
Last month, P a rt I discussed the origin of bank
affiliates and the events that led to enactment of the
bank affiliate legislation of 1933.

In P a rt II , the

various types of regulatory legislation adopted in
that year applicable to banks and their affiliates are
review ed, including the “ holding company affiliate”
provisions— the first F ederal statutes designed to
regulate bank holding companies. A lth ou gh the bulk
of the 1933 legislation accomplished its purpose and
continues in force, for various reasons the m ethod
of regulating “ holding com pany affiliates” proved to
be inadequate.

P art I I concludes with a description

of the developm ents betw een 1935 and 1955 in volv­
ing bank holding com panies that caused the “ holding
com pany affiliate” provisions to be replaced zvith
the Bank H olding Com pany A c t of 1956 and its
amendments in 1966 and 1970.

AFFILIATE AND BANK HOLDING CO M PAN Y
LEGISLATION OF 1933

Banking affiliates.
There seems to be no doubt
anywhere that a large factor in the overdevelop­
ment of security loans, and in the dangerous use
of the resources of bank depositors for the pur­
pose of making speculative profits and incurring
the danger of hazardous losses, has been furnished
by perversions of the national banking and State
banking laws, and that, as a result, machinery has
been created which tends toward danger in several
directions.
(a) The greatest of such dangers is seen in the
growth of “ bank affiliates” which devote them­
selves in many cases to perilous underwriting oper­
ations, stock speculation, and maintaining a market
for the banks’ own stock, often largely with the
resources of the parent bank. This situation was
never contemplated by the National Banking Act,
and it would, therefore, appear that the affiliate
system calls for the establishment of some legis­
lative provisions designed to deal with the situation.
It has been suggested from many quarters that the
affiliate system be simply “ abolished.” This sug­
gestion has much authority behind it, but, in addi­
tion to the manifest difficulty of enforcement,
owing to the existence of well-known subterfuges to
maintain control, there remains the question wheth­
er it would be of much real service so long as State
legislation permits the growth of affiliates in con­
nection with State banks and trust companies. . . .
❖

❖

❖

A combination of events in the early months of
1933 undermined public confidence in banking insti­
tutions.

Bank failures increased at an alarming rate,

creating panic in som e states.
M ichigan declared
a Bank H oliday on February 4, and by M arch 3 at
least 28 other states had either closed their banks or
im posed some form of restriction on withdrawals of
deposits.
One of the first official acts of newlyinaugurated President R oosevelt was to declare a
national Bank H oliday on M arch 5, which lasted
almost 10 days. M ore than 2,000 of the banks that
closed during this period never reopened. Then, on
M arch 31, tw o leading M ichigan-based bank holding

(b) Group banking. Closely allied in many points
of similarity with the affiliate system is the plan
of group banking in operation in some parts of the
United States, working, in a few cases, on a large
scale. . . . The evils of indirect control are similar
in the two cases, and they may lead to similar
abuses, as is seen when it is noted that holding
companies also usually control companies organized
for security financing. However, such companies
have in some parts of the United States become
well rooted, and the difficulty of eliminating or
abolishing them in any effective way is similar to
the difficulty of eliminating or abolishing the
affiliates of city banks. It is, therefore, thought
best to attempt the control and oversight of these
companies. . . .x

W ith these w ords, the basis was laid for enactment

and Detroit Bankers Co., Inc., filed voluntary peti­

of a cluster o f statutes designed to regulate relation­
ships am ong banks and their affiliates, including bank

tions for dissolution.

holding companies, in three principal ways.

companies, the Guardian Detroit U nion G roup, Inc.
A t about the same time, a

Senate subcommittee investigating the activities of

These

involved : ( 1 ) separation of com m ercial banking from

the National City Bank and its securities affiliate

investment banking; ( 2 )

exposed abuses that made headline news throughout

financial relationships between banks and their affili­

the country.
Against this background, the Senate Banking and

a te s; and ( 3 ) authorization o f Federal bank super­

Currency Committee filed a report on M ay 15, 1933,
recom m ending the bill that became the Banking A ct

affiliates. In addition, special provisions were enacted

of 1933 just one month later.

member banks of the Federal R eserve System.

In the report, securi­

placing o f limitations on

visory agencies to examine and obtain reports from
applicable to bank holding companies affiliated with

ties affiliates were severely criticized, and bank h old ­
ing companies were linked with securities a ffiliates:



1 S. Rep. No. 77, 73rd Cong., 1st Sess. (1933), pp. 9-10.

FEDERAL RESERVE BA N K OF RIC H M O N D

3

Separation of Commercial Banking from Invest­
ment Banking

T h e re m e d y a d op ted b y C on g ress

to deal with the various abuses resulting from the

poration, association, business trust, or other similar
organization engaged in the business

of issuing,

underwriting, selling, or distributing stocks, bonds,

m ixin g of com m ercial and investment banking was

notes, or other securities shall, at the same time, to

complete separation of these functions.

T his sepa­

any extent whatever, engage in the business o f re­

ration was accomplished by Sections 16, 20, 21, and

ceiving deposits subject to check or repayment upon

32 of the Banking A ct o f 1933.2
T w o of these provisions, Sections 20 and 32,

presentation of a passbook, certificate of deposit, or

brought about the separation of ownership, control,

other evidence of debt, or upon request of the de­
positor.5 Section 16 absolutely prohibits national

and management of securities companies and member

banks from purchasing for their ow n account any

banks o f the Federal R eserve System.

shares o f stock of any corporation, except as may be

Section 20

declares it unlawful for any member bank to be affili­

authorized by law, and this restriction is made appli­

ated with any securities com pany by means of com ­

cable to state member banks by Section 9 o f the
Federal R eserve A ct.G M oreover, both national and

mon shareholders, directors, trustees, or other per­
sons exercising similar functions.3 Section 32 renders
it unlawful for any officer, director, or em ployee of

state member banks are forbidden to purchase for

any member bank of the Federal R eserve System to

obligations of the United States and other obligations

be at the same time an officer, director, or em ployee
of any securities com pany, except as may be p er­

specifically authorized by statute or under regulations
prescribed by the C om ptroller of the Currency.

their ow n account any investment securities except

mitted by the B oard of G overnors o f the Federal R e ­
serve System.4
Com plem enting Sections 20 and 32, Sections 16
and 21 of the 1933 A ct were designed to prevent
banks from themselves engaging in the securities

Limitations on Financial Relationships Between
Banks and Affiliates

The

1933 le g isla tio n did

not require the separation o f ownership or control o f
affiliates other than securities companies from m em ­

business or from purchasing securities for their ow n

ber banks, and this continues to be the law today

account except as specifically authorized. Section 21,
which applies to all types of banks and not just to
member banks of the Federal Reserve System, p ro ­

except where affiliation is by means o f bank holding
com pany ownership. Instead of requiring such d i­
vorcem ent, Congress dealt with abuses involving the

vides that after June 16, 1934, no person, firm , c o r ­

channeling of bank funds to their affiliates by en­
acting Section 23A o f the Federal R eserve A ct. T his
statute, as supplemented by an amendment adopted in

2 48 Stat. 186, 188, 189, and 194 (1933).
3 48 Stat. 188 (1935), as amended 49 Stat. 707 (1933). The scope
of this provision, as well as of the other affiliate provisions, depends
upon the definition of “ affiliate.” In reality, for all practical pur­
poses, there are two coexisting and different definitions of affiliation
currently on the statute books. One, which was enacted in 1933 and
subsequently amended in 1966, includes situations involving common
ownership or control by means of individual owners, bank holding
companies, or other types of organizations.
The other definition
is a consequence of the Bank Holding Company Act of 1956, as
amended in 1970. It applies only to affiliation by means of bank
holding company ownership.
Although both sets of provisions
cover situations where there is common ownership or control of a
bank and other banks or nonbank companies, they differ signifi­
cantly in the ways in which they specify what constitutes common
ownership or control.
These statutory provisions are found, re­
spectively, at 12 U.S.C. § 221(a) and 12 U.S.C. §1841. The Bank
Holding Company Act does not use the term “ affiliate” as such but
achieves the same result by its definitions of “ bank holding com­
pany,” “ company,” “ bank,” and “subsidiary.”
Paragraph 5 of
Section 23A of the Federal Reserve Act states: “ For the purposes
of this section, the term ‘affiliate’ shall include, with respect to any
member bank, any bank holding company of which such member
bank is a subsidiary within the meaning of the Bank Holding
Company Act of 1956, as amended, and any other subsidiary of
such company.” 12 U.S.C. § 3 7 1 (c ). Bank holding companies and
their subsidiaries are also, by the terms of the Bank Holding Com­
pany Act, made subject to the same types of restrictions as regards
examinations and furnishing of reports as are applicable to affili­
ates generally under the 1933 legislation.
4 Section 32 provides:
No officer, director, or employee of any corporation or
unincorporated association, no partner or employee of any
partnership, and no individual, primarily engaged in the
issue, flotation, underwriting, public sale, or distribution, at
wholesale or retail, or through syndicate participation, of
stocks, bonds, or other similar securities shall serve (at) the
same time as an officer, director, or employee of any member
bank except in limited classes of cases in which the Board of
Governors of the Federal Reserve System may allow such
service by general regulations when in the judgment of the
said Board it would not unduly influence the investment poli­
cies of such member bank or the advice it gives its customers
regarding investments.

4



1966 to Section 1S ( j ) of the Federal Deposit Insur­
ance A ct, limits loans to and investments in affiliates
by banks insured by the Federal Deposit Insurance
Corporation to 10 percent o f the capital and surplus
o f the lending bank to any one affiliate and to a
m axim um of 20 percent of the bank’s capital and
surplus to all affiliates in the aggregate. Section 2 3 A
also requires that each loan or extension o f credit to
an affiliate by an insured bank be secured by collat­
eral in the form of stocks, bonds, debentures, or
other such obligations having a market value at the
time o f making the loan or extension o f credit o f at
5 Section 2 1(a) provides, in relevant part, that it shall be unlawful:
(1)
For any person, firm, corporation, association, business
trust, or other similar organization, engaged in the business
of issuing, underwriting, selling, or distributing, at wholesale
or retail, or through syndicate participation, stocks, bonds,
debentures, notes, or other securities, to engage at the same
time to any extent whatever in the business of receiving
deposits subject to check or to repayment upon presentation
of a passbook, certificate of deposit, or other evidence of debt,
or upon request of the depositor . . .
6 48 Stat. 165 (1933). In Investment Company Institute V. Camp,
401 U.S. 617 (1971), the Supreme Court held that even though a
national bank may lawfully commingle trust assets, act as managing
agent for customers, and purchase stock for the account of its
customers, it is prohibited by Sections 16 and 21 of the 1933 legis­
lation from combining these functions to operate an investment
fund that affords bank customers the opportunity to invest in stock
funds created and maintained by the bank.

M ONTHLY REVIEW, APRIL 1973

least 20 percent m ore than the amount o f the loan
or extension, or at least 10 percent m ore if secured
by the obligation of any state or any o f its political
subdivisions or agencies.7
Examinations and Reports

B oard, to disclose fully the relations between the
affiliate and each affiliated mem ber bank.
These
reports must be published by the member bank under
the same circumstances as govern publication o f its
condition reports.10

C o n g re ss c lo s e ly fo l­

low ed the recomm endation of the Board of G overnors
by adopting legislation authorizing the Board and
the Com ptroller of the C urrency to examine all affili­
ates of state member banks and national banks, re­
spectively, as necessary to disclose fully the relations

Bank Holding Company Regulation

In a d d ition

to the three classes o f affiliate laws described above,
which were made applicable to all affiliates, special
provisions were enacted in the Banking A ct o f 1933
applicable to “ holding com pany affiliates.”

T his was

the first Federal statute designed specifically to regu­

between such banks and their affiliates and the effect

late bank holding companies.

of the affiliate relationship upon the affairs of the
In addition, national and state member

T he term “ holding com pany affiliate” was defined
to include any corporation, business trust, association,

banks were required to obtain from each o f their

or other similar organization ow n ing or controlling

affiliates, other than member banks, and furnish to

eith e r:

banks.8

the B oard of G overnors not less than three reports
each year.9 Each report must be in such form as
the Board may prescribe and must contain all in for­
mation that is necessary, in the judgm ent o f the
7 The first two paragraphs of Section 23A provide as follows:
1. Loans to affiliates and investments in, or loans on, their
obligations
No member bank shall (1) make any loan or any extension
of credit to, or purchase securities under repurchase agree­
ment from, any of its affiliates, or (2) invest any of its
funds in the capital stock, bonds, debentures, or other such
obligations of any such affiliates, or (3) accept the capital
stock, bonds, debentures, or other such obligations of any such
affiliate as collateral security for advances made to any
person, partnership, association, or corporation, if, in the
case of any such affiliate, the aggregate amount of such loans,
extensions of credit, repurchase agreements, investments, and
advances against such collateral security will exceed 10 per
centum of the capital stock and surplus of such member bank,
or if, in the case of all such affiliates, the aggregate amount
of such loans, extensions of credits, repurchase agreements,
investments, and advances against such collateral security
will exceed 20 per centum of the capital stock and surplus
of such member bank.
2.

Security for loans to affiliates
Within the foregoing limitations, each loan or extension
of credit of any kind or character to an affiliate shall be
secured by collateral in the form of stocks, bonds, debentures,
or other such obligations having a market value at the time
of making the loan or extension of credit of at least 20 per
centum more than the amount of the loan or extension of
credit, or of at least 10 per centum more than the amount of
the loan or extension of credit if it is secured by obligations
of any State, or of any political subdivision or agency thereof:
Provided, That the provisions of this paragraph shall not
apply to loans or extensions of credit secured by obligations
of the United States Government, the Federal intermediate
credit banks, the Federal land banks, or the Federal Home
Loan Banks, or by such notes, drafts, bills of exchange, or
bankers’ acceptances as are eligible for rediscount or for
purchase by Federal reserve banks. A loan or extension of
credit to a director, officer, clerk, or other employee or any
representative of any such affiliate shall be deemed a loan to
the affiliate to the extent that the proceeds of such loan are
used for the benefit of, or transferred to, the affiliate.
Section 1 8 (j) of the Federal Deposit Insurance Act, as amended
in 1966, provides as follows:
(j)
The provisions of Section 23A of the Federal Reserve
Act, as amended, relating to loans and other dealings between
member banks and their affiliates, shall be applicable to every
nonmember insured bank in the same manner and to the
same extent as if such nonmember insured bank were a
member bank; and for this purpose any company which would
be an affiliate of a nonmember insured bank, within the
meaning of Section 2 of the Banking Act of 1933, as amended,
and for the purposes of Section 23A of the Federal Reserve
Act, if such bank were a member bank, shall be deemed to
be an affiliate of such nonmember insured bank. 80 Stat. 242
(1966).
8 48 Stat. 166, 192 (1933). In 1966, Congress amended Section 10(b)
of the Federal Deposit Insurance Act to authorize the FDIC to
examine all affiliates of nonmember insured banks. 80 Stat. 1053
(1966).
8 48 Stat. 165 (1933).




(1) a majority of the shares of capital stock of a
member bank or more than 50 percent of the
number of shares voted for the election of directors
of any one bank at the preceding election, or con­
trolling in any manner the election of a majority
of the directors of any one bank; or
(2) for the benefit of whose shareholders or mem­
bers all or substantially all the capital stock is
held by trustees.11

A n y com pany falling within the definition o f a
“ holding com pany affiliate” was prohibited from
voting any stock ow ned or controlled by it in any
member bank without first obtaining a voting permit
from the B oard of G overnors. In order to obtain a
voting permit, a holding com pany affiliate was re­
quired to agree to the follow in g co n d itio n s:
(1) To be examined by Federal Reserve examiners,
and to permit each subsidiary bank to be examined,
just as if it were a member bank;
(2) To permit full disclosure of the relations be­
tween the holding company affiliate and its banks,
and the effects of such relations upon the banks;
(3) To publish individual or consolidated state­
ments of condition of all banks owned by it, if
required;
(4) To avoid all connections, direct or indirect,
with any organization engaged in underwriting
and selling securities, except government issues and
a few other special types;
1 Id. Paragraph 9 of Section 21 of the Federal Reserve Act now
0
provides:
Whenever member banks are required to obtain reports
from affiliates, or whenever affiliates of member banks are
required to submit to examination, the Board of Governors
of the Federal Reserve System or the Comptroller of the
Currency, as the case may be, may waive such requirements
with respect to any such report or examination of any
affiliate if in the judgment of said Board or Comptroller,
respectively, such report or examination is not necessary to
disclose fully the relations between such affiliate and such
bank and the effect thereof upon the affairs of such bank.
This statute was added as a new paragraph to Section 21 of the
Federal Reserve Act by the Banking Act of 1935.
49 Stat. 751
(1935). Because all member banks are required to furnish reports
to the Board of Governors, it has the authority to waive submission
of reports.
The authority of the Board and the Comptroller is
divided in waiving examinations of affiliates of state member banks
and national banks, respectively.
48 Stat. 162 (1933). In 1966, this definition, in substance, became
paragraph (4) of the definition of “ affiliate,” 80 Stat. 242.

FEDERAL RESERVE BA N K OF R IC H M O N D

5

(5) To build up a reserve in the form of cash or
readily marketable assets other than bank stock
that, after five years from the enactment of the
Banking Act of 1933, would equal at least 12 per­
cent of the aggregate par value of the bank stocks
owned by the holding company affiliate. (This was
to be increased 2 percent a year until free assets
equaled 25 percent of the par value of bank stocks.
All net earnings in excess of 6 percent of book
value were to be retained until such free assets
equaled 25 percent of par) ; and
(6) To limit its payment of dividends to actual
net earnings.12

B efore granting the permit, the Board was re­
quired to satisfy itself that the financial condition of
the holding com pany, the general character o f its
management, and the probable effect o f the granting
of the voting permit on the banks were all favorable.
A nother provision made every officer, director, agent,

Decem ber 31, 1934. A m on g these were 170 holding
com pany affiliates, o f which the B oard ’s 1934 A n ­
nual R ep ort stated: “ (t)h e r e were 60 holding co m ­
pany affiliates that were prim arily bank holding com ­
panies.” 14
B y draw ing a distinction between “ holding com ­
pany affiliates” and “ bank holding com panies” in
this way, a precedent was established for a policy
limiting the regulation of bank holding companies to
those that were “ prim arily” engaged in managing or
controlling banks, and excluding from regulation
companies controlling only one or tw o banks, or
engaging prim arily in nonbanking activities and only
incidentally in holding the stock of banks.

Legal

authority for this policy was conferred by Section

and employee of a holding com pany affiliate subject

301 o f the Banking A ct of 1935, which added the

to the same penalties for false entries— in any book,

follow ing language to the 1933 definition o f “ holding

report, or statement of the affiliate— that apply to

com pany affiliate” :

officers, directors, agents, and employees of member
banks of the Federal R eserve System .13
T he 1933 “ holding com pany affiliate” provisions
were based on control of a single bank, and in this

. . . the term “ holding company affiliate” shall not
include (except for the purposes of Section 23A of
the Federal Reserve Act, as amended) any corpora­
tion all of the stock of which is owned by the
United States, or any organization which is deter­

H ow ever, the

mined by the Board o f Governors of the Federal
Reserve System not to be engaged, directly or in­

legislation was defective for several reasons. First,
it applied only to member banks of the Federal

directly, as a business in holding the stock of, or
managing or controlling, banks, banking associ­
ations, savings banks or trust companies.

respect their coverage was broad.

R eserve System and thus did not include thousands
of state-chartered banks that were not members.

Both the H ou se and Senate R eports on the bill

A part from this, if control over a bank could be

that became Section 301 cited examples o f companies

exercised without voting its stock, the holding co m ­
pany did not have to subject itself to regulation. In

intended to qualify for exem ption from the voting
permit requirement.

T he H ouse R eport referred to

one instance, for example, a bank holding com pany
ow ned a controlling interest in 24 banks yet obtained
voting permits to vote the stock of only tw o o f them.

a number o f actual cases illustrating “ the types of

T w o years later the coverage of the 1933 “ holding
com pany affiliate” legislation was further curtailed
by Section 301 of the Banking A ct o f 1935. This

tained in the present law, because they are not be­

event was significant for the later development of
bank holding com pany regulation, because it marked
the beginning of a period o f special treatment for
one-bank holding companies that lasted until the
end o f 1970.

so-called holding com pany affiliates which the am end­
ment would exclude from the broad definition co n ­
lieved to be within the intent o f the provisions of law
regarding

holding

com pany

affiliates.” 15

A m on g

these “ actual cases” were a department store chain, a
labor union, a charitable foundation, a large lumber
com pany, and a corporation organized to hold real
property for a church.

Each of these companies

owned the stock of only one or tw o member banks.16
The

1935 Holding

ments

Company Affiliate

Am end­

A total o f 2,314 a ffilia tes w e re rep orted

by 1,142 national and 295 state member banks in
response to the call fo r reports by the Federal R e ­
serve Board and the Com ptroller of the C urrency on
1 48 Stat. 186 (1933).
2
In lieu of the requirements specified in
paragraph (5) above, the Banking Act of 1935 subjected holding
company affiliates after June 16, 1938, to the requirement that
each such affiliate establish and maintain out of the net earnings
over 6 percent per annum on the book value of its own shares a
reserve of readily marketable assets of not less than 12 percent of
the aggregate par value of bank stock held by it not subject to
statutory liability.
The voting permit provisions of the 1933
Banking Act were repealed in their entirety in 1966 by Public Law
89-485, 80 Stat. 242 (1966).
13 48 Stat. 186 (1933).

This provision was also repealed in 1966.

6



1 Annual Report of the Board of Governors of the Federal Reserve
4
System (1934), p. 59. This report stated that of the total number
of affiliates, 281 were nonmember state banks, 227 were safe-deposit
or bank-building companies, 124 were foreign organizations, and
1,682 were described as “ . . . mainly in the fields of finance and
investment and real estate.” The report further stated:
Among the affiliates comprehended by the statutory defi­
nition are factories, stores, churches, colleges, newspapers,
steamship companies, cemeteries, hotels, and labor unions. A
large number of these are in the affiliate relationship acci­
dentally, and not as the result of any purpose of establishing
such relationships. In many cases the affiliation is due to the
fact that the bank has had to realize on collateral pledged to
secure loans, or holds certain property as trustee of an estate,
or has been helped out of difficulties of its own by the
owners of other businesses. About one-sixth of the affiliates
grow out of the liquidation of bad assets by member banks.
1 H. Rep. No. 742, 74th Cong., 1st Sess. (1935), p. 15.
5
1 Ibid., pp. 15-16.
8

M ONTHLY REVIEW, APRIL 1973

R eferring to bank holding companies of this de­

the U nited States.20

scription, the Senate R eport noted that “ (t )h e intent

was thus com prom ised by the fact that bank holding
companies as a group controlled only a relatively
small and generally static proportion of total banks
and bank deposits in the country. Nevertheless, there

of the amendment is to relieve such organizations
from the limitations and requirements to which hold­
ing companies engaged as a business in controlling
banks are su bject.” 17
In retrospect, Section 301 was an aberration in
the

development

of

bank

Federal
holding

policy

tow ard

companies

and

the
their

T he urgency o f the message

was one com pany whose continued rapid grow th and
expansion, across state lines and into a variety of
nonbanking areas, gave cause for serious concern.

regulation

of

affiliates.

Later, it was m ore clearly recognized

in 1943 on its experience regulating bank holding

that if com m on ownership or control of a bank and

companies under the voting permit mechanism, the

The Exceptional Case

R e p o r tin g to

C on g re ss

other businesses by a bank holding com pany could

B oard o f G overnors noted that, on the whole, their

lead to abuses threatening the soundness or solvency
of the bank, the risk would be present regardless of

management had been cooperative and that it had
enjoyed satisfactory relations with most o f them.

whether the holding com pany owned one or tw o or a

H ow ever, the Board a d v ise d :

number o f banks.

Indeed, if the one bank were a

large bank, the holding com pany’s interests in exten­
sive nonbanking businesses might well lead to abuses
m ore serious than if the com pany controlled several
small banks.
Nevertheless, the decision was made in 1935 to
limit Federal regulation o f bank holding companies
to those that were “ engaged as a business in manag­
ing or controlling banks.”

Between 1935 and 1966,

It is the exceptional case which now concerns the
Board, for it is in the exceptional case that the in­
adequacies of the (1933 holding company affiliate
legislation) are real impediments and in which the
Board’s ability to regulate is challenged. In the
exceptional case, the Board has found that the
corporate device of the holding company has not
been used solely as a mechanism for the efficient
operation of controlled banks but as a device to
accomplish by indirection objectives which could
not be accomplished directly.21

T w o different aspects of operations by “ the excep­
tional case” were criticized.

First, the B oard char­

when Section 301 was repealed, the Board exercised

acterized the pow er of a bank holding com pany to

its authority to make “ 301 determinations” on at

acquire

least 356 occasions.

approval as in conflict with the objective o f Federal

In actual practice the vast ma­

banks

without any

requirement

of prior

jority of holding com pany affiliates exempted from

branch banking legislation.

the voting permit requirements were one-bank hold­

establishment o f branches by national banks to the

ing com panies.18

same geographic areas permitted to state-chartered
banks by state law. A s the Board pointed out,
. .

BANK HOLDING CO M PAN Y DEVELOPMENTS
1935-1955
O n A pril 28,

1938, President Roosevelt sent a

Special Message to Congress calling for “ . . . a
thorough

study of the concentration of econom ic

pow er in Am erican industry and the effect o f that
concentration upon the decline of com petition.” 19 In
the message, bank holding companies were singled
out for special attention.

Immediate legislation was

These laws limit the

the same management which is restricted in its op er­
ation under a bank charter can, through the holding
com pany device, acquire unit banks, operate them in
the same manner branches will be operated, and thus
defeat the will o f Congress regarding the establish­
ment o f branches.” 22
T he Board also called attention to the creation by
“ the exceptional case” of a conglom erate organization
com bining bank ownership with extensive control
over nonbanking businesses:

called for to halt their grow th and eventually to limit
them, even though the number of such companies had
declined from 97 in 1931 to 52 in 1936. B y the latter
year they could not have accounted for more than 8
to 10 percent of total com m ercial banking deposits in

Accepted rules of law confine the business of banks
to banking and prohibit them from engaging in
extraneous businesses such as owning and oper­
ating industrial and manufacturing concerns. It is
axiomatic that the lender and borrower or potential
borrower should not be dominated or controlled by
the same management. In the exceptional case,
the corporate device has been used to gather under

17 S. Rep. No. 1007, 74th Cong., 1st Sess. (1935), p. 14.
20 “ Origin and Development of Bank Holding Companies,” Federal
Reserve Bulletin (1938), p. 99.

1 On a few occasions the Board exempted organizations that con­
8
trolled more than one bank.
In one case, the holding company
controlled three banks and in another case four banks.
In both
cases, however, the holding company was a nonbanking organization,
in one the Mormon Church and in the other a college.

21 Annual Report of the Board of Governors of the Federal Reserve
System (1943), p. 36. (Emphasis added.)

19 Senate Document No. 173, 75th Cong., 3rd Sess. (1938), pp. 8-9.

22 Ibid., p. 37.




FEDERAL RESERVE BA N K OF R IC H M O N D

7

one management many different and varied enter­
prises wholly unallied and wholly unrelated to the
conduct of a banking business.23

Based upon its experience with “ the exceptional
case,” and because of the threat posed by the lack of
effective regulation, the B oard concluded its report
with this recom m endation:

pendent Bankers A ssociation, a national organization,
and the President o f the Independent Bankers A s s o ­
ciation of the T w elfth Federal R eserve District, the
area that included California and other western states
where Transam erica banks were located. Both as­
serted that free enterprise and com petition in banking
were threatened by the grow th of bank holding co m ­

The Board believes, therefore, that it is necessary
in the public interest and in keeping with sound
banking principles that the activities of bank hold­
ing companies be restricted solely to the banking
business and that their activities be regulated, as
are the activities of the banks themselves.24

panies, especially Transam erica.26 A lthough the bill
was reported out favorably by the Senate Banking
and C urrency Committee, no further legislative action
was taken in that session of Congress, and it was not
until 1949 that another bill to regulate bank holding

Identifying the Exceptional Case

A

bill d e ­

signed to regulate bank holding companies was p ro ­
posed by the B oard in 1945, and Congressional hear­
ings were held in 1947.

Chairman E ccles o f the

companies was introduced.
A s of 1948, therefore, there was but one affiliate
statute intended to provide some measure o f control
over bank holding

companies, and that was the in­

Board of G overnors appeared as a witness and in the

effective “ holding com pany

course of his testimony identified “ the exceptional

1933 based upon the voting permit mechanism. W ith

case” that was the cause o f such concern :

prospects dim for further bank holding com pany

While the management of the great majority of
the important bank holding company systems have
sought the Board’s views, if not its approval, on
proposed bank acquisitions, there is one case where
a holding company management has openly defied
the Board in its attempt to halt an unbridled bank
expansion program. I refer to the Transamerica
Corp. with its vast group of controlled banks in
Arizona, California, Nevada, Oregon, and Wash­
ington. . . .
It may be interesting to the members of the com­
mittee to have the latest figures on the size of the
Transamerica banking empire. As of December 31,
1946, information available to the Board indicates
that there are 41 banks in the Transamerica group,
operating a total of 619 banking offices having
aggregate deposits in excess of 6 ^ billion dollars.
This represents more than 40 percent of all the
banking offices and 38 percent of all of the com­
mercial deposits in the five-state area. Since 1934,
the Transamerica group has acquired a total of
126 banks, which have been operated either as
separate units or have been absorbed by the banks
in the group. . . .
In addition, (Transamerica) owns and operates
many other types of businesses with aggregate re­
sources of more than $275,000,000. . . . There is
real estate, iron and brass foundaries, another real
estate outfit, buying, processing, and selling fish
and seafood, a very big fishing outfit; the manu­
facture of diesel engines and other products; hold­
ing real estate and acting under trusts. . . . Then
there is Occidental Corp., Occidental Life Insur­
ance. That is a large life, health and accident
company. And so forth.

affiliate”

provision o f

legislation in the near future, another method of
bringing the grow th o f Transam erica under control
was attempted.
The Transamerica Litigation

O n Ju ne 24, 1948,

after receiving a report from the Department of
Justice that there was not sufficient evidence o f abuse
of pow er by Transam erica to support an antitrust
proceeding under the Sherman A ct, the B oard of
G overnors issued a com plaint charging Transam erica
with violation of Section 7 o f the Clayton A ct.27 T h e
complaint alleged that Transam erica and its prede­
cessors had “ continuously and systematically” ac­
quired the stocks o f independent com m ercial banks
located in the five states o f California, O regon , N e ­
vada, W ashington, and A rizon a, and that the effect
o f such acquisitions might be to substantially lessen
com petition, restrain com m erce, or tend to create a
m onopoly.

T his was the first such proceeding chal­

lenging stock acquisitions of com m ercial banks by
bank holding companies by either the B oard o f G o v ­
ernors or the A ntitrust D ivision o f the Department
o f Justice during the entire 34 years since enactment
o f the Clayton A c t in 1914.
H earings were held and evidence was taken before
a member o f the Board, w h o filed his findings and
recom m ended decision on June 13, 1951, concluding

I want just to indicate that there is nothing really
excluded from acquisition if it appears to be profit­
able opportunity for investment.25

that Transam erica had violated Section 7, as alleged.

A part from Chairman Eccles, only tw o other w it­

of 3 to 2 (w ith G overnors R obertson and M ills not

Thereafter, on A pril 1, 1952, the B oard itself by vote
nesses testified in support o f the proposed legislation.

participating) concluded that a total of 47 bank stock

T hey were, respectively, the Secretary of the In de­

acquisitions by Transam erica were illegal. It ordered

23 Ibid., p. 36. (Emphasis added.)

2 Ibid., pp. 31-2, 44.
0

2 Ibid., p. 37.
4

2 Transamerica Corp. v. Board of Governors of the Federal Reserve
7
System, 206 F.2d 163 (3rd Cir. 1953), cert, denied, 346 U.S. 901
(1953).

25 Hearings on S. 829, 80th Cong., 1st Sess. (1947), pp. 22, 24.

8



MONTHLY REVIEW, APRIL 1973

divestiture in all instances, except for the stock of

regarded com m ercial banking as “ interstate com ­

Bank of A m erica National Trust and Savings A s so ­

m erce” subject to Federal regulation. Consequently,
the court upheld the B oa rd ’s jurisdiction to proceed
under the Clayton A ct with these w o r d s :

ciation.
Transam erica appealed to the United States Court
o f Appeals for the T hird Circuit, which vacated and
set aside the B oa rd ’s order on July 16, 1953, on the
ground of failure of p roof.28 H ow ever, the decision
was of profound significance because of its rulings on
the legal issues.

Transamerica argued that Congress

had not intended for the Sherman A ct and Section 7
of the Clayton A ct to apply to com m ercial banks.

It

pointed out that both statutes were based upon the
pow er of Congress to regulate interstate com m erce,
that the Suprem e Court had consistently held during
the nineteenth century that com m ercial banking was
not “ interstate com m erce,” and that such decisions
were in force when the Sherman and Clayton A cts
were passed in 1890 and 1914, respectively.29 It
asserted that Congress could not have intended anti­
trust statutes, which are based on the Com m erce
Clause of the Constitution, to apply to activities that
did not constitute “ interstate com m erce” at the time
the statutes were enacted.
It also noted that the
constitutional basis for banking legislation had his­
torically been the pow er of Congress to “ coin money
. . . and regulate the value thereof,” and not the
Com m erce Clause.
T he Court of Appeals conceded the logic o f these
arguments but took note that, com m encing in 1942
with the decision in N .L .R .B . v. Bank o f A m erica
N ational T rust & Savings A ssn .,30 the courts had
reversed their nineteenth century position and now

It may readily be admitted that Congress has in
the past customarily dealt with the banking busi­
ness by special legislation directed solely to that
end.
This it did under its fiscal and currency
powers.
Indeed more than 100 years ago the
Supreme Court had held that banking was not
commerce. It is, therfore, doubtless true that the
members of Congress in enacting Section 7 of the
Clayton Act in 1914 did not specifically contem­
plate that “ corporations engaged in commerce”
would include banks.
We find nothing in the
legislative history, however, to indicate that Con­
gress did not intend by Section 7 to exercise its
power under the commerce clause of the Constitu­
tion to the fullest extent. The avowed purpose of
the Clayton Act was to supplement the Sherman
Act by arresting in their incipiency those acts and
practices which might ripen into a violation of the
latter act.
Since the general language of the
Sherman Act was designed by Congress “ to go
to the utmost extent of its Constitutional power in
restraining trust and monopoly agreements” the
supplementary general language of the Clayton
Act was undoubtedly intended to have the same
all inclusive scope.31

W ith this language, the court provided the legal
basis for full application of the antitrust laws to the
banking industry.
than that.

But the cou rt’s opinion did more

If any doubt remained as to the pow er of

Congress under the Constitution to regulate all bank
holding companies, regardless of their ownership of
stock in member banks o f the Federal R eserve Sys­
tem, it was swept away with the Transam erica d eci­
sion. A n d the ruling against the B oard on the facts
of the case provided renewed impetus fo r the drive to
enact legislation placing discretion in the B oard to
control the grow th of bank affiliation by means of
bank holding com pany ownership.

28 Ibid., p. 163.

W illiam F . Upshaw

2 Ibid., p. 165.
9
80 N.L.R.B. v. Bank of America National Trust < Savings Assn.,
fe
130 F.2d 624, 626 (9th Cir. 1942), cert, denied, 318 U.S. 791, 792
(1943).

8 Supra, note 27, pp. 165-66.
1

P a rt III, to appear n ext month, discusses the regulation of bank and nonbank affiliation under the
Bank H olding Com pany A c t of 1956, as amended. T he regulatory structure applicable to bank hold­
ing com panies and their affiliates is com pared with the provisions applicable to bank affiliation by
other means.




FEDERAL RESERVE BA N K OF RIC H M O N D

9

trict between 1971 and 1972.

TIME AND SAVINGS DEPOSITS

Table I shows the

amount outstanding and the percentage change from
the previous year in time and savings deposits in the
Fifth District, classified by type of deposit as well as

IN THE FIFTH DISTRICT

size and location of the bank holding the deposits.
Total time and savings deposits in the Fifth District
were $11.6 billion in O ctober 1972, an increase of

to its term, which may range from periods of less

T he Federal R eserve System and the Federal D e ­
posit Insurance Corporation conduct in O ctober an

than one year to longer than tw o years.

annual survey of time and savings deposits held by

deposits, while technically subject to a thirty-day

insured com m ercial banks. Interim quarterly surveys

more than 20 percent from the previous year.

withdrawal notice, are in practice withdrawn on de­

are conducted on a sample of banks.

Total

deposits com prise tw o main categories o f d ep osits:
time and savings deposits.

tween a time and a savings deposit lies with the

Growth in Tim e and Savings Deposits

stipulated time constraint on time d ep osits: the de­
posit in a time account must not be withdrawn prior

the highest rate in the 12-month period ending in

deposits grew at the slower rate of 14.6 percent. T w o

September. This m ovem ent— a decline in rates from
autumn of 1971 to the beginning of 1972 follow ed

trends appear to underlie the large increase in time

by an increase— was also exhibited by rates on prime

deposits.

First, large denomination deposits, basic­

comm ercial

paper

of

fou r-to-six

months

and

on

ally certificates of deposit of $100,000 or m ore, grew

longer-term T reasury issues o f three-to-five years.

by 61 percent.

o f Fifth District banks, on O ctober 31, 1971 and
O ctober 31, 1972.

T he chief distinction be­

1972, which was the lowest rate since July 1963.
T hey then rose to 4.651 percent in September 1972,

posits, which grew at a rate of 28.8 percent.1 Savings

o f h o ld e r: savings deposits are held only by individ­
uals or nonprofit organizations. T his article co m ­
pares data collected from the tw o most recent surveys

gather inform ation on total deposits and on interest

behavior of rates of return on various com peting in­
struments in the market.
Rates on new issues of
three-month U . S. T reasury bills fell from 4.668 per­
cent in September 1971 to 3.180 percent in February

grow th largely resulted from expanding time de­

mand. A nother difference is represented by the type

Both surveys

rates paid in various categories of deposit.

Savings

This

grow th was in longer-term deposits, i.e., deposits of
tw o years or more.
These trends may be explained by reference to the

Y ields on corporate bonds and on com m on stocks
displayed m ore steady declines during this period.

Second, in deposits of smaller de­

nomination, i.e., those less than $100,000, the largest

T he dow nw ard movement of market rates o f return
on investments between 1971 and early 1972 was an

T im e and
1 This figure refers to the change in total time deposits, which is
not shown in Table I.

savings deposits rose dramatically in the Fifth D is­

incentive for funds to be attracted to savings and time

Tablc

C H A N G E S IN TIM E A N D S A V IN G S DEPO SITS AT FIFTH DISRICT B A N K S:
FIFTH DISTRICT

Type of Deposit
Held by Individuals,
Partnerships and
.Corporations (IPC)

Am ount
Outstanding
($ Millions)
as of
October 31,
1972

% Change
From Year
Ago

M ARYLAND

% of Deposits held
by Banks with
Total Deposits of

% C hange in Deposits
from Year A g o for Banks
W ith Total Deposits

Less than
$100 mill

Total Time and S a v in g s Deposits
S a v in g s Deposits

$100 mill,
or more

Less than
$100 mill.

Am ount
O utstanding
($ Millions)
October 31,
1972

O CTO BER 31, 1971 TO O CT O BER 31, 1972
V IR G IN IA

D. c.

% Cange
FrorYear
/,0

Am ount
Outstanding
($ Millions)
October 31,
1972

% Change
From Year
Ago

Am ount
Outstanding
($ Millions)
October 31,
1972

WEST V IR G IN IA

% Change
From Year
A go

Amount
Outstanding
($ Millions)
October 31,
1972

% Change
From Year
Ago

NORTH C A R O L IN A
Am ount
Outstanding
($ Millions)
October 31,
1972

SOUTH C A R O L IN A

% Change
From Year
A go

Am ount
Outstanding
($ Millions)
October 31,
1972

% Changt
From Yeai
Ago

$100 mill,
or more

1 1,597

20.7

32.5

67.5

17.2

22.4

1,598

126

1,065

7.4

4,382

19.6

1,352

19.0

2,658

37.2

543

14.3

6,108

14.6

34.2

65.8

16.2

13.7

1,268

1^0

587

8.0

2,192

15.5

713

14.4

1,097

18.3

250

10.4

1

Time Deposits
Less than $100,000

3,706

19.2

38.5

61.5

16.6

21.0

207

Ifo

148

— 10.2

1,774

23.0

512

20.1

833

19.9

232

20.8

Less than 1 year

1,718

12.7

33.9

66.1

7.7

15.5

79

2 4

118

— 9.4

695

11.1

241

13.5

432

16.5

153

27.7

749

10.8

53.2

46.8

11.3

10.2

54

1

13

— 18.1

349

10.7

147

11.0

132

22.7

54

5.4

1,239

36.5

35.9

64.1

37.1

36.1

74

3

17

— 9.2

730

45.8

124

52.1

270

24.2

25

18.5

1,528

61.0

13.5

86.5

34.9

66.1

82

0

296

16.3

341

36.0

108

47.2

655

153.6

47

27.9

979

74.5

7.8

92.2

67.3

75.3

58

4

164

17.6

240

29.6

64

56.1

452

232.4

1

37.2

549

41.5

23.8

76.2

21.2

49.2

24

3£2

132

14.7

101

54.1

43

35.8

203

66.1

46

27.7

81.6

16.9

16.9

42

3-2

33

20.1

75

4.2

19

44.9

72

30.1

15

1 to 2 years
2 years or more
$100,000 or more
N e go tiab le Certificates of
Deposit
N on negotiab le Certificates
of Deposit an d O pen
Accounts
Special Funds1

255

17.0

18.4

N um ber of Banks Reporting

366

360

329

37

325

35

46

6

12

12

150

146

108

108

24

23

26

26

M e m oran du m : Consum er-Type
O pen Account Deposits

860

27.2

28.6

71.4

— .5

43.4

58

8

38

6.7

326

49.4

103

4.2

196

35.9

139

18.0

-2 4 .1

1 Christmas Clubs and similar non-interest bearing accounts

10



MONTHLY REVIEW, APRIL 1973

FEDERAL RESERVE BA N K OF RIC H M O N D

11

accounts at com m ercial banks.
Furtherm ore, the
fluctuations in market rates of interest induced
greater uncertainty, which probably increased the
willingness of investors to incur longer commitments

less than $100,000, classified by type o f deposit as

at fixed rates of return.

mitted.

The Distribution of Deposits by Size of Bank
In both 1971 and 1972, approxim ately 10 percent of
Fifth District member banks held $100 million or
more in total deposits.2 In 1971, these larger banks
held 66.6 percent of total Fifth District d ep osits; in
1972, this figure increased slightly to 67.5 percent.

well as by location and size of bank.3

Section B

shows the percentage o f these deposits, similarly clas­
sified, receiving the maxim um rate o f interest p er­
Section A indicates that 80.1 percent o f all

banks in the Fifth District paid the m axim um rate
of 4.50 percent on savings deposits.

Section B indi­

cates that only 73.2 percent of all savings deposits in
the Fifth District received the 4.50 percent return.4
The District of Columbia banks appeared to be som e­
what less aggressive in com peting for time deposits

T he savings and time com ponents of total deposits

than were banks in other parts of the District.

display similar patterns o f concentration. In terms
of grow th, the larger banks experienced a greater

41.7 percent of D. C. banks were paying maxim um

O nly

increase in total time and savings deposits, 22.4 p er­

ample, while 88.0 percent of V irginia banks were pay­

rates on time deposits of less than one year, fo r e x ­

cent, than did the smaller banks, with 17.2 percent.

ing the maxim um on these deposits. N orth Carolina,

A s Table I shows, much of this increase is explained

which exhibited the greatest increase in time and

by the substantial rise in large bank holdings o f large

savings deposits, also had the greatest percentage o f

time deposits, which grew by 66.1 percent com pared
with a rate of 34.9 percent in smaller banks. In co n ­
trast, the rate of increase of savings deposits was
more rapid in smaller banks, at 16.2 percent, than in
larger banks, at 13.7 percent.

banks paying the m axim um rate of interest: 91.7 p er­
cent. M aryland and the District of Columbia, which
had the tw o lowest increases in total time and savings
deposits in the Fifth District, also had the lowest
percentage of banks paying m axim um rates o f in­
terest.

A greater percentage o f banks with deposits

T h e g re a te st in ­

of $100 million or more pay maxim um rates on time

crease in total time and savings deposits for the

deposits of less than $100,000 than do smaller banks.

period considered was in N orth Carolina, with a gain

In V irginia, W est V irginia, and N orth Carolina, the

Growth in Deposits by States

of 37.2 percent.

N orth Carolina exhibited a par­

ticularly salient increase of 153.6 percent in time
deposits of $100,000 or m o r e ; and its savings deposits
grew at a rate of 18.3 percent, the most rapid rise in
the Fifth District.

T he District of Columbia showed

the smallest increase in total savings and time de­
posits, having a rise of only 7.4 percent.

Smaller

denomination time deposits declined by 10.2 percent
in the District of Columbia while increasing by 23.0
percent in V irginia, the largest such increase in the
Fifth District.

T his disparity suggests that the D is­

figure

is

100 percent.

smaller banks, however,

A

greater percentage of

pay m axim um

rates

on

savings deposits.
It appears, therefore, that com petition for deposits,
as shown by percentages o f banks paying maxim um
interest rates, is keener for savings deposits am ong
the smaller banks, and for time deposits of less than
$100,000, am ong the larger banks. Furtherm ore, a
smaller percentage of savings deposits received the
m axim um rate in 1972 than in 1971, while a larger
percentage of time deposits of less than $100,000
received the maxim um rates in 1972 than in 1971.

trict of Columbia banks faced substantial com petition
“ Maximum Rates under Regulation Q:

from neighboring areas in V irginia.

Percent

Rates Paid on Savings and Time Deposits of
Less than $100,000

A con sid era tion o f the rates

offered by banks in the Fifth District helps to further
define their com petitive position.

Table II is co n ­

cerned with the patterns of rates paid on time and
savings deposits in the Fifth District.

Section A

shows the percentage of banks paying the maxim um
rates allowable under Regulation Q on deposits of
2 Hereafter, time and savings deposits will refer to deposits of
individuals, partnerships, and corporations (IPC) only.

12



Savings
4.50
Multiple Maturity Time Deposits
30-89 days
4.50
90 days to 1 year
5.00
1 year to 2 years
5.50
5.75
2 years and over
Single Maturity Time Deposits*
Less than $100,000
5.00
30 days to 1 year
5.50
1 year to 2 years
2 years and over
5.75
$100,000 and over
30-89 days
no set maximum at p
6.75
90-179 days
180 days to 1 year
7.00
7.50
1 year or more
*These rates were used as maximums.
1 The discrepancy in percentages is explained by the less-than-equal
distribution of deposits among banks: 10 percent of the banks, for
example, may hold more or less than 10 percent of total deposits.

MONTHLY REVIEW, APRIL 1973

Table II

D ISTR IBU T IO N OF M A X IM U M RATES OF TIM E A N D S A V IN G S D EPO SITS
OF LESS T H A N $100,000 O N O CT O BER 31, 1971 A N D O CT O BER 31, 1972
FIFTH DISTRICT
A. Percentage of Banks Paying M axim um Rates
Type of Deposit

Time

Savin gs
Less Than
1 Year

A rea and Size of Banks1

B. Percentage of Deposits Receiving M axim um Rates
Savings

1-2
Years

2 Years
or More

71.4

67.5
67.2
65.3
83.8

87.8
65.6

Time
Less Than
1 Year

1-2
Years

2 Year:
or Mon

85.0

92.1
96.2
97.1

77.1
85.9
80.0

91.5

73.2

97.5
97.7

95.7

92.5

97.5

FTH DISTRICT
78.1
78.4

Total 1971

80.0

Total 1972
Less than $100 mill.
$100 mill, or more

80.1
81.8
64.9

76.9
91.9

73.5
72.9
78.4

MARYLAND
Total 1971
Total 1972
Less than $100 mill.
$1 00 mill.. or more

82.6

52.2

54.3

47.8

96.6

81.4

50.2

90.5

82.6
80.5
100.0

43.5
39.0
80.0

47.8
46.3
60.0

47.8
43.9

96.7
88.9

86.3
87.1

52.8
72.4

80.0

100.0

85.4

30.1

83.7
95.2
76.6

83.3
83.3
85.7
80.0

50.0

50.0

81.9

33.3
*
*

81.8

91.5
57.1
*

60.0

25.0
*
*
*

14.6
*
★
*

50.0
*
*

84.8
80.7

88.0

87.6
88.0

80.0

86.9
100.0

100.0

79.6
55.7
89.3
32.2

70.2
86.0
83.5
100.0

D. C.
Total 1971
Total 1972
Less than $100 mill.
$100 mill, or more

41.7
*

78.1
82.2

58.1

52.1

V IR G IN IA
Total 1971
Total 1972

89.0

82.1
78.1

99.0
99.8
99.5

93.5
95.1
91.2

98.7
99.4
98.5

100.0

100.0

100.0

98.0
99.1
98.9

46.3
73.9
72.5

95.7
97.6
97.4

100.0

100.0

100.0

80.6
100.0

83.9

86.9

46.2

100.0

69.4
77.8
77.1
100.0

72.2
80.6
80.0
100.0

100.0

59.3
60.2
59.0
100.0

Total 1971
Total 1972
Less than $100 mill.

91.3
91.7
94.1

95.7
91.7
88.2

91.3
91.7
88.2

91.3

99.1

91.7
88.2

79.7
97.8

76.7
99.9
98.9

80.7
98.2
78.9

$100 mill, or more

85.7

100.0

100.0

100.0

78.1

100.0

100.0

99.6
100.0

99.9

96.3

55.5

99.0

78.5

89.0

99.5

54.1
*

93.4
*

Less than $100 mill.
$1 00 mill, or more
W EST V IR G IN IA
Total 1971
Total 1972
Less than $1 00 mill.
$1 00 mill, or more

59.3
72.2
71.4

N O R T H C A R O L IN A

SO U TH C A R O L IN A
Total 1971

80.8

84.6

65.4

42.3

Total 1972

69.2

80.8
77.3

53.8

50.0

63.7
21.4

54.5
*

50.0
*

97.8
*

Less than $100 mill.
$100 mill, or more

81.8
*

100.0

100.0

1 By am ount of total deposits
* W ithheld to avoid disclosure




FEDERAL RESERVE BA N K OF RIC H M O N D

13

Rates on Time Deposits of $100,000 or More
These deposits exhibited the greatest percentage in ­
crease in the Fifth District.
The m axim um rates
paid by Fifth D istrict banks on large time deposits

Table III
M A X IM U M

RATES P A ID BY FIFTH DISTRICT B A N K S

O N O CTOBER 31, 1972 O N TIME D EPO SIT S OF
$100,000 O R M O R E BY A R E A A N D B A N K S IZ E 1

are shown in Table I I I ; interest rate patterns for

Negotiable
Certificates
(percent)

Other
Certificates
and Open
Accounts
(percent)

these deposits differ somewhat from those discussed
above for smaller deposits.

The most typical rate

paid on both negotiable and other certificates of
deposit and open accounts was in the range o f 6.25
percent and less. A lthough not shown in Table III.

FIFTH DISTRICT

data from the survey reveal that 12.5 percent o f

Less than $100 million

7.26 - 7.50

7.26 - 7.50

smaller banks paid m ore than the typical rate on

$100 million or more

6.25 and less

6.51 - 6.75

Less than $100 million

6.76 - 7.00

6.25 and less

$100 million or more

6.25 and less

6.25 and less

Less than $100 million

6.25 and less

6.25 and less

$100 million or more

6.25 and less

6.25 and less

Less than $100 million

7.26 - 7.50

7.26 - 7.50

$100 million or more

6.25 and less

6.51 - 6.75

Less than $100 million

7.26 - 7.50

7.26 - 7.50

$100 million or more

6.25 and less

6.25 and less

Less than $100 million

6.25 and less

6.25 and less

$100 million or more

6.25 and less

6.25 and less

7.26 - 7.50

6.25 and less

negotiable certificates of deposit, while none o f the
larger banks paid more than this typical rate.

F or

other certificates and open accounts of m ore than
$100,000, 7.1 percent o f the smaller banks paid more
than the typical rate, while only 3.1 percent o f the
larger banks paid m ore than 6.25 percent.

Thus,

there is evidence of keen com petition for time deposits
of $100,000 or m ore by smaller b an k s; but the limited
num ber o f banks in this category prevents broad
generalization in this regard.
Conclusion

M ARYLAND

DISTRICT OF C O L U M B IA

V IR G IN IA

T im e and sa v in g s d e p o sits in the

Fifth District grew substantially during the period
from O ctober 1971 to O ctober 1972.

A s rates of

interest in the market exhibited instability and de­
clines, the com petitive position o f com m ercial banks
for funds im proved. A s a result, there were m ajor
increases in deposits, particularly in time deposits.
T im e and savings deposits rose most rapidly in
locations where m axim um rates of return prevailed.
A greater percentage of smaller banks offered higher
interest rates on savings deposits and larger certifi­
cates o f d e p o sit; how ever, larger banks m ore fre ­
quently offered higher returns on time deposits of
less than $100,000.

14



Susan P . K ru g

W EST V IR G IN IA

NO RTH C A R O L IN A

SOUTH C A R O L IN A
Less than $100 million
$100 million or more

none

6.25 and less

M ost Typical Rate Paid
in Fifth District
1 By amount of total deposits

M ONTHLY REVIEW, APRIL 1973

6.25 and less

6.25 and less

THE DISTRICT ECONOMY
IN PERSPECTIVE: 1972
In the United States and the Fifth Federal Reserve
District, 1972 was a bullish year.

consum er price increases were held to 3.0 percent.

Both the rate of

N ot only have the controls retarded the rise in prices

unemployment and the rate o f inflation declined.

but they have also contributed to a reduction in the

Output, employm ent, and incom e all m oved in the
right direction, as a climate o f expanding econom ic

inflationary expectations that plagued the econom y
during 1971.

activity and stimulative fiscal and monetary actions
nurtured rapid econom ic grow th.

In most instances, econom ic developments in the
Fifth District during 1972 paralleled those of the

A strong demand for good s and services, aided by
accelerated monetary grow th, characterized the na­

nation at large. Statistics for 1972, com bined with
sample survey1 results, clearly indicate that 1972 was

tional econom y during the past year. Gross national
product gained nearly 10 percent, increasing by m ore
than $100 billion for the first time in history. A fter

at the individual sectors of the Fifth District econom y

a banner year for all District states.

A closer look

adjustment for price increases, “ real” G N P expanded

provides a better perspective o f District developments
over the past year.

6.5 percent, the most substantial advance in m ore
than six years. T he increased demand for good s and

The Employm ent Picture

services by individuals and all levels o f governm ent

ployment statistics showed moderate to substantial

was accom panied by a rise in the volum e o f business
purchases. T he 21 percent jum p in gross private

im provem ent in the nation and the District during
1972. Em ploym ent figures through Decem ber were

domestic investment from fourth quarter

up 3 percent over a year ago, with gains of 4 percent
in manufacturing and 2 percent in nonmanufacturing
industries. A close look at the m ajor categories of

1971 to

fourth quarter 1972 far outstripped the 1970-1971
growth. T he strong upward momentum of spending
during the year was associated with a large rise in
the level of credit outstanding.

F or 1972, com m er­

cial bank credit rose at a 14 percent annual rate. The
marked increase in total spending also prom pted a
sharp rise in production. Y ear-to-year, the industrial
production index was up 10.4 percent in Decem ber.
Stepped-up production was made possible by three
key factors— labor force expansion, im proved labor
utilization, and increased productivity. Civilian em ­
ployment rose at a 3.6 percent annual rate for most
of the y e a r ; both average hours w orked and output
per m an-hour were up over a year a g o ; and a much
slower rise in production costs in the first three quar­
ters reflected the increased productivity of labor, as
well as slower grow th in compensation. T his greater

N o n a g ricu ltu ra l e m ­

nonm anufacturing employm ent illustrates the relative
strength o f each.
A part from manufacturing, governm ent is the
leading source of job s in the District. In Decem ber,
Federal, state, and local governm ents supplied
1,508,900 job s or 22 percent o f the District’s total
nonagricultural employment.
T he relatively large
size of the governm ent sector reflects the location of
the nation’s capital within the District. T he 3 p er­
cent expansion of governm ent employm ent during
1972 roughly paralleled the 1971 increase. In divid­
ual state advances w e r e : 7 percent for South C aro­
lina, 5 percent for V irginia, 4 percent for M aryland,
and 1 percent for N orth Carolina and W est Virginia.
T he District o f Columbia showed no grow th in g o v ­

productivity m irrored an increasingly efficient re­

ernment employm ent in 1972, perhaps reflecting an

source allocation as the econom y approached a more

attempt by the Federal Governm ent to reduce em ­

optimal operating level.

ployment rolls.

Further illustrating the dynamic nature o f the 1972

Both the trade and services categories also posted

econom y, total personal income, after price change

sizable increases in em ploym ent during 1972.

adjustments, grew

5.6 percent through the third

the third most im portant source o f nonagricultural

A smaller percentage of the gain was lost

employment, wholesale and retail trade accounted for

quarter.

As

in higher prices than in previous years, as prices
have advanced at a slow er rate since the imposition
of wage and price controls in A ugust 1971.



F or 1972,

1 The Fifth District Opinion Survey of Business Conditions is con­
ducted monthly by the Research Department of the Federal Reserve
Bank of Richmond. Respondents represent manufacturing, banking,
and trade and services industries throughout the District.

FEDERAL RESERVE BA N K OF RIC H M O N D

15

19 percent of the D istrict’ s nonagricultural job s in
O ctober, up 3 percent for the year. T he m ost im ­
pressive gains were in M aryland and South Carolina,
each showing 5 percent increases. Jobs in the service

ages continued to restrict the output of textile and
furniture producers. T he low unem ployment rate in
the District does not portend any immediate im prove­
ment in the labor shortage problem .

industries were also up 3 percent for the second year

A t 3.7 percent, the rate of unem ployment in the
D istrict ended the year below the national rate o f 5.2

in a row , closely follow in g the national trend. M ary­
land and N orth Carolina experienced the largest
relative gains in service employment. Y ear-to-year,
the trade and services categories com bined to p ro ­
vide 34 percent of nonagricultural em ploym ent in
the District.
Surveys of business conditions for N ovem ber and

percent.

N ot only was the aggregate rate fo r the

D istrict below the U . S . fig u r e ; but each state posted
a Decem ber 1972 rate o f unem ployment below the
national average, with the exception o f W e st V ir ­
ginia.

Overall, joblessness showed a marked decline

in the District during 1972, with much o f the im ­

D ecem ber reflected a continued increase in nonagri­

provem ent the result of a slight easing o f W est V ir ­

cultural employment, with the exception o f the manu­

ginia’s unemployment crisis.
State unem ployment
rates in Decem ber w e re : W est V irginia, 7.1 percen t;

facturing sector where some leveling off is indicated.
A significant number of nonagricultural respondents
continued to report severe shortages o f both skilled
and unskilled labor relative to desired needs, particu­
larly in the manufacturing sector.
T he number of workers employed provides one key
to the grow th of manufacturing industries in the
District.

A fter adjustm ent for seasonal variation,

em ploym ent in manufacturing industries in 1972 re­
flects a reversal of the general decline reported a year
earlier. T he year was characterized by strong up­
ward adjustments in inventory levels, volum e of
shipments, and new orders and order backlogs.

A c­

com panying this trend was a severe shortage o f labor,
notably in the textile and furniture industries.
In D ecem ber, overall District manufacturing em ­
ploym ent rolls were 4 percent higher than a year
earlier.
T he bulk of the increase was in durable
goods industries, which showed a 6 percent jum p in
employment. Each state shared in the manufacturing
employm ent grow th, with the exception of the D is­
trict of Columbia. O nly V irginia and the Carolinas
experienced gains in both durables and nondurables.
Perhaps an equally im portant measure o f grow th
is manufacturing man-hours, which follow ed a steady
upward trend during 1972. The District index in
D ecem ber was up 5 percent from a year earlier, with
a 7 percent gain in durables and a 3 percent increase
in nondurables.

These figures reflect a substantial

recovery over the m an-hour declines that character­
ized 1971.

A s was true of manufacturing em ploy­

ment, the largest man-hour gains were in the durables
sector. T otal manufacturing man-hours through D e ­
cember increased 7 percent in V irginia, 6 percent in
South Carolina, 5 percent in North Carolina, 3 per­
cent in M aryland, and 1 percent in W est V irginia.
T he index showed a small decline of 2 percent in the
District of Columbia.

Survey respondents in N o ­

M aryland, 4.2 p ercen t; South Carolina, 3.4 p e rce n t;
V irginia and the District o f Columbia, 2.7 percent ;
and N orth Carolina, 2.4 percent.
Construction Highlights

F o r the U . S. at large,

1970 was a year in which the construction industry
boom ed. T he surge in construction activity generally
reflected an ample availability of m ortgage credit at
stable interest rates, a strong demand fo r residential
housing, and a general expansion in business activity.
In

spite

of

labor

and

material

shortages

that

plagued the industry during the year, the index of
construction contracts, both residential and nonresidential, showed a marked increase throughout 1972.
Overall, construction contracts in the District were
up 14 percent through Decem ber, prim arily as the
result of a 38 percent jum p in residential contract
awards. Gains in the residential sector w ere sizable
in each state, with the exception of the District o f
Columbia, which suffered a sharp decline. T he rela­
tive increases w e r e : 99 percent in W est V irginia, 53
percent in South Carolina, 49 percent in V irginia,
42 percent in N orth Carolina, and 23 percent in
M aryland.
Districtwide, nonresidential contract
awards declined slightly from January to D ecem ber
1972.

A 5 percent decrease in W e st V irginia, an 8

percent decline in the D istrict of Columbia, and a
6 percent drop in M aryland were offset by substantial
gains in V irginia and the Carolinas. V irginia showed
the largest grow th in nonresidential construction ac­
tivity, registering a 49 percent increase.

Other gains

were N orth Carolina, 13 percent, and South C aro­
lina, 12 percent.

Generally, nonresidential construc­

tion benefited from new industries locating in the
District and from sizable plant expansions by several
manufacturing firms.
The Farming Data

C ash re ce ip ts fro m

farm

vem ber and Decem ber reported sizable increases in

marketings during the January-N ovem ber period

hours worked per week, but troublesom e labor short­

were 8 percent above those of the same period last

16



M ONTHLY REVIEW, APRIL 1973

year, with gains of 9 percent from livestock and 7
percent from crop receipts. C ool weather and e x ­
cessive rainfall in early summer caused substantial
damage to agricultural crops, and many farmers
suffered severe damage from the floods accom pany­
ing H urricane A gn es in June. A lthough crop co n ­
ditions had im proved by late summer, the production
level was still below a year ago.

T he 1972 flue-

Banking Developments T h e 1972 sta tistics fo r
member banks in the Fifth District clearly reflect a
significant easing o f credit, a broad expansion of
business activity, and strong loan demand. T hrough
Decem ber of 1972, the bank debits index rose 20
percent for the District as a whole. L arge increases
were experienced in each state, ranging from a low of

cured tobacco marketing season was highlighted by

12 percent in M aryland and W e st V irginia to 28
percent in V irginia. T h e stepped-up level o f e co ­

record high prices, which averaged 10 percent above

nom ic activity com bined with strong loan demand to

a year earlier. T he volum e of marketings was 5 per­

result in a dramatic increase in loans and discounts

cent lower, however, resulting in only a 5 percent in­

by District member banks.

crease in the value of sales. In general, 1972 crop
production reflected both smaller acreages for harvest
and low er yields per acre. Prices received by farmers

cember 1972, loans and discounts were up 24 percent

from all com m odities increased in each District state
through Decem ber. Generally, the largest gains were

in loans. A lthough the increase in investments by
member banks in the D istrict was not as im pressive

in prices received from livestock. Y ear-to-year in­
creases in the receipts from farm marketings w e r e :

as the grow th o f loans, it was still substantial. In ­
vestment in other securities (m ainly m unicipals)
jum ped 12 percent from Decem ber 1971 to Decem ber

20 percent in South Carolina, 16 percent in W est
V irginia, 14 percent in V irginia, 13 percent in M a ry­
land, and 8 percent in N orth Carolina.
T he general increase in farm marketing receipts

over a year earlier.

A t $17.6 billion in D e ­

Unusually heavy consum er and

real estate lending accounted for much o f the increase

1972 to a level o f $5.2 billion.

H oldings o f U . S.

Governm ent obligations increased at a m ore m oder­
ate 7 percent to $2.5 billion.

Total assets o f member

in prices paid by farmers, i.e., wage and production
costs. In a Decem ber 1972 survey o f farm conditions

banks in the District were $30.5 billion at the close
of 1972, up 18 percent over 1971. B y states, total
assets on the last W ednesday in Decem ber posted

in the District, 95 percent of the respondents indi­
cated that prices paid by farm ers continued to rise

cen t; N orth Carolina, 20 percen t; W est V irginia, 18

was accompanied by a continued upward movement

throughout 1972, although in some cases the increase
was slight.
Survey respondents felt that gains in

the follow in g year-end in creases: V irginia, 22 per­
p ercen t; M aryland, 14 p e rce n t; District o f Columbia,

realized net farm incom e were likely, but the increase

13 percent; and South Carolina, 11 percent.
District member banks also experienced sizable

would not be as large as the expected hike in realized

deposit expansion during 1972.

gross income.
A strong demand

deposits at the close of the year were $25.8 billion, 18

throughout 1972.

for

farm

credit

continued

District farm ers increased their

use of both long- and short-term debt, causing both
types of credit to expand at a much faster rate than a
year earlier.
A pproxim ately the same number of
farmers borrow ed from com m ercial banks in 1972 as
in the previous year, but the average size of a farm
loan increased. In general, most survey respondents
indicated that the financial condition o f District farm ­

percent above 1971.
T otal deposit gains by state
w ere : 24 percent in N orth Carolina, 21 percent in
V irginia, 17 percent in W est V irginia, 16 percent in
M aryland, 12 percent in South Carolina, and 11 per­
cent in the District of Columbia. Both demand and
time deposits showed sharp increases in all states.
Overall, the 21 percent time deposit expansion was
only slightly more impressive than the 16 percent
demand deposit grow th.

ers im proved during 1972.




Total member bank

B . Gayle B urgess

FEDERAL RESERVE BA N K OF RIC H M O N D

17

Outlook for ’73 . . .

SPOTLIGHT ON AGRICULTURE
This y ea rs prospects fo r the nation s agriculture were recently analyzed by top level economists of the
V . S. Department o f Agriculture at the National Agricultural Outlook Conference.
The outlook, as they see it, shapes up this way.

Realized gross income of the nation’s farm ers in
1973 may well top last year’s record perform ance.
But farm production

expenses will probably rise

faster than gross income and leave slightly less net
income than the all-time high realized in 1972. Even
so, net incom e per farm could almost equal 1972’s
im proved level. F arm ers’ demand for credit will re­
main high. M ost lenders feel, however, that ample
funds will be available to meet the increased demand.
Strong dom estic and foreign demand— key factors

F ood consum ption per capita is expected to in­
crease, hitting a new high as it rebounds from last
year’s reduced level. W ith food supplies early in
the year somewhat low er than in 1972, all of the an­
ticipated increase will probably occur in the second
half.
Consumers are expected to eat m ore meat,
poultry, fish, dairy products, fruit, and processed
vegetables, and use m ore vegetable oil than they did
in 1972.

But they seem likely to reduce their co n ­

continued

sumption of eggs, fresh vegetables and potatoes,
animal fats, coffee, and cocoa.

strength to farm prices, income, and exports in the
year ahead.
M oreover, the expansion in general

sumption, consumers will probably spend from 7 to

in

the

ou tlook — are

expected

to

lend

econom ic activity will likely gain momentum, adding
further strength to agriculture’s prospects for 1973.

W ith both higher food prices and increased co n ­
8 percent m ore for food in 1973 than they did last
year. But the increase in food expenditures w ould

A n d yet, uncertainties in several areas cloud the out­

still be smaller than the indicated 9.5 percent a d ­

look.

vance in disposable personal income.

A m on g them a r e : the unsettled international

monetary situation ; the question o f whether or not
farmers will plant larger acreages of soybeans, wheat,
and feed grains this year in response to grow in g
w orldw ide d em an d ; and the related unknowns co n ­
cerning when and if the Peruvian fish catch will
again

permit

normal

production

and

exports

of

fish meal.

perhaps to 15.5 percent.
Supply-Demand

Conditions

S u p p lies o f h ig h -

protein feeds are tight, and market demand for feedstuffs and food grains is grow in g, both at hom e and
abroad.

Food Prices and Expenditures A m e r ic a n c o n ­
sumers trying to cope with skyrocketing food prices

It thus appears

that the share of consum ers’ after-tax incom e spent
for food will again decline fractionally, dropping

To

help

meet

this

stepped-up

demand,

m odifications have been made in 1973 farm p ro ­

will not find the outlook for 1973 very encouraging.

grams for wheat, feed grains, and cotton to en­
courage farm ers to produce m ore grains and so y ­

W ith somewhat larger food supplies than in 1972,

beans.

they may eat m ore but they will pay higher prices.

likely, and m ore hogs will probably com e to market

Retail food prices are likely to average about 6

M oderately larger cattle marketings are also

after midyear.

Prices o f food

Consumer demand for food and other farm p ro d ­

purchased both at grocery stores and in restaurants

ucts, fueled by rising incomes, is expected to re­

are expected to rise at a faster pace than they did

main strong.

last year.

Gains in prices of grocery store food may

ment, and above-norm al tax refunds from overw ith­

well outstrip those for restaurant foods, rising per­

holding in 1972 may boost disposable personal in ­

haps as much as 6.5 percent.

com e about 9.5 percent above a year ago, despite the

percent higher this year than last.

M uch of this year’s

H igher wage rates, increased em ploy­

advance in food prices will result from higher prices

substantial rise in social security taxes.

for beef, veal, and pork.

consum ers’ willingness to buy in 1973 will match

But price increases are also

W hether

indicated for poultry, eggs, and fish. O n the brighter

their ability to do so remains to be seen.

side, some respite from the sharply higher beef, veal,

prices in key areas such as food , plus the impact of

and pork prices appears likely after midyear.

last year’s spectacular increase in installment credit

18



MONTHLY REVIEW, APRIL 1973

R ising

and the resulting sharp upturn in outstanding in­

labor.

stallment debt, could curb consumer spending to

most m inor, expense items to be higher than a year

some extent.
B lossom ing export demand for the nation’s farm
products prom ises to expand to unprecedented levels
in the current fiscal year. E xports, as a result, may
well total $11.1 billion— up about $3.0 billion from

ago, however.

the previous all-time high set last year.1 M ore than

Farmers can expect costs o f all m ajor, and

Commodity Digest H e re is a b rie f ru n d o w n on
the Department of A gricu ltu re’s expectations for
m ajor Fifth District com m odities.
T obacco

G row ing dom estic and overseas demand

half the gain will result from larger v olu m e; the re­

for

mainder, from higher prices.

sharply low er surplus stocks are bright spots in the
outlook for tobacco farmers. W ith this upturn in

W eather-reduced har­

vests in many foreign countries in 1972, R ussia’s

tobacco

prod u cts— especially

cigarettes— and

huge purchases of grains and soybeans, emergence of

demand and reduced supplies, basic marketing quotas

the P eop le’s R epublic of China as a significant e x ­

for flue-cured and burley have been increased. G row ­

port market, continued grow th o f the livestock and

ers can thus be expected to harvest considerably more

poultry industries in Japan and W estern Europe,

tobacco this year.

and the expanded w orld demand for other protein

tion in loan stocks is indicated.

meals because of the sharply reduced supplies of

for eligible 1973-crop tobaccos will be 5.3 percent

Peruvian fish meal have been the m ajor develop­
ments leading to this year’ s unusually strong foreign

higher than in 1972.

Still, another significant reduc­
T he support levels

demand. Realization o f this big jum p in farm e x ­
ports hinges to a great extent, however, on whether

United States leaf exports will continue to face
intense com petition in w orld markets. A s a result,
overseas shipments will decline, falling to a more

or not the nation’s transportation system perform s

normal level after the sharp expansion in 1972 that

at a high level, without a m ajor disruption, for the

follow ed the dock tie-ups a year earlier.

entire year.

of U nited States to b a cco ; expanded production, im ­

H igh prices

proved quality, and low er prices o f foreign-grow n
Farm Income and Expenses

F arm in co m e p r o ­

spects for 1973 may be summed up this way.

The

to b a cco ; and the tobacco policies o f the enlarged
European Com m unity are adversely affecting our

volum e o f farm marketings will probably be larger

tobacco exports.

than a year ago. Farm prices are likely to average
higher but may decline slightly after midyear and

tight supplies, skyrocketing prices, and attempts to

Soybeans and P eanuts

Unusually strong demand,

average near year-earlier levels in the second half.
T he com bination of larger marketings and higher

get farmers to plant m ore soybeans this spring char­

average prices will likely result in about an 8 per­
cent gain in cash receipts. Thus, despite sharply re­

entire 1972 crop of soybeans is indicated, and carry­

duced

Government payments to farmers, realized

mestic and foreign demand will remain strong, keep­

gross income could reach a new high roughly 5 p er­
cent above the previous record set last year. Farm

ing supplies tight and prices high through the re­
mainder of this crop year at least.
W ith peanut production continuing to outstrip co n ­

production expenses, however, may well rise even
m ore than gross income. A s a result, total realized
net farm incom e may drop slightly below 1972’s
peak level but w ould be the second highest on record.
Farm expenses jum ped 7 percent in 1972 and will
likely rise at least as much, if not m ore, this year.
Should farm output expand in response to the e x ­
ceptionally heavy demand at home and abroad as is
anticipated, farm ers w ill doubtless use m ore and
higher priced inputs.

E xpenses for items of farm

origin— feed, livestock, and seed— can be expected to
advance m ore sharply than those for items of non­
farm origin.

Leading the parade o f larger-than-

average cost increases will probably be those for pur­
chased feed, purchased seed, and wages o f hired
1 This forecast was made prior to the February 12 devaluation of
the dollar and does not consider possible effects of the devaluation.




acterize the current soybean situation.

U sage o f the

over stocks will be at minimum levels.

sumption, supplies are at record levels.

Both d o ­

Output this

season was about one-third above requirements for
food and farm use, and peanut prices again averaged
near the support level.

U n der existing legislation,

1973 acreage allotments have been set at the m ini­
mum level.
C otton

Because o f the big

1972 crop, cotton

supplies are up over 2 million bales above last sea­
son’s 14.8 million.

W ith strengthening foreign de­

mand, cotton export prospects are much brighter
and may total about 4.5 million bales— the most since
1966-67.

Dom estic mill use, on the other hand, may

drop around 5 percent below a year ago, probably
falling to the lowest level since the late forties. The
decline would reflect prim arily the increasing com p e­
tition from man-made fibers that has resulted from

FEDERAL RESERVE BA N K OF R IC H M O N D

19

last year’s reduced supplies of cotton. Cotton mill
consum ption will continue to benefit from the g r o w ­
ing popularity of denim and corduroy, however.

W ith tighter milk supplies, milk prices may aver­
age 4 to 5 percent above last year’s level. T he higher

E x­

prices will m ore than likely offset the smaller m ar­

pected disappearance will be up slightly but much less
than 1972 output, so the cotton carry-over this

ketings, and dairym en’ s gross cash receipts will in­

for cotton have been cut 13 percent, and the c ro p ­

crease moderately. But their production costs rose
faster than their gross incomes early in 1973, and
net returns for the year may be low er than in 1971

land set-aside requirement for eligibility in the cotton

and 1972.

summer will be larger.

T he 1973 acreage allotments

program has been eliminated.
P ou ltry and E gg s

M eat Anim als

T he outlook for poultry and

egg producers is generally favorable, although they
are faced with sharply higher feed costs. Consumer
demand is strong, and the small pork supplies and
high red meat prices are helping to support the prices
of poultry and eggs. M oderate increases in broiler
and turkey production are likely, but egg output may
stay below year-earlier levels throughout most of
1973.
W ith broiler and turkey production only
slightly larger, prices will likely be above 1972 for
most of the year.

E gg prices have remained strong

thus far and are expected to continue well above
1972’s low levels through the summer.

Prospects for beef cattle and hogs

are optimistic. Demand fo r red meat is boom ing.
Cattle and hog prices are up sharply and are en cour­
aging farmers to expand production.
Fed cattle
marketings will probably increase m oderately as they
did last y e a r ; larger hog marketings are indicated
after midyear, with gains in the second half offsetting
reductions in the first half.

W ith consum er demand

remaining strong, prospects are that livestock prices
will continue to be firm but will weaken some after
midyear.

But even if hog prices soften in the second

half, especially in the fall, the h og-corn feeding ratio
will likely remain favorable.

Dem and for feeder

cattle is exceptionally strong, and prices are expected
D airy P rod u cts

M ilk production this year may be

down slightly since higher feed prices, poor quality
roughage, and short supplies of feed in some areas
are slow ing gains in milk output per cow and are
likely to intensify the culling of herds.
numbers are also continuing to decline.

N o te :

M ilk cow

to remain high.

T his year’s sharply higher prices of

feed and replacement livestock, driven up by strong
demand, will mean larger outlays by some farm ers
but a substantial boost to the incom e o f other farmers.
Sada L . Clarke

A new estimate made by the Department of Agriculture as this

R e v ie w

was going to press indicates that

total realized net farm income in 1973 will not decline slightly, as anticipated earlier, but may instead hit a new
record high about 9 percent above the 1972 peak.

20


MONTHLY REVIEW, APRIL 1973

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