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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW
Bank A ffiliates and Their Requlation:
P a rt I I I
International Agricultural Trade and
the JJ. S. Balance of P aym ents




T he

M o n th ly

R e v ie w

is produced by the Research

D epartm ent of the Federal 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 Relations. F e d ­
eral R eserve Bank of Richm 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 Bank's Research
D epartm ent unth a copy of any publication in which an
article is used.




BANK AFFILIATES AND THEIR REGULATION:
PART III
P arts I and I I of this scries discussed the events

com m ercial bank deposits in the United States ;2 and

that led to the bank affiliate legislation of 1933 and

18 o f these companies with 254 banks and aggregate

described the bank affiliate provisions adopted in that

deposits

year, including the first statutes designed to regulate

under the 1933 holding com pany affilate legislation.

bank holding companies.

The 1933 bank holding

company legislation proved to be inadequate; and
bills designed to limit and control the grow th of such
companies,

especially

Transamerica

C orporation,

w ere introduced in C ongress throughout the 1940’s.
W h en these bills failed to pass, an antitrust p ro­
ceeding zvas begun against Transamerica in 1948.
T he case was lost, but the defeat spurred new legis­

of

M oreover,

$10.8
of

the

billion
18

were

regulated

already

regulated

companies,

only

Transam erica com bined banking and nonbanking ac­
tivities to any significant extent.

Five o f the 18

companies had no nonbanking subsidiaries at all.
A lthough the remaining 13 had 82 nonbanking sub­
sidiaries with total assets o f $687 million, T rans­
america and its 23 nonbanking subsidiaries alone ac­
counted for $654 million, or almost 96 percent.3

lative efforts that resulted in com prehensive Federal

T he lengthy, extensive hearings in 1954 and 1955
not only established that bank holding companies as

regulation of bank holding companies.

a group did not g row appreciably between 1933 and

In this con­

cluding article, current regulatory provisions ap­

1955— they also failed to produce any significant

plicable to affiliation by means of bank holding com ­

evidence of abuse of pow er or im proper use of bank

pany ownership are discussed.

resources by such companies in the years follow ing
the 1933 holding com pany affiliate legislation.
the contrary,

E fforts to obtain bank holding com pany legisla­
tion intensified after the antitrust case against T rans­

all three

Federal bank

On

supervisory

agencies concurred in the view that, on balance, e x ­
perience with bank holding com panies and their o p ­

america failed in 1953. A t least five bank holding
com pany bills were introduced in 1955, and extensive

erations had been favorable since that time.

hearings were held before committees o f both the
H ouse and the Senate. A gain, as in prior years, the

the 179 national banks controlled by bank holding

Independent Bankers A ssociation took the lead in
demanding legislation. Indeed, the prim ary reason
for existence of this organization was to lead the
fight against bank holding companies, and it was
supported by many small banks across the nation,
who were convinced that bank holding companies
were being used as a device to evade Federal and
state laws restricting branch banking and to bring
about concentration in banking.1
In reality, however, there had been little if any
growth of bank holding companies, in the aggregate,
since enactment of the holding company affiliate
legislation of 1933.

A s of Decem ber 31, 1954, only

391 banks were owned by the 46 known multi-bank
holding companies, i.e., companies that owned or
controlled 25 percent or more of the stock o f each
of tw o or more banks.

Total deposits of these banks

amounted to $14.3 billion, or just 7.7 percent o f total
1 Hearings on S. 76 and S. 118, 83rd Cong., 1st Sess. (1953), p. 58.




T he

C om ptroller o f the C urrency reported that all of
companies were well-rated and were being operated
successfully.4

Similarly, the Chairman o f the F e d ­

2 “ Control of Bank Holding Companies,” Hearings on S. 880, S. 2350,
and H.R. 6227, 84th Cong., 1st Sess. (1955), p. 54.
3 Ibid., pp. 62-3.
4 Hearings on H.R. 2674, 84th Cong., 1st Sess. (1955), p. 131.
During the 1953 hearings the Deputy Comptroller of the Cur­
rency discussed one situation in which a finance company based
in Dallas, Texas, had purchased control of three small state banks
located in Chicago, then proceeded to sell large amounts of doubtful
finance paper to the banks on a “ without recourse” basis, and to
borrow from the banks. Initially, the Deputy Comptroller took the
position that the improper use of bank resources could have been
prevented by the pending bank holding company bills. Later, how­
ever, he revised his opinion to acknowledge that the root of the
problem lay in the fact that existing affiliate provisions in Section
23A of the Federal Reserve Act limiting financial dealings between
banks and their affiliates did not, at that time, apply to insured
state banks that were not members of the Federal Reserve System.
This situation was remedied in 1966 by making Section 23A of the
Federal Reserve Act applicable to insured nonmember banks. Supra,
note 1, p. 103.
Section 18(J) of the Federal Deposit Insurance
Act now provides as follows:
(J) The provisions of Section 23A of the Federal Reserve Act,
as amended, relating to loans and other dealings between mem­
ber banks and their affiliates, shall be applicable to every non­
member 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 af­
filiate of such nonmember bank. 80 Stat. 242 (1966).

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

3

eral Deposit Insurance C orporation filed a statement
indicating that banks owned by bank holding co m ­
panies presented few er problem s with regard to as­

cretion, antitrust principles were incorporated into

set control

the pattern of affiliate regulation.

and

management

than

independently-

ow ned banks.5

thority.

T o guide the Board in exercising its dis­
A s stated in a

Senate Committee R e p o r t:

Y et Transam erica’s uncontrolled grow th and e x ­
pansion over the years demonstrated the inadequacy
of the 1933 holding com pany affiliate provisions in
certain respects.

Board of G overnors acting pursuant to statutory au­

Com m enting on its experience ad­

ministering the 1933 provisions, the Board o f G o v ­
ernors advised C on g re ss:
These provisions of existing law regulate the ac­
tivities of a bank holding company only if it hap­
pens to control a member bank and only if it
desires to vote the stock of that bank. In effect,
therefore, regulation is largely voluntary on the
part of the holding company. Even if a voting
permit is obtained, the regulation to which a hold­
ing company is subject is aimed mostly at protect­
ing the soundness of the member banks in the
group.
These provisions, therefore, do not deal at all
with two apparent problems in the bank hold­
ing company field. In the first place, there is
nothing in present law which restricts the ability
of a bank holding company to add to the number
of its controlled banks. Consequently, there can
well be situations in which a large part of the com­
mercial banking facilities in a large area of the
country may be concentrated under the manage­
ment and control of a single corporation.
In the second place, there is nothing in existing
law which prevents the combination under the
same control, through the holding company device,
of both banking and nonbanking enterprises. Ob­
viously, this makes it possible for the credit fa ­
cilities of a controlled bank to be used for the
benefit of the nonbanking enterprises controlled
by the holding company. Moreover, the ordinary
nonbanking business requires a managerial attitude
and involves business risks of a kind entirely dif­
ferent from those involved in the banking busi­
ness. Banks operate largely on their depositors’
funds. These funds should be used by banks to
finance business enterprises within the limitations
imposed by the banking laws and should not be
used directly or indirectly for the purpose of en­
gaging in other businesses which are not subject
to the safeguards imposed by the banking laws.0

The Bank Holding Company Act of 1956 was the
result of many years of effort. It was intended
to apply in the field of banking and bank holding
companies the several purposes of the antitrust
laws— to promote competition and to prevent
monopoly, and the general purposes of the GlassSteagall (Banking) Act of 1933— to prevent un­
duly extensive connections between banking and
other businesses. . . .7

Coverage of the Statute

A t the ou tset, the d e ­

cision was made to exclude ownership or control by
individuals, acting on their ozvn behalf and in their
individual capacity, from the special restrictions on
permissible affiliation im posed by the Bank H oldin g
Com pany A ct.

The rationale for this decision was

explained by G overnor R obertson in the course of
the h ea rin gs:
(Control by individuals) is subject to an inherent
limitation, in that the stock is dispersed either
through sales while the individuals are alive, or
through disposition of their estates after they die.
There is very little you can do about that, in my
opinion, and I do not believe that it is especially
dangerous. In the first place, the number of banks
which can be controlled in that manner is limited
by the amount of funds which the individual or
individuals have, as contrasted with a situation
where, in holding company banking, you have a
corporation which has the facilities for gathering
large quantities of money with which to buy new
banks or, by exchanging stock of the holding com­
pany for the stock of the bank. . . .8

A nother decision at the heart of the 1956 legisla­
tion— but one that was reversed in 1970— was to e x ­
clude bank holding companies that controlled only
one bank. A s pointed out by the Board on num erous
occasions during the hearings prior to 1956, abuses
that result from com bining both banking and non ­
banking businesses can exist regardless o f whether

THE BANK HOLDING COMPANY ACT OF 1956

one bank or m ore than one bank is controlled.9
Nevertheless, Congress excluded one-bank holding

T he Bank H oldin g Company A ct of 1956 was
designed to remedy the tw o “ apparent problem s” de­
scribed by the Board of G overnors.

Bank holding

companies were prohibited from acquiring additional
banks or from

engaging in nonbanking activities

except to the extent authorized by the A ct or by the
5 “ Control of Bank Holding Companies,” Hearings on S. 880, S.
2350 and H.R. 6227, 84th Cong., 1st Sess. (1955), p. 99.
6 Supra, note 4, pp. 13-14.

4



7 S. Rep. No. 1179, 89th Cong., 2nd Sess. (1966), 2 U. S. Code
Congressional and Administrative News (1966) at p. 2386.
s Supra, note 4, p. 84. Affiliation by means of individual owner­
ship or control is, of course, subject to the affiliate provisions im­
posed in 1933, involving restrictions on financial dealings with af­
filiates, examinations by and reports to Federal supervisory au­
thorities, and the separation of ownership and control of securities
dealers and member banks. Except as prohibited by the 1933 af­
filiate legislation, therefore, Congress in 1956 decided not to pro­
hibit affiliation of banks and nonbank businesses where ownership
is by individuals on their own behalf and in their individual ca­
pacity instead of by bank holding companies.
9 See, e.g., “ Hearings on H.R. 2674,” 84th Cong., 1st Sess. (1955),
p. 15.

M ONTHLY REVIEW, M A Y 1973

companies from regulation in 1956.10 Because o f the

members of the Federal R eserve.12

phenomenal grow th of one-bank holding companies

cum bersom e machinery, the Bank H old in g Company
A ct lodges additional supervisory authority in the

after 1966, however, these companies were brought
under regulation effective Decem ber 31, 1970.

O n top of this

A t present, therefore, the term “ bank holding com ­
pany” is defined to include any corporation, partner­

Board of G overnors over all holding companies and
all o f their subsidiaries, including banks as well as
nonbanking companies. T he Board is authorized to

ship, business trust, association, or similar organiza­

issue such regulations and orders as may be neces­

tion, or any long-term trust that owns, controls, or

sary to enable it to administer and carry out the p u r­

holds with pow er to vote 25 percent or m ore o f the

poses o f the Bank H old in g Com pany A ct and p re­

voting shares of any one bank, or controls in any

vent evasions of it.

manner the election of a m ajority of the directors

quire reports under oath to keep it inform ed o f c o m ­

or trustees o f a bank, or which exercises a controlling

pliance with the A ct and the B oard’s regulations and

influence over the management or policies o f a bank.11

orders issued pursuant thereto. T he Board may also
examine all bank holding companies and their bank

E very organization com ing within the definition

In addition, the B oard may re­

of a “ bank holding com pany” must register with the

and nonbank subsidiaries but is directed “ as far as

Board of Governors, and the B oard’s prior approval

possible” to use reports o f examination made by
other agencies.13

must be obtained for the form ation of any new bank
holding com pany.

A ll bank holding companies must

obtain the B oard ’s prior approval for the acquisition

Restrictions on Financial Relationships
E very
subsidiary bank of a holding com pany is required

o f ownership or control of m ore than 5 percent o f

to be an insured bank and is therefore subject to

the voting shares o f any bank, or for the acquisition
of substantially all of the assets of a bank, or for any

to, extending credit to, or investing in any other

m erger or consolidation with any other bank hold­
ing com pany.
Supervision of Bank Holding Companies

F ed­

eral supervision and examination of banks is divided
am ong three a gen cies: the Com ptroller o f the C ur­
rency for national banks, the Federal Deposit In ­
surance Corporation for insured state banks that do
not belong to the Federal R eserve System, and the
B oard of G overnors for insured state banks that are
10 In 1956, the Senate Report gave this reason for its decision not
to cover one-bank holding companies:
Your committee did not deem it necessary to include within the
scope of this bill any company which manages or controls no
more than a single bank. It is possible to conjure up visions
of monopolistic control of banking in a given area through
ownership of a single bank with many and widespread branches.
However, in the opinion of your committee, no present danger
of such control through the bank holding company device
threatens to a degree to warrant inclusion of such a company
within the scope of this bill. Should legislation of that nature
prove desirable in the future, the Congress is free to act upon
a showing of need for such a law.
S. Rep. No. 1095, 84th
Cong., 1st Sess. (1955), p. 7.
Ten years later Congress again declined to accept the Board’s
recommendation that one-bank holding companies be brought under
regulation, but for a different reason. On that occasion the Senate
Committee report stated:
After considering all of this testimony, the committee came to
the conclusion that there was no substantial evidence of abuses
occurring in one-bank holding companies.
Furthermore, the
committee received much testimony to the effect that repeal of
the exemption would make it more difficult for individuals to
continue to hold or to form small independent banks . . . However,
in order to minimize the danger that conflicts of interest might
occur in this field, the committee amended the Federal Deposit
Insurance Act so as to make the provisions of Section 23A of
the Federal Reserve Act relating to transactions between a bank
and its affiliates applicable to all banks.
S. Rep. No. 1179,
89th Cong., 2nd Sess. (1966), U. S. Code Congressional and
Administrative News, Vol. 2, p. 2389 (1966).
As has been shown, there was no evidence of substantial abuses
occurring in multi-bank holding companies from 1933 to 1956, when
the Bank Holding Company Act was enacted.
11 12 U.S.C. §1841. Certain exceptions from coverage of the statute
are provided in Section 2 ( a ) ( 5 ) thereof.
Probably the most im­
portant of these permits banks to own shares of other banks in a
fiduciary capacity without becoming regulated bank holding com­
panies, except to the extent that this class of ownership is spe­
cifically covered in Sections 2 (g ) (2) and (3) of the Act.




Section 23 A of the Federal R eserve A ct in lending
subsidiary or the parent holding com pany itself, or
in accepting the capital stock, bonds, debentures, or
other such obligations o f any other subsidiary or o f
the parent com pany as collateral security fo r ad­
vances made to any person, partnership, association,
or corporation.

These provisions effectively limit

the amount o f a subsidiary bank’s funds that may
be used for the benefit of an affiliate in the holding
com pany system to 10 percent o f the bank’s capital
and surplus, in the case o f any one such affiliate,
and to a maxim um o f 20 percent of the bank’s capital
and surplus in the case o f all such affiliates in the
aggregate.
Further protection is afforded by the
requirement o f Section 2 3 A that even the limited
permissible amount of loans to, extensions of credit
to, and investments in other subsidiaries in the h old ­
ing com pany system be well secured by stocks, bonds,
debentures, or other such obligations.14

REGULATING EXPANSION OF
BANK HOLDING COMPANIES
T he pow er o f bank holding companies to expand
by acquiring banks and

nonbank businesses

was

brought under Federal regulation with the Bank
H old in g Com pany A ct of 1956.

A fundamentally

different approach, however, was used to control
bank holding com pany grow th by acquisitions of
12 See, e.g., 12 U.S.C. §1818.
« 12 U.S.C. §1844.
1 The relevant paragraphs of Section 23A are quoted in full in
1
footnote 7 of Part II.

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

5

banks from the method adopted to regulate non­

The Geographic Restriction on Expansion A p a r t

banking expansion.

from the restriction on approval of Section 3 applica­

Bank Acquisitions and the Formation of Bank
Holding Companies U n d er S e ctio n 3 o f the B ank
H old in g Com pany A ct, prior approval by the Board
of G overnors is required fo r the form ation o f a bank
holding com pany, for the acquisition by such a co m ­
pany of m ore than 5 percent of the voting shares of
a bank, for the merger or consolidation o f tw o or
m ore bank holding companies, or for the acquisition
of substantially all of the assets of a bank by a bank
holding com pany.15
In every case, the B oard is required to take into
consideration the financial and managerial resources
and future prospects o f the applicant and the banks
concerned, as well as the convenience and needs of
the com m unity to be served. The Board, however,
has considerable discretion in applying these stan­
dards.
hibited

A pproval of an application is absolutely p ro ­
only

where

very

quences w ould result.

serious antitrust conse­

Thus, Section 3 ( c )

of the

A ct provides that the Board “ shall not approve” any

tions that w ould produce significantly adverse anti­
trust effects, the A ct in effect confines the grow th of
bank holding com panies by means of bank acquisi­
tions to a single state for each com pany.

Section

3 ( d ) prohibits the B oard of G overnors from approv­
ing any application to acquire any voting shares of,
interest in, or substantially all of the assets of a bank
located outside o f the state in which the operations of
the applicant holding com pany’s banking subsidiaries
were principally conducted on July 1, 1966, or the
dated the applicant became a bank holding com pany,
whichever is later, unless such an acquisition

. . is

specifically authorized by the statute laws of the State
in which such bank is located, by language to that
effect, and not merely by im plication.” 17

A s o f the

end o f 1972, Iow a was believed to be the only state
that had affirmative legislation of this kind, but even
this legislation is said to authorize acquisitions by
out-of-state holding com panies to a limited extent
only.18

such transaction if it will result in a m onopoly, or

Growth of Bank Holding Companies

be in furtherance o f any com bination or conspiracy
to m onopolize or to attempt to m onopolize the busi­

grow th of regulated bank holding com panies occurred
from 1956 through 1965, as shown by data in Table

ness of banking in any part of the U nited States.

I.

V e r y little

In the earlier year there were 53 such companies

In addition, the B oard is not permitted to approve

with 428 banks and total deposits o f $14.8 billion,

any other application under Section 3 if the effect

or just 7.5 percent of total com m ercial bank deposits

of the transaction may be substantially to lessen co m ­
petition, or to tend to create a m onopoly, or which

in the United States.

Nine years later there were

still only 53 registered multi-bank companies, and

in any other manner would be in restraint o f trade,
unless the Board finds that the anticompetitive ef­
fects o f the proposed transaction are clearly ou t­

to $27.5 billion, or 8.3 percent o f total comm ercial
bank deposits in the nation.

weighed by its probable effect in meeting the co n ­
venience and needs of the com m unity to be served.10

From 1965 through 1970, however, substantial
grow th o f multi-bank companies occurred. B y the

the aggregate deposits of their 468 banks amounted

end of the latter year, 121 companies were registered
15 Mergers of banks are not included within the Board’s jurisdiction
under the Bank Holding Company Act. However, prior approval of
all bank mergers, where the surviving bank is an insured bank, is re­
quired under Section 18(c) of the Federal Deposit Insurance Act,
and the same statutory standards must be applied by the Federal
banking agency acting on the merger application that govern ap­
plications to acquire a bank by a bank holding company.
Under
the Bank Holding Company Act, the requirement of prior approval
does not apply where shares are acquired by a bank in a fiduciary
capacity, with certain exceptions specified in Section 3 (a ) of the
Act: to shares acquired in the regular course of securing or col­
lecting a debt previously contracted in good faith, provided the
shares are disposed of within two years from the date they are
acquired; and to additional shares acquired by a bank holding com­
pany in a bank in which such holding company owned or con­
trolled a majority of the voting shares prior to such acquisition.
1 12 U.S.C. §1842.
0
Before 1966, substantially different criteria
governed the approval of Section 3 applications. From 1956 until
the Act was amended in 1966, the Board was required to take into
consideration the following factors in acting on Section 3 ap­
plications: (1) the company or companies and the banks con­
cerned: (2) their prospects; (3) the character of their management:
(4) the convenience, needs, and welfare of the communities and the
areas concerned; and (5) whether or not the effect of the acquisi­
tion or merger or consolidation would be to expand the size or
extent of the bank holding company system involved beyond limits
consistent with adequate and sound banking, the public interest,
and the preservation of competition in the field of banking.
(70
Stat. 135.)
Between 1957 and 1966 the Board repeatedly advised
Coneress of its difficulties in attempting to balance the “ con­
venience and needs” test of the fourth statutory factor with the
“ size or extent” test in the fifth factor.
In 1966, Congress re­
sponded by substituting the antitrust and banking considerations
described in the text for the five criteria of the original 1956 Act.

6



with the Board of G overnors, with 895 banks and
deposits o f $78.0 billion.

T his represented 16.2 p er­

cent o f total deposits, almost double the percentage
just five years earlier.
Even m ore dramatic grow th occurred am ong un ­
regulated one-bank holding com panies after
however.

1965,

In that year there were 550 of these co n ­

cerns, but most o f them were relatively small o r ­
ganizations

that

controlled

rather

small

banks.19

Their deposits amounted to only $15.1 billion, or 4.5
percent o f total deposits, approxim ately half the size
of the deposits controlled by regulated multi-bank
companies.
17 70 Stat. 134 (1956), as amended 80 Stat. 237 (1966).
18 Speech, Jerome W . Shay, January, 1973.
1 Federal Reserve Bulletin, December, 1972, pp. 999-1000.
9

MONTHLY REVIEW, M A Y 1973

Table I

COMPARISON OF OFFICES A N D DEPOSITS OF
BANKS AFFILIATED WITH REGISTERED BANK HOLDING COMPANIES
1956

1960

1965

1968

1969

1971*

1970

53

Banks

47

53

80

97

121

1,567

428

Num ber of companies

426

468

629

723

895

2,420

783

Offices as a percentage
of all bank offices

1,037

1,486

2,262

2,674

3,260

10,832

1,211

Branches
Total offices

1,463

1,954

2,891

3,397

4,155

13,252

5.7

6.1

6.7

8.9

10.1

11.8

36.1

Deposits
(In billions of dollars)

14.8

18.2

27.5

57.6

62.5

78.0

297.0

Deposits as a percentage
of all bank deposits

7.5

7.9

8.3

13.2

14.3

16.2

55.1

*The 1971 figure includes one-bank holding companies, brought under regulation by the Bank Holding C om p any Act for the
first time on December 31, 1970. A s of December 31, 1965, however, a total of 550 one-bank holding com panies accounted
for only 4.5 percent of total United States bank deposits, and multi-bank companies for 8.3 percent, or a total of 12.8
percent.
Source: Board of G overnors of the Federal Reserve System.

Then, between 1966 and 1968, 201 new one-bank

1970.21 Section 4 o f the A c t prohibits bank holding

holding companies were form ed, and between June

companies from ( 1 ) ow ning any voting shares o f any

1968 and D ecem ber 1970, an additional 690 such

com pany that is not a bank, or

companies were created. M any o f the new companies

any activities other than banking or managing and

owned very large banks.

controlling banks, or ( 3 ) furnishing services to or

B y the end o f 1968 there

(2 )

engaging in

were 28 companies w hose banks had $1 billion or

perform ing services fo r their subsidiaries, except as

more of deposits, and by this time most o f the na­

specifically authorized by the A ct itself or by the

tion’s largest banks had been absorbed into one-bank
holding companies. A s o f June 1971, one-bank hold­
ing companies had aggregate deposits o f $191 billion,

B oard of G overnors under authority o f Section 4

or over 33 percent of total bank deposits in the
country, com pared with only about 20 percent
for multi-bank com panies.20

Combined, by the end

of 1971 there were 1,567 multi-bank and one-bank
holding companies, accounting for $297.0 billion in
deposits, or 55.1 percent of total deposits; and both
classes of companies were regulated by the B oard o f
Governors on the same basis as a consequence of
the 1970 amendments to the Bank H old in g C om ­
pany A ct.

( c ) ( 8 ) o f the A ct.
U nder Section 4 ( c ) ( 8 ) , bank holding companies
are authorized to acquire shares o f any com pany
the activities o f which have been determined by the
B oard of G overnors, after notice and opportunity for
hearing, to be so closely related to banking or m anag­
ing or controlling banks as to be a proper incident
thereto.

In making these determinations, the Board

is required to consider whether the perform ance o f
a particular activity by an affiliate o f a holding co m ­
pany can reasonably be expected to produce benefits
to the public, such as greater convenience, increased

Nonbank Activities of Bank Holding Companies
Both multi-bank and one-bank holding companies
have been subject to the same provisions of law
regulating the extent of permissible nonbank ac­
tivities since the amendments to the Bank H oldin g
Com pany A ct became effective on D ecem ber 31,
2° Ibid., pp. 999-1003; Table I.




2 A “ grandfather” clause of the 1970 amendments provides that
1
one-bank holding companies brought under regulation as a result of
such amendments may continue to engage in activities that they
were engaged in on June 30, 1968, and have been continuously en­
gaged in since that time.
The Board, however, is authorized to
terminate this authority if it determines that such action is neces­
sary to prevent undue concentration of resources, decreased or un­
fair competition, conflicts of interest, or unsound banking practices.
In the case of any company with “grandfather” privileges that
controls a bank having assets in excess of $60 million, the Board
is required to make a determination regarding continuation of
“grandfather” authority within two years after December 31, 1970,
or two years after the date on which the bank assets first exceed
$60 million.

FEDERAL RESERVE B A N K OF R IC H M O N D

7

posals to acquire goin g concerns and proposals to

com petition, or gains in efficiency, that outweigh pos­
sible adverse effects, such as undue concentration of
resources, decreased or unfair com petition, conflicts

com m ence activities de n ovo (that is, by organizing
a new com pany instead of by acquiring an existing

of interest, or unsound banking practices.

com pany with an established market p o sitio n ).

In issuing

orders or regulations pertaining t o 4 ( c ) ( 8 ) activities,
the Board is authorized to differentiate between p ro ­

T he

B oard has, in fact, adopted procedures that favor
expansion by de n ovo entry as com pared with acqui­
sitions o f established companies.
T hus far, 10 types of nonbanking activities, which
may be broken dow n into at least 16 specific a c­
tivities, have been authorized under Section 4 ( c ) ( 8 ) .

Table II

N O N BA N K IN G ACTIVITIES UNDER
SECTION 4(c)(8)

E ight have been ruled to be not permissible, and
three were under consideration at the time this article
was com pleted.

1.

T hese are described in T able II.

N o official figures have yet been published by the

AUTHORIZED

B oard o f G overnors indicating the extent o f entry

Issuing letters of credit and accepting drafts

2. M a k in g m ortgage loans

by

3. Consum er finance activities
4. Operating credit card com pany

tivities authorized under Section 4 ( c ) ( 8 ) since this

bank holding companies

into

nonbanking ac­

section was amended on Decem ber 31, 1970.

A v a il­

5. Factoring
6 . O perating an industrial bank

able unofficial inform ation indicates, how ever, that

7. Servicing loans

during

1971

and

1972,

bank

holding

com panies

8 . Providing trust services
9. Acting as investment and financial adviser as
specifically authorized
10. Furnishing general economic information and advice

published the required notification of de n ovo ac­

11. Providing portfolio investment advice
12. Leasing of personal property on a full-payout basis

Table I II, the principal activities proposed to be
undertaken appear to have been com m ercial and co n ­

13. M a k in g investments in community w elfare projects
14.

Providing bookkeeping or data processing services

15. Acting as insurance agent or broker w here insurance
is connected with an extension of credit
16.

Underw riting of credit life insurance and credit
accident and health insurance that is directly
related to extensions of credit by the bank holding
com pany system

tivities in 504 different instances, and filed 174 ap­
plications to acquire goin g concerns.

A s shown by

sumer finan ce; m ortgage banking; insurance; per­
sonal property lea sin g; furnishing investment, fi­
nancial, and econom ic advisory serv ices; data p ro ­
cessing; and factoring.
It seems clear that a substantial degree o f affilia­
tion already exists am ong banks ow ned b y bank
holding companies and nonbanking organizations au­

DENIED
1.

Insurance premium funding

thorized under Section 4 ( c ) ( 8 ) .

2.

Underwriting general life insurance

believe that affiliation of this type will becom e even
m ore substantial in the future.

3. Real estate brokerage
4. Land development
5. Real estate syndication
6 . Property m anagem ent

Acting as Investment Adviser

7. M anagem ent consulting
8 . O w n in g savings and loan associations (This activity
m ay be the subject of further consideration by the
Board)

It is reasonable to

T h e c o n tin u in g

influence of the 1933 affiliate legislation on per­
missible affiliation under the Bank H old in g Com pany
A ct is particularly evident in the restrictions im posed
by the B oard of G overnors on the perform ance o f in­

UNDER C O N SID E R A T IO N
1.

vestment advisory services.

2.

Furnishing armored car and courier services

3.

Providing m ortgage guarantee insurance

Source:

'

sidiaries may act as investment advisers to both openend and closed-end investment companies, a bank

Regulation Y, 12 C.F.R. 225.4(a), for authorized
activities; 12 C.F.R. 225.126 for activities denied
on ground that they are not closely related to
banking.
The authorized activities set forth in
12
C.F.R. 225.4(a) have been broken dow n into
their constituent parts for purposes of this table.
Section 225.4(a) of Regulation Y and applicable
interpretations by the Board should be consulted
for precise language of authorization by the
Board of G overnors to engage in permissible non­
banking activities.

8



T h e B oard has ruled

that while bank holding com panies and their sub­

Leasing real property

holding com pany may not sponsor, organize, or co n ­
trol a mutual fund.

T his restriction does not apply,

however, to closed-end investment com panies that
are not prim arily or frequently engaged in the is­
suance, sale, and distribution of securities.

In no

case may a bank holding com pany act as investment
adviser to an investment com pany having a name
that is similar to, or a variation of, the name o f the
holding com pany or any o f its subsidiary banks, nor

M ONTHLY REVIEW, M A Y 1973

may it sell or distribute securities of any investment

Permissible Geographic Expansion

com pany for which it acts as investment adviser.

contrast to the provision of the Bank H old in g C om ­
pany A ct limiting acquisitions o f banks by bank h old ­
ing com panies to a single state, except where the

M oreover, in view o f potential conflicts o f interest
that may exist, bank holding companies and their
subsidiaries are not permitted t o : ( 1 ) purchase for
their ow n account securities of any investment com ­
pany for which the bank holding com pany acts as
investment adviser, ( 2 ) purchase in their sole dis­
cretion any such securities in a fiduciary capacity

In m arked

state to be entered specifically allows it by statute,
nonbanking subsidiaries may expand

and operate

across state lines unless prohibited by state law o f
the state into which they are expanding, except
where the Board of G overnors may im pose limita­
tions by order in individual cases.24 M any leading

(including as managing a gen t), ( 3 ) extend credit

bank holding companies have already established

to any such investment com pany, or ( 4 ) accept the

substantial business operations in authorized non ­

securities of any such investment com pany as c o l­
lateral for a loan which is fo r the purpose o f pur­

banking areas, both within the states where their
banking activities are principally conducted and

chasing securities of the investment com pany.22

across state lines as well.

Other Permissible Nonbanking Activities

A p a rt

from Section 4 ( c ) ( 8 ) , eleven other paragraphs o f

pany activities along these lines.

Section 4 of the Bank H old in g Com pany A c t au­

CONCLUSION

thorize various types of activities for bank holding
companies, some of which may be perform ed by
banks themselves and some o f which may not.
example,

Section

4 (c )(5 )

permits

bank

F or

holding

companies to acquire investment securities o f the
kinds and amounts eligible for purchase by national
and state member banks under Section 5136 o f the
Revised Statutes, while Sections 4 ( c ) ( 6 ) and 4 ( c )
(7 )

enable

bank

holding

companies

to

acquire

It is reasonable to expect

further significant expansion o f bank holding co m ­

T he present structure of Federal regulation o f re­
lationships am ong banks and their affiliates is the
product o f tw o different but not entirely unrelated
events.

T h e first of these was the development of:

affiliates by many large banks beginning about 1908,
principally

to

engage

in

the

securities

business.

A buses developed and legislation was enacted in

specified amounts of com m on stocks and other se­

1933 to correct these abuses.

curities that are prohibited to national and state

was broadly defined in this legislation to include

T h e term “ affiliate”

member banks for their ow n account.

These and

situations involving com m on ownership or control

other provisions o f Section 4 setting forth perm is­

of banks and nonbanking businesses by individual

sible activities for bank holding companies are sum­

owners, bank holding companies, or other organiza­

marized in the footnote below .23

tions.

A pattern o f regulation was based upon this

definition involving com plete separation o f ow n er­
22 Interpretation of Regulation Y , 12 C.F.R. 225.125. The interpre­
tation also imposes certain other restrictions on bank holding com­
panies acting as investment advisers.
23 The following are authorized under Section 4 ( c ) :
(1) Acquiring shares of any company engaged or to be en­
gaged in (a) holding or operating properties used by banking
subsidiaries or acquired for future use, (b) conducting a safe
deposit business, (c) furnishing services to or performing
services for the bank holding company or its banking sub­
sidiaries, and (d) liquidating assets, to the extent authorized;
(2) Acquisitions of shares by a bank in satisfaction of a debt
previously contracted in good faith;
(3) Acquiring shares from subsidiaries that have been requested
to dispose of the shares by Federal or State examining au­
thorities;
(4) Acquiring or holding shares in good faith in a fiduciary
capacity, except where specifically prohibited by Sections 2 (b )
and 2 (g ) of the Act;
(5) As discussed in the text, acquiring shares of the kinds and
in amounts eligible for investments by national and State mem­
ber banks and, in addition, (a) acquiring shares of any com­
pany which do not include more than 5 percent of the out­
standing voting shares of such company, and (b) acquiring up
to 5 percent of the voting shares of an investment company
that is not a bank holding company and is not engaged in
any business other than investing in securities, which securities
do not include more than 5 percent of the outstanding voting
shares of any company;
(6) Acquiring shares of companies authorized under Section
4 (c ) ( 8 ), as discussed in the text;
(7) Ownership of shares by or activities conducted by foreign
bank holding companies, the greater part of whose business is
conducted outside of the United States, under conditions im­
posed by the Board of Governors if the Board determines that
the exemption would not be substantially at variance with the
purposes of the Bank Holding Company Act and would be in
the public interest;




ship and control of securities companies and m em ­
(8) Continued ownership of shares lawfully acquired and
owned prior to May 9, 1956, by a bank which is a bank holding
company, or by any of its wholly-owned subsidiaries;
(9) Shares owned directly or indirectly by a one-bank holding
company brought under regulation by the amendments effective
December 31, 1970, in a company which does not engage in any
activities other than those in which a bank holding company
may engage under Section 4 (c ) ( 8 ), except that such subsidiary
may not acquire any interest in or the assets of a going con­
cern other than one which was a subsidiary on June 30, 1968;
(10) Ownership of shares or activities engaged in by com­
panies brought under regulation in 1970 which, within specified
time limits, either (a) cease to be bank holding companies or
(b) cease to retain unauthorized shares or engage in unau­
thorized activities;
(11) Ownership of shares or activities engaged in by any
company which does no business in the United States except
as an incident to its international or foreign business, if the
Board of Governors determines that, under the circumstances
and subject to such conditions as it may impose, the exemption
would not be substantially at variance with the purposes of the
Bank Holding Company Act, and would be in the public
interest.
The full text of Section 4 (c ) of the Bank Holding Company Act
is found at 12 U.S.C. §1843.
24 “ Statement by Board of Governors of the Federal Reserve System
Regarding Proposal by NCNB Corporation to Operate a Trust
Company in South Carolina Through American Trust Company,”
March 9, 1973.
In addition, the Board of Governors has per­
mitted Edge Act corporations to operate in more than one state.
Their activities, however, are restricted to international or foreign
banking and financial operations.

FEDERAL RESERVE B A N K OF R IC H M O N D

9

Table III

DE NO VO NOTIFICATIONS AND PROPOSED ACQUISITIONS UNDER
SECTION 4(c)(8) OF THE BANK HOLDING CO M PAN Y ACT
1971 and 1972
Total
Notifications
De N ovo

Com m ercial an d Consum er Finance *

Proposed

Notifications

Acquisitions

84
109

M o rtg a g e B an k in g
Insurance
Personal Property Leasing
Investment, Financial an d Economic
A d v iso ry Services
D ata Processing

68
92

Trust O perations
Factoring
C om m unity Developm ent

64
36
49

148
145
117

8

100

3
3
2
4

77
37
15
21

1
4

13
5

174

678

13
17
12
1

74
34

Other

504

and Proposed
Acquisitions

* Includes industrial banks.
Figures reflect multiple activities involved in some notifications and proposed acquisitions.
Sources:

Unofficial tabulations, staff, Board of G overnors of the Federal Reserve System; Bank Expansion Quarterly.

ber banks of the Federal R eserve System.

In ad­

whether such control is by individuals or by organ i­

dition, limitations w ere placed upon financial re­

zations.

lationships between insured banks and their affiliates,
and Federal bank supervisory agencies were em ­

Unlike the 1933 legislation, which was designed
to remedy actual abuses, the Bank H old in g C om ­

pow ered to examine and obtain reports from af­

pany A ct is intended to prevent potential abuses that

filiates.
T h e second

might result from the uncontrolled ability o f bank
holding com panies to acquire banks and engage in

significant

event

that

led

to

the

present pattern of affiliate regulation was the grow th

nonbanking activities.

o f bank holding companies.

1933

by the B oard is required for any bank holding com ­

legislation contained provisions applicable to bank

pany to acquire additional banks or to engage in

holding companies, these provisions proved to be

nonbanking

inadequate and were entirely replaced with the Bank

specified nonbanking activities are permitted by the

H old in g

Bank H old in g C om pany A ct itself.

C om pany

A ct

of

A lthough

1956,

as

the

extensively

amended in 1966 and 1970. Although both the 1933
legislation

and the Bank

H oldin g

Com pany

A ct

activities,

A ccordin gly, prior approval

except

to

the

extent

that

A cquisitions of

banks are, in effect, limited to the state in which
the principal banking activities o f a bank holding

cover situations where there is com m on ownership

com pany are conducted.

or control of a bank and other banks or nonbanking

Federal law upon the geographical expansion o f bank

organizations, they differ significantly in the ways

holding com panies in nonbanking areas, how ever,

in

provided the perform ance o f such activities is not

which

they

specify

ownership or control.

what

constitutes

com m on

T here is no restriction in

A m on g other things, control

inconsistent with state law in the state to be entered,

by individuals in their individual capacities is not

except to the extent that the Board o f G overnors

subject to regulation under the Bank H old in g C om ­

may im pose such limitations by order or regulation

pany A ct, although the 1933 affiliate provisions ap­

in individual cases.

ply to situations of com m on control regardless o f
10



M ONTHLY REVIEW, M A Y 1973

W illiam F . Upshaw

INTERNATIONAL AGRICULTURAL TRADE AND
THE U. S. BALANCE OF PAYMENTS
A gricultural com m odities have figured importantly
in U . S. foreign trade since colonial times.

Foreign

cou ntry’s share of w orld soybean exports has risen
from 2 percent in 1934-38 to approxim ately 90 per­

markets have always been im portant to U . S. farmers

cent in 1972.

and appear likely to be o f increasing importance in

o f U . S. soybean acreage is exported, and more than
nine-tenths o f all soybean and soybean product e x ­

the future.

Currently, they provide an outlet for

about 15 percent of total U . S. farm output.

Trade

in agricultural com m odities is, o f course, a tw o-w ay
street and the U . S. is also a m ajor market for many
agricultural products produced abroad. In 1972,1 for
example,

agricultural

com m odities

accounted

for

Production from m ore than one-half

ports are com m ercial sales for dollars.
Fifth District tobacco producers also have a large
stake in the export market. T he United States is
the w orld ’s largest exporter o f unmanufactured to ­

But at the

bacco, accounting for about one-fourth o f w orld e x ­
ports o f this com m odity. In recent years between 55

same time, they accounted for approxim ately 18 per­
cent of total exports, leaving this country with

and 60 percent of this tobacco has been produced
in Fifth District states.

about 12 percent of total U . S. imports.

a sizable balance o f trade surplus in agricultural
products.

Prospects that this surplus may be en­

larged in the near future are a m ajor reason to hope
that the unsatisfactory balance in this cou ntry’s trade
with the rest of the w orld can be corrected soon.
Importance of Agricultural Exports

Chart 1

10 LEADING U. S. AGRICULTURAL EXPORTS
A S PERCEN TAG E OF FA R M SALES, 1972*

U . S. fa rm ­

ers in 1972 supplied about one-sixth o f the agri­
cultural com m odities entering free world trade, with
U. S. agricultural exports reaching a high of $8.05
billion.

This was an increase of m ore than 57 per­

Rice
Soybeans t
Tallow

cent since 1960. T he output o f 1 of every 5 har­
vested acres was exported in 1972 and foreign sales

Hides, cattle

accounted for 15 percent of the total cash receipts

W heat J

from farm marketings. In that year, export sales
accounted for m ore than one-half of the U . S. p ro ­
duction of soybeans and rice, m ore than tw o-fifths
of the cattle hides and tallow, and over one-third of
the wheat and tobacco. Details of U. S. agricultural
exports, by com m odity groups, are given in Chart 1
and

Table

I.

In

terms

of

value,

oilseeds

and

products was the most important exp ort item in

Tobacco
Cotton, raw
Nonfat
dry milk
Corn
G rain
sorghum s

1972, follow ed by feed grains and wheat and wheat
flour.

Soybeans and soybean products accounted for

0

20

40

60

Percent

a large fraction of the value o f oilseeds and products.
A ggressive marketing in the face of strong foreign

*Y e ar ended June 30.

demand

flnclud in g oil and meal.

for

high-protein

feed,

coupled

with

the

sharply increasing U . S. harvest, has made soybeans

Jlncluding products.

the leading dollar earner in foreign markets.

Note:

S oy ­

beans now account for more than one-fourth o f the
total value of U .

S. agricultural exports.

This
Source:

Exports com pared with farm sales,
except with production for rice, cattle
hides, tallow, cotton, tobacco, and
nonfat dry milk.
U. S. Department of Agriculture.

1 Except where otherwise noted all data are for fiscal year 1972.




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

11

Table I

Japan is the number one foreign custom er for

U. S. AGRICULTURAL EXPORTS

U . S. agriculture, and the U nited States is placing
increasing emphasis on exports of food and agri­

Fiscal Y e ar 1972

cultural raw materials to Japan to help alleviate its
overall trade imbalance with that country.

Exports Under
Government Commercial
Financed
Sales for
Program s
Dollars

Commodity

In 1972

the U nited States shipped approxim ately 14 percent
Total

of its total agricultural exports to Japan.

Japan is

the m ajor foreign market for U . S. soybeans, feed

1
[millions of dollars)

grains, wheat, cotton, cattle hides, tallow, lem ons,

W heat and w heat flour

371.7

675.3

1,047.0

Feed grains, excluding
products
Rice

78.1

1,040.0

1,118.1
306.7

shipments o f tobacco, poultry, nuts, fruits, and meats.
out the prom ise o f a steady expansion in Japanese

alfalfa meal, and raisins.
198.3

108.4

96.2

433.3

22.5
135.9

547.4

529.5
569.9

2,086.5

2,222.4

Dairy products

96.0

99.1

195.1

Anim al and anim al products
except dairy products

29.7

Cotton
Tobacco, unmanufactured
Oilseeds and products

purchases

of

a g row in g

variety

of

U.

S. farm

786.4

816.1

381.3
229.9

381.3
229.9

could be eliminated or liberalized. In any case, it
appears likely that Japan will continue as a m ajor

93.2

542.3

635.5

custom er for U . S. farm exports.

1,121.6

Vegetables and preparations
Other
exports

Source:

R ising incomes and living standards in Japan hold

products. T his important market w ould also be en­
larged further if existing barriers to U . S. good s

6,929.9

8,051.5

Fruits and preparations

Total

Japan also takes sizable

U. S. Department of Agriculture, Foreign Agricultural
Trade of the United States, Novem ber 1972.

Agricultural Exports by States

T h e v a lu e o f

agricultural exports as a proportion o f cash receipts
from farm marketings is one way to measure the
im portance of farm exports to individual states.

On

this basis the five leading agricultural exporting
Financing of Agricultural Exports A g r icu ltu ra l
exports are made through normal com m ercial chan­

states in 1972 were Illinois, Iow a, California, T exas,
and N orth Carolina.

nels resulting in dollar payments or through G ov ­
ernment-financed program s.
In recent years co m ­
mercial sales for dollars have accounted for a rising
proportion of total agricultural exports.

Rankings o f other Fifth D is-

Table II

Between

1960 and 1972 com m ercial exports increased from

VALUE OF U. S. AGRICULTURAL EXPORTS
TO 15 MAJOR MARKETS

72 percent to 86 percent o f the total. M ost G overn ­
ment-financed program s for farm exports are under

Fiscal Y ear 1972

the authorization of the Agricultural Trade D evelop­
ment and Assistance A ct, popularly known as Public
L aw 480, or the F ood for Peace Program . E xports
under this program include sales for foreign cu r­

Country

1972
(millions of dollars)

Japan
C an ad a
Netherlands

1,163.0
804.7
616.4

rency, long-term credit sales, and donations. M ore
than $21 billion w orth o f agricultural com m odities

W est G erm any
United Kingdom

607.3
429.9

have been exported under the authority o f P L 480

Korea, Republic of

316.9

since its inception in 1954. Governm ent-financed e x ­

Italy

305.6

security

(A ID )

program s.

214.1

Spain

200.8

India

ports are also made under authority o f the mutual

France

193.0

Taiw an

169.0

Belgium-Luxem bourg

147.8

ucts were shipped to 165 countries in 1972 but 15

USSR

136.0

countries received 60 percent of the total.

Mexico

130.8

Indonesia

120.4

M ajor Export Customers

A m e rica n farm p r o d ­
T he 50

largest markets accounted fo r 98 percent of total e x ­
ports.

Developed countries, such as Japan, Canada,

Spain, and members

o f the European

E conom ic

Community, are the largest markets for U . S. agri­
cultural exports.

Nevertheless, shipments to d e­

veloping countries are sizable.
12



15 M ajor Markets

5.555.7

Other

2.495.8

Total

8,051.5

Source:

U. S. Department of Agriculture, Foreign Agricultural
Trade of the United States, Novem ber 1972, p. 39.

MONTHLY REVIEW, M A Y 1973

trict states were South Carolina, 2 0 th ; V irginia,
2 9 th ; M aryland, 35th ; and W est Virginia, 46th. A p ­
proxim ately 9 percent of U. S. farm exports in 1972
were produced in Fifth District states. T he value
of these exports represented m ore than one-fifth of
District cash farm marketings. In both N orth and
South Carolina the value of farm exports accounted
for m ore than one-fourth of total cash farm receipts.

Table III

U. S. AGRICULTURAL IMPORTS
BY COUNTRY OF ORIGIN
Fiscal Y e ar 1972
Value in
Millions of Dollars

Country
Brazil

$ 617

Mexico

N early three-fourths of U . S. tobacco exports and

53(

Australia

15 percent of the poultry exports were produced in
the Fifth District. In terms of value, tobacco was

Philippines
C anad a

409
369
322

New Zealand

222

Colom bia

the most important export item for the District
follow ed by feed grains, soybeans, and cotton in

Denmark

that order.

Dominican Republic

195
166
161

Netherlands

152

Agricultural

Imports

Im p o rts

of

a g ricu ltu ra l

products into this country rose from around $3.7
billion in 1962 to about $6 billion in 1972.

T hey

Source:

U. S. Department of Agriculture, U. S. Foreign
cultural Trade Statistical Report, Fiscal Year 1972.

com e chiefly from developing countries and from
such established agricultural suppliers as Australia,
T en cou n ­

agricultural exports in helping curb the flow of d o l­

tries listed in Table III supplied 59 percent of our
agricultural im ports in 1972. A gricultural imports

lars from the U . S. may be measured by their co n ­

can be divided into tw o ca teg ories: those that com ­

payments.

pete

between the value o f total merchandise exports and

Canada, Denmark, and the Netherlands.

directly

with

com m odities

produced

United States and those that do not.

in

the

T he form er

tribution to our balance of trade and the balance of
T he balance o f trade is the difference

total merchandise im ports.

T he

balance of pay­

class includes such items as animal, grain, cotton,

ments, on the other hand, records all types o f e co ­

and tobacco products.
Som e foreign goods, such
as bananas, coffee, tea, and rubber, are noncom ­

nom ic transactions involving the exchange of goods,

petitive because they either are not produced in this
country or are produced in small quantities.

services, and financial assets between U . S. residents
and residents of the rest of the world.
A lthough the U. S. has experienced deficits in its

Sixty-five percent of the agricultural com m odities
imported in 1972 were competitive, com pared to 55

balance o f payments in most years since the early

percent in 1962.

trade deficit occurred.

T he three leading com petitive im ­

1950’s, 19712 was the first year since 1935 that a
A gricultural, nonagricultural,

ports are meat and meat products, sugar, and fruits,

and total balance of trade data since 1962 are shown

nuts and vegetables.
Im ports of meat and meat
products in 1972 totaled 1.9 billion pounds. B one­
less fresh or frozen beef accounted for roughly

in Chart 2. In agricultural trade, the U . S. balance
with the rest of the w orld has been in surplus in

three-fifths

Similar to U . S. cow beef, it is used

to $1.9 billion in 1971, only slightly below the peak
for the period reached in the middle 1960’s. W ith ­

prim arily for hamburger or other meat products and
is im ported primarily from Australia, N ew Zealand,

out this surplus, the overall U . S. trade deficit of
$6.4 billion in 1972 w ould have been $9.4 billion.

products.

of

total

im ports

of

meat

and Central Am erica.
T he M eat Im port Law , enacted in

and

meat

1964, p ro ­

every year of this period.

Balance of P aym en ts

This surplus amounted

T he U S D A estimates the

vided for restrictions on imports o f fresh, chilled,

gross contribution of agriculture to the balance of

and frozen beef, veal, mutton, and goat.

payments in the follow in g manner.

In response

Realized dollar

to increased demand and higher meat prices, h ow ­

returns and savings on noncom m ercial exports are

ever, quantitative restrictions

added to the dollar value of com m ercial sales.

imposed

under this

These

realized dollar returns and savings are in the form

law were suspended in June 1972.

of ( 1 ) the dollar value o f foreign currencies gene­
The

Agricultural

Trade

Balance

E x p o r ts

of

rated under P L 480 and used overseas by the G o v ­

agricultural com m odities exceed imports by a sub­

ernment to pay such bills as embassy expenses, m ili­

stantial margin and, consequently, provide one of
the m ajor bright spots in an otherwise negative
U . S. balance of payments situation.



T he role of

2 In the remainder of the paper data are on a calendar year basis
unless otherwise noted.

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

13

tary outlays, and costs of market development
operations and ( 2 ) repayments fo r exports made

around 250 million bushels of corn, and 40 million
bushels o f soybeans.

under Government credit to foreign nations. A g r i­
cultural im ports are then subtracted from this figure

trade position is grow ing, agricultural trade as a

W h ile agriculture’s net contribution to the U . S.

to determine the net contribution to the balance of
payments (T a b le I V ) .
In 1971 agriculture’s net
contribution to the balance of payments was $1.13

share o f total trade has declined recently. Since
1960 agricultural exports have declined from 24 to

billion, the second largest net contribution since

comm unist bloc nations and im proved prospects for

1960.

A griculture has had a positive net influence

additional sales to these countries notwithstanding,

on the U . S. balance of payments every year since

potential grow th of farm exports faces several re­

1961.

T he peak year in agriculture’s net contribu­

tion was 1966 when it totaled $1.17 million.

18 percent of total exports.

stricting factors.

Recent large sales to

F orem ost am ong these are ( 1 ) in­

creased agricultural production in the less developed
nations, which is dim inishing the need for our aid

Factors Affecting Export Prospects

E stim a tes

for fiscal year 1973 place agricultural exports at
about $11 billion, almost $3 billion above
record high.
and soybeans.

1972’s

M ost o f the increase will be in grains
W h ile exports of these com m odities

to m ost custom ers will be up over last year, the

e x p o rts; ( 2 ) num erous tariff and nontariff barriers
on agricultural com m od ities; and ( 3 ) expansion ot
the European E conom ic Com m unity to include the
United

K ingdom ,

Ireland, and

Denm ark3 in the

area under the Com m unity’s Com m on A gricultural
P olicy ( C A P ) .

large purchases by the Soviet U nion are the single
m ost important item.

A s o f January 1973, Russia

had purchased over 400 million bushels o f wheat,

3 Other members are France, Italy, Germany, Brussels, the Nether­
lands, and Luxembourg.

Chart 2

U. S. TRADE BALANCE
$ Billions

Calendar Years
Source:

U. S. Department of Agriculture.

14



MONTHLY REVIEW, M A Y 1973

E xports to the Com m on M arket are restricted by

Table IV

the Com m unity’s Com m on A gricultural Policy, and

THE CONTRIBUTION OF AGRICULTURE
TO THE U. S. BALANCE OF PAYMENTS
Item

1961

1971

(millions of U.S. dollars)
Commercial agricultural exports
Plus:

$3,569

$6,556

Realized dollar returns

155

322

Mutual Security (AID) foreign
currencies used by U. S. agencies

15

Export-lm port Bank principal
and interest dollar repayments

31

80

Gross contribution

3,770

6,958

Less: Agricultural imports

3,756

5,826

14

1,132

Net contribution of agriculture
to U. S. balance of payments

series of agreements am ong members designed to
establish free agricultural trade within the C om ­
munity and to protect domestic agriculture from im ­

and savings on noncommercial
agricultural exports
PL 480

the recent expansion of the Com m on M arket area is
certain to have an unfavorable impact on U . S. e x ­
ports of agricultural com m odities. T he C A P is a

ports.

T he C A P protects agricultural producers in

member countries through variable levies and other
devices that force final import prices above domestic
prices.

The biggest impact o f Com m on M arket e x ­

pansion to include nations with previously less re­
strictive agricultural im port policies will be on to­
bacco, grains, rice, and fresh and canned fruits and
juices.

Soybeans have been entering the Common

M arket countries without duties or other restrictions
....

less than $500,000

Source:

and will continue to do so in the expanded market.

U. S. Department of Agriculture, World Monetary Con­
ditions In Relation to Agricultural Trade, M ay, 1972, p. 29.

W h ile a record year for agricultural exports in
fiscal 1973 seems assured, the factors listed above
serve to make long-term forecasts difficult if not im ­

Com m on Market countries account for nearly tw ofifths of the w orld ’s total imports and, in fiscal 1972,
these nine nations took nearly a third of total U . S.
farm exports.

The United K ingdom alone bought

$430 million worth of our farm products in fiscal

possible.

Nevertheless, it seems reasonable to as­

sume that U . S. agricultural exports will continue
to make

significant contributions

the

nation’s

Thom as E. Snider

1972.




to

balance of trade and balance of payments positions.

FEDERAL RESERVE BANK OF RIC H M O N D

15

1972 ANNUAL REPORT
T he 1972 Annual R ep ort o f the Federal Reserve Bank o f R ichm ond features an
article entitled “ T he Check Payments System and the Fifth District Regional Clearing
Plan.”

T he article reviews the historical development o f the payments mechanism and

describes the proposed Fifth District regional clearing system. T he R ep ort also includes
highlights o f the Bank’s operations during 1972, com parative financial statements, and
current lists o f officers and directors of our Richm ond, Baltimore, and Charlotte offices.
Copies of the 1972 A nnual R ep o rt are available upon request from the Bank and
Public Relations Department, Federal R eserve Bank o f R ichm ond, P. O . B o x 27622,
Richm ond, V irginia

23261.

NOTE
Corrected figures for year-to-year increases

in cash

receipts from

farm

marketings,

which appeared on page 17 o f the A pril 1973 M on th ly R eview , are as fo llo w s : 18 per­
cent in W est V irginia, 13 percent in South Carolina, 8 percent in N orth Carolina and
V irginia, and 5 percent in

16



M aryland.

M ONTHLY REVIEW, M A Y 1973

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