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FEDERAL RESERVE BANK OF RICH M O N D

MONTHLY
REVIEW
■

■

■

H

V

U. S. Coal Exports to Europe
Fifth D istrict H unting
Functional Cost A nalysis
The Fifth D istrict




NOVEMBER

1967

1950

L ig n ite
Coal
O il
N a tu r a l G as
P r im a r y E le c tric ity
T o ta l
C o m m u n ity S o u rc e s
( c o a l)
I m p o rts

I9 6 0

196 -

25

34

3E

213

245

237

30

126

240

1

14

20

20

42

37

289

461

572

257

336

327

(2 1 5 )

(2 3 6 )

(2 1 4

125

245

32

* P a r ts d o n o t a d d t o t o t a l d u e t o r o u n d in g .

U. S. Coal Export:
In July 1967 the three major economic alliances
in postwar Europe, the European Economic Com­
munity (the E .E .C .), the European Coal and Steel
Community (the E .C .S.C .) and the European Atomic
Energy Community (Euratom ) integrated to form
the six-nation European Community. O f these three
organizations, the Coal and Steel Community, based
in Luxembourg, shows perhaps the most dramatic
history. Whereas at the formation of the E.C.S.C. in
1951 coal played a predominant role in the European
energy supply and long-term prospects for its con­
sumption seemed favorable, today the closing of
mines and rapidly increasing surplus stocks form a
major concern for the E.C.S.C.’s High Authority. In
the past decade coal production has dropped by about
14%. Steel plants, once expanding at a very high
rate, now suffer from overcapacity and weak prices.
In this article, an attempt will be made to describe
the complete reversal of the coal market and to trace
the role that U.S. coal exports to the E.C.S.C. have
played therein. These exports have a special sig­
nificance for the Fifth District, since a large part of
the coal originates in the mines of Virginia and West
Virginia, and moves out through District ports.

placed under a common High Authority, in an
organization open to the participation of the other
countries of Europe.” Nowadays it is hard to ap­
preciate the revolutionary significance of this an­
nouncement. Five years after the war, however,
distrust of Germany was still deeply rooted, and
European economic cooperation was only in its in­
fancy. Through offering to collaborate in this im­
portant section of both countries’ economies, France
opened to Bonn the opportunity to play once again
an equal role among the European nations. M ore­
over, as was explicitly pointed out, “ any war between
France and Germany becomes, not merely unthink­
able, but materially impossible.” From this proposal,
a first step towards European economic integration
could be made. After a series of fruitful negotia­
tions, France, Germany, Italy, Belgium, the Nether­
lands and Luxembourg, on April 18, 1951, signed
the Treaty establishing the European Coal and Steel
Community. Great Britain, although repeatedly in­
vited to do so, felt that she could not join the
E.C.S.C. The transfer of autonomy over one of

The E.C.S.C. On May 9, 1950 the French Minister
of Foreign Affairs, Robert Schumann, announced
the proposal of his government “ that the entire
French-German production of coal and steel be

become an associate member in December 1954; and

2




her basic industries to the supranational High A u ­
thority was unacceptable to her.
in a Standing Council, both

She did, however,
parties have since

regularly consulted each other and exchanged in­
formation.

a b le I

TO TA L IN TER N AL ENERGY REQUIREMENTS OF THE E.C.S.C.

is o lu te C o n s u m p tio n

1965

1966

S h a re o f th e M a r k e t
( fo r e c a s t)
1967

( fo r e c a s t)
1970

(fo r e c a s t)
1980

1950

1960

1964

38

40

9

7

7

6

6

5

74

53

41

38

34

31

2 7 -3 2

[

10

28

42

45

48

51

5 4 -4 9

\

19 6 5

m e tric to n s , c o a l e q u iv a le n t)

( fo r e c a s t)
1967

1966

( fo r e c a s t)
1970

( fo r e c a s t)
1980

Per C e n t

34

34

35

225

208

201

2 0 0 -2 3 3 )

271

299

328

3 9 8 -3 6 5 )

r

8 2 5 -7 6 0

5

3
7 3 -6 7

23

27

34

53

1 3 0 -1 6 0

_

3

4

4

4

5

7

1 2 -1 5

45

49

46

54

1 3 7 -1 7 2

7

9

6

7

8

8

7

1 2 -1 5

598

617

644

743

1 00

100

100

100

100

100

100

100
3 8 -5 1

1 ,1 3 0 *

322

311

310

3 3 1 -3 6 1

4 2 5 -5 8 5

89

73

57

54

50

48

4 5 -4 9

(202)

(1 8 5 )

(1 7 8 )

( 1 6 8 -1 9 8 )

(1 0 0 -1 8 5 )

(7 4 )

(5 1 )

(3 7 )

(3 4 )

(3 0 )

(2 8 )

(2 3 -2 4 )

276

306

334

4 1 2 -3 8 2

7 0 5 -5 4 5

11

27

43

46

50

52

5 5 -5 1

S o u rc e :

" R a p p o r t g e n e r a l s u r I 'a c t i v it e
d e la C o m m u n a u te , " L u x e m b o u rg , a v r il 1 9 6 7 a n d
e n e rg e tiq u e s a lo n g te r m e d e la C o m m u n a u te e u r o p e e n n e , " L u x e m b o u rg , a v r il 1 9 6 6 .

'N o u v e lle s

R e fle x io n s

sur

les

(9 -1 6 )
6 2 -4 9

p e rs p e c tiv e s

to the European Community
Aims of the E.C.S.C. A rticle tw o of the T reaty
states the objectives as follow s: to contribute to the
expansion of the economy, the development of em­
ployment, and the improvement of the standard of
living in the member countries through the creation
of a common market for coal and steel. T o this end
all mutual import and export duties and quantitative
restrictions, all discrimination based on nationality,
all forms of state assistance, and all restrictive

E.C.S.C. has always had more power than its E.E.C.

The E.C.S.C. Energy Market A s may be seen
from Table 1, the 1966 total energy consumption in
the E.C.S.C. amounted to 617 million metric tons coal
equivalent (c.e .), an increase of 113% since 1950.
It is estimated that in 1970 total energy require­
ments will have gone up to 743 million tons c.e., and
in 1980 to 1,130 million tons c.e., an increase of
83% over last year.
Changes in the relative importance of each source
of energy for the whole market have been large.
Coal went down from 74% in 1950 to 34% in 1966,
whereas oil increased during that period from 10%
to 48% . A continuation of this trend is foreseen.
The Community’s growing reliance upon external
energy sources for the vital needs of its industries is
also clear from the table. In 1950 only 11% of total
energy needs had to be covered through imports.
This compares with 50% last year and a 62% pre­
diction for 1980. In 1965, 91% of the total oil con­
sumption, accounting for 89% of all E.C.S.C. energy
imports, had to be covered through shipments into
the six member countries. This situation has been

counterpart, and in fact was the only truly supra­

a source of great anxiety to the High Authority.

practices would have to be abolished.

A five year

transitional period was provided for. A t the external
frontier a common duty would be levied.
In order to carry out these tasks, the following
institutions were set up : (1 ) a High Authority of
nine members, its decisions to be binding on all
member countries; (2 ) a Council of Ministers, con­
sisting of one representative from each of the six
governments; (3 ) an Assembly; and (4 ) a Court of
Justice.
It is noteworthy that the High Authority of the

national body in the European communities.

A t the

Compared to the changes that occurred in the Six,

recent merger of the executive branches of the three

changes in the U. S. national energy market have

organizations this distinction was lost.

been relatively small.

The new

Over the period 1950-1965,

14-member Commission retains the right of initiative,

coal’s share dropped from 42.5% to 23%

but the Council will play a decisive role.

market, oil increased from a 33.2% to a 39.6%




of the

3

share, natural gas went up from 20.3% to 33.5% and
primary electricity decreased from 4.7% to 3.9% .
Oil and Natural Gas in the E.C.S.C. Since there
are no major oil fields in the E.C.S.C. it will con­
tinually, and to an increasing extent, have to depend
upon imports, mainly from the Middle East. By
1970 the need for oil will have gone up to about 380
million tons coal equivalent; its share in the market
will then amount to about 54% . Only a small
fraction can be met by indigenous production.
Natural gas is expected to play an increasingly
important role in the energy market. Its share is
estimated to rise to 7% in 1970 and to 12% -15% in
1980. The Six will be largely self-supporting in this
field, mainly due to the discovery of huge natural gas
layers in the northeastern part of the Netherlands.
Proved reserves of around 13 trillion cubic feet, not
including any future discoveries in the North Sea,
make it the largest known field in the world. The
Dutch Government plans to exploit these layers over
the next 30 to 40 years. It will export some 235
billion cubic feet a year, and intends to keep around
170 billion cubic feet a year for domestic use.
The Coal Market A s shown in T able 1, co n ­
sumption of coal in the E.C.S.C. has over the years
declined rather rapidly. This is to a large extent
due to the structural shift away from the traditional
energy sources in favor of oil that started in the late
fifties. In an attempt to adapt themselves to this
trend, mining companies have decreased production
or closed pits altogether. In Belgium, for instance,
only 45 pits were in operation at the end of 1966,
as compared to 120 in 1957. For the Community
as a whole, a 48% drop in the number of pits oc­
curred during this period.
The process of readaptation has, however, been in­
creasingly hampered by large scale coal imports from
the U.S. Total 1953 imports of this product were
approximately 14 million tons, about half of which
originated in the U .S. This figure was up to 44
million tons in peak year 1957, when U. S. coal
accounted for nearly 86% . Last year’s shipments
to the Six, although dowm, still amounted to 25
million tons, and the U.S. share continued to be at a
high level of 72% . Expressed as a percentage of coal
consumption, total imports in the respective years
were 6 % , 16%, and 12% of the Community’s
market.
Importation has, of course, aggravated the adap­
tation difficulties and made overcapacity more acute.
A clear illustration of this is the sharp increase of
stocks. A t the end of 1952 pithead stocks of coal
were reported to be some 7 million to n s; in De4




T a b le 2
U. S. C O N S U M P T IO N
T o ta l U .S.
C o n s u m p tio n

T o ta l
E x p o rts

AND

EXPORTS OF C O A L

E x p o rts
T h ro u g h
V a . P o rts

S h a re o f U .S .
c o a l e x p o r ts
to E .C.S.C.

m illio n s o f to n s , n e t

S h a re o f U.S.
c o a l e x p o rts
to C a n a d a

Per C e n t

1961

3 7 4 .4

3 4 .9

2 2 .7

37

32

1 96 2

3 8 7 .8

3 8 .4

2 4 .9

41

31

196 3

4 0 9 .2

47.1

2 9 .7

45

29

1 96 4

431 .1

4 7 .9

3 0 .5

44

30

196 5

4 5 8 .9

5 0 .2

3 1 .9

43

31

1966

N .A .

4 9 .3

3 1 .5

40

32

N o te :

O n e n e t to n is 0 .9 0 7 m e tr ic to n s .

S o u rc e s :

" B itu m in o u s C o a l Facts 1 9 6 6 ," N a t io n a l C o a l A s s o c ia ­
t io n ; " U . S. E x p o r t s ," D e p a r tm e n t o f C o m m e rc e ; P u b li­
c a tio n s o f th e V ir g in ia S ta te P o rts A u t h o r it y .

cember 1960 this figure had risen to 27 million tons.
Last year showed a 32 million tons record : a total
increase of about 460% . In addition to this a stock
of coke at coking plants that has gradually gone up
to 9 million tons should be taken into account. M ore­
over, large stocks are accumulated at dealers and con­
sumers; in the fall of 1965 18 million tons were
reported. In Germany alone, excess coal amounted
to 20 million ton s; in the first six months of 1967
this increased by about 5.5 million tons, bringing the
total value of unused German coal up to $375 million.
Thus it is clear that these imports are of great
concern to the High Authority. But how important
are these transactions to the U .S. ? In 1966 the value
of total U.S. exports amounted to $29.5 billion, of
which 20% went to the European Community.
Table 2 indicates that in the period 1961-1965 U. S.
coal exports have increased faster than national con­
sumption, namely, 44% compared to 22.6% . A l­
though its share has decreased slightly in recent
years, the E.C.S.C. remains this country’s main coal
customer. Canada holds a stable second position,
with Japan ranking third at 15% in 1965. It is hard
to predict whether the downward trend in ship­
ments to the Community will continue; this will de­
pend in part upon the extent and duration of the
protectionist measures taken by the High Authority
in 1965.
The table also shows how important a role V ir­
ginia ports play in the U .S. coal export trade. In
1966 about 64% of total shipments went via Norfolk
and Hampton Roads, accounting for around 90% of
overall business in those ports by weight.
How is it that the U.S. has acquired such a con­
siderable share of the Community’s coal market ?
A glance at prices gives the clue. In the Six, the

January 1967 price of coal at the mine ranged be­
tween $15.29 and $17.92 per metric ton. By com ­
parison U. S. coal had a $13.31 per metric ton
quotation in the harbors of Antwerp, Rotterdam, and
Amsterdam. Thus it appears that, even after over­
seas transport at a freight of $2.20 per metric ton.
the U. S. price is, and has in the past few years
always been, considerably lower.
W hat is the cause of this large difference? Tw o
closely related reasons may be pointed out. First
of all, mechanization in the successive phases of coal
production is much more pronounced in this country
than in the Community. The Six have, however,
made considerable progress, as is shown by the
fact that the percentage of production from fully
mechanized faces has gone up from 30.3% to 71%
between 1959 and 1966. Still, labor productivity in
U.S. mines remains much higher than it is in the
Community, or in fact, than anywhere else in the
world. In 1965 the output per man per day, as
averaged over all mines, amounted to 17.52 tons in
the U .S., as compared to a mean of 2.25 tons in the
Six. Germany, which ranked highest in the Com­
munity at 2.56 tons, also showed the most pronounced
increase, namely, 84% from 1957 to 1966.
The price differential is to a large extent also due
to a second factor: the difference in the prevailing
mining conditions. Whereas in the E.C.S.C. almost
all coal has to be extracted from underground mines,
nearly one third of total coal production in this
country originates in strip mines. Needless to say,
open-air layers are highly favorable to efficient and
low-cost mining. The output per man-day in U.S.
strip mines amounted in 1965 to 31.98 tons as com ­
pared to 14 tons in underground mines. A s distinct
from the first factor, there is little that the Six can do
in this field to improve its position.
Considering then these two causes, it is no wonder
that European mines have a very hard time com ­
peting with imported U.S. coal.

the Community’s mines. Only last year, for example,
the total number of persons employed in E.C.S.C.
mines fell by almost 62,500 men to 637,400, a 10%
drop, following a 5% decline in the previous year.
Am ong them were some 43,000 underground mine
workers. An even more rigorous adaptation, though
perhaps desirable from an economic point of view,
is considered socially unacceptable. Through re­
training programs and financial aid, the High A u ­
thority tries to facilitate the transition to new kinds
of employment.
T o protect themselves against the imports of
coal, some member countries have also resorted to
protectionist measures such as quantitative restric­
tions and import duties ($5 per metric ton in Ger­
many). Often a subsidy is given to keep coking coal prices competitive with those of foreign coal.
Both practices in fact run counter to the principles
of the E.C.S.C. In view of the very difficult situa­
tion, however, the High Authority has generally
given approval upon request of the governments.

ways tried to lower production, such as by curtailing

The Future A t this point a look forw ard seems
tempting. According to recent estimates, it is likely
that the share of coal in the Community’s energy
market will decrease further from 38% in 1965 to
about 2 7 % -3 2% in 1970. It is predicted that in
1980 it will have dropped to 9 % -1 6 % . T o what level
production will fall is hardly predictable. Much will
depend on the relative competitive strength of the
various energy sources in the many different sectors
of consumption. It is certain, however, that some
coal mining will always go on, if it were only because
the recent Middle East war has once again proved
that the E.C.S.C. cannot rely unconditionally upon
continuous availability of oil. Besides, it would be
unwise if the Six increasingly exposed themselves to
outside price pressure by importing both oil and all
coal. This would imply, for instance, that in 1970
the Community would have to rely upon external
sources for about 85% of her energy requirements.
As to how such a minimum production quantum
would be divided among the member countries
nothing can be said, but it seems likely that Germany
would claim a large part of it.
However this may be, considering the historical
position of the coal mining industry, the number of
laborers involved and the importance of a sound

working time and by closing marginal pits or mines.

energy situation, intricate and complicated discussions

T o meet the competition of imports, large scale

both among the ministers and in the newly integrated

Policy of the High Authority W h at has the H igh
Authority done to meet the problems brought about
by the secular decline in coal consumption and the
increased imports ? Considering the long term nature
of the shift, a continuous adaptation seemed indicated.
Consequently, the High Authority has in various

mechanization and rationalization schemes have been

Commission may be foreseen before the Community

set in motion.

can reach a satisfactory “ European” solution of her

Their effects were noted above.

This policy, of course, very intensely affects the
lives of all those who are directly connected with




energy problems.
Jan H . IV. Bennderman

5




□

H a v in g opernound th e m id d le o f S e p te m b e r f o r som e ty p e s o f g a m e , th e h u n tin g

season is n o w \n d e r w a y in th e F ifth D is tric t.

W ith its a b u n d a n c e o f w o o d e d

a re a s a n d o p e rjs as w e ll as p ro te c te d w a te r w a y s , th e D is tric t is a n id e a l h u n tin g
g ro u n d .

D istrioj-tsm en f in d

a v a r ie t y o f g a m e fr o m

a re a a ls o o f f e r |v e r s ity o f ty p e s o f h u n tin g fr o m
a rro w

to th e

p ttry o f " r id in g

to th e

h o u n d s ."

q u a il to b e a r.

O ur

p r im it iv e s ta lk in g w ith b o w a n d
Q] H u n tin g is a t le a s t as

p o p u la r in th e ;t as in th e rest o f th e n a tio n , a n d n a tio n a lly , th e re
a re a b o u t 2 5 n- h u n te rs w h o p o u r a p p r o x im a t e ly
e q u ip m e n t,

lic e tra v e l,

and

p u rs u it o f g a m u r p r is in g ly ,

th e
m o re

1.5 b illio n

d o lla r s y e a r ly in to

m u ltitu d e o f o th e r e xp e n se s in v o lv e d in th e
is s p e n t o n g a s a n d o il f o r t r a v e lin g th a n f o r g u n s

a n d a m m u n it io i 1 9 6 5 , h u n te rs d ro v e a lm o s t 9 b illio n m ile s to re a c h d e s ire d
h u n tin g a re a s . A n tin g license s as w e ll as th e 11% F e d e ra l e xcise ta x
im p o s e d on sp< g o o d s a n d a m m u n itio n a re a n im p o r ta n t so u rce o f re v e n u e to
s u p p o r t s ta te g co m m issio n s.

A s ta te h u n tin g license , g o o d f o r o n e y e a r,

costs a re s id e n te s ta te o n ly a n o m in a l a m o u n t, b u t n o n -re s id e n ts m u s t p a y a
s u b s ta n tia lly

laliee.

H u n tin g

licenses p u rc h a s e d in th e D is tric t c o m p ris e 9 .2 % o f th e

m o re th a n 14 . f o r th e n a tio n in 19 64 .

C o n s id e rin g th e n u m b e r o f h u n tin g

licenses issu e d iD is tric t in 1 9 6 4 , N o rth C a r o lin a a p p e a rs to be th e m o st p o p u la r
h u n tin g a re a w 'rg in ia f o llo w in g close b e h in d .

FIFTH

DISTRICT

N o . o f p a id
H u n tin g
cense H o ld e rs '

H U N T IN G

L IC E N S E S -1 9 6 4

S ta te %
o f F ifth
D is tr ic t T o ta l

H u n te rs ($)

S ta te %
o f F ifth
D is tr ic t T o ta l

G ro s s C o st
to

1 6 4 ,3 7 2

12.6

8 1 5 ,2 1 7 .2 5

15.8

3 9 6 ,8 9 9

30.4

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

2 7 .3

1 9 2 ,2 3 7

14.8

6 0 8 ,2 9 6 .6 5

11.8

3 5 1 ,0 4 8

27.0

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

2 8 .5

1 9 7 ,9 6 6

15.2

8 5 6 ,9 6 3 .0 0

16.6

1 ,3 0 2 ,5 2 2

fo ta l

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

is o n e in d iv id u a l r e g a rd le s s o f th e n u m b e r o f lice n se s he m a y p u rc h a s e ,
la r t m e n t o f th e

I n te r io r , B u re a u o f S p o rt F ish e rie s a n d W ild lif e .

Functional Cost Analysis
A Tool of Bank Management

High interest rates on time deposits, rising salary
and wage expenses, and increases in other cost
factors affecting earnings have made it increasingly
difficult for banks to employ available funds in areas
that will yield a return large enough to pay the in­
terest and other costs and still produce adequate
profits.
For a bank to obtain the total cost or the total
income for a year’s operation is a relatively simple
task.

Information in the aggregate such as this does

not lend itself readily to analysis by management,
however.

Before any meaningful evaluation can be

made, income and expense figures must be allocated
to the proper functions.

A s a result of these alloca­

tions, management can more readily answer such
questions a s :
W hat does it cost to maintain demand deposits

Do we have more tellers than are needed for
our volume of transactions?
What are the break-even points on our con­
sumer instalment loans?
W hat is the cost of issuing a certificate of
deposit ?
W hat is the officer expense per $1,000 of loans?
Functional Cost Analysis

T o assist managem ent

in answering these and related questions is the over­
all objective of Functional Cost Analysis, a cost
accounting service that eleven Federal Reserve Banks
sponsor for the member banks in their respective
Districts.

Although Functional Cost Analysis has

been in existence since 1956, it has grown signicantly only in the past three years.

In 1964, 279

banks in three Federal Reserve Districts participated

and time deposits?

in the program.

Where can expenses be reduced for a particular

eleven Federal Reserve Districts took part in the

function if they are considered excessive?

voluntary study.

W hat is the average cost of making a loan?

In 1966, however, 1,022 banks in

The program is offered without charge each year

What is the average cost of processing each
loan payment?
8

to member banks.

are not required to remain in the program in con-




Even though participating banks

SOURCES A N D

D ISTR IBU TIO N OF IN C O M E

BY SIZE OF B A N K
EXPENSE O F A V A IL A B L E F U N D S

IN C O M E F R O M A V A IL A B L E F U N D S

R e al E s ta te M o r t g a g e
Loans

I n s ta lm e n t L o a n s

C o m m e r c ia l a n d
A g r ic u lt u r a l L o a n s

In v e s tm e n ts

D e m a n d D e p o s its

T im e D e p o s its

C a p it a l F u n d s

Per C e nt

f~
l

D e p o s its U p T o $ 5 0 M il. (7 7 4 B ks.).

N o te :

□

D e p o s its $ 5 0 t o $ 2 0 0 M il. (1 9 8 B k s .).

□

D e p o s its

over

$ 2 0 0 (6 8 B ks.).

1. C a lc u la tio n s E x c lu d e th e C o m p u te r , T ru s t, S a fe D e p o s it a n d O th e r N o n -F u n d U s in g D e p a r tm e n ts .
2. A v a ila b le F u n d s A r e D e fin e d A s :

T o ta l L ia b ilit ie s a n d C a p it a l Less F ix e d a n d O th e r A s s e ts .

secvitive years, experience has shown that there is
very little attrition from one year to the next. One
of the advantages of participating in consecutive
years is that comparisons are given for each bank
with its own year-ago figures. T o participate, all a
bank must do is fill in the five reporting schedules
that are supplied by the Federal Reserve. The time
required to fill in the schedules varies, of course,
from bank to bank depending on the size, accounting
procedures, and operational set up that each bank has.
Functional Cost Analysis has two primary ob­
jectives. First it is designed to give an itemized

The work schedules are filled out on a calendar
year basis and returned to the Federal Reserve Bank
for processing in February of the ensuing year. About
six weeks later the finished report, consisting of 28
computer printout pages and several printed pages,

list of the various current income and expense items

to be the fund-providing functions.

as they relate to the major banking functions. Also,

deposit analysis includes a detailed breakdown of

comparative figures for groups of other banks are

the processing, administrative and overhead expenses.

is mailed to the participating banks.

The report

gives an analysis of three fund-providing functions,
four fund-using functions, and four categories of
nonfund-using service departments.
F u n d -P ro v id in g

Fun ction s

Dem and

deposits,

time deposits, and net capital funds are considered
The demand

provided to aid in the analysis of an individual bank’s

This analysis, like all others in the Functional Cost

performance.

Analysis report, is developed from information sup­

The uniform reporting of all partici­

pating banks makes possible interbank comparisons

plied to the Reserve Bank on the reporting schedules

that are not generally available in any other cost

and includes information such as the average cost of

program.

handling a home debit, a deposit, and a transit check.

Where overall comparisons are made—

such as between balance sheets— banks are compared

Demand deposits are also segregated into, and an

with other banks that have a similar dollar volume

analysis is given for, regular and special checking

of total deposits and a similar percentage of time

accounts.

deposits.

break-even balance on a checking account is also pro­




Information for determining the average

9

vided.

This is expressed as the average annual

balance required to p a y : (1 ) the account maintenance,

Service Departments T h e com puter, trust, and
safe deposit functions are service departments that

(2 ) the home debits cost, (3 ) the transit checks cost,

do not use balance sheet funds and are included in

and (4 ) any added services cost.

the non fund-using section of the report.

A deduction is

made for any activity income earned on the account.
In addition to the comparisons with its own year-

Interbank

comparisons for the computer department are made
with ten banks that have a rental expense for com ­

ago figures, interbank comparisons are also given.

puter hardware similar to the subject bank.

For the demand deposit function, demand deposits

parisons for the trust function are with banks that

Com­

of ten banks— five having a dollar volume of demand

have similar 5-year average incomes, while total

deposits just above and five having a dollar volume

number of boxes is used for selecting group average

of demand deposits just below the subject bank—

banks in the safe deposit analysis.

make up the group average.
For the time deposit function, the average cost
per transaction of a deposit, a withdrawal, opening
an account, and closing an account is given.

A

separate analysis, complete with information

for

determining the average annual break-even balance,
is given for passbook savings, certificates of deposit,
and Christmas and similar club accounts.

The group

average for the time deposit analysis consists of
average time deposits of ten banks with similar
dollar volumes.
The

third fund-supplying function, net capital

funds, consists of capital and valuation reserves plus
“ other” liabilities and borrowings less fixed and “ all
other” assets.

Federal funds purchased are analyzed

Summary Reports

T w o reports in addition to

those for individual banks are produced by the Fed­
eral Reserve.

The “ National Average” report and

the “ Performance Characteristics of High Earning
Banks” report both contain virtually the same in­
formation as the individual bank report except that
the “ National” report contains average figures for
all banks in the program and the “ High Earnings”
report contains average figures for banks in the top
earnings quartile.
A review of all three reports will give a fairly ac­
curate evaluation of how a bank is doing on the na­
tional level as well as how it compares with the
best earning banks.
W hile participation in Functional Cost Analysis

as part of the capital funds function.

is limited to Federal Reserve member banks, the
Fund-Using Functions T h e fund-using functions

“ National” and “ High Earnings” reports are avail­

consist of real estate mortgage loans, instalment loans,

able free of charge to non-member and non-parti­
cipating banks upon request.

commercial and agricultural loans, and investments.
For each of the fund-using functions, the clerical
expense per thousand dollars is given along with such

Conclusion

miscellaneous information as the average cost of

bank.

T here are many w ays of costin g a

The important thing, however, is that a bank

making a loan, the average cost of collecting a pay­

is doing some type of costing.

ment, the average volume of loans serviced per per­

fering more and more services to their customers

Today banks are of­

son, and the break-even points for the consumer

beyond the traditional banking functions of receiving

instalment loan function. Gross yield on investments

deposits and making loans, and the trend will no

and liquidity loans are included in the analysis of

doubt continue in the future.

the investment function.

Liquidity loans are re­

banking is becoming more complex and competitive,

stricted to Federal funds sold, commercial paper

and the banker that has more detailed and reliable

purchased, brokers’ loan participations with a cor­

cost and income information has the advantage.

respondent, purchased certificates of deposit, bankers’
acceptances and

commodity

credit certificates

of

interest.

The Federal Reserve’s role, so far as Functional
Cost Analysis is concerned, is to diagnose— not pre­
scribe.

For each of the fund-using functions, as was the

It is no secret that

Once a bank has its cost report, it has a

medium of unlimited potential as a management tool.

case with the fund-providing functions, a comparison

The report can be a prelude to budgeting, profit

is made with ten other banks that have similar

planning or any other use that management can

dollar volumes

determine with its discerning eye.

studied.
10




of

the particular

function

being

W . 0 . Pearce

«

THE FIFTH DISTRICT
Most of the latest data suggest that the pace of
business in the Fifth District may be picking up after
showing a rather lackluster performance for most of
the year. Demands for textiles and furniture show
signs of renewed strength and the chemical industry
appears to be recovering from a mild slump in the
first half of the year. Construction activity has in­
creased, and employment continues at a high level
in most industries. Financial data for the District
so far this year reflect a distinctly slower pace of
growth than in the same period of 1966.
Loan Demand Off The chart shows that business
loans at Fifth District weekly reporting banks rose
steadily in 1966, but after the seasonal peak at the
end of the year they failed to rise in the first three
quarters of 1967. They fluctuated around the yearend level and were no higher in September than
nine months earlier. Real estate loans after the first
quarter of this year rose at about the same pace as
in other recent years, but all other loans, including
consumer loans, were still well below the December
1966 level. Banks have had adequate reserves and
have borrowed very little from the Federal Reserve.
The slow growth in loans appears to be due pri­
marily to sluggish demand.
Time Deposits Up T im e and savings deposits at
Fifth District banks rose steadily in 1966, but in

LOANS

early 1967 they turned up sharply and continued to
increase rapidly until the end of August. Rising
personal income, due chiefly to higher wages and
rising employment, gave individuals additional funds
to save. Corporations and state and local govern­
ments rebuilt their liquidity through record offerings
of securities with at least some of the proceeds going
into time and savings deposits. Relatively high in­
terest rates on time deposits thus succeeded in at­
tracting funds from all types of depositors.
banks.

Savings and loan associations and other

financial intermediaries also received heavy inflows
of funds.

Demand deposits, which reflect to some

extent the volume of loan activity, dropped somewhat
more than seasonally in early 1967, and have in­
creased only moderately since then.
Loan-Deposit Ratio Down




T h e ratio of total

loans to total deposits, an indicator of the banking
system’s ability to meet future loan demand, rose at
Fifth District weekly reporting banks in 1966 from
less than 64.5% to more than 66.5% .

It began

dropping in the second half of last year, however,
and as deposits grew rapidly with little increase in
total loan volume, the ratio fell steadily and by Sep­
tember it was well below 64% .

DEPOSITS
$ M illio n

The in­

crease in savings was not restricted to commercial

LOAN -D EPOSIT RATIO

FIFTH DISTRICT W EE KLY R E P O R TIN G B A N K S
M illio n

J

Per C e n t

INVESTMENTS *

BANK DEBITS*

INTEREST RATES

$ M illio n

$ M illio n

* S M S A s a n d S e le c te d C itie s , F ifth D is tr ic t

kF ifth D is tr ic t W e e k ly

Per C e n t

R e p o rtin g B a n ks
S o u rc e :

Higher Deposit Turnover Bank debits to demand
deposits show primarily the dollar volume of checks
written and are measured for major population
centers in the District and across the nation. They
frequently are used as indicators of financial activity
in individual metropolitan areas, but the sum of all
debits for major District cities also gives some in­
dication of the trend of business activity in the Dis­
trict as a whole. The series fluctuates widely, but
the general trend in bank debits was upward through
the end of 1966. They turned down and fell for
about four months in 1967, but since then have
moved up sharply.
Investment Volume Up W h en the flow o f re­
serves was reduced and money became tight in 1966,
the banking system liquidated substantial amounts of
securities in order to meet loan demand and also to
pay off maturing certificates of deposit. W ith the
advent of an easier monetary policy late last year,
banks began rebuilding their investment portfolios.
In 1967, total investments at Fifth District weekly
reporting banks have risen at a record pace. During
most of the first three quarters, holdings of tax
exempt state and local Government securities rose
most rapidly. The demand for short- and inter­
mediate-term tax exempts was especially strong.
One-to-five year Federal Government issues also rose
substantially. Holdings of short-term Governments

B o a rd o f G o v e r n o r s o f th e
F e d e ra l R e serve S y s te m .

Large new supplies of short-term Treasury debt have
contributed to the increase in bank liquidity.
Interest Rates Dip M ost interest rates turned
down late last year and fell during the first half of
1967. Mortgage money became more easily available
as funds poured into savings and loan associations
and mutual savings banks, and rates declined steadily
until the second quarter.

They have been edging

upward since then, however, and in some areas have
passed their 1966 highs.

Many mortgage investors

have already committed all their available funds well
into the future.

Others are finding alternative in­

vestments at attractive rates.
The demand for business loans has been much less
vigorous this year than last, and the Federal R e­
serve’s quarterly interest rate survey shows lower
average rates on business loans for each quarter this
year.

Business borrowing from banks apparently

has been affected by inventory reductions, postpone­
ments of expansion plans, and by the acquisition of
funds from alternative sources.
Rates on 3-month Treasury bills fell sharply from
their late 1966 high until June, when they turned up
again.

W ith several large new issues reaching the

market, they continued to rise in the third quarter.
Harmon H. Haymes

fluctuated during the first half of the year and turned
up sharply in June as large new issues were marketed.
The volume of long-term Governments held has de­
clined steadily since mid-1966.

of investments suggests that banks have added con­
siderably to their net liquidity so far this year.
12




PHOTO

The overall pattern
6.

&

7.

F is h e rie s .

V ir g in ia

CREDIT

C o m m is s io n

of

G am e

and

In la n d