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VOLCKER 1981 Money Targets NOWS S&Ls Start Fast SUPPLY-SIDE Reviewing the Evidence MIAMI Behind Foreign Banking Surge ECKSTEIN The Fed vs. Inflation Economic Review FEDERAL RESERVE BANK OF ATLANTA President: William F. Ford Sr. Vice President and Director of Research: Donald L. Koch Vice President and Associate Director of Research: William N. Cox III Financial Structure: B. Frank King, Research Officer David D. Whitehead National Economics: Robert E. Keleher Regional and International Economics: Gene D. Sullivan, Research Officer Donald E. Baer, Research Officer Charlie Carter William J. Kahley Database Management: Delores W. Steinhauser Editing: Gary W. Tapp Graphics: Susan F. Taylor and Eddie W. Lee, Jr. The purpose of the Economic Review is to inform the public about Federal Reserve policies and the economic environment and, in particular, to narrow the gap between specialists and concerned laymen. 2 APRIL 1 9 8 1 , E C O N O M I C REVIEW * 1 »1 o ® Renewable Energy Sources » » from the F a r m 4 Producing energy from renewable farm products is technically possible, but is it economically practical? T h e Fed vs. I n f l a t i o n 6 Otto Eckstein, President of Data Resources, Inc., of Lexington, Massachusetts, recently shared his views on the economy with the Board of Directors of the Federal Reserve Bank of Atlanta. Behind Miami's Surge in Supply-Side Tax Policy: R e v i e w i n g International Banking 9 Miami's emergence as an international banking center has been stimulated by both regulatory changes and economic factors. What are the roles of local commercial banks, Edge Act corporations, and foreign bank agencies in Miami's international banking development? the Evidence 16 Is any tax policy which affects aggregate supply a "supply-side" tax policy? What is the evidence regarding the effects of tax cuts on labor, saving, and investment? A review of the empirical and historical evidence on supply-side tax cuts suggests that some conventional models may be misleading. New C o m p e t i t i o n for C o n s u m e r The 1 9 8 1 M o n e t a r y Targets 2 2 Excerpts from testimony by Federal Reserve Chairman Paul A. Volcker before the House Banking Committee, February 25, 1981 Financial Business 2 4 How many S&Ls and credit unions will use their new powers (granted in the Monetary Control Act) to become full-service competitors of banks? What are the implications for future consolidations and mergers? • : N O W Competition: S & L s Start Fast, Banks More Conservative 2 7 Surveys and preliminary reports from southeastern financial institutions show wide variations in NOW pricing. A summary of early indications of pricing strategy and intensity of competition Inflation Experiences in Seven Major C o u n t r i e s : A n Overview 31 What factors play major roles in international inflation? Has the U.S. experience been typical of other western nations? A review of the inflation histories of seven major world economies. > a V O L U M E LXVI, N O . 2 3 Renewable Energy Sources from the Farm Farmers, especially in the Southeast, are intensely interested in alternate fuels generated from farm products. Wide variations in cost make the economic feasibility of alcohol from corn questionable. Gas from wood is an attractive alternative to natural gas. Energy is a significant cost in all farm o p e r a t i o n s . Direct use of fuels t o p o w e r farm m a c h i n e r y may a m o u n t t o as m u c h as 15 p e r c e n t of total c r o p p r o d u c t i o n costs. W h e n costs o f materials d e r i v e d f r o m p e t r o l e u m and/or natural gas are i n c l u d e d (insecticides, herbicides, pesticides, and most n i t r o g e n fertilizers), nearly 50 p e r c e n t of the costs o f p r o d u c i n g c o t t o n in the Southeast is directly d e p e n d e n t o n energy prices. Farmers are intensely interested in alternate fuel sources that may p r o m i s e t o c u t t h e i r energy e x p e n d i t u r e s and especially in those fuels that can be generated directly o n the f a r m . It is technically possible t o get energy f r o m renewablefarm products, butis iteconomically feasible? p r o d u c e s f r o m 1.0 t o 2.5 gallons of e t h a n o l (pure alcohol w i t h o u t water), d e p e n d i n g u p o n the efficiency o f the o p e r a t i o n . The main byp r o d u c t is 20 t o 30 gallons of " s t i l l a g e , " a l i q u i d made u p of distillers' grains, d i s t i l l e r s ' s o l u b l e s , and w a t e r . The stillage has some value as animal f e e d , principally because of the p r o t e i n c o n t e n t of the grain that remains in the s o l u t i o n . It is d i f f i c u l t t o utilize the stillage, h o w e v e r , since it c a n n o t be stored f o r longer t h a n t w o o r t h r e e days w i t h o u t spoilage unless it is d r i e d . Its high w a t e r c o n t e n t keeps most o f even t h e largest farm animals f r o m c o n s u m i n g e n o u g h o f the l i q u i d d i r e c t l y t o gain sufficient n u t r i t i o n f r o m it, and t h e energy r e q u i r e m e n t f o r d r y i n g t h e s o l u t i o n is a b o u t e q u i v a l e n t t o the energy utilized in t h e original distillation process. Alcohol from Farm Products Specific costs of alcohol p r o d u c t i o n vary d e p e n d i n g o n the price o f c o r n w h i c h accounts f o r 40 t o 60 percent of the total. D u r i n g the past year, the price ranged b e t w e e n $2.75 and $3.75 per bushel. The raw p r o d u c t cost of the final p r o d u c t ranges b e t w e e n $1.10 per gallon in t h e most efficient o p e r a t i o n and $3.75 per gallon. Costs o f fuel f o r heat t o speed u p the conversion process range b e t w e e n 10 cents'and 40 cents per gallon, d e p e n d i n g o n the efficiency of the operations and the type o f fuel e m p l o y e d . O t h e r variable costs, i n c l u d i n g labor and additives, range b e t w e e n 5 cents and 20 cents per gallon. Fixed or o v e r h e a d costs add a n o t h e r 20 cents t o 50 cents. A l t o g e t h e r , alcohol p r o d u c e d f r o m c o r n may cost as little as $1.55 p e r gallon if p r o d u c e d u n d e r ideal circumstances, o r it c o u l d costas m u c h a s $ 5 . 0 5 p e r g a l l o n if all i t e m s c o m e in at the high range. In most cases, costs have been o n the high side of the range. A f u r t h e r disadvantage is that alcohol p r o duces less energy than gasoline o r diesel. A Farm p r o d u c t i o n of alcohol f r o m locally prod u c e d p r o d u c t s is o n e possibility that has been of particular interest t o farmers. The alcohol can be m i x e d w i t h gasoline t o stretch fuel supplies, t h e r e b y r e d u c i n g expenditures f o r c o m m e r c i a l fuels. A n u m b e r of o n - f a r m stills have been erected f o r the p u r p o s e of c o n v e r t i n g highstarch materials t o a l c o h o l . C o r n is t h e most c o m m o n l y used raw p r o d u c t , a l t h o u g h alcohol can be p r o d u c e d f r o m almost any type o f vegetable material that contains starch o r sugar. Thus far, results f r o m attempts at alcohol p r o d u c t i o n have varied over a w i d e range, a n d e c o n o m i c feasibility is q u e s t i o n a b l e even u n d e r the best results o b t a i n e d . 1 O n e bushel of c o r n ' Based on a presentation by Dr. William Givan, Economics ot Farm Renewable Energy Sources,'' Georgia Cooperative Extension Service, at the Georgia Chapter ot American Society of Farm Managers and Rural Appraisers, January 2 7 , 1 9 8 1 . 4 APRIL 1 9 8 1 , E C O N O M I C REVIEW gallon of regular gasoline generates 124,000 BTU, n u m b e r 2 diesel gives 139,000 BTU, w h i l e pure alcohol gives 85,000 BTU. A l c o h o l at 190 proof and 160 p r o o f gives 81,000 and 68,000 BTU, respectively. Some gains in efficiency of c o m b u s t i o n are realized f r o m gasoline and alcohol mixtures, b u t even so, a gallon of alcohol supplies only about t w o - t h i r d s of the energy obtained f r o m a gallon of regular gasoline. Thus, even at the lowest p r o d u c t i o n cost of $1.55 per gallon, alcohol is an expensive substitute for the regular gasoline it is i n t e n d e d to replace. Farmers may get some additional payback from the stillage b y - p r o d u c t used as feed, b u t most farmers are n o t e q u i p p e d t o handle the p r o d u c t w i t h o u t expensive additional investment and operating costs. A f u r t h e r p r o b l e m is that the stillage cannot be simply discarded w i t h o u t creating serious problems of environmental p o l l u t i o n . Tax credits available to alcohol producers are additional c o n t r i b u t i o n s t o w a r d e c o n o m i c feasibility. A n investment tax credit a m o u n t i n g to 20 percent of the investment in e q u i p m e n t is available to producers in the first year of operation. In a d d i t i o n , an income tax credit is available to users a m o u n t i n g to 40 cents per gallon for use of alcohol that is 190 p r o o f or greater and 30 cents per gallon for use of alcohol under 190 proof. To raise alcohol to 190 p r o o f or above approximately doubles the total energy utilized in distillation. Vegetable Oils f r o m Oilseeds The vegetable oils o b t a i n e d f r o m crops such as soybeans, cottonseed, sunflowers, and peanuts have been used successfully in a mixture with n u m b e r 2 diesel fuel to p o w e r diesel engines. Some engines have allegedly been operated on 100 percent vegetable oil. Alt h o u g h some engine problems may result f r o m continuous usage of vegetable oil fuel mixtures, many believe that these problems can be overcome relatively easily. The major obstacle to widespread usage of vegetable oils as a substitute f o r diesel fuel is the higher cost of oils. The cost of soybean o i l , the cheapest of the alternatives available c o m m e r cially, ranged between $1.50 and $2.30 per gallon d u r i n g 1980. In mid-January of 1981, farmers paid an average of $1.06 per gallon for diesel fuel and the spot price of soybean oil was FEDERAL RESERVE B A N K O F A T L A N T A about $1.85 per gallon. Clearly, farmers cannot save m o n e y be replacing diesel fuel w i t h vegetable oils at c u r r e n t prices. Vegetable oils c o u l d serve as a t e m p o r a r y backup fuel supply in the e v e n t t h a t p e t r o l e u m supplies w e r e curtailed or cut o f f . Over the l o n g run, however, prices of f o o d products such as vegetable oils seem likely to increase also as p e t r o l e u m prices rise. Gas from Wood A hospital at Rome, Georgia, has successfully e x p e r i m e n t e d w i t h a w o o d gasification process w h i c h replaces natural gas and n u m b e r 2 f u e l oil as the primary means of heating. 2 W o o d is harvested and run t h r o u g h a c h i p p e r , then hauled to the use site w h e r e it is fed green into the gasification unit. C o m b u s t i o n of the w o o d chips themselves generates heat that drives gases f r o m the w o o d and t h r o u g h a pipe to a gas b u r n e r w h i c h provides the heat source for the hospital. Costs of the gas f r o m w h o l e t r e e w o o d chips averaged $2.04 per m i l l i o n BTU in 1980 as c o m p a r e d w i t h $3.50 and $6.20 per m i l l i o n BTU f r o m natural gas and n u m b e r 2 fuel oil, respectively. The investment in the w o o d gasification unit itself was not included in the cost of fuel f r o m w o o d chips, b u t the investment costs allegedly w o u l d be recovered over a four-year period f r o m the savings generated t h r o u g h the use of w o o d chips. It is uncertain that w o o d chips w o u l d cont i n u e to be available at 1980's prices if use were to expand sharply. The cost increased about 20 percent f r o m 1977 to 1980. Nevertheless, the potential is attractive to farmers because the w o o d chip system allows t h e m to market all trees g r o w n w i t h no waste resulting f r o m unused portions of the tree. The clean removal of all trees f r o m the harvested area facilitates the replanting and r e g r o w t h process and increases the productivity f r o m a given area of forest land. DOU —Gene D. Sullivan ' Based on a presentation by Ray A. Shirley, Director ot the Georgia Forestry Commission. "Wood as an Alternative Energy Source.'' Georgia Chapter of American Society of Farm Managers and Rural Appraisers, January 2 7 , 1 9 8 1 5 The Fed vs. Inflation by Otto Eckstein The e c o n o m y is likely t o e n t e r a n e w recession in the w e e k s ahead. A rising p r i m e rate w i l l cause interest-sensitive e x p e n d i tures t o p l u m m e t . The substantial declines in housing, other construction, and automobiles w i l l create a small recession f o r t h e e c o n o m y as a w h o l e . H o w e v e r , since business and h o u s e h o l d expectations never became particularly positive d u r i n g the brief recovery, and inventories are near e q u i l i b r i u m , the recession is u n l i k e l y t o be d e e p . I n d e e d , t h e r e is still a chance that the declines o f early 1981 w i l l n o t c o n s t i t u t e a g e n u i n e recession, b u t w i l l be l i m i t e d t o t h e h o u s i n g and a u t o m o t i v e sectors. M o r e i n t e r e s t i n g is t h e d e v e l o p m e n t of p r o d u c t and financial markets o n c e t h e little recession is o v e r : w i l l the Federal Reserve's t o u g h policy o f l i v i n g w i t h i n the m o n e t a r y aggregate targets k e e p interest rates unstable f o r a n o t h e r year o r two? If so, the e c o n o m y may be t r a p p e d in a stop-go pattern that w i l l make business p l a n n i n g d i f f i c u l t and damage the already l o w rate of capital f o r m a t i o n . W i l l t h e e c o n o m y be k e p t in recession u n t i l t h e inflation has abated, a process w h i c h c o u l d take q u i t e a l o n g time? O r are w e in a p e r i o d o f . . . restraint w h i c h can set t h e stage f o r new policies of e c o n o m i c d e v e l o p m e n t t h r o u g h supply-side measures? The near-term e c o n o m i c o u t l o o k is d o m i nated by the Federal Reserve's struggle against i n f l a t i o n ; later o n , the w i s d o m and 6 s t r e n g t h of t h e n e w a d m i n i s t r a t i o n ' s e c o n o m i c policies w i l l b e c o m e decisive. Why Has There Been So Much Trouble? W h e n t h e Federal Reserve a d o p t e d t h e m o n e t a r i s t a p p r o a c h a year ago, n o o n e exp e c t e d it t o p r o d u c e such volatile interest rates and t w o recessions. W h y has its i n t r o d u c t i o n p r o v e d so t r o u b l e s o m e ? First, the g r o w t h in t h e m o n e y supply has b e e n hard t o p r e d i c t , a n d i n d e e d even d i f f i c u l t t o measure. The r e d e f i n i t i o n s o f m o n e y r e q u i r e d by the arrival of N O W a n d ATS accounts i n t r o d u c e n e w uncertainties i n t o the d e f i n i t i o n o f m o n e y and its r e l a t i o n s h i p t o e c o n o m i c activity. W i t h t h e w e e k l y m o n e y s u p p l y estimates r e s e m b l i n g t h e t h r o w o f d i c e , m o n e t ary p o l i c y is d r i v e n by a partly r a n d o m variable. Second, the Federal Reserve is still l e a r n i n g the relation b e t w e e n its n e w policy i n s t r u m e n t (the v o l u m e o f bank reserves) [and] the m o n e y s u p p l y . In early 1980 t h e Fed u n d e r e s t i m a t e d the effects o f reserve retard a t i o n in creating a recession and b r i n g i n g d o w n the m o n e y s u p p l y ; o v e r t h e s u m m e r , it u n d e r e s t i m a t e d the effect o f reserve expansion and created a m o n e y s u p p l y e x p l o s i o n . T h i r d , the c o m p l i a n c e and r e p o r t i n g lags f o r bank reserves c o m p l i c a t e t h e Fed's task needlessly, a l t h o u g h this flaw is b e i n g corrected. Finally, and most f u n d a m e n t a l l y , a 6 1 / 2 % year-over-year increase in the m o n e y s u p p l y c a n n o t be r e c o n c i l e d w i t h a very APRIL 1 9 8 1 , E C O N O M I C REVIEW I — Otto Eckstein is President of Data Resources, Inc., of Lexington, Massachusetts. On a recent visit to Atlanta, he addressed the Board of Directors of the Federal Reserve Bank of Atlanta. The following are excerpts from his remarks. s t u b b o r n core inflation and the oil price shocks. The m o n e t a r i s t a p p r o a c h converts every price shock i n t o an activity s h o c k , and w h i l e this a p p r o a c h may ultimately b r i n g d o w n the i n f l a t i o n rate, it w i l l cause m u c h pain along the way. )4 > H o w severe w i l l be t h e effects o f the current r o u n d of m o n e t a r y policy? As Chart 1 shows, the real interest rate peak is higher than in t h e earlier r o u n d s , b u t t h e r e are no c o n s u m e r credit c o n t r o l s this t i m e , and familiarity w i t h 20% rates has m a d e t h e m less d i s t u r b i n g . C o n s e q u e n t l y , the d e c l i n e in n e w h o m e sales and h o u s i n g activity is likely t o be less than in [Spring 1980.] The Fed w i l l n o t score a k n o c k o u t v i c t o r y over i n f l a t i o n this t i m e a r o u n d . The 1981 prospect is d o m i n a t e d by a 9 + % c o r e rate, a 2.1% shock rate created by OPEC and d o m e s t i c oil price dec o n t r o l , and a f o o d price increase o u t l o o k o f 14.9%. Weak d e m a n d w i l l l o w e r t h e inflation rate by o n e percentage p o i n t , the b e n e f i t o f the m o n e t a r y policy t h r o u g h l o w e r c o m m o d ity prices (Chart 2), some wage m o d e r a t i o n and business cost a b s o r p t i o n . Chart 1 Federal Funds Rate vs. Inflation Rate* "As measured by the year-over-year percent change in the Producer Price Index for finished goods. Chart 2 Sensitive Prices, BLS Tuesday Spot Price Index No a d m i n i s t r a t i o n is likely t o tolerate such f r e q u e n t b o u t s o f t i g h t m o n e y , w i t h interest rates b o u n c i n g f r o m 10% t o 20% t w i c e in o n e year. If inflation p e r f o r m a n c e i m p r o v e s d u r i n g 1981, the Federal Reserve may be able to achieve its m o n e t a r y target t h r o u g h a normal increase o f velocity. If the i n f l a t i o n record does n o t i m p r o v e t o make this happy -* FEDERAL RESERVE B A N K O F A T L A N T A 7 o u t c o m e possible, the Federal Reserve is likely t o b e c o m e s o m e w h a t m o r e flexible a b o u t the achievement of its targets. Assumptions The first h u n d r e d days o f t h e Reagan Adm i n i s t r a t i o n w i l l see a dramatic e f f o r t t o halt the g r o w t h of real g o v e r n m e n t s p e n d i n g . Alt h o u g h the requisite goals f o r s p e n d i n g cont r o l are u n d e r s t o o d , the political difficulties o f m e e t i n g t h e m are e m e r g i n g . DRI has raised its federal s p e n d i n g forecasts somew h a t since the N o v e m b e r post-election forecast. DRI assumes a t w o - p a r t tax package effective July 1, 1981, p r o d u c i n g tax cuts (at annual rates) o f $38 b i l l i o n , $62 b i l l i o n , and $93 billion in 1981, 1982, a n d 1983, respectively. The personal cuts consist of a 10% r e d u c t i o n in tax rates effective July 1, 1981, f o l l o w e d by 5% r e d u c t i o n s o n January 1, 1981 a n d January 1, 1982, creating revenue losses of $30 b i l l i o n in 1981, $48 b i l l i o n in 1982, and $72 b i l l i o n in 1983. The c o r p o r a t e tax package, assumed to be retroactive t o January 1, 1981, consists o f accelerated d e p r e c i a t i o n w h i c h reduces corporate tax liabilities by $8 b i l l i o n in 1981, $14 b i l l i o n in 1982, and $21 b i l l i o n in 1983. The Reagan A d m i n i s t r a t i o n w i l l increase military outlays and reduce civilian s p e n d i n g . In the DRI forecast, real defense purchases rise 5.7% in 1981, 3.1% in 1982, a n d 5.3% in 1983. Real n o n d e f e n s e purchases decline 5.4% in 1981, 5.5% in 1982, and 3.2% in 1983. The u n i f i e d b u d g e t deficit d r o p s f r o m $59.0 b i l l i o n in fiscal 1980 t o $54.8 b i l l i o n in fiscal 1981 b e f o r e increasing again d u e t o tax cuts and a slow e c o n o m y . The fiscal 1981 b u d g e t outlay estimate is $648.4 b i l l i o n , far above the j o i n t Congressional r e s o l u t i o n figure of $632.4 b i l l i o n b u t b e l o w some internal Carter A d m i n i s t r a t i o n figures. Fed policy limits reserve g r o w t h early in 1981, even as demand-side weakness pushes 8 interest rates l o w e r . The Reagan fiscal policy stimulus is n o t a c c o m m o d a t e d by the Fed d u r i n g t h e second half, so that interest rates again m o v e h i g h e r . The s t r o n g 1982 e c o n o m y generates t o o - r a p i d m o n e t a r y g r o w t h , a n d Fed policy o n c e again t u r n s restrictive. The Forecast in Brief The recession s h o u l d be o v e r by mid-1981. By July 1, and perhaps even a m o n t h or t w o earlier, the tax cuts s h o u l d be effective, b o o s t i n g c o n s u m e r p u r c h a s i n g p o w e r and p r o v i d i n g n e w incentive to business investm e n t . Real g r o w t h moves to a 4.6% rate f o r t h e f o u r quarters e n d i n g in mid-1982, as h o u s i n g starts m o v e t o w a r d 1.6 m i l l i o n units, car sales recover t o 10 m i l l i o n units, and inv e s t m e n t begins a 6% rate of increase. Inflat i o n i m p r o v e s o n l y slightly over t h e 1980 rec o r d , w i t h the c o n s u m e r price index u p by 11.6% in t h e f o u r quarters e n d i n g next Dec e m b e r . The rate o f wage increase accelerates a bit, as w o r k e r s and e m p l o y e r s m o v e t o maintain real p u r c h a s i n g p o w e r . Interest rates retreat, n o w that t h e y have d o n e t h e i r nasty w o r k , w i t h the p r i m e interest rate b o t t o m i n g o u t at an average 14% in the s u m m e r . It is assumed that t h e Federal Reserve w i l l n o t repeat its mistake o f letting real interest rates go substantially negative. The next u p s w i n g in interest rates is m o r e g e n t l e , carrying t h e p r i m e rate t o 16% a n d AA utility b o n d yields and m o r t g a g e yields to 14%. This relatively m i l d c r e d i t cycle begins to curtail the e c o n o m y ' s g r o w t h by 1983. The best year of t h e recovery, 1982, shows a 4.1% rate o f g r o w t h ; 1983 shows a retreat to 3.0%. C o n s u m p t i o n shows s o m e w h a t s m o o t h e r g r o w t h , as p u r c h a s i n g p o w e r is m a i n t a i n e d by tax cuts. The forecast assumes that the initial personal r e d u c t i o n is 10%, b u t that t h e seco n d and t h i r d steps are l i m i t e d t o 5% cuts because o f the danger of unacceptably large deficits. OR] APRIL 1 9 8 1 , E C O N O M I C REVIEW Behind Miami's Surge in International Banking Miami's international banking activity has expanded substantially since 1969. Regulatory changes have made the Edge Act corporation a more viable entity. Florida's legal and tax structure has become more accommodating to international financial development. And banking activity with Latin American individuals and nonfinancial firms has surged. » In t h e past t w o decades, M i a m i has e m e r g e d as o n e of t h e n e w international b a n k i n g centers. T h e m o v e t o M i a m i by major U . S. a n d foreign banks has b e e n stimulated by b o t h regulatory changes and e c o n o m i c factors. International Banking from Miami: The Cast of Participants International b a n k i n g f r o m M i a m i consists of locally based c o m m e r c i a l banks, Edge A c t c o r p o r a t i o n s set u p by out-of-state a n d foreign banks, a n d f o r e i g n bank agencies and representative offices. U s i n g June 1980 data, transactions w i t h the Caribbean Basin and t h e rest of Latin A m e r i c a c o n s t i t u t e d at least half, and regularly 80 t o 90 p e r c e n t , of M i a m i ' s commercial b a n k , Edge, and agency activity with foreigners. Commercial Banks Several o f M i a m i ' s c o m m e r c i a l banks have had active i n t e r n a t i o n a l d e p a r t m e n t s f o r years. In recent years, t h e i r n u m b e r has g r o w n steadily. C u r r e n t l y , m o r e than 20 commercial banks have " a c t i v e " international departments (see Table 1). This g r o w t h has been stimulated by c o m p e t i t i v e factors, by the increasing n u m b e r s of Latin Americans traveling t o M i a m i , a n d by an i n t e r n a t i o n a l orientation stimulated by f o r e i g n acquisition of Florida c o m m e r c i a l banks. In fact, nine o f the c o m m e r c i a l banks w i t h active international d e p a r t m e n t s are f o r e i g n - c o n t r o l l e d (see Table 2). FEDERAL RESERVE B A N K O F A T L A N T A Edge Act Corporations It was n o t u n t i l 1969 that a n o n - F l o r i d a U. S. bank e n t e r e d t h e M i a m i i n t e r n a t i o n a l b a n k i n g m a r k e t . In that year, t h e Georgiabased Citizens a n d S o u t h e r n National Bank o p e n e d t h e first Edge A c t c o r p o r a t i o n i n M i a m i . Edge A c t c o r p o r a t i o n s are restricted t o i n t e r n a t i o n a l transactions. Since 1969, 21 m o r e banks have e n t e r e d M i a m i ' s b a n k i n g m a r k e t as Edge Act c o r p o r a t i o n s ; a n o t h e r 11 have applications a p p r o v e d or p e n d i n g (see Table 3). All N e w York banks w i t h b a n k i n g Edges have or have a p p l i e d f o r M i a m i presence. Four of t h e six C a l i f o r n i a banks a n d t h r e e o f the f o u r Chicago banks w i t h b a n k i n g Edges also have active or p e n d i n g M i a m i presence. The f u t u r e g r o w t h o f Edge A c t c o r p o r a t i o n s in M i a m i , h o w e v e r , w i l l be t h r o u g h e x p a n d i n g use o f Edge A c t p o w e r s by f o r e i g n banks a n d by U . S. regional banks. C u r r e n t l y , 22 U. S. regional c o m m e r c i a l banks have b a n k i n g Edge Act c o r p o r a t i o n s o r Edge branches in t h e U. S.; nine have established o r a p p l i e d f o r M i a m i presence. Foreign banks, n o w eligible f o r Edge A c t c o r p o r a t i o n e s t a b l i s h m e n t , have just b e g u n t o utilize t h e Edge A c t vehicle. T h e rapid expansion o f Edge A c t c o r p o r a t i o n s a n d t h e i r branches in M i a m i has been i n d u c e d n o t o n l y by t h e e x p a n d i n g i n t e r n a t i o n a l i s m of the city b u t also by regulatory changes m a k ing t h e Edge A c t c o r p o r a t i o n a m o r e viable entity (see box). 9 TABLE 5 The Miami Bank Participants in International Banking (as of December 31, 1980) Commercial Banks Creditbank Bank of Miami Barnett Bank Capital Bank Central Bank and Trust Central National Bank City National Bank ot Miami Coconut Grove National Bank Dadeland National Bank First National Bank of Greater Miami First State Bank of Miami Flagship Banks. Inc Florida National Bank International Bank of Miami intercontinental Bank Pan American Bank Peoples Downtown National Bank Republic National Bank Royal Trust Bank of Miami Southeast First National Bank Southeast First National Bank Totalbank Edge Act Corporations Algemene Bank Nederland' American Security Bank International Banco de Bogota International Banco de Santander International Banco de Venezuela International' BankAmerica International Bank of Boston International of Miami Bank of New York International 1 Bankers Trust International—Miami Chase Bank International—Miami Chemical Bank International of Miami Citizens and Southern International Bank Citibank International Continental Bank International European American Bank International' First Chicago International' First Palm Beach International Bank' First Union International Bank' Irving Trust Company International/Miami Manufacturers Hanover International Banking Corporation Edge Act Corporations (continuedÌ Marine Midland Inter American Bank Mellon International Company-' Merchants International Bank' Morgan Guaranty International Bank New England Merchants Bank International Northern Trust InterAmerican Bank Republic International Bank of New York Riggs International Banking Corporation' J Henry Schroder International Bank Security Pacific International Bank Shamut Boston International Banking Corporation' United California Bank International Wells Fargo InterAmerican Bank Foreign Bank Agencies Banco de Bilbao Banco Central' Banco de la Nacion Argentina Banco de la Provincia de Buenos Air Banco de Santander Banco de Viscaya Banco do Brasil Banco do Estado de Sao Paulo Banco Exterior de Espana Banco Industrial de Venezuela' Banco Real Bank Hapoalim Bank Leumi Le-lsrael Bank of Nova Scotia Barclays Bank International' Credit Suisse' Israel Discount Bank Lloyds Bank International Royal Bank of Canada Standard Chartered Bank Foreign Bank Representative Offices Banco internacional de Costa Rica Bank of Tokyo Ltd Credit Suisse' Dow Banking Corporation' ' Approved, unopened 1 Application pending Foreign Bank Agencies In 1977, Florida f u r t h e r e d its international b a n k i n g d e v e l o p m e n t by a u t h o r i z i n g f o r e i g n bank agencies and representative offices. At first, f o r e i g n bank agencies set up u n d e r Florida state charters w e r e l i m i t e d t o internationally o r i e n t e d credits and to n o n d e p o s i t activities. Since e n a c t m e n t o f the U. S. International Banking Act o f 1978, w h i c h set up mechanisms for establishment of federally chartered agencies, Florida has altered its regulations o n f o r e i g n bank agencies so as t o 10 be o n a par w i t h t h o s e federally chartered. 1 N o w all f o r e i g n b a n k agencies in Florida may deal f u l l y in d o m e s t i c a n d international credits and can accept n o n r e s i d e n t (foreign) deposits. Agencies are l i m i t e d to c r e d i t balances reflecting i n t e r n a t i o n a l transactions. Representative offices are p r o h i b i t e d f r o m und e r t a k i n g d e p o s i t o r l e n d i n g activity and may o n l y represent t h e i r parent bank. T h r o u g h D e c e m b e r 1980, 16 f o r e i g n banks had set up Florida agencies; t h r e e m o r e f o r e i g n banks had agency applications e i t h e r a p p r o v e d or p e n d i n g . A n o t h e r f o u r f o r e i g n banks have set up or are in the process of o p e n i n g M i a m i representative offices. International Banking f r o m Miami: The Deposit (Liability) Structure M i a m i ' s i n t e r n a t i o n a l l y o r i e n t e d banks acc e p t over f o u r - f i f t h s o f t h e i r f o r e i g n deposits f r o m individuals and n o n f i n a n c i a l firms (see Table 4). Total U. S. bank liabilities t o individuals a n d n o n f i n a n c i a l f i r m s , in contrast, r e p r e s e n t e d o n l y 15 p e r c e n t . Nearly t w o t h i r d s of the M i a m i deposits f r o m f o r e i g n e r s are placed in t i m e deposits. The f o r e i g n agencies in M i a m i , h o w e v e r , d e p e n d p r i m a r i l y o n their affiliated bank offices abroad f o r f u n d s . Since Florida f o r e i g n bank agencies can n o w accept f o r e i g n deposits, their share of such deposits s h o u l d expand in the f u t u r e . In spite of the large influx o f out-of-state and o u t - o f - c o u n t r y banks i n t o M i a m i ' s international b a n k i n g m a r k e t , M i a m i ' s c o m m e r c i a l banks still d o m i n a t e the city's f o r e i g n d e p o s i t activity (see Table 5). Edge Act c o r p o r a t i o n s , h o w e v e r , have dev e l o p e d t h e largest d e p o s i t activity w i t h f o r e i g n official i n s t i t u t i o n s . International L e n d i n g — W h a t Is the Depth of Miami's International Banking Center? W h i l e M i a m i - b a s e d c o m m e r c i a l banks d o m i n a t e in liability activity w i t h f o r e i g n e r s , the Edge Act c o r p o r a t i o n s d o m o r e t h a n half ' S e e E. N . R o u s s a k i s , " F o r e i g n B a n k s i n M i a m i ' s I n t e r n a t i o n a l B a n k i n g C o m m u n i t y , " M i a m i School of Business and O r g a n i z a t i o n a l Sciences, F l o r i d a I n t e r n a t i o n a l U n i v e r s i t y , 1980. P r o f e s s o r R o u s s a k i s has a l s o r e c e n t l y written t w o companion manuscripts o n Miami's international banking, " E d g e A c t C o r p o r a t i o n s in M i a m i ' s I n t e r n a t i o n a l B a n k i n g C o m m u n i t y " a n d " L o c a l B a n k s in M i a m i ' s I n t e r n a t i o n a l B a n k i n g C o m m u n i t y . " APRIL 1 9 8 1 , E C O N O M I C REVIEW TABLE 2 K n o w n and Pending Foreign A c q u i s i t i o n s of Florida Commercial Banks (Through November 5,1980) Acquired Bank New Name of Bank (if changed) Name of Acquirer Nationality of Acquirer American Bank of Orange County Royal Trust Bank of Orlando Royal Trust Company Canada Bank of Culler Ridge Creditbank J L. Calonge Spain Bank of Miami Beach Intercontinental Bank J. Castell Lastortras Family Spain Bank o( Perrine' No name change F Corea Maya and F. H. Saldarnaga Colombia Baymeadows Bank Royal Trust Bank of Jacksonville Royal Trust Company Biscayne Bank No name change M. Espirito and S. Silva Portugal Central National Bank ot Miami No name change Sabrían Properties/ Eagle National Holding C o m p a n y Colombia Dale Mabry State Bank Royal Trust Bank of Tampa Royal Trust Company Canada Dania Bank No name change J. J- Gonzalez Gorrondona, Jr Venezuela Deerfield Beach State Bank- No name change MFG Investments/ J. Alvarez Stelling Venezuela Fidelity National Bank of South Miami International Bank of Miami Banco Internacional de Comercio 1 Spain First Bank of Gulfport Royal Trust Bank of St Petersburg Royal Trust Company Canada First Bank of Pembroke Pines Royal Trust Bank of Broward County Royal Trust Company Canada First City National Bank of Jacksonville No name change Canadian and Dutch Investors Canada/Netherlands First National Bank of Hialeah First National Bank of Greater Miami J Alvarez Stelling/ MFG Investments Venezuela Flagler Bank Intercontinental Bank J. Castell Lastortras Family Spain E Safra/SafraCorp Brazil Spanish and South American Investors Six countries' Flagship Bank of Adventura Flagship National Bank of Dadeland SafraBank Dadeland National Bank International Bank of Miami Royal Trust Bank of Miami Royal Trust Company Canada Miami National Bank No name change Banco Zaragozano Spain Pan American Bank of Coral Gables Caribank J. J Gonzalez Gorrondona, Jr Venezuela Republic National Bank of Miami No name change Rebank Corporation/ Isaias Family Ecuador No name change A. Robles Chiara and J. Andonie Fernandez Panama/Honduras No name change F E. Blanco Spain Royal Trust Bank of Palm Beach Royal Trust Company Canada Sunshine State Bank Totalbank Worth Avenue National Bank • O w n e d by H. V. R o j a s a n d J. M i c h a e l s o n U r i b e . 2 Plus t w o o t h e r g r o u p s of S p a n i s h i n v e s t o r s . ' C o l o m b i a , C o s t a Rica, El S a l v a d o r , G u a t e m a l a , P a n a m a , a n d S p a i n . 4 P e n d i n g . S o u r c e s : W . L o n g b r a k e , M . Q u i n n , a n d J. W a l t e r , F o r e i g n O w n e r s h i p o f U. S. B a n k s : F a c t s a n d P a t t e r n s , W a s h i n g t o n , D. C., O f f i c e of t h e C o m p t r o l l e r of t h e C u r r e n c y , 1 9 8 0 , plus Office of t h e C o m p t r o l l e r of t h e C u r r e n c y a n d B o a r d of G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s t e m u p d a t e d i n f o r m a t i o n , a n d M i r a W i l k i n s , " I m p a c t o f N o n - U . S . I n v e s t m e n t on Florida's R e s o u r c e s a n d E n t e r p r i s e s , " R e p o r t to t h e O f f i c e of t h e S e c r e t a r y of S t a t e , M i a m i , F l o r i d a I n t e r n a t i o n a l U n i v e r s i t y , 1 9 8 0 . of Miami's d i r e c t l e n d i n g a b r o a d . Excluding funds placed w i t h affiliated f o r e i g n b a n k offices, t h e Edge share j u m p s t o nearly two-thirds. Lending t o n o n f i n a n c i a l f i r m s and i n d i v i d u als abroad c o n s t i t u t e d a t h i r d o f M i a m i ' s foreign l e n d i n g at t h e e n d o f June 1980 (see Table 4). The relatively heavy c o n c e n t r a t i o n on such l e n d i n g reflects, as o n t h e liability side, the i m p o r t a n c e o f f o r e i g n personal and nonfinancial e n t i t y transactions t o M i a m i . FEDERAL RESERVE B A N K O F A T L A N T A A q u a r t e r o f M i a m i ' s f o r e i g n l e n d i n g is t o unaffiliated f o r e i g n b a n k s ; m u c h o f this is t h r o u g h lines o f c r e d i t established w i t h corr e s p o n d e n t banks a b r o a d . O n l y a m i n o r p o r t i o n is l e n t d i r e c t l y t o f o r e i g n g o v e r n m e n t s and o t h e r official institutions. Significant bank l e n d i n g t o p u b l i c b o r r o w e r s is generally d o n e t h r o u g h large-scale syndicated credits w h i c h t r a d i t i o n a l l y have been b o o k e d in m o n e y centers. The capital base o f t h e Edge Act corp o r a t i o n s , particularly b e f o r e t h e IBA i n d u c e d 11 TABLE 5 Banking Edges and Edge Branches in the United States, by Year of Establishment* (Through December 31,1980) N e w York Banks Bank of N e w York B a n k e r s Trust Chase Manhattan Chemical Citibank European American Irving Trust M a n u f a c t u r e r s H a n o v e r Trust Marine Midland Morgan Guaranty Republic National Bank of N e w York J. Henry Schroder Bank & Trust California Banks Bank of A m e r i c a Bank of California Crocker Security Pacific United California Wells Fargo Chicago Houston 1980 2 1974 1974 1964 1972 1 980 2 1974 1974 2 1 980 1980 5 Foreign Banks A l g e m e n e Bank N e d e r l a n d B a n c o C o n s o l i d a d o del C e n t r o 3 Banco de Bogota (Colombia) B a n c o de S a n t a n d e r (Spain) B a n c o de V e n e z u e l a B a n c o Real B a n q u e de Paris (France) S k a n d i n a i s s k e Enskilda Banker S t a n d a r d C h a r t e r e d (England) Total 1980= 1 980 2 1974* 1973 1970 1980* 1970* 1979 1974 1973* 1980 2 1980 1980 New York 1980 2 1974 1972 1979 1971 1980 2 1972 1979 1979 1977 1979 1980 1972* 1972* 1972* 1973 1980* 1980" 1980" 1 9805 1980* 1980* 1971 Chicago Banks Continental Illinois First National Bank of C h i c a g o Harris Trust Northern Trust Regional Banks Allied B a n k ' A m e r i c a n Security ( W a s h i n g t o n , D.C.) Central National Bank of C l e v e l a n d Citizens a n d S o u t h e r n (Georgia) Connecticut Bank & Trust Fidelity Bank (Pennsylvania) First National Bank in Dallas First National Bank of B o s t o n First National Bank of St. Louis First W i s c o n s i n Bank of M i l w a u k e e First National Bank of Palm B e a c h (Fla.) Girard Bank (Pennsylvania) Mellon Bank ( P e n n s y l v a n i a ) M e r c h a n t s National Bank & Trust (Ind.) N e w E n g l a n d M e r c h a n t Bank (Mass.) North Carolina National Bank Philadelphia National Bank Pittsburgh National Bank Rainier National Bank (Washington) Riggs National Bank (Washington. D C.) S h a m u t Bank of B o s t o n State Street Bank & Trust C o m p a n y (Mass.) W a c h o v i a Bank & Trust (N. C.) 1972 Los Angeles 1974* 1979 1972* 1973* 1979* 1980* 1974 San Francisco 1973 1977* 1980* 1980 2 ( A l l / D a l l a s ) ' 1972- 1980" 1950* 1966 1967 1967 1962 1964 1962* 1962 1971 1968 1980" 1974" 1980*"* 1980 ( B o s t o n ) 1968 1980 1968 1972 (New Orleans) 1969 1980" 1974 1972 1980 = 1 9802 1980 2 1980 2 1980* 1963 1980 5 1980* 1972 1968 1978 1959 , 1 9 8 0 (Dallas)* 1972 1969 1963 1973 1967 1980* 1969 1965 1973 1980 1980" 1980* 1980 1980* 1980 1980 1980* 1980s 1979 1980* 1980" 14 16 14 33 28 25 I n c l u d e s o n l y B a n k i n g E d g e s l o c a t e d o u t s i d e the B a n k s h e a d q u a r t e r city T h i s list a l s o i n c l u d e s E d g e s a p p r o v e d in 1980. But u n o p e n e d a s well a s E d g e s w i t h a p p l i c a t i o n s p e n d i n g 1 A |Ointly o w n e d E d g e b y a n u m b e r ot U S r e g i o n a l b a n k s » A p p l i c a t i o n p e n d i n g » W i t h First N a t i o n a l B a n k of G r e a t e r M i a m i * N o w a n E d g e Act c o r p o r a t i o n Branch. The d a t e r e f e r s to t h e b a n k s first E d g e A c t c o r p o r a t i o n p r e s e n c e in t h e city n o t n e c e s s a r i l y t h e d a t e of r e s t r u c t m g of a n e x i s t i n g E d g e Act c o r p o r a t i o n into a Branch of a n o t h e r E d g e > A p p r o v e d u n o p e n e d E d g e A c t c o r p o r a t i o n or E d g e b r a n c h " ( A t l a n t a 1 B e v e r l y Hills . C l e v e l a n d D a l l a s . M i n n e a p o l i s ' . St L o u i s * . S e a t t l e 1 ) "(Atlanta B o s t o n C l e v e l a n d ' . D a l l a s M i n n e a p o l i s ' . St L o u i s Seattle) •••(Cleveland Dallas Minneapolis Philadelphia Seattle ) 12 APRIL 1981, ECONOMIC REVIEW TABLE 4 TABLE 5 Miami International B a n k i n g — D i s t r i b u t i o n of Activity with Foreigners (Percent of Total, June 1980) Miami International B a n k i n g — M a r k e t Share of Activity with Foreign Entities (Percent of Total, June 1980) Com- Edge Act Foreign mercial CorpoBank Banks rations Agencies Total Com- Edge Act Foreign mereiai CorpoBank Banks rations Agencies Total Reporting Entity's Own Claims On: Reporting Entity's Own Claims On Foreign public borrowers Unaffiliated foreign banks 5.1 5.0 19.0 6.2 78.5 25.7 23.0 25.4 Own foreign offices All other foreigners Total 100.0 7.6 100.0 25.9 34.9 Own foreign offices 58.7 35.1 6.2 100.0 32.1 33.5 All other foreigners 18.9 73.1 8.0 100.0 100.0 100.0 100.0 100.0 Total 38.6 53.0 8.4 100.0 Reporting Entity's Own Liabilities To: 0.5 5.5 6.6 — 3.2 Foreign official instit. 11.4 88.6 - 100.0 7.7 Unaffiliated foreign banks 51.4 46.0 2.6 100.0 8.3 2.9 1.6 90.7 6.9 Own foreign offices 94.0 83.5 6.4 82.2 100.0 100.0 100.0 100.0 — Source: U. S. Department of the Treasury. capital c o n s o l i d a t i o n , l i m i t e d t h e size o f Edge-organized syndicated credits. The lack o f a significant i n t e r b a n k market in credit participations or in acceptances keeps M i a m i f r o m b e i n g a full m o n e y c e n t e r . M a n y M i a m i Edges and f o r e i g n agencies sell participations o f large loans t o t h e i r parent and affiliate banks rather t h a n to c o m p e t i t o r banks. Bankers acceptances t r a d e d by M i a m i Edges are also typically sold t o an Edge's parent bank rather t h a n in the m a r k e t p l a c e — this in part is d u e t o a l o w e r rating given in m o n e y markets f o r bankers acceptances issued by an Edge c o m p a r e d t o the parent bank. Because M i a m i is in the same t i m e zone as N e w Y o r k , and because o f the speed of f u n d transfers, t h e d e v e l o p m e n t o f a full m o n e y center in M i a m i is v i e w e d by some participants as unrealistic. Nevertheless, a l i m i t e d i n t e r b a n k market is likely to d e v e l o p . As of June 1980, M i a m i banking entities placed a t h i r d of t h e i r international claims w i t h their o w n affiliated foreign offices a b r o a d . These f u n d s are placed into i n t e r b a n k Euromarkets and largely represent excess f u n d s . M i a m i , f o r years, has FEDERAL RESERVE B A N K O F A T L A N T A 25.5 53.7 46.2 Unaffiliated foreign banks Total 42.8 23.1 Foreign official instit. Allother foreigners 31.7 38.7 16.4 Reporting Entity's Own Liabilities To: Own foreign offices Foreign public borrowers Unaffiliated foreign banks 10.1 89.9 100.0 All other foreigners 65.2 34.4 0.4 100.0 Total 59.2 35.2 5.6 100.0 — Source: U. S. Department of the Treasury. generated m o r e f u n d s f r o m abroad t h a n it has b e e n able to place directly a b r o a d . M i a m i has tax advantages over N e w York. The Florida legislature has e x e m p t e d internat i o n a l transactions f r o m intangible and d o c u m e n t a r y taxes. It is c o n s i d e r i n g legislat i o n t o fully e x e m p t t h e p r o p o s e d international b a n k i n g facilities (IBFs) f r o m all state and local taxes; N e w York has already d o n e so. The e s t a b l i s h m e n t o f IBFs in Florida c o u l d add a n o t h e r d i m e n s i o n t o M i a m i ' s international financial d e v e l o p m e n t and e n c o u r a g e a d d i t i o n a l M i a m i Edge Act c o r p o r a t i o n s , particularly f r o m banks w i t h o u t N e w York offices. International Banking From Miami — A Perspective In slightly m o r e t h a n a decade, M i a m i ' s i n t e r n a t i o n a l b a n k i n g has e x p a n d e d f r o m a relatively small n u m b e r o f M i a m i - b a s e d c o m m e r c i a l banks i n t o a b a n k i n g c e n t e r w i t h a diversified cast of participants w h i c h inc l u d e m a j o r banks in the U. S. and the w o r l d . 13 Geographic Distribution of Miami Banking Activity with Foreigners Claims On: Commercial Banks Edge Act Corporations Foreign Agencies Still, it is i m p o r t a n t to maintain a perspective. Miami's emergence into a Caribbean and Latin American banking center is still in a d e v e l o p m e n t phase. The city's forte, so far, has been the d e v e l o p m e n t of activity w i t h Caribbean and Latin American individuals and nonfinancial firms. M i a m i accounts for a sixth of U. S. bank d e m a n d and t i m e deposits f r o m these sources. H o w e v e r , less than 5 percent of U. S. parent bank l e n d i n g to individuals and nonfinancial firms in the Caribbean and Latin America is o u t of M i a m i . M i a m i accounts for a similarly small p r o p o r t i o n of U. S. bank claim and liability activity w i t h Caribbean and Latin American g o v e r n m e n t s , The Edge Act Corporation-A Regulatory Perspective Edge Act corporation formation was set out in the 1919 amendment sponsored by New Jersey's Senator Walter Edge. The amendment, which permits establishment of internationally oriented banking subsidiaries beyond a bank's own state, was years before its time. It was not until 1950 that a bank actually set up a "banking"' Edge. The 1960s saw formation of another 20 "banking" Edge Act corporations; nearly all of these Edge Act corpo- 1 (June 1980) Liabilities to: Banking Edges, upon which this article concentrates, are regulatorily defined as those Edges regularly accepting deposits in the U. S. from nonaffiliated persons. The other class of Edge Act corporations, commonly referred to as the investment" Edge, is often established in the same city as the parent bank and generally has confined its activities to its bank's investments abroad. 14 Commercial Banks Edge Act Corporations Foreign Agencies official institutions, and unaffiliated foreign banks. So M i a m i has ample r o o m to g r o w . As interbank transactions increase, as bank clearings b e c o m e m o r e efficient, as the cast of participants expands, and as International Banking Facilities b e c o m e i n c o r p o r a t e d , M i a m i will emerge m o r e and m o r e as a Caribbean and Latin American b a n k i n g center. The c o n t i n u e d expansion of Miami's international c o m m e r c e , transportation, and t o u r i s m will c o m p l e m e n t t h i s growth. 0EJ rations were set up in New York by California, Chicago, and regional banks. The 1970s witnessed a quite different Edge Act era. Not only did the number of banking Edge Act corporations triple (from 24 in 1970 to 70 in 1979), but Edges also dispersed geographically, mainly to Chicago, Houston, Los Angeles, Miami, New York, and San Francisco. The Edge Act expansion is far from over. In 1980 alone, 65 new banking Edge Act corporations and their branches have applications approved or pending (more than in the first 58 years of the amendment's existence). What has motivated this surge in Edge Act corporation formation? The answer is complex. The increasing importance of international trade and international banking to the U. S. economy explains, in part, this surge. The liberalization of Edge Act corporation regulation is also inducing renewed interest in the Edge Act corporations. These changes in Edge Act regula- —Donald E. Baer tion stem from the 1978 International Banking Act (IBA) and accompanying alterations to the Federal Reserve System's Regulation K i Some of the most important regulatory changes on Edge Act corporations are detailed in the ensuing sections. Edge Act Corporation Orientation Edge Act corporations have always been limited to dealing with the international transactions of U. S. firms and with persons and entities abroad. In turn, each Edge Act corporation is required to explicitly publicize its international orientation through the requirement that its name include "international," "foreign," "overseas," or some similar word. 2 Copies of Regulation K can be obtained by writing to the Service Department of the Federal Reserve Bank of Atlanta, P. O. Box 1731, Atlanta, Georgia 30301. APRIL 1981, E C O N O M I C REVIEW With U. S. entities, Edges have been generally confined to trade financeoriented activity. The IBA has extended permissible Edge Act activity to include the financing of the costs of production of goods and services exported. 3 The Board of Governors of the Federal Reserve System is reviewing the effects of possible extension of Edge Act corporation activity to include "full-service" banking to qualified internationally oriented business entities (e.g., a firm which conducts twothirds or other such determined proportion of its sales abroad). Edge Act Corporation Branching in the U.S. Until the IBA-induced changes, each Edge Act corporation had to be separately incorporated. Formation of an Edge Act corporation required a minimum $2million capitalization. Edge Act corporations, as with national banks, were subject to the provision that no loan could be made to any single borrower which was greater than 10 percent of that Edge's capital and surplus. This provision, therefore, both induced larger-thanminimum capitalization and, at the same time, limited large-scale loans being booked by the Edges. Larger loans required complex accounting practices as the Edge participated portions of the loan to their parent bank or other affiliated entities. The June 14, 1979, revised Regulation K has affected Edge capitalization and, therefore, intrinsically the size of loans that can be booked by any single Edge Act office. The revised Regulation K also permits an Edge Act corporation to establish branches in the U. S., subject to Federal Reserve approval. This revision, therefore, permits establishment of Edge branches without requiring a separate capitalization of each office. A bank with several Edge Act corporations can consolidate its capital into a single Edge Act corporation and have the separate Edge offices operate as branches. This branching provision should reduce the costs of entering and operating at new locations. Ultimately, exporters and importers should encounter larger and more competitive international banking entities. The consolidation of individual Edge Act corporations into a single corporation with multiple branches also expands the lending limit of any single Edge office. Lending to a single borrower now constitutes the entire Edge Act corporation lending to that entity compared to the 3 The provision requires that either an export order be obtained or that the items produced are identifiable as for export. FEDERAL RESERVE B A N K O F A T L A N T A consolidated Edge Act corporation's capital and surplus.4 To assure sufficient capitalization, the Board established that risk assets of Edge Act corporations shall not exceed 7 percent of the Edge's capital and surplus. This replaces the previous requirement which stated that aggregate outstanding liabilities on accounts of acceptances, monthly average deposits, borrowings, guarantees, endorsements, debentures, bonds, notes, and other such obligations could not exceed 10 times the Edge's capital and surplus. Reserve Requirements and Deposit Liabilities Edge Act corporations were subject to a minimum 10-percent reserve requirement on deposit liabilities. This resulted in higher required reserves on certain Edge deposits than those imposed on Federal Reserve System member banks. The 1979 revised Regulation K eliminated such separate treatment and now subjects Edge Act corporation deposits to the same reserve requirements (and interest rate ceilings) as member banks. Edge Act corporations may now accept savings deposits and issue negotiable certificates of deposit; previously, Edge Act corporations were limited to demand and certain time deposits. All Edge Act deposits must have an international orientation, either involving an entity residing or operating abroad or with U. S. entities where the deposit involves an international transaction. The Edge as an Optional Form for Foreign Bank Establishment Until the IBA, foreign banks were prohibited from establishing Edge Act corporations. The IBA eliminated this restriction and, in effect, gave foreign banks "national treatment" in regard to Edge Act corporation establishment. 5 The Edge Act corporation has several distinct advantages and disadvantages as compared to a foreign bank's other options (e.g., an agency, branch, or subsidiary bank acquisition). 4 Extensions of credit to one person by a member bank and by its Edge corporation and foreign direct and indirect subsidiaries may not exceed the member bank's lending limit. 5 Edge Act corporation ownership, as set out by the IBA, shall at all times be held by citizens of the U. S., corporations, firms or companies majority owned by U. S. citizens, or held by one or more foreign banks or by banks in the U S. controlled by foreign banks. Banks in the U. S. owned by foreign individuals, however, may not be majority owners of Edge Act corporations. The Board of Governors has recommended to Congress that the Board be given authority to permit majority ownership of Edge corporations by a U S. bank controlled by foreign individuals. First, Edge Act corporations may be set up in any U. S. state and are not limited to those states accepting foreign bank agencies or branches. 6 Second, Edge Act corporation establishment does not require reciprocity from the applying bank's home country. Several U. S. states require such reciprocity for agency and/or branch charter. 7 The reciprocity issue is significant to many Basin economies which have placed restrictions on foreign bank operations in their own countries. Edge Act corporations, as seen, are subsidiaries and not fully integrated components of their parent bank, as an agency or branch may be. This separation, an advantage to foreign banks where consolidation would subject the foreign office to more restrictive parent bank reserve requirements, obligatory investments, etc., may be particularly important to Latin American banks operating in highly bank-regulated economies. Edge Act corporations may accept internationally related demand, time, and savings deposits from U. S. clients as well as from entities and persons abroad. Agencies are limited to more restrictive "credit balances" with domestic clients. Although U. S. Comptroller of the Currency interpretations permit federally chartered agencies to accept deposits from foreigners, 8 many state-chartered agencies cannot. Florida altered its state-chartered agency treatment in early 1980 to place their state-chartered agencies on a par with Federal agencies, thereby permitting agencies to accept offshore deposits. Edge Act corporations operate with some disadvantages compared to foreign agencies or branches. First, by definition, Edge Act corporations are restricted to international activities. Foreign bank agencies and branches, on the other hand, may lend to finance purely domestic activities. Edge Act corporations require separate incorporation and a $2-million minimum capitalization. Lending, as seen, is compared to this capitalization. Agency lending is not so restricted. No separate capitalization is required for agency establishment, although a capital equivalency deposit is required. 9 HRl 6 The Banque de Paris Edge Act corporation in Houston is an example of a foreign bank operation in a state (Texas) which does not permit foreign bank agencies or branches. ' It should be recognized that federally chartered agencies and branches do not require such reciprocity. »Federal Register, Vol. 44, No. 220, November 13, 1979. 9 Five percent of an agency's liabilities are to be maintained in deposits in other qualified banks or in eligible securities as a "capital equivalency deposit." 15 Commentary Supply-Side Tax Policy: Reviewing the Evidence " S u p p l y - s i d e e c o n o m i c s " has c o m e t o mean d i f f e r e n t things t o d i f f e r e n t p e o p l e . A variety of proposals n o w are i d e n t i f i e d w i t h t h e " s u p p l y s i d e " label. M o r e i m p o r t a n t l y , t h e r e is a g o o d deal of disagreement a b o u t t h e e v i d e n c e relating t o supply-side tax policies. What Are Supply-Side Tax Cuts? Supply-side tax policies c o n s t i t u t e m o r e t h a n a mere r e c o g n i t i o n that tax changes affect t h e supply of g o o d s a n d services. W h a t distinguishes supply-side policies f r o m o t h e r policies is the m a n n e r in w h i c h tax changes affect factors of p r o d u c t i o n (labor a n d capital, f o r example) and, hence, aggregate s u p p l y . Tax changes w h i c h are especially relevant t o aggregate supply are changes in tax rates—more specifically, changes in marginal tax rates ( t h e rate at w h i c h t h e a d d i t i o n a l i n c r e m e n t of activity is taxed). It is tax rates at t h e margin ( n o t average tax levels) w h i c h affect behavior a n d incentives. Proponents of supply-side tax cuts indicate that t h e r e is an i m p o r t a n t d i s t i n c t i o n b e t w e e n tax rates and tax revenues. They emphasize that changes in such tax rates are changes in relative prices and thus affect c h o i c e , allocation of resources, and, hence, real e c o n o m i c activity. T h u s , tax rate changes s h o u l d be t h o u g h t o f as relative price changes a n d n o t as revenue or i n c o m e changes; it is t h e change in relative prices a n d n o t t h e change in i n c o m e or s p e n d i n g that matters f o r aggregate s u p p l y . P r o p o n e n t s o f supply-side e c o n o m i c s , t h e r e f o r e , d o not see tax cuts as injections of p u r c h a s i n g p o w e r o r spending. have o n l y a l i m i t e d effect o n t h e overall s u p p l y o f labor (usually measured b y hours o f w o r k ) . W o r k e r s d o n o t m a r k e d l y increase or decrease hours o f w o r k , in o t h e r w o r d s , in response t o changes in after-tax wage rates. (The elasticity o f aggregate labor w i t h respect t o wages is low.) A 10-percent i n c o m e tax r e d u c t i o n , f o r e x a m p l e , m i g h t increase hours of w o r k f o r various g r o u p s o f w o r k e r s b y a n y w h e r e f r o m a b o u t 1 t o as m u c h as 10 p e r c e n t , d e p e n d i n g o n t h e relevant group considered.1 These responses are especially l o w f o r p r i m e age male w o r k e r s . A 10-percent i n c o m e tax r e d u c t i o n , f o r e x a m p l e , m i g h t increase labor s u p p l i e d by such w o r k e r s by a b o u t 1 percent. 2 This e v i d e n c e , t h e n , indicates that tax cuts w o u l d have little effect o n hours w o r k e d b y p r i m e age males. Secondary w o r k e r s (mostly married w o m e n ) together with younger and o l d e r w o r k e r s make u p a b o u t o n e - h a l f of t h e total w o r k force. Those g r o u p s have been f o u n d t o be m u c h m o r e responsive t o changes in after-tax wage rates. 3 Tax Cuts and Savings: A l t h o u g h f e w studies have carefully e x a m i n e d this issue, most studies have f o u n d that saving is n o t responsive t o changes in interest rates. The c o n v e n t i o n a l v i e w holds that tax cuts w h i c h w o u l d increase t h e after-tax rate o f r e t u r n t o saving w o u l d have little o r n o effect o n increasing t h e supply of saving. Because o f this, some large e c o n o m e t r i c m o d e l s d o n o t i n c l u d e mechanisms representing the effect o f taxes o n personal savings. 1 A Brief Review of Some Empirical Evidence Tax Cuts and the Supply of Labor: Several e m p i r i c a l studies have e x a m i n e d t h e effects o f tax cuts o n t h e supply o f labor. T h e b u l k o f t h e e v i d e n c e indicates that i n c o m e tax r e d u c t i o n s 16 See. for example, Harvey Rosen, What Is Labor Supply and Do Taxes Affect It?", American Economic Review, May 1980; Don Fullarton, " O n the Possibility of an Inverse Relationship Between Tax Rates and Government Revenues," Working Paper Series, National Bureau of Economic Research, No. 467; a n d Jerry Hausman, "Income and Payroll Tax Policy and Labor Supply," paper prepared for a conference on "The Supply-Side Effects of Economic Policy," Washington University and the Federal Reserve Bank of St. Louis. October 24-26, 1980. The labor studies referred to here are cross-section studies and, hence, are not associated with a time dimension. Consequently, they provide no information as to the timing of the response. 2 See, for example, Hausman, op. cit.,p. 25. i See Rosen, op. cit., p. 171. (Elasticities tor married women workers, for example, have been estimated to be as high as 1.0.) APRIL 1981, E C O N O M I C REVIEW * ^ > r- » ~ Supply-side tax policies are policies which change the marginal tax rate, not average tax levels. Empirical and historical evidence suggests that conventional macroeconomic models may be unable to detect supply-side effects of changes in marginal tax rates. I * Recently, h o w e v e r , some e v i d e n c e has b e e n p r o v i d e d w h i c h contradicts this accepted doctrine. M i c h a e l Boskin, e m p l o y i n g m o r e relevant measurements o f interest rates, f o u n d a substantial interest elasticity of saving (about 0.4). W h i l e this is n o t an e n o r m o u s elasticity by c o n v e n t i o n a l standards, it is substantially larger than virtually all previous estimates and t h e c o n v e n t i o n a l w i s d o m . 4 Results i n d i c a t i n g a substantial interest elasticity of saving have also been recently f o u n d by Evans, T u r e , a n d especially King, S u m m e r s , and Boskin and Lau. 5 This recent e v i d e n c e tends t o indicate that the interest elasticity o f saving is larger t h a n c o n v e n t i o n ally believed. (Some of these recent estimates have been as high a s 2 . 0 o r 2 . 5 ! ) 6 T h e i m p l i c a t i o n is that tax cuts w h i c h increase the real after-tax return t o saving w o u l d w o r k t o i n d u c e an i m p o r t a n t increase in saving. Tax Cuts and Investment: W h e r e a s t h e conventional d o c t r i n e holds that tax cuts have relatively small effects o n t h e supply of saving and labor, it accepts t h e idea that tax changes can i m p o r t a n t l y affect i n v e s t m e n t . This v i e w suggests that tax cuts d i r e c t e d at i n v e s t m e n t may be t h e most p o t e n t area t o stimulate aggregate s u p p l y via t h e i r effect in increasing the capital stock. O t t o Eckstein, f o r e x a m p l e , suggests that tax cuts f o r i n v e s t m e n t are t h e best ( i 4 Michael J. Boskin, "Taxation, Saving, and the Rate of Interest, " Journal of Political Economy, Vol 86, No. 2, Part 2, April 1978, p. 54. Boskin's study employs annual time series data. His results, then, imply that a 10-percent increase in the after-tax rate of return would increase saving by 4 percent per year The other studies mentioned can be interpreted similarly. Michael K. Evans, An Econometric Model Incorporating the Supply-Side Effects of Economic Policy," paper prepared for a conference on "The Supply-Side Effects of Economic Policy," October 24-25 1930; Norman Ture, testimony before the Joint Economic Committee, Forecasting the Supply Side of the Economy, Ninety-Sixth Congress, Second Session, May 21, 1980; M. King, "Savings and Taxation," G. A. Hughes and G. M. Heal, e d . . , Essays in Public Policy (London, 1980); L. H Summers, "Tax Policy in a Life Cycle Model," National Bureau of Economic Research Working Paper No. 302, 1978; and Michael Boskin and L. J Lau, Taxation, Social Security and Aggregate Factor Supply in the United States, Washington, 1978. '•See, for example, Summers, op. cit., King, op. cit., and Lawrence H. Summers, "Tax Policy and Corporate Investment," paper presented at the St. Louis Conference on Supply-Side Effects of Economic Policy," October 24.1980. p. 32 FEDERAL RESERVE B A N K O F A T L A N T A way to b o o s t real GNP. The effect o n i n v e s t m e n t and t h e capital s t o c k , of course, d e p e n d s o n t h e size and type of t h e tax cut. A study by Eckstein indicates that t h e elasticities of i n v e s t m e n t w i t h respect t o taxes (over t h e 1982-85 p e r i o d ) f o r various tax policies are the f o l l o w i n g : 7 c o r p o r a t e i n c o m e tax rate —0.3 d e p r e c i a t i o n allowances —1.1 i n v e s t m e n t tax c r e d i t —0.9 As an illustration of the p o t e n c y of d e p r e c i a t i o n a l l o w a n c e s , Eckstein s t u d i e d t h e so-called 10-5-3 p r o p o s a l and c o n c l u d e d that if this p r o p osal had been enacted in 1980, real business fixed i n v e s t m e n t w o u l d have b e e n $20.9 b i l l i o n higher in 1984. ( M o r e o v e r , d u r i n g t h e phase-in p e r i o d b e f o r e 1984, a d d i t i o n a l i n v e s t m e n t w o u l d have averaged $10 b i l l i o n a year.) 8 Several authors have c o n t e n d e d that if j u d i c i o u s l y c h o s e n , tax cuts in the i n v e s t m e n t area c o u l d lead t o a substantial increase in i n v e s t m e n t w i t h o u t any large revenue loss t o the governm e n t . They have indicated that it is possible f o r certain o f these business tax cuts to be selffinancing. 9 Tax Cuts and Aggregate Supply: W h a t does all this mean f o r aggregate supply? The c o n v e n t i o n a l v i e w holds that tax cuts d o — t o s o m e e x t e n t — increase t h e supply o f l a b o r , saving, i n v e s t m e n t , a n d , hence, aggregate s u p p l y . But the c o n v e n t i o n a l v i e w holds that these effects w i l l n o t be very large. Eckstein, f o r e x a m p l e , simulated Kemp-Roth type i n c o m e tax cuts o n the DRI m o d e l . 1 0 He c o n c l u d e d that if Kemp-Roth had been i n t r o d u c e d in 1980, by 1985, real GNP w o u l d have 7 Otto Eckstein, A Time for Supply Economics." testimony submitted to the Joint Economic Committee, 96 Cong., 2 Sess., May 2 1 , 1 9 8 0 . »Otto Eckstein, "Tax Policy and Core Inflation," a study prepared for the use of the Joint Economic Committee, 96 Cong.. 2 Sess., April 10, 1980. • See, for example. Lawrence H Summers, Tax Policy and Corporate Investment," paper presented at the St. Louis conference on Supply-Side Effects of Economic Policy," October 24,1980. "> See Eckstein, "A Time for Supply Economics," op. cit. 17 increased by 2.6 p e r c e n t and potential GNP w o u l d have increased by 1.9 p e r c e n t . (The elasticity o f potential o u t p u t w i t h respect t o personal i n c o m e taxes is small, i.e., —0.05.) Thus, a c c o r d i n g to Eckstein, personal i n c o m e tax cuts have little effect o n aggregate s u p p l y . He indicates that the 50-percent increase in t h e personal i n c o m e tax rate over the last 15 years has r e d u c e d p o t e n t i a l GNP by o n l y V h p e r c e n t . O f course, this consensus v i e w o f the effect of Kemp-Roth type tax cuts is p r e m i s e d o n little o r no response of either labor or capital t o a r e d u c t i o n in personal i n c o m e tax rates. M o s t large e c o n o m e t r i c m o d e l s , it s h o u l d be rem e m b e r e d , are essentially d e m a n d - o r i e n t e d , i n c o m e - e x p e n d i t u r e m o d e l s w i t h little or no supply-side constructs built i n t o t h e m . Supply-side m o d e l s , o n the o t h e r h a n d , have b e e n built by Laffer-Ranson, Evans, T u r e , and others. The Evans m o d e l includes larger responses of savings and labor t o a cut in taxes. As a c o n s e q u e n c e , Evans indicates that y o u get i m p o r t a n t supply-side effects in t h r e e t o five years w i t h a Kemp-Roth type tax c u t . Une m p l o y m e n t w i l l be r e d u c e d by 2.4 p e r c e n t by 1985 if t h e tax cuts are n o t offset by g o v e r n m e n t s p e n d i n g decreases a n d by 1.8 p e r c e n t if they are offset. (Inflation is slightly w o r s e n e d — u p by 1.8 p e r c e n t in 1 9 8 5 — w i t h these tax cuts if they are not offset by g o v e r n m e n t s p e n d i n g cuts, b u t it is substantially i m p r o v e d — d o w n by 5 perc e n t — i f these tax cuts are a c c o m p a n i e d by s p e n d i n g limits.) 1 1 Tax Cuts and Tax Revenues: T h e r e is little empirical e v i d e n c e relating t o the so-called Laffer c u r v e ( a c c o r d i n g t o w h i c h higher tax rates e v e n t u a l l y l e a d t o l o w e r tax r e v e n u e s ) . C o n v e n t i o n a l o p i n i o n o f t e n tends t o equate tax rate cuts w i t h tax revenue cuts so that b o t h tax rates and tax revenue are o f t e n p r e s u m e d t o fall in the same p r o p o r t i o n . H o w e v e r , since the c o n v e n t i o n a l v i e w concedes that Kemp-Roth type tax cuts i n d u c e s o m e small increases in aggregate s u p p l y , it is f o r c e d t o c o n c e d e that f e e d b a c k effects d o exist a n d , c o n s e q u e n t l y , tax revenues w i l l p r o p o r t i o n a l l y fall by less t h a n w i l l tax rates. H a u s m a n , f o r e x a m p l e , estimates that a 10-percent cut in tax rates w i l l result in a fall of tax revenues by 6.1 percent. 1 2 H o w e v e r , this c o n v e n t i o n a l v i e w emphasizes that Kemp-Roth t y p e tax cuts are n o t self-financing (especially in the short run). Some e v i d e n c e exists w h i c h indicates that tax cuts aimed at specific sectors (i.e., i n v e s t m e n t ) , specific g r o u p s (i.e., high i n c o m e g r o u p s ) , or specific localities may be self-financing. In o t h e r w o r d s , the Laffer effect (of self-financing tax cuts) is m o r e likely t o exist f o r n a r r o w l y based taxes t h a n f o r b r o a d l y based taxes. The o n l y empirical study of t h e Laffer curve (for labor) at the m a c r o l e v e l — b y F u l l a r t o n — i n d i c a t e s that the U. S. c o u l d conceivably be o p e r a t i n g in the area w h e r e tax rate cuts lead t o tax revenue increases. For this t o be t h e case, h o w e v e r , labor supply elasticity w o u l d have t o be higher t h a n most estimates n o w suggest. 1 3 The supply-side m o d e l s o f b o t h Evans and Laffer-Ranson indicate that Kemp-Roth tax cuts are self-financing in a longer run t i m e frame. The Evans' m o d e l , f o r e x a m p l e , indicates that such tax cuts w o u l d b r i n g a b o u t a surplus o f $78 b i l l i o n by 1985, even if g o v e r n m e n t s p e n d i n g c o n t i n u e d t o g r o w at a 10-percent rate. The Laffer-Ranson m o d e l indicates t h a t , by the f i f t h year after passage, Kemp-Roth w o u l d increase total aggregate tax r e v e n u e above w h a t it w o u l d have been in the absence o f a tax cut. 1 4 Some Criticisms of the Evidence W h y hasn't t h e supply-side t h e o r y received m o r e e m p i r i c a l support? Is the t h e o r y w r o n g ? Are t h e a p p r o p r i a t e data n o t available? Is the t h e o r y d i f f i c u l t t o test? T h e r e are various " S e e Hausman, op. cit. This study is based on cross-section data. See footnote 1. 13 Fullarton's research, for example, indicates that high elasticities of labor supply with respect to tax r a t e s — elasticities at least as high as 1.0 (together with a tax rate of at least 30 p e r c e n t ) — would make the Laffer effect plausible. It should be remembered that Fullarton's paper applies only to labor, whereas the Lafter curve applies to all factors of production. 14 " See Evans, op. cit. 18 See Evans, op. cit., and Arthur Laffer and David Ranson, "The Prototype Wedge Model': A Tool tor Supply-Side Economics (H. C. Wainwright & Co., Economics, September 14,1979). APRIL 1981, E C O N O M I C REVIEW > reasons t o believe that a g o o d deal o f t h e c o n v e n t i o n a l e v i d e n c e may be misleading. Measurement Problems: O n e p r o b l e m w i t h much of t h e e v i d e n c e relates t o m e a s u r e m e n t . T h e c r i t i c a l tax v a r i a b l e f o r s u p p l y - s i d e economists is the marginal tax rate. Marginal tax rates d i f f e r across individuals and sectors o f the e c o n o m y . M o r e o v e r , because o f i n f l a t i o n and e c o n o m i c g r o w t h , t h e y change over t i m e . Hence, t h e r e are m a n y c o n c e p t u a l difficulties associated w i t h m e a s u r i n g an aggregate marginal tax rate. C o n s e q u e n t l y , average tax rates and even levels o f tax revenue are o f t e n e m p l o y e d as proxies f o r marginal tax rates in various empirical studies. These variables can o b s c u r e the effects that rising marginal tax rates may have o n e c o n o m i c activity. In s h o r t , m a n y o f the studies p u r p o r t i n g t o test supply-side p r o p o s i tions have e m p l o y e d t h e w r o n g tax variable. M u c h of the labor s u p p l y e v i d e n c e uses hours w o r k e d as a p r o x y f o r labor supply. Because of the i n s t i t u t i o n o f a 40-hour w o r k w e e k , this variable w o u l d n o t be e x p e c t e d t o be r e s p o n sive t o tax changes f o r some o f t h e labor f o r c e . H o w e v e r , o t h e r variables relating to t h e s u p p l y of labor may still r e s p o n d to tax incentives. Variables, such as m o t i v a t i o n , e n t r e p r e n e u r ship, w o r k intensity, t h e quality of w o r k , i n n o vation, managerial skills, and a m b i t i o n , alt h o u g h d i f f i c u l t t o measure, may r e s p o n d t o tax incentives a n d be very i m p o r t a n t f o r t h e s u p p l y of labor. Tax cuts may also result in less absenteeism, later r e t i r e m e n t , and shorter p e r i o d s of u n e m p l o y m e n t . They may e n c o u r a g e p e o p l e t o assume m o r e responsibility and a c c u m u l a t e more h u m a n capital. These effects are n o t measured in the c o n v e n t i o n a l e m p i r i c a l w o r k . If they w e r e i n c l u d e d , t h e response o f t h e labor supply w i t h respect t o tax changes w o u l d und o u b t e d l y be greater t h a n is n o r m a l l y believed to be the case. ¡ i Finally, these studies d o not recognize t h e effect of t h e so-called u n d e r - g r o u n d e c o n o m y . The supply of labor t o t h e m a r k e t m i g h t be f o u n d t o be m o r e responsive t o tax changes if this c o u l d be m e a s u r e d . Virtually all e c o n o m i s t s recognize that t h e Laffer curve w o r k s b e t t e r f o r FEDERAL RESERVE B A N K O F A T L A N T A n a r r o w l y based taxes t h a n f o r b r o a d l y based taxes. The existence o f t h e u n d e r - g r o u n d e c o n o m y (plus various tax l o o p - h o l e s ) implies that personal i n c o m e tax is m u c h m o r e n a r r o w l y based (and is b e c o m i n g m o r e so) t h a n is c o m m o n l y believed. Laffer effects, t h e n , may be m o r e likely t o o c c u r t h a n is c o n v e n t i o n a l l y believed. Some Criticisms of the Large Econometric Models: T h e r e are several reasons to believe that the large m a c r o e c o n o m e t r i c m o d e l s o f t e n used t o simulate tax policies such as Kemp-Roth will n o t detect supply-side effects o f tax cuts. In general, these m o d e l s are d e m a n d - o r i e n t e d , i n c o m e expenditure models with underdeveloped supply-side constructs. Being incomeexpenditure models, they emphasize spending f l o w s rather t h a n relative prices. C o n s e q u e n t l y , t h e y are u n l i k e l y t o d e t e c t supply-side effects o f changes in marginal tax rates. As a result, t h e y exaggerate r e v e n u e losses. Secondly, taxation is o f t e n assumed to have no i n d e p e n d e n t effect o n saving in most m o d els. As Evans has i n d i c a t e d , changes in saving d o n o t translate i n t o changes in i n v e s t m e n t in m a n y of these m o d e l s . Instead, saving retards d e m a n d w h e r e a s i n v e s t m e n t increases it. T h i r d l y , many general effects o f tax rate red u c t i o n s are n o t c a p t u r e d in m a n y of these studies. For e x a m p l e , t h e c o m m o n n o t i o n implicit in m a n y studies o f Kemp-Roth that taxes o n individuals o n l y affect labor i n c o m e is s i m p l y n o t c o r r e c t . The i n d i v i d u a l i n c o m e tax affects small businesses as w e l l as i n c o m e f r o m interest, d i v i d e n d s , a n d capital gains. Personal inc o m e taxation, t h e n , is hardly irrelevant t o capital f o r m a t i o n . 1 5 A r e d u c t i o n in i n c o m e tax rates, in fact, affects at least f o u r relative prices at the same t i m e : 1. The price o f leisure vis-a-vis w o r k . Leisure b e c o m e s m o r e expensive in t e r m s of f o r e g o n e i n c o m e . (At the m a r g i n , t h e n , » Alan Reynolds, "Individuals and the Tax Question," Wall Street Journal, October 2 4 , 1 9 8 0 ; see also World Report, First Chicago Corporation, July-August 1980 19 such a tax rate r e d u c t i o n lessens the attractiveness o f tax-free u n e m p l o y m e n t a n d welfare benefits relative t o w o r k . ) 2. The price of c u r r e n t c o n s u m p t i o n vis-a-vis f u t u r e c o n s u m p t i o n , i.e., saving and investment. Current consumption becomes m o r e expensive in terms o f f u t u r e i n c o m e f o r e g o n e by n o t saving or investing. 3. The r e t u r n t o w o r k in the market e c o n o m y vis-a-vis w o r k in the n o n m a r k e t ( u n d e r ground) economy. 4. The return o n i n v e s t m e n t in t h e taxable sector vis-a-vis t h e r e t u r n o n i n v e s t m e n t in tax shelters. C o n s e q u e n t l y , at the m a r g i n , resources w i l l shift f r o m leisure t o w o r k , f r o m c o n s u m p t i o n t o saving and investing, f r o m the u n d e r g r o u n d e c o n o m y t o t h e m a r k e t e c o n o m y , and f r o m investments in tax shelters t o m o r e p r o d u c t i v e taxable i n v e s t m e n t . None of the studies of Kemp-Roth or econometric models contain all of these relative price changes and capture all of these resource shifts into saving and investment as well as into market labor. If t h e y d i d , the response of aggregate s u p p l y t o r e d u c t i o n in tax rates w o u l d u n d o u b t e d l y be larger t h a n is c o m m o n l y supposed. Time Frames: Finally, supply-side e c o n o m i c s relates t o t h e l o n g r u n . M a n y of t h e studies, as w e l l as the large m a c r o e c o n o m e t r i c m o d e l s , f o c u s o n a relatively s h o r t - t e r m t i m e f r a m e . Alice Rivlin, in her t e s t i m o n y b e f o r e the Joint Economic C o m m i t t e e on supply-side e c o n o m i c s , f o r e x a m p l e , p o i n t e d o u t the inadequacies o f m a c r o e c o n o m e t r i c m o d e l s in d e a l i n g w i t h issues r e l a t i n g t o l o n g - r u n e c o n o m i c g r o w t h . 1 6 These large macroe c o n o m e t r i c m o d e l s w e r e essentially b u i l t to analyze s h o r t - t e r m stabilization policies, n o t policies relating to long-run g r o w t h . All e c o n o m i s t s recognize that elasticities b e c o m e larger the longer the t i m e frame u n d e r conside r a t i o n . Hence, supply-side e c o n o m i c s bec o m e s m o r e relevant the longer t h e t i m e frame. " A l i c e Rivlin, Forecasting the Supply Side of the Economy, op. cit., pp. 6, 7. 20 Supply-side e c o n o m i c s , t h e n , has n o t h i n g t o d o w i t h stabilization p o l i c y ; it pertains t o l o n g - r u n economic growth. Some Broader Historical Evidence Because m u c h o f t h e e c o n o m e t r i c e v i d e n c e may be i n a d e q u a t e , w e s h o u l d c o n s i d e r o t h e r sources o f i n f o r m a t i o n a b o u t supply-side tax p o l i c y . A great deal o f "casual e v i d e n c e " s h o w s that in various historical episodes, tax rate cuts w e r e associated w i t h tax revenue i n c r e a s e s — particularly f o r n a r r o w l y based taxes (such as tariffs). 1 7 D u r i n g t h e G l a d s t o n e era in England, f o r e x a m p l e , various tax rates w e r e r e d u c e d a n d e c o n o m i c g r o w t h a n d tax revenues increased. 1 8 Historical examples o f cuts in i n c o m e taxes are n o t as n u m e r o u s . The U. S., f o r e x a m p l e , has had very little historical e x p e r i e n c e w i t h significant r e d u c t i o n s in federal i n c o m e tax rates. The M e l l o n tax cuts in the 1920s and the Kenn e d y tax cuts in t h e early 1960s p r o v i d e p r o b a b l y t h e o n l y g o o d examples. A l t h o u g h no extensive e m p i r i c a l w o r k has b e e n d o n e o n the M e l l o n tax cut e p i s o d e , t h e casual e v i d e n c e seems t o s u p p o r t t h e supply-side p o s i t i o n . Specifically, t h e tax c u t s — w h i c h l o w e r e d marginal rates o f t a x a t i o n — w e r e associated w i t h b o t h rapid e c o n o m i c g r o w t h and increases in tax revenues. 1 9 M a r g i n a l i n c o m e tax rates w e r e also r e d u c e d in t h e early 1960s. A l t h o u g h t h e r e are always i m p o r t a n t d i f f e r e n c e s b e t w e e n various historical p e r i o d s , the K e n n e d y tax cuts p r o v i d e a useful example o f the t y p e o f i m p a c t that a Kemp-Roth tax cut m i g h t have. Specifically, in 1964, marginal tax rates w e r e cut across the b o a r d f r o m 91 p e r c e n t t o 70 p e r c e n t at t h e t o p and f r o m 20 p e r c e n t t o 14 p e r c e n t at the b o t t o m . " S e e , for example, Robert E. Keleher and William P. Orzechowski, "Supply-Side Effects of Fiscal Policy: Some Historical Perspectives," Working Paper Series, Federal Reserve Bank of Atlanta, August 1980. "Ibid. " S e e , for example, ibid; Andrew W. Mellon, Taxation: The People's Business (MacMillan & Company, 1924); Jude Wanniski, The Way the World Works (Basic Books, 1978); and Jack Kemp, " K e m p on Stein: Are We All Supply-Siders Now?", letter to Wall Street Journal, April 4, 1980. APRIL 1 9 8 1 , E C O N O M I C REVIEW Evidence indicates that the Kennedy tax cuts w o r k e d , b u t n o t f o r reasonsthe Keynesians w h o designed t h e m have stated. Specifically, Denison's estimate of the gap b e t w e e n actual and potential GNP for 1962 and 1963 indicates that this gap may have been t o o small for demandside policies t o have created the g r o w t h in real GNP that actually ensued. 2 0 S o m e t h i n g else had to have caused aggregate supply to increase. What happened appears to be fully consistent w i t h an increase in aggregate supply in response to the various tax incentives w h i c h were created. This assertion is fully s u p p o r t e d by t w o recent empirical studies by Canto, Joi'nes, and Webb (1979 and 1980). 21 The evidence w i t h respect to tax revenues also seems to s u p p o r t the supply-side view. Specifically, the w o r k by Canto, Joines, and Webb indicates that the Kennedy tax cuts caused only a small loss of revenues f r o m the individual i n c o m e tax by 1 9 6 6 — a loss w h i c h was largely offset by gains in corporate and o t h e r tax receipts f r o m t h e increased real e c o n o m i c growth. Conclusions • A supply-side cut in income and business taxes will probably result in some increase in the supply of labor, saving, investment, and, hence, in aggregate supply. • Because of this additional real g r o w t h , the tax base will increase and, hence, revenues will not fall in p r o p o r t i o n to tax rates. In short, the deficit will not be as large as many have predicted because of these feedback effects. M o r e o v e r , w i t h i n c r e a s e d real e c o n o m i c g r o w t h , some g o v e r n m e n t spending (such as transfers) may d e c l i n e , f u r t h e r m i n i m i z i n g the deficit. '•> See Paul Craig Roberts, "The Economic Case for Kemp-Roth," The Economics of the Tax Revolt, Arthur B. Laffer and Jan P. Seymour, eds. (Harcourt Brace Jovanovich, 1979), p. 61; Denison's estimates are published in E. F. Denison, Accounting For Slower Economic Growth (Brookings Institute, 1979). Victor A. Canto, Douglas H. Joines, and Robert I. Webb, "Empirical Evidence on the Effects of Tax Rates on Economic Activity," unpublished manuscript. University of Southern California, September 1979, and Victor A. Canto, Douglas H. Joines, and Robert I. Webb, "The Revenue Effects of the Kennedy Tax Cuts," unpublished manuscript, University of Southern California, November 1980. FEDERAL RESERVE B A N K O F A T L A N T A • Despite the increase in aggregate supply, the tax cuts w i l l p r o d u c e an increase in the deficit, at least in the short run. H o w e v e r , to the extent that the tax cuts create an increase in saving, the deficit may be, in part, financed w i t h o u t increasing the m o n e y supply. • In the l o n g run, the supply-side effects should be m o r e p o t e n t a n d the deficit s h o u l d be less w o r r i s o m e . Supply-side economics pertains to l o n g - r u n e c o n o m i c g r o w t h policy rather than short-run stabilization policy. If lower tax rates increase deficits for t w o to three years b u t result in a stronger e c o n o m y after that, in the l o n g r u n , f u t u r e taxpayers may inherit b o t h a stronger e c o n o m y and a smaller d e b t b u r d e n . In assessing the effects of such tax cuts, several o t h e r factors should also be m e n t i o n e d . First, there is a large a m o u n t of evidence w h i c h indicates that tax rates f o r individuals, as well as f o r businesses, have increased substantially in recent years. As classical economists repeatedly and forcefully indicated, w h e n p e o p l e spend a significant a m o u n t of t i m e and resources in o r d e r to c i r c u m v e n t o r avoid taxes, tax rates p r o b a b l y are t o o high. (The u n d e r g r o u n d e c o n o m y may be telling us something.) In a d d i t i o n to b e i n g t o o h i g h , tax rates o n labor, saving, and investment are increasing every day d u e to inflation. In a d d i t i o n to increases d u e to inflation, Social Security tax increases, as well as increases in w i n d f a l l oil profits taxes, are already scheduled. In short, tax rates are not only t o o high b u t are increasing every day and scheduled to increase even f u r t h e r in the f u t u r e . Thus, to some extent, a Kemp-Roth type tax cut will simply be offsetting these past, present, and f u t u r e increases in tax rates. In a d d i t i o n , a l t h o u g h a few supply-side p r o p onents still c o n t e n d that tax cuts can be made w i t h o u t regard to g o v e r n m e n t spending, many supply-side economists assert that g o v e r n m e n t s p e n d i n g restraints should accompany the tax cuts w h e r e v e r possible. If such restraints d o accompany tax cuts, the deficit will be smaller and less w o r r i s o m e . m —Robert E. Keleher 21 The 1981 Monetary Targets Excerpts from testimony before the House Banking Committee, February 25, 1981 Chairman, Fed Study Upholds 1979's Reserve Targeting Technique As y o u w e l l k n o w , 1980 was a t u m u l t u o u s year f o r the e c o n o m y and financial markets. W h i l e most measures of t h e m o n e t a r y and c r e d i t aggregates grew at or very close t o o u r target ranges f o r the year as a w h o l e , t h e r e was c o n s i d e r a b l e volatility f r o m m o n t h t o m o n t h or quarter t o quarter. M o r e o v e r , interest rates m o v e d t h r o u g h a sharp cycle, and had considerable instability over shorter t i m e spans. In the light of these developments, I initiated in September a detailed study b y Federal Reserve staff of the o p e r a t i n g t e c h n i q u e s a d o p t e d by the Federal O p e n M a r k e t C o m m i t t e e in O c t o b e r , 1979, l o o k i n g , a m o n g o t h e r things, t o the q u e s t i o n of w h e t h e r the particular t e c h n i q u e s w e e m p l o y e d cont r i b u t e d i m p o r t a n t l y t o the o b served volatility. Those t e c h n i q u e s , as described in o u r Report, place emphasis in t h e short r u n o n f o l l o w i n g a path of n o n - b o r r o w e d reserves. 1. The w o r k c o n f i r m s that t h e w e e k - t o - w e e k m o n e y supply figures are subject t o a considerable a m o u n t o f statistical "noise"—unpredictable s h o r t - r u n variations related t o the inherent difficulty of comp u t i n g reliable w e e k l y seasonal 22 Paul A. Volcker Board of Governors of the Federal Reserve System a d j u s t m e n t factors and o t h e r r a n d o m disturbances. O n e analysis suggests the r a n d o m e l e m e n t in the w e e k l y M 1 data, as first p u b l i s h e d , is a b o u t $3 b i l l i o n , plus o r m i n u s . W h i l e those variations average o u t overtime, they could a m o u n t t o $11/2 b i l l i o n o n a m o n t h l y average basis, equivalent t o a change o f 41/2% at an annual rate. 2. N o clear e v i d e n c e was f o u n d that, in the present institutional setting, alternative approaches t o reserve (or m o n e t a r y base) t a r g e t i n g w o u l d increase t h e p r e c i s i o n of monetary control. 3. Pursuing the closest possible s h o r t - r u n c o n t r o l o f the m o n e y supply by any t e c h n i q u e entails a w i l l i n g n e s s t o tolerate large changes o v e r short periods o f t i m e in s h o r t - t e r m interest r a t e s — g r e a t e r t h a n w e r e e x p e r i e n c e d in 1980. 4. Interest rate instability associated w i t h the n e w t e c h n i q u e s per se is e x t r e m e l y d i f f i c u l t t o distinguish f r o m o t h e r sources of interest rate fluctuation. However, the major swings in interest rates d u r i n g the y e a r — h i s t o r i c peaks in early 1980, the sharp d r o p in t h e s p r i n g , and t h e r e t u r n t o historic h i g h s — c a n be traced t o disturbances in t h e e c o n o m y itself, t o the i m p o s i t i o n and removal o f c r e d i t c o n t r o l s , t o t h e budgetary situation, and t o s h i f t i n g inflationary expectations. Indeed, while much c o m p r e s s e d in t i m e , t h e b r o a d interest rate f l u c t u a t i o n s w e r e , in relative m a g n i t u d e , n o t o u t o f k e e p i n g w i t h earlier cyclical experience. 5. M o n e y s u p p l y f l u c t u a t i o n s last year over periods o f a q u a r t e r o r so w e r e p r o b a b l y larger t h a n m i g h t have b e e n expected o n the basis o f e c o n o m e t r i c analysis of reserve c o n t r o l t e c h n i q u e s . The inference f r o m t h e study is that the credit control program and o t h e r external " s h o c k s " c o u l d have been responsible. At t h e same t i m e , the e v i d e n c e is that t h e q u a r t e r l y deviations in money growth from the trend f o r t h e year d i d n o t have an important influence on e c o n o m i c activity. If m o n e y g r o w t h had s o m e h o w b e e n held constant, s h o r t - r u n interest rate variability w o u l d have b e e n still larger. As a personal o b s e r v a t i o n , I w o u l d emphasize that swings in t h e m o n e y and c r e d i t aggregates over a m o n t h , a q u a r t e r , or even longer s h o u l d n o t be d i s t u r b i n g (and i n d e e d may i n some situations be desirable), p r o v i d e d t h e r e is understanding and c o n f i d e n c e in o u r int e n t i o n s over m o r e significant periods of time. APRIL 1 9 8 1 , E C O N O M I C REVIEW 1981 Targets Aim to Further Reduce Money G r o w t h • The 1981 targets w e r e set w i t h the i n t e n t i o n o f a c h i e v i n g further r e d u c t i o n in t h e g r o w t h of m o n e y and c r e d i t , r e t u r n i n g such g r o w t h o v e r t i m e t o .amounts consistent w i t h the capacity o f the e c o n o m y to grow at stable prices. Against the b a c k g r o u n d of the s t r o n g inflationary m o m e n t u m in the e c o n o m y , t h e targets are frankly d e s i g n e d t o be restrict i v e . They d o i m p l y restraint o n j j l t h e potential g r o w t h of the n o m i n a l GNP. If i n f l a t i o n cont i n u e s unabated or rises, real activity is likely t o be s q u e e z e d . As i n f l a t i o n begins noticeably t o abate, t h e stage w i l l be set f o r s t r o n g e r real g r o w t h . M o n e t a r y policy is, o f c o u r s e , d e s i g n e d t o encourage that d i s i n f l a t i o n a r y process. But the success o f the p o l i c y , and the extent t o w h i c h it can be achieved w i t h o u t great pressure o n interest rates and stress o n financial markets that have already b e e n heavily strained, w i l l also d e p e n d u p o n o t h e r p u b l i c policies and private attitudes and b e h a v i o r . Planned and Actual Growth of Monetary and Credit Aggregates (percent changes, fourth quarter to fourth quarter) M-1 targets and growth before and after shifts into ATS/NOW accounts Before adjustments After adjustments M-1 B M-1 A M-1 A M-1 B 41/2 to 7(b) 21/4 to 4%(b) Planned for 1980 31/a to 6 4 to 6 7 1 /4 5 Actual 1980 61/2(a) 6%(a) 1 1 1 1 6 to 8 /2(c) -4 /2 to -2(c) Planned for 1981 3 to 5 /2 3 /2 to 6 M-2, M-3 and bank credit targets and growth Planned for 1980 Actual 1980 Planned for 1981 M-2 6 to 9 9.8 6 to 9 M-3 6V2 to 91/2 9.9 61/2 to 91/2 Bank Credit 6 to 9 7.9 6 to 9 (a) Reflects current estimates of the impacts on M-1A and M-1 B of shifting from demand deposits and other assets into new ATS and NOW accounts not taken into account in 1980 targets. Growth of M-1 A is about VA percentage points larger than actual recorded data after adding back in shifts out of demand deposits; growth of M-1 B is reduced by about Vz percentage point after taking out shifts into M-1 B from savings accounts and other assets. (b) Target ad|usted to reflect N O W / A T S account shifts referred to in note above. (c) Reflects tentative assumptions regarding impacts of shifts into new ATS and N O W accounts in 1981. Growth of M-1A is assumed to be reduced by roughly IV2 percentage points by transfer from demand balances to N O W / A T S accounts; growth of M-1 B is assumed to be increased by 2Vi percentage points by transfer from sources outside of M-1 A. These assumptions will be reviewed from time to time. * NOW Accounts "Distort Figures I must emphasize that b o t h M1 series, as actually r e p o r t e d , are currently d i s t o r t e d by the shift into interest-bearing transfaction accounts. Those shifts were particularly large in V January, w h e n f o r t h e first t i m e | depository i n s t i t u t i o n s in all t FEDERAL RESERVE B A N K O F A T L A N T A parts of the c o u n t r y w e r e perm i t t e d to o f f e r such accounts. As t h e year progresses, w e anticipate t h e d i s t o r t i o n w i l l dim i n i s h , as has already b e e n the case in February. H o w e v e r , any estimate of the shifts i n t o N O W - t y p e accounts f o r 1981 as a w h o l e , and the source o f t h o s e f u n d s , must be tentative. Monetary Policy Alone Cannot Deal w i t h Inflation I k n o w that t h e case is sometimes made that m o n e t a r y policy can a l o n e deal w i t h t h e inflation side of the e q u a t i o n . But n o t in the real w o r l d — n o t if o t h e r policies pull in o t h e r directions, f e e d i n g i n f l a t i o n a r y expectations, p r o p e l l i n g t h e cost and wage s t r u c t u r e upw a r d s , and placing e n o r m o u s b u r d e n s o n financial markets w i t h large b u d g e t a r y deficits i n t o the i n d e f i n i t e f u t u r e . That is w h y it seems t o m e so c r i t i c a l — i f m o n e t a r y policy is to d o its j o b w i t h o u t u n d u l y straining the financial f a b r i c — that the Federal b u d g e t be b r o u g h t i n t o balance at t h e earliest practical t i m e . That o b j e c tive c a n n o t be achieved in a sluggish e c o n o m y . M o r e o v e r , tax r e d u c t i o n — e m p h a s i z i n g incentives—is important to help lay t h e base f o r r e n e w e d g r o w t h and p r o d u c t i v i t y . For those reasons, t h e l i n c h p i n of any effective e c o n o m i c p r o gram today seems t o me early, and by past standards massive, progress in c u t t i n g back the u p w a r d surge o f e x p e n d i t u r e s , o n and o f f b u d g e t . 0R] 23 New Competition for Consumer Financial Business An article in the February Economic Review compared the size and structure of southeastern financial institutions as they enter a new phase of competition. This article extends that discussion and focuses in more detail on the probable shape of the new competition. The D e p o s i t o r y Institutions D e r e g u l a t i o n a n d M o n e t a r y C o n t r o l A c t (MCA) affects f o u r types o f financial i n s t i t u t i o n s : c o m m e r c i a l banks, savings a n d loan associations, m u t u a l savings banks, a n d c r e d i t u n i o n s . They already had d e f i n i t e family resemblances; n o w they may b e c o m e identical q u a d r u p l e t s — a t least in c o n s u m e r s ' eyes. T h e M C A gave all c o m m e r c i a l banks, m u t u a l savings banks and savings a n d loan associations p o w e r s t o o f f e r N O W accounts t o i n d i v i d u a l s . It a l l o w e d f e d erally insured credit u n i o n s t o o f f e r share drafts. These p o w e r s c o m p l e m e n t each institution's existing p o w e r s t o o f f e r t i m e a n d savings deposits. Thus, c o n s u m e r d e p o s i t 24 p o w e r s w i l l b e c o m e closely parallel f o r all institutions. O n t h e l e n d i n g side, S&Ls received n e w p o w e r s t o o f f e r second mortgages, c r e d i t cards, a n d c o n s u m e r installment credit. They w e r e also a l l o w e d t o o f f e r trust services a n d o p e r a t e r e m o t e autom a t e d teller machines. Insured credit u n i o n s had already received a u t h o r i t y t o o f f e r longt e r m residential mortgages. Thus, as of Dec e m b e r 31, 1980, t h e f o u r types of i n s t i t u t i o n s had parallel p o w e r s in c o n s u m e r l e n d i n g a n d c o n s u m e r deposits. The n e w p o w e r s c o u l d rapidly increase t h e n u m b e r o f financial institutions o f f e r i n g f u l l c o n s u m e r services. Previously, c o m m e r c i a l APRIL 1 9 8 1 , E C O N O M I C REVIEW banks had an exclusive h o l d o n this distinct i o n . Since m a n y c o n s u m e r s prefer d e a l i n g w i t h a single b a n k i n g i n s t i t u t i o n f o r all services, banks d r e w a significant c o m p e t i t i v e edge f r o m the situation. If the t h r i f t institutions use t h e i r n e w p o w e r s , h o w e v e r , banks stand t o lose that e d g e . Three crucial q u e s t i o n s arise f r o m this expansion of p o w e r s : W h a t are the characteristics of these i n s t i t u t i o n s w i t h n e w powers? H o w m a n y w i l l use t h e n e w p o w e r s t o bec o m e full-service c o m p e t i t o r s of banks? W h a t do those answers i m p l y f o r t h e future? Alt h o u g h these q u e s t i o n s are a n s w e r e d here in terms o f t h e Sixth District states, t h e answers apply generally t o the n a t i o n . Florida and Mississippi are near o p p o s i t e ends of a national c o n t i n u u m of relative n u m b e r and size of t h r i f t i n s t i t u t i o n s ; t h e region's o t h e r states are i n - b e t w e e n . First, what are the important characteristics of the institutions? The region has 2,135 c o m mercial banks. W h e n m u l t i b a n k h o l d i n g c o m p a n y subsidiaries are l u m p e d i n t o single organizations, that n u m b e r is r e d u c e d t o 1,720 (of t h e nation's 12,700). These b a n k i n g organizations (banks f o r short) operate 6,940 offices. There are 564 savings and loans and 2,673 c r e d i t u n i o n s (and n o m u t u a l savings banks) in the r e g i o n . O n January 1, 1981, t h e n , the total n u m b e r o f i n s t i t u t i o n s able t o offer full c o n s u m e r services j u m p e d f r o m 1,720 to nearly 5,000. These institutions o p e r ate m o r e t h a n 12,000 offices. ( C o m p a r a b l e national figures are 40,000 i n s t i t u t i o n s and 96,000 offices.) S&Ls and credit unions generally trail commercial banks in aggregate deposits in the region. O n l y in Florida are t h e y larger overall than banks. T h e i r aggregate share is smallest (22 percent) in Mississippi. Credit union c o n t r i b u t i o n t o this aggregate is m o d est i n d e e d , a c c o u n t i n g f o r b u t 3 p e r c e n t in the region. H o w e v e r , S&Ls and c r e d i t u n i o n s already hold substantial p r o p o r t i o n s of certain types of c o n s u m e r business. Their share of transactions accounts is still l o w , but t h e y h o l d around 18 p e r c e n t of c o n s u m e r installment loans. They h o l d m o r e than half o f c o n s u m e r time and savings deposits in Florida, G e o r g i a , and Louisiana a n d a r o u n d 90 p e r c e n t of single-family m o r t g a g e loans in all states b u t Mississippi and Tennessee. O m i s s i o n o f busiFEDERAL RESERVE B A N K O F A T L A N T A ness d o n e by c o n s u m e r finance c o m p a n i e s and m o r t g a g e c o m p a n i e s o w n e d by banks and bank h o l d i n g c o m p a n i e s inflates the n o n b a n k i n s t i t u t i o n s ' share o f c o n s u m e r and m o r t g a g e loans to s o m e e x t e n t . The fact remains, h o w e v e r , that the n o n b a n k i n s t i t u t i o n s have already m a d e substantial inroads in c o n s u m e r financial business. They have p l e n t y o f o p p o r t u n i t y t o cross-sell their n e w services if t h e y desire. In a d d i t i o n t o having substantial market p e n e t r a t i o n in s o m e types o f c o n s u m e r business, i n d i v i d u a l S&Ls are c o n s i d e r a b l y larger than i n d i v i d u a l banks in s o m e areas. This pattern is most e v i d e n t in Florida a n d Georgia, w h e r e deposits of the m e d i a n S&L are seven times and t h r e e t i m e s , respectively, those o f t h e median bank. The m e d i a n S&L is also larger in Alabama and Tennessee. Banks are typically larger in Louisiana and Mississippi. S&Ls rank a m o n g t h e 10 largest dep o s i t o r y financial intermediaries headquartered in each o f t h e region's states except Louisiana. C r e d i t u n i o n s are typically q u i t e small. The region's m e d i a n u n i o n has o n l y a b o u t $600,000 in shares. Finally, u n d e r present rules, S&Ls have f e w e r expansion restrictions. They are all o w e d by t h e Federal H o m e Loan Bank Board statewide b r a n c h i n g b o t h by de novo b r a n c h and by m e r g e r . They are no longer r e q u i r e d t o s h o w that o p e n i n g n e w branches w i l l have no ill effects o n the b r a n c h i n g i n s t i t u t i o n . In the r e g i o n , statewide b r a n c h i n g is unavailable t o banks in any state. Statewide bank h o l d i n g c o m p a n i e s may o p e r a t e in Alabama, Florida, G e o r g i a , a n d Tennessee, b u t Tennessee severely restricts and Georgia p r o h i b i t s acquisit i o n of de novo banks. Since b r a n c h i n g is a less expensive m e t h o d o f e x p a n s i o n , S&Ls have a distinct advantage over banks in all of the region's states. How many of the institutions potentially offering the same full line of consumer financial services will actually offer these services? For a start, w e can i g n o r e most c r e d i t u n i o n s as full-service c o m p e t i t o r s . M o s t are q u i t e small. Unless they m u l t i p l y t h e i r size several t i m e s , t h e y w i l l be unable to capture scale e c o n o m i e s available in c o n s u m e r l e n d i n g and d e p o s i t o p e r a t i o n s . The c o m m o n b o n d r e q u i r e m e n t makes expansion d i f f i c u l t f o r m o s t . They may, h o w e v e r , c o m p e t e effectively in some lines o f business, in some 25 p l a c e s — p a r t i c u l a r l y w h e n a subsidy assures that they cover their costs despite their small size. Savings and loans are different. They are generally at least as large as banks and have substantial existing c o n s u m e r deposit and mortgage business. Many will be aggressive. The New England N O W experience indicates that the thrifts have embraced interest-paying transactions accounts just as the public has. A recent survey d o n e by this Bank f o u n d that more than 90 percent of the District's savings and loans began offering N O W accounts f r o m the beginning of 1981. If most consumers still prefer one-stop " b a n k i n g , " S&Ls will likely be drawn into the other new s e r v i c e s — c o n s u m e r loans, second mortgages, credit cards, and trust services. This will make t h e m full-service c o m p e t i t o r s of banks. Savings and loan-oriented publications have been full of " h o w t o " articles; consultants are still d o i n g a land office business. Larger associations have been aggressively advertising full-service plans. Larger credit unions and most S&Ls c o u l d well account for a 40-percent increase in the n u m b e r of full-service c o n s u m e r financial institutions in the Sixth District states and about the same percentage gain in the nation. The increase will not be d i s t r i b u t e d equally. Florida and Georgia, w h e r e S&Ls and credit unions are larger and m o r e active already, will feel it more than Mississippi and Tennessee. What are the implications of such an increase? M o s t obviously, S&Ls and some credit unions will begin to be m o r e like commercial b a n k s — i n financial statements and in management problems. In a d d i t i o n , a large j u m p in the n u m b e r of competitors in any line of business w i t h some scale economies generally leads to lower profit margins, less tolerance for mistakes by the market, and, consequently, m o r e incentive for institutions to exit the market. Failure and liquidation are generally f r o w n e d on as m e t h o d s of exit for insured financial institutions in this c o u n t r y . Thus, this added incentive to exit will probably accelerate the consolidation of financial institutions. Consolidation implies loss of some c o m p e t i t o r s , g r o w t h by others. W h o will disappear and w h o will grow? Larger, well-managed S&Ls o f f e r i n g a full line of 26 services and w i t h m o r e liberal b r a n c h i n g powers are likely to be particularly threatening to rural and suburban banks and S&Ls, especially the smaller, c o n s u m e r - o r i e n t e d institutions. The large S&Ls will be able to enter the smaller institutions' markets inexpensively w i t h branches and offer consumers all the services that banks can. In a d d i t i o n , for up to six years, they may retain their regulatory interest differential on some types of time and savings deposits. Some smaller institutions are likely to disappear. Larger S&Ls will gain, b u t they may not n o w m e r g e w i t h or acquire banks. Small banks will have to look to larger b a n k i n g organizations for relief. If this consolidation proceeds rapidly, pressures to d o away w i t h geographic and interinstitutional barriers to consolidation will rise. These pressures w o u l d be particularly strong in cases of weakness a m o n g smaller institutions in states like Mississippi w i t h few large banks, S&Ls, or credit unions. A bill allowing interstate h o l d i n g c o m p a n y acquisitions of large failing banks has received strong Federal Reserve s u p p o r t , but it has not passed. Pressure for this and m o r e extensive legislation will no d o u b t c o n t i n u e . There will also be pressure for credit unions to consolidate in o r d e r to achieve scale economies. That w o u l d center attention on the c o m m o n b o n d r e q u i r e m e n t w h i c h limits mergers and o n merger procedures for these institutions. We can expect political activity on these fronts as well. Conclusions The new c o n s u m e r powers will increase the n u m b e r of full-service financial institutions. M a n y of the new institutions are neither runts nor johnnys-come-lately to c o n s u m e r financial services. Consolidation will result f r o m the increase in c o m p e t i t o r s , and the large S&Ls and banks may benefit most. Political and regulatory action for interstate and interinstitutional mergers and for credit u n i o n mergers will probably f o l l o w . The era w h i c h o p e n e d officially on January 1, 1981, offers new o p p o r t u n i t i e s to consumers. It also offers problems for bankers, thrift institution managers, and regulators alike. 0R] —B. Frank King APRIL 1 9 8 1 , E C O N O M I C REVIEW NOW Competition: S&Ls Start Fast, Banks More Conservative Preliminary data indicate that S&Ls in the Southeast are more aggressive in their pricing strategy than commercial banks. Banks which are "defensive" tend to be those with a high percentage of household demand balances in their total demand accounts. Almost all savings a n d loan associations a n d c o m m e r c i a l banks in t h e Southeast are o f fering NOW accounts (interest-paying c h e c k i n g accounts), b u t t h e r e are w i d e variations in pricing. The S&Ls s h o w m o r e aggress i v e n e s s in- t h e i r pricing ' strategies. A D e c e m b e r survey by t h e Federal Reserve Bank o f A t l a n t a p r e d i c t e d t h a t S&Ls w o u l d price l o w e r t h a n banks, ; and recent reports f r o m t h e institutions t o t h e Federal Reserve . c o n f i r m t h e survey's indications. Seventy-seven percent of S&Ls surveyed are r e q u i r i n g FEDERAL RESERVE B A N K O F A T L A N T A m i n i m u m charge-free balances of o n l y $500 o r less. N i n e t y - o n e p e r c e n t o f banks, o n t h e o t h e r h a n d , have set m i n i m u m balances at o r above $1,000. Banks a n d S&Ls have o t h e r d i f f e r e n c e s o n service charges a n d balance r e q u i r e m e n t s . - 5 4 p e r c e n t o f t h e banks assess charges o n b o t h a m o n t h l y and p e r - c h e c k basis, c o m p a r e d t o o n l y 19 p e r c e n t o f t h e S&Ls. Seventy-nine percent of t h e S&Ls make a m o n t h l y charge only. - O n l y 16 p e r c e n t o f t h e banks i n c l u d e balances in o t h e r a c c o u n t s ( s u c h as r e g u l a r passbook savings accounts) as part o f t h e r e q u i r e d m i n i m u m . The f i g u r e is h i g h e r (27 percent) f o r S&Ls. C o m m e r c i a l bank m a r k e t i n g strategy t e n d s t o be defensive, a l t h o u g h a significant m i n o r i t y (32 percent) of banks describe t h e i r strategy as aggressive. " D e f e n s i v e " banks t e n d t o be t h o s e w i t h a high percentage o f h o u s e h o l d d e m a n d balances (HDBs) in t h e i r total d e m a n d balance (TDB). T h e h i g h e r t h e h o u s e h o l d share o f T D B , t h e h i g h e r g e n e r a l l y is t h e m i n i m u m balance f o r chargefree N O W accounts. T h e " a g gressive" banks t e n d t o have a l o w e r percentage o f HDBs a n d generally o f f e r N O W s w i t h n o 27 service charges and w i t h m i n i m u m balances lower than " d e f e n s i v e " banks. These " a g g r e s s i v e " b a n k s also t e n d t o split evenly bet w e e n a per m o n t h service charge and per m o n t h plus per check service charge if the balance falls b e l o w the required m i n i m u m . The " d e f e n s i v e " banks tend to structure service charges o n a per m o n t h plus per check basis. The average service charge for b e l o w - m i n i m u m balance is $7.55 for the greater-than-50 percent HDB banks and $6.95 f o r the less-than-50 p e r c e n t HDB g r o u p . Banks also show a willingness to accommodate customer preferences by o f f e r i n g variety in their p r o d u c t . Some banks are allowing customers to pick a b u n d l e of bank services f r o m several choices. Banks w i t h a " d e f e n s i v e " m a r k e t i n g strategy are w i l l i n g to offer charge-free N O W s if a m i n i m u m balance is maintained in another t i m e account. S&Ls are m o r e aggressive in pricing, but banks are slightly m o r e likely to offer N O W s . Ninety percent of S&Ls and 97 percent of commercial banks began o f f e r i n g N O W accounts as soon as they became legal on December 31,1980. In a d d i t i o n , 19 of 26 credit unions surveyed w e r e already o f f e r i n g share draft accounts (similar t o N O W accounts). Thrift institutions in the Sixth District are reacting to the new accounts w i t h considerably m o r e enthusiasm than thrifts in New England did w h e n N O W s w e r e first offered there. T w o years after N O W s began in New England, only one-half to t h r e e - f o u r t h s of thrifts w e r e o f f e r i n g N O W s . The Southeast surpassed that total at the outset. In Mississippi and Lousiana, however, where bank-thrift1 c o m p e t i t i o n is less intense, only two-thirds and three-fourths, respectively, of the S&Ls offered NOWs i m m e d i a t e l y — , c o m p a r e d to 100 percent in Alabama, Florida, Georgia and the District p o r t i o n of Tennessee. Larger institutions (with deposits over $100 million) in the District are somewhat more likely to offer N O W s than smaller ones, by a margin of 95 to 85 percent. Similarly, m o r e ' larger credit unions (deposits f over $25 million) are o f f e r i n g share draft accounts than smal- , ler ones (in the $5- to $25m i l l i o n range). No significant differences have emerged between urban and rural institutions. EH —William N. Cox III The following tables present the results of surveys conducted by the Federal Reserve Bank of Atlanta in December 1980. The surveys included 26 credit unions, 60 savings and loan associations, and 127 commercial banks in the Sixth District. TABLE 1 CREDIT UNIONS: Share Draft Survey, S i x t h Federal Reserve D i s t r i c t s ( s a m p l e of 26 i n s t i t u t i o n s , December 1980) Offering Share Drafts? State/Size* Alabama Service Charge If Offered? All Over $25m. $5-25m. S5-25m. Over $25m. All 1 Out of 3 2 out of 2 3 out of 5 0 out of 1 6/7 0/3 3/3 2 out of 2 2/3 2 out of 3 2/6 Florida 3/4 Georgia 2/3 1/2 3/5 2/2 1/1 3/3 0/0 2/2 0/2 0/0 0/2 Louisiana** 2/2 Mississippi** 0/2 1/1 1/3 0/0 0/1 0/1 Tennessee** 1/2 2/2 3/4 0/1 1/2*** 1/3 Sixth Federal Reserve District 9/16 9/10 18/26 2/9 6/9 8/18 "Deposit Size in Millions. " S i x t h District Portion. " " B e l o w S300 minimum, $3 per month. 28 APRIL 1981, E C O N O M I C REVIEW TABLE 2 SAVINGS AND LOAN ASSOCIATIONS: NOW Account Pricing in the Sixth Federal Reserve District (sample of 60 institutions, December 1980) Percentage of Institutions Offering NOWs Later Right Away in 1981 Sixth Federal Reserve 91% District 5% Service Charges for Below Minimum Checking** Minimum Balance for Charge-Free Checking** Not Sure Less than $500 4% 26% 51% 11% 8% 11 11 0 $500 $500-1,000 4% $1,000 Over $1,000 Per Month Only Per Item Only Both 79% 2% 19% 100 0 0 Charge-Free Checking with Minimum Balance in Another Time Account** Yes No 27% 73% 22 78 Alabama 100 0 0 22 56 Florida 100 0 0 42 33 0 8 17 89 0 11 36 64 Georgia 100 0 0 33 42 8 17 0 45 0 55 33 67 Louisiana* 78 11 11 0 57 0 14 29 86 14 0 33 67 Mississippi* 62 25 13 0 83 0 17 0 83 0 17 0 100 Tennessee* 100 0 0 43 57 0 0 0 86 0 14 29 71 96 4 0 32 53 0 11 4 82 4 14 33 67 Smaller Institutions (under $100 million) 86 7 7 20 48 8 12 12 76 0 24 20 80 Large Institutions (over $100 million) "Sixth District Portion Only. " I n c l u d e s S&Ls which did not respond, unsure or not offering NOW Accounts. TABLE 3 COMMERCIAL BANKS: NOW Account Pricing in the Sixth Federal Reserve District (survey of 127 institutions, December 1980) Percentage of Institutions Offering NOWs Sixth Federal Reserve District Alabama Florida Georgia 97% 100 Minimum Balance for Charge-Free Checking** Charge-Free Checking with Minimum Balance in Another Time Account** $1,000 Over $1,000 Per Month Only Per Item Only 4% 37% 54% 39% 0% 54% 0 42 58 78 0 22 5 95 0 68 32 68 0 100 21 79 0 100 Not Sure Less than $500 $500 $500-1,000 1% 2% 0% 3% 0 0 0 0 Later Right Away in 1981 Service Charges for Below Minimum Checking** 92 4 4 0 9 0 36 55 32 100 0 0 0 0 9 58 33 0 Both Yes No 16% 84% Louisiana* 96 0 4 0 4 9 35 52 39 0 61 Mississippi* 94 0 6 0 0 6 12 82 76 0 24 6 94 0 28 33 67 100 0 0 0 6 0 44 50 72 Large Institutions (over $100 million) 100 0 0 0 4 6 32 58 51 0 49 _ 18 82 Smaller Institutions (under$100million) 95 1 4 0 3 2 30 40 42 0 58 15 85 Tennessee* "Sixth District Portion Onlv. ""Includes S&Ls which did not respond, unsure or not offering NOW Accounts. FEDERAL RESERVE B A N K O F A T L A N T A 29 I TABLE 4 Commercial Banks: Now Account Pricing Based on Household Accounts "Estimated percent of total d e m a n d balances in h o u s e h o l d demand balances* Percent of responding banks in e a c h c a t e g o r y Offering NOWs Immedi ately Minimum Balance for Weighted Charge-Free Checking average Later in 1981 Not Sure Less than $500 S500 y)00 2 2 0 5 5 39 51 Service Charges for Below Minimum Checking Charge-Free Checking with M i n i m u m Balance in A n o t h e r Time Account Per Month Only Per Item Only Both Yes $1,278 44 0 56 17 Over $1,000 $1,000 20- 30% 39% 30- 40% 27 100 0 0 0 0 7 31 62 1,341 50 40- 50% 0 50 10 23 90 100 0 0 0 4 8 52 36 1,156 52 4 44 20 80 96% 83 50- 60% 7 88 0 12 0 0 0 29 71 1,386 14 60- 70% 0 86 14 4 86 100 0 0 0 0 0 0 100 1,375 25 0 75 0 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 70-100% commercial banks surveyed responded to the "Estimated percent of total demand balances in retail household a c c o u n t s : " question, with slightly less for other questions TABLE 5 Commercial Banks: Marketing Strategy Based on Household Accounts Estimated percent of total d e m a n d balances in household demand balances Aggressive Defensive Other 20-30% 44% 42% 14% 30-40% 17% 63% 20% 40-50% 28% 52% 20% 50-60% 43% 29% 28% 60-70% 0% 75% 25% 70-100% 0% 0% 0% TABLE 6 "Our NOW marketing strategy is:"* Offering NOWs I m m e d i Later ately i n 1981 Service Charges for Below Minimum Checking M i n i m u m Balance for Charge-Free Checkinq Not Sure Less than $500 $500 $500-1,000 $1,000 $1,000 Per Month Only Over Charge-Free Checking with M i n i m u m Balance in A n o t h e r T i m e Account Per Item Aggressive Both Yes 100% 0 0 No 0 6 11 58 25 44 66 Defensive 17 83 98 2 0 0 0 2 31 67 40 58 Other 85 15 95 0 5 0 5 5 16 74 56 44 16 84 •87% (111/127)0, commercia l banks surveyed responded to the " O u r NOW marketing strategy i s : " question, with slightly less for other questions. 30 APRIL 1981, E C O N O M I C REVIEW Inflation Experiences in Seven Major Countries: A n Overview An analysis of seven major economies reveals some interesting patterns in world inflation experiences. The author focuses on money growth, wage pressures, government deficits, and oil prices. tA J " f W h i l e c u l t u r a l a n d institutional differences make it d i f f i c u l t t o c o m p a r e data f r o m c o u n try t o c o u n t r y , w e can discern some general patterns in t h e i n f l a t i o n history o f some major western e c o n o m i e s . From these general patterns, perhaps w e can draw some policy implications. Let's l o o k at i n f l a t i o n (measured by t h e C o n s u m e r Price Index) for the seven c o u n tries. The U. S., Canada, and G e r m a n y shared relatively l o w i n f l a t i o n rates f r o m 1954-66 (the first t h r e e periods in Table 1). The U. S. had the lowest rate of i n f l a t i o n of any o f the c o u n t r i e s d u r i n g the 13-year span. The U n i t e d K i n g d o m had m u c h higher i n f l a t i o n in the 1954-58 and 1961-66 periods t h a n the U.S., G e r m a n y , or Canada b u t d i d have an a b r u p t s l o w i n g in 1959-60. France's i n f l a t i o n was unif o r m l y high t h r o u g h o u t the 13 years, r u n n i n g t w o to t h r e e times faster t h a n o t h e r w e s t e r n e c o n o m i e s . Italy and Japan had relatively m i l d i n f l a t i o n u n t i l 1961-66 w h e n their rates j u m p e d several-fold. Seven c o u n t r i e s in particular l e n d t h e m selves to analysis because of close trade relationships, c o m p l e t e n e s s of available data, and their major roles in i n t e r n a t i o n a l c o m merce. 1 They are: Canada, France, G e r m a n y , Italy, Japan, t h e U. S., and t h e U n i t e d Kingdom. ' The table covers six time periods, starting with the post-Korean War period, 1954-58. The second period, 1959-60, was chosen because, in five out of the seven nations, there was a marked slowing in inflation from the moderate pace of 1954-58. Two six-year periods, 1961-66 and 1967-72, were chosen because of fairly consistent rates within the two periods. The three-year period, 1973-75, was taken as a sub-period due to the tremendous supply shocks which occurred, making that period's inflation substantially different from other periods. The final period is 1976-79, or up to date as of this writing. W o r l d w i d e i n f l a t i o n became e n t r e n c h e d d u r i n g the 1960s and 1970s. Virtually no c o u n t r y was unscathed by t h e effects of rapidly rising prices, e i t h e r at h o m e o r in international transactions. Some c o u n t r i e s , h o w e v e r , have b e e n m u c h m o r e successful than others in s l o w i n g the l o n g - t e r m t r e n d t o w a r d ever higher rates of i n f l a t i o n . FEDERAL RESERVE B A N K O F A T L A N T A 31 TABLE 5 Consumer Price Inflation in Seven Countries (percent change per year) Canada 1954-58 1.66 United Kingdom West Germany France Italy 3.66 1.86 4.77 2.43 Japan 1.12 United States 1.62 1959-60 1.35 0.95 1.50 4.71 1.35 1.83 1.21 1961-66 1.94 3.60 2.90 3.41 4.48 5.96 1.60 1967-72 3.95 5.80 3.41 5.28 4.19 5.64 4.81 1973-75 10.02 16.72 6.26 10.61 13.64 15.22 9.53 1976-79 8.03 12.75 3.68 9.69 15.14 5.86 8.76 Source: Rapidata—Citibank Database. Starting in 1967-72, every c o u n t r y in t h e study s h o w e d either c o n t i n u e d high rates or a substantial increase t o higher rates o f inflat i o n . D u r i n g 1973-75, every nation suffered sharp increases in i n f l a t i o n , s o m e d o u b l i n g and others t r i p l i n g . The U n i t e d K i n g d o m , f o r instance, leaped 11 p e r c e n t , w h i l e Japan's rate rose a b o u t 9 p e r c e n t . In t h e U. S., the rate d o u b l e d f r o m 4.8 t o 9.5 p e r c e n t . O f t h e seven, G e r m a n y had m u c h t h e b e t t e r experience, w i t h i n f l a t i o n averaging 6.3 p e r c e n t d u r i n g 1973-75, up f r o m 3.4 p e r c e n t in 1967-72. Finally, the 1976-79 p e r i o d i n c l u d e d a w i d e range o f experiences. Canada, France, and t h e U. S. s h o w e d m o d e s t s l o w i n g , w h i l e the U n i t e d K i n g d o m and G e r m a n y had declines in rates. Japan's rate was c u t by nearly t w o t h i r d s t o 5.9 p e r c e n t per year. In contrast, Italy's i n f l a t i o n rate actually increased, averaging 15.1 p e r c e n t , c o m p a r e d to 13.6 percent in 1973-75. A l t h o u g h the U n i t e d Kingd o m had a d e c l i n e , its rate o f inflation was still very high at 12.7 p e r c e n t . In each c o u n try, w i t h the e x c e p t i o n o f Japan and Germany, i n f l a t i o n rates w e r e h i g h e r , in some cases, m u c h h i g h e r t h a n in the 1961-72 p e r i o d . Even in G e r m a n y and Japan, c o n s u m e r price i n f l a t i o n is significantly faster n o w t h a n d u r i n g t h e 1950s. W h a t are the i m p o r t a n t factors b e h i n d the nearly universal acceleration in i n f l a t i o n since 32 the mid-sixties? Let's examine f o u r patterns: (1) the g r o w t h in m o n e y supply, (2) wage pressures d u e to o r g a n i z e d labor, (3) the size, absolute a n d relative, of g o v e r n m e n t deficits, and (4) the price o f i m p o r t e d oil. 2 1. Money Supply Growth. For i n t e r n a t i o n a l c o m p a r i s o n , t h e o n l y m o n e y supply definit i o n w h i c h is w o r t h using and f o r w h i c h historical data are available is M - 2 . Table 2 contains data f o r t h e late 1960s and 1970s as w e l l as the average annual rate o f g r o w t h f o r 1960-68 f o r t h e seven c o u n t r i e s . Table 2 shows t r e m e n d o u s acceleration in w o r l d m o n e y g r o w t h f r o m the late 1960s to t h e early 1970s. A l m o s t as if o r c h e s t r a t e d , m o n e y g r o w t h rates w e r e 30 t o 100 p e r c e n t faster in 1971 t h a n in 1970 after rising relative t o l o n g - t e r m t r e n d s in 1970. Faster m o n e y g r o w t h (relative t o t h e 1960s' t r e n d rate) c o n t i n u e d in all c o u n t r i e s t h r o u g h 1974. By 1974, the U. S., Japan, a n d G e r m a n y had succeeded in b r i n g i n g m o n e y g r o w t h back t o o r b e l o w a rate customary d u r i n g t h e 1960s. In 1974, all the c o u n t r i e s except France and Canada s h o w e d a s l o w i n g , in several cases, a 2 This discussion excludes a long list ot contributing inflationary factors which create a vicious circle effect but are in themselves not primary causes. These include low savings rates and small shares of investment in GNP, tax structures that create nonneutral results during inflationary periods, cost-increasing governmental regulations, slow productivity growth, external payments problems from imperfect exchange markets, and not least, indexing of contracts and welfare benefits. However, most of these factors are in many respects products of inflation rather than primary causes of inflation. APRIL 1981, E C O N O M I C REVIEW TABLE 2 Money Supply (M-2) Percent Growth per Year 9 Canada France Japan Italy West Germany United Kingdom United States 1960-68 8.6 12.5 16.6 12.5 10.4 k 1969 5.6 4.6 18.6 11.4 7.8 1970 9.8 15.9 16.9 13.6 9.1 9.5 8.3 1 1971 18.3 18.1 24.3 17.1 13.4 13.4 11.1 1972 14.7 18.6 24.6 18.2 14.4 28.1 11.0 1973 16.5 14.9 16.9 23.2 10.1 27.0 8.8 1974 21.2 20.6 11.5 15.5 8.5 12.6 7.1 1975 8.3 16.4 14.5 23.5 8.6 7.6 11.5 » A ~ 7.0 3.2 2.6 1976 19.8 12.8 13.5 22.3 8.4 11.2 14.1 1977 13.4 13.9 11.1 20.3 11.2 9.8 10.8 1978 17.2 12.2 13.1 23.0 11.0 14.9 8.3 1979 18.0 14.4 9.1 19.7 5.8 12.3 8.8 i Source: "International Economic Indicators and Competitive Trends," 1976 and 1980, U. S. Department ot Commerce. » ! I f ; i ' ! r ) H * marked s l o w i n g . From 1975 t o 1979, t h e average rate o f m o n e y g r o w t h was faster in most countries t h a n in the 1960s. Canada's and Italy's rates w e r e nearly d o u b l e those of the 1960s. In the U. S., the rate averaged a b o u t 30 percent faster; in France, 15 p e r c e n t faster, Germany's g r o w t h was virtually identical w i t h the 1960s, a n d Japan's actually d r o p p e d 25 percent. The c o r r e l a t i o n s o f m o n e y g r o w t h rates with the i n f l a t i o n p e r f o r m a n c e s are q u i t e high, a l t h o u g h the degrees of sensitivity are very d i f f e r e n t (another way of saying that changes in velocity o f m o n e y vary w i d e l y across countries). In t h e U. S., t h e 30-percent faster m o n e y g r o w t h in the late 1970s accompanied a rate of i n f l a t i o n t h r e e times that o f the 1960s. For Japan, m o n e y g r o w t h is 25 percent slower t h a n the 1960s, b u t t h e i n f l a t i o n rate is a b o u t the same. A 20-percent faster money g r o w t h c o i n c i d e d w i t h d o u b l e d inflation in France. A d o u b l i n g in t h e Canadian and Italian m o n e y g r o w t h rates a c c o m p a n i e d nearly q u a d r u p l e d i n f l a t i o n . The U n i t e d Kingdom e x p e r i e n c e is hard t o j u d g e because of FEDERAL RESERVE B A N K O F A T L A N T A l i m i t e d pre-1967 data, b u t it w o u l d appear that a d o u b l e d m o n e y g r o w t h rate o c c u r r e d s i m u l t a n e o u s l y w i t h a t r i p l e d i n f l a t i o n rate. G e r m a n y ' s i n f l a t i o n f o r the 1975-79 p e r i o d and its m o n e y g r o w t h rate are almost identical t o t h e 1960s' e x p e r i e n c e . That m o n e y g r o w t h a n d i n f l a t i o n are s t r o n g l y related is n o t a d i s p u t a b l e p o i n t . That has b e e n k n o w n f o r years, h o w e v e r , and still m o n e y g r o w t h c o n t i n u e s very s t r o n g in m a n y c o u n t r i e s . Central banks m u s t be aware o f the role o f m o n e y in i n f l a t i o n , yet t h e y d o n o t restrict its rapid g r o w t h . Why? The answ e r m u s t be either t h e r e are e c o n o m i c a n d political costs t o restraining m o n e y g r o w t h , or t h e banks d o n o t k n o w h o w t o restrain it. 2. Wage Pressures. W o r k i n g days lost d u e t o strikes relative t o total labor f o r c e is an indicator o f pressures b r o u g h t by o r g a n i z e d labor t o raise wages a n d t o persuade p o l i c y m a k e r s t o f o l l o w p r o - e m p l o y m e n t , e x p a n s i o n i s t , and inflationary policies w h e r e i n m o n e y g r o w t h and g o v e r n m e n t s p e n d i n g are excessive. Table 3 contains t h e ratio o f w o r k i n g days lost 33 TABLE 5 Industrial Disputes—Number of Working Days Lost as Share of Labor Force (percent) 1965 1966 United States .05 -- .37 .0 .12 .13 - .78 .0 .09 .35 .04 .45 .02 .11 .57 .06 .49 .0 .19 .65 2.05 .01 .28 .55 .54 1968 .67 1970 United Kingdom .34 .72 .21 Japan West Germany France 1967 1969 Italy Canada 1.00 .11 .07 . .83 .09 .08 1.13 .80 .33 .0 .45 .84 .17 .56 .60 1971 .35 .21 .12 1972 .94 .18 .10 1.07 .0 1.00 .33 1973 .67 .19 .09 1.28 .02 .30 .33 1974 1.02 .16 .18 1.04 .04 .60 .56 1975 1.18 .19 .15 1.44 .0 .24 .37 1976 1.22 .24 .06 1.34 .02 .13 .43 1977 .34 .18 .03 .83 .0 .41 .40 1978 .74 .11 .03 .51 .17 .38 - Union Membership (percent labor force unionized), International Directory of the Trade Union Movement 1979 27.0 23.0 34.7 40.0 38.0 40.0 23.7 Source: Year of Labor Statistics, 1975 and 1979, International Labor Office. t o labor f o r c e f o r t h e seven countries f r o m 1965 t o 1978. The table also shows p e r c e n t u n i o n i z a t i o n in 1979. pressures seem t o c o n t r i b u t e t o i n f l a t i o n , they are n o t necessary f o r inflation to o c c u r . In the days-lost-to-strikes-ratio, Italy is o n c e again the clear w i n n e r overall, a l t h o u g h Canada has closed the gap in recent years. Far b e h i n d these t w o are the U. S., and the U n i t e d K i n g d o m , w i t h the U. S. g e t t i n g a slight edge f o r t h i r d place. Fairly far back in f i f t h is France, w i t h Japan sixth and G e r m a n y a distant last. Except f o r France, all the c o u n tries s h o w some c o n n e c t i o n b e t w e e n wage pressures and i n f l a t i o n , especially in the 1970s. France's case is a m b i g u o u s . The inflat i o n rate and days lost index d o n o t match the pattern set by the first f o u r , b u t that does n o t necessarily mean that French u n i o n s have a m o r e p o w e r f u l voice t h a n t h e days lost index indicates t h e y w o u l d . W h i l e wage 3. Government Deficits. Table 4 depicts by c o u n t r y t h e g o v e r n m e n t ' s deficits as a percent of GNP f o r t h e years 1964 t o 1979. T h e r e are a f e w general c o n c l u s i o n s w h i c h can be d r a w n i m m e d i a t e l y f r o m these data. Deficit s p e n d i n g has been and remains highest in Italy. That c o u n t r y ' s deficit at 15.4 p e r c e n t of GNP in 1978 dwarfs any o t h e r c o u n t r y ' s highest n u m b e r . Virtually all c o u n t r i e s set a new r e c o r d by w i d e margins d u r i n g 1975. After 1975, every g o v e r n m e n t except France has utilized deficits t o a m u c h greater extent than d u r i n g the pre-1974 era. In the 1975-79 p e r i o d , the Japanese a l l o w e d their deficit t o g r o w rapidly, and as a share of GNP, it is m u c h larger t h a n the late 1960s or early 1970s. 34 APRIL 1981, E C O N O M I C REVIEW TABLE 4TABLE5 Government Deficits as a Share of GNP (percent) Canada France West Germany United Kingdom United States Japan Italy 1.1 2.4 0.3 1.3 0.9 1964 0.3 1965 .0 .0 1.6 4.2 0.5 1.7 0.2 1966 1.1 0.4 2.2 4.6 0.5 1.4 0.5 1967 2.0 1.1 1.6 2.8 1.7 2.9 1.1 1968 1.1 1.5 1.3 4.3 0.7 1.7 1.7 0.3 1969 0.3+ 0.5 1.0 3.2 0.3+ 1.9+ 0.6+ 1970 1.2 0.5+ 0.4 5.5 .0 1.3+ 1.2 1971 2.0 0.4 0.2 6.9 0.2 1.1 2.3 1972 1.6 0.6+ 1.6 7.8 0.4 2.5 1.5 1973 1.4 0.7+ 1.6 8.9 0.3 3.2 0.6 1974 1.1 0.3+ 1.3 8.1 1.0 4.2 0.8 1975 3.8 3.0 4.7 13.2 3.3 8.0 4.9 1976 2.6 0.8 2.0 9.4 2.7 5.4 3.3 1977 4.3 0.8 6.1. 11.8 1.9 3.1 2.7 1978 4.6 0.8 6.5 15.4 2.0 5.1 2.1 1979 4.0 — 5.3 11.2 1.9 5.5 1.2 * + = surplus Source: "International Financial Statistics Yearbook 1980." International Monetary Fund. Italy has the highest deficit relative t o GNP. it is far ahead of Japan, t h e s e c o n d r a n k i n g c o u n t r y . After Japan c o m e t h e U n i t e d K i n g d o m , Canada, the U. S., G e r m a n y , and well back, France. France's e x p e r i e n c e is quite e x t r a o r d i n a r y . Since 1964, it had f o u r surplus years and, since 1975, the lowest relative deficits o f the seven. * In f o u r cases, the relative size of the deficit is positively c o r r e l a t e d w i t h i n f l a t i o n : the United K i n g d o m , Italy, Canada, a n d , t o a lesser d e g r e e , t h e U. S. In G e r m a n y , France, and Japan, o n the o t h e r h a n d , either the correlation is reversed or no c o r r e l a t i o n * exists. The French and Japanese experiences are especially surprising. O f course, this is only a q u i c k l o o k at b r o a d relationships, i Nonetheless, it is o b v i o u s that large FEDERAL RESERVE B A N K O F A T L A N T A g o v e r n m e n t deficits d o n o t inevitably mean h i g h inflation rates. 4. The Price of Imported Oil. M a n y g o v e r n m e n t s , i n c l u d i n g past U. S. a d m i n i s t r a t i o n s , have argued that t h e i r inability t o c o n t r o l inflation was l i n k e d to rising oil prices. T h e r e is little d o u b t that t h e q u a d r u p l i n g o f oil prices by the OPEC actions of 1973 and 1974 had an effect o n the i n f l a t i o n rates of all o u r sample c o u n t r i e s . In a d d i t i o n to the oil price r u n - u p , t h e r e had already been a j u m p in w o r l d c o m m o d i t y prices in 1973. The oil price surge was a c o n t i n u a t i o n o f that e x p l o s i o n in 1974. It is easy t o see that the rise in oil prices was a c c o m p a n i e d by higher inflation rates in 1973-75. Table 5 shows the cost of oil i m p o r t s as a p r o p o r t i o n of GNP in o u r sample e c o n o m i e s . For each c o u n t r y , the outlays for 35 TABLE 5 Oil Imports as a Share of GNP (percent) Canada France Japan Switzerland Italy West Germany United Kingdom United States 1964 0.64 1.00 1.47 1.36 1.44 1.16 1.78 0.29 1965 0.60 1.10 1.50 1.30 1.59 1.08 1.74 0.30 1966 0.48 1.03 1.42 1.30 1.65 0.94 1.65 0.28 1967 0.54 1.13 1.47 1.39 1.90 1.30 1.83 0.45 1968 0.51 1.12 1.44 1.48 1.90 1.44 2.10 0.27 1.87 1.33 1.88 0.27 1.90 1.26 1.79 0.28 2.06 1.48 2.05 0.31 1969 0.50 1.06 1.34 1.37 1970 0.48 1.18 1.36 1.41 1.57 1.64 1971 0.57 1.36 1972 0.65 1.38 1.46 1.34 1.90 1.29 1.83 0.37 1973 0.76 1.41 1.61 1.84 2.21 1.63 2.27 0.58 1974 1.80 3.69 4.57 3.17 5.68 3.26 5.40 1.85 1975 1.99 2.86 4.19 2.27 4.29 2.80 3.96 1.74 1976 1.71 3.29 4.13 2.52 4.78 3.13 4.38 2.00 1977 1.56 3.10 3.71 2.49 4.54 2.87 3.53 2.32 1978 1.50 2.54 2.64 1.98 4.11 2.50 2.72 1.96 1979 1.70 3.75 3.29 4.53 3.49 2.72 2.47 - Source: "International Financial Statistics Yearbook 1980." International Monetary Fund. oil rose sharply in absolute terms and relative to GNP. All of the rise was d u e t o price since quantities w e r e flat or d o w n . In Japan, the ratio c l i m b e d f r o m 1.6 percent in 1973 t o 4.6 p e r c e n t in 1974, nearly a t r i p l i n g . In West G e r m a n y , the increase was a d o u b l i n g , f r o m 1.6 p e r c e n t t o 3.2 p e r c e n t . Similar changes o c c u r r e d in all the nations in the aftermath of the OPEC price hike. From 1974 t h r o u g h 1978, most c o u n t r i e s managed t o r e d u c e oil i m p o r t s as a share of GNP. T h e n , w i t h the near d o u b l i n g of prices, the shares rose a g a i n — b u t n o t by the m a g n i t u d e t h e y d i d in 1974. The U n i t e d K i n g d o m , w h i c h d e v e l o p e d its o w n s u p p l y , was able t o h o l d d o w n i m p o r t s , as was Canada, j a p a n , G e r m a n y , and the U. S. w e r e hard hit, w i t h oil i m p o r t s rising as a share of GNP. Japan's i m p o r t ratio d i d n o t reach the 36 1974 level, w h i l e G e r m a n y and the U. S. attained n e w highs. The i n f l a t i o n e x p e r i e n c e in these c o u n t r i e s since 1975 is revealing. W h i l e i m p o r t i n g virtually all t h e i r p e t r o l e u m , G e r m a n y a n d japan managed t o cut their i n f l a t i o n rates by 50 a n d 60 p e r c e n t , respectively. 3 The U. S., Canada, France, t h e U n i t e d K i n g d o m , a n d Italy achieved o n l y slight o r no i m p r o v e m e n t in t h e i r inflation. So, w h i l e oil was most likely an i m p o r t a n t c o n t r i b u t o r to i n f l a t i o n in 1974-75, it certainly c a n n o t take exclusive b l a m e f o r w h a t has h a p p e n e d since 1975. H i g h and rising oil prices do n o t guarantee that accelerating inflation w i l l o c c u r . ' T h e relative strength of the Japanese and German currencies limited the effect of oil price increases. It is also likely that these two economies may have newer, more energy-efficient equipment than other Western countries APRIL 1981, E C O N O M I C REVIEW Conclusions Comparative inflation rates of the late sixties and early seventies were w i t h i n such a narrow range for the seven nations (3.4 to 5.8 percent) that it is difficult to say very much about inflation's causes except that the w o r l d w i d e acceleration was accompanied by w o r l d w i d e m o n e y acceleration and almost universal m o v e m e n t t o w a r d expansionist fiscal policies in the late sixties. Japan, if anything, moved t o w a r d a tighter policy in the 1967-72 p e r i o d . A rise in the n u m b e r of labor disputes also o c c u r r e d c o n c u r r e n t l y w i t h more expansionist monetary and fiscal policies in the U. S., the U n i t e d K i n g d o m , Italy, and Canada. The secular m o v e m e n t t o w a r d faster money growth, greater use of deficits, and labor disputes has been maintained since the early seventies, w i t h the specific exceptions previously m e n t i o n e d . In the early seventies, n o clear identification of causality across c o u n tries could be made, o t h e r than m o n e y growth. Simultaneous movements of the other factors in virtually all countries and the* attendant acceleration of inflation c o n f o u n d empirical research efforts trying to test various theories. Then, in the 1973-75 p e r i o d , the oil price shocks, f o l l o w i n g t r e m e n d o u s c o m modity inflation in 1972-73, f u r t h e r obscured the already difficult task of discerning patterns in the evidence. Since 1975, the various factors and inflation rates have diverged e n o u g h to p e r m i t some conclusions. 1. M o n e y g r o w t h rates are correlated positively w i t h inflation rates. 2. W i t h the exception of France, the degree of wage pressure is correlated positively w i t h inflation. 3. W i t h the exception of France and Japan and, to a lesser degree, Germany, inflation is positively correlated w i t h the size of deficits relative to CNP. Deficits d o not necessarily cause inflation or make it worse. 4. The relative importance of oil imports in an e c o n o m y is not always a g o o d indication of inflation. FEDERAL RESERVE B A N K O F A T L A N T A We can make some observations about these general conclusions. Germany and Japan c o n t r o l l e d m o n e y g r o w t h since 1975 despite greater-than-traditional use of deficits. Their success is u n d o u b t e d l y related to their high personal savings rates w h i c h provide large quantities of funds to the capital markets. As a result, m o n e t i z a t i o n of gove r n m e n t d e b t is not necessary. In a d d i t i o n , the wage restraint and general cooperativeness of labor in i m p r o v i n g p r o d u c t i v i t y in Japan and Germany means that higher levels of e m p l o y m e n t (lower levels of u n e m p l o y ment) are possible w i t h the same degree of monetary and fiscal stimulus w i t h o u t engend e r i n g wage-push inflation d u r i n g slack periods. In the anomalous case of France, the m o n e y g r o w t h and inflation are obviously r o o t e d in institutional differences that labor pressures and fiscal policy measures d o n o t capture. What can governments do? They can reduce their role in increasing wage rigidities and upward biases in wages. They can p r o m o t e supply-side incentives, such as tax cuts to encourage p r o d u c t i v e efforts. They can enforce belt-tightening fiscal policies w h i c h reduce the need to m o n e t i z e debt. Central banks' resolve to act responsibly in c o n t r o l l i n g m o n e y g r o w t h w o u l d still be needed, b u t the j o b w o u l d be infinitely easier if the o t h e r changes were f o r t h c o m i n g . As the title of this analysis indicates, this is an overview. We have deliberately not considered exchange rates and balance of payments data because of the difficulties in assessing all the changes in exchange rate regimes, etc. We have also n o t l o o k e d at institutional or structural changes—such as changes in the industrial makeup of national o u t p u t . Factors such as the u n d e r g r o u n d e c o n o m y , w h i c h are of great importance in some European e c o n o m i e s , were also not examined. 0r] —Charles J. Haulk 37 ALSO AVAILABLE WORKING PAPER SERIES: Estimating Sixth District Consumer Spending by Brian D. Dittenhafer Changes in Seller Concentration in Banking Markets by B. Frank King Regional Impacts of Monetary and Fiscal Policies in the Postwar Period: Some Initial Tests oy William D. Toal A Framework for Examining the Small, Open Regional Economy: An Application of the Macroeconomics of Open Systems by Robert E. Keleher Southern Banks and the Confederate Monetary Expansion by J o h n M. Godfrey tyoXVwMetllT Unked °,i90P0,y Th60ry: A " Ana ySiS ' °f Rorlda H °,ding Companies Regional Credit Market Integration: A Survey and Empirical Examination by Robert E. Keleher Entry, Exit, and Market Structure Change in Banking by B. Frank King Future Holding Company Lead Banks: Federal Reserve Standards and Record by B. Frank King Money-Income Causality at the State-Regional Level by Robert E. Keleher and Charles J. Haulk by ChTrne n Car°e f r Se,eCted FaCt °rS S O W d O W n i n South ' eastern Manufacturing Productivity 1919-1939 Reassessed: Unemployment and Nominal Wage Rigidity in the U K by Barbara Henneberry, Robert E. Keleher, and James G. Witte Home Office Pricing: The Evidence from Florida by David D. Whitehead 38 APRIL 1 9 8 1 , E C O N O M I C REVIEW C o p i e s of t h e s e p u b l i c a t i o n s are a v a i l a b l e u p o n r e q u e s t f r o m : R e s e a r c h D e p a r t m e n t , F e d e r a l R e s e r v e B a n k of A t l a n t a , P.O. B o x 1731, A t l a n t a , G e o r g i a 30301. Please i n c l u d e a c o m p l e t e m a i l i n g a d d r e s s w i t h Z I P C o d e t o e n s u r e d e l i v e r y . I n t e r e s t e d p a r t i e s m a y a l s o have t h e i r n a m e s p l a c e d o n a s u b s c r i p t i o n list f o r f u t u r e s t u d i e s . RESEARCH PAPER SERIES: No. 1 Impact of Holding Company Affiliation on Bank Performance: A Case Study of Two Florida Multibank Holding Companies by Stuart G. H o f f m a n No. 2 Convenience and Needs: Holding Company Claims and Actions No. 3 Small Banks and Monetary Control: Is Fed Membership Important? by J o s e p h E. Rossman and B. Frank King by William N. Cox, III No. 4 Component Ratio Estimation of the Money Multiplier by Stuart G. H o f f m a n No. 5 Holding Company Power and Market Performance: A New Index of Market Concentration No. 6 Fundamental Determinants of Credit Volume: A Survey and Regional Application by David D. Whitehead by Robert E. Keleher No. 7 State Usury Laws: A Survey and Application to the Tennessee Experience by Robert E. Keleher No. 9 Supply-Side Effects of Fiscal Policy: Some Preliminary Hypotheses by Robert E. Keleher No. 10 An Empirical Analysis of Sectoral Money Demand in the Southeast by Stuart G. Hoffman FEDERAL RESERVE B A N K O F A T L A N T A 39 Federal Reserve Bank of Atlanta P.O. Box 1731 Atlanta, Georgia 30301 U . S . Postage Address Correction Requested Atlanta, Ga. B u l k Rate PAID P e r m i t 292 Free subscription a n d a d d i t i o n a l copies available u p o n request to t h e I n f o r m a t i o n C e n t e r , Federal Reserve Bank of Atlanta, P.O. Box 1731, Atlanta, Georgia 30301. M a terial h e r e i n may be r e p r i n t e d or abstracted, p r o v i d e d this Review, t h e Bank, and the a u t h o r are c r e d i t e d . Please p r o v i d e this Bank's Research D e p a r t m e n t w i t h a c o p y of any p u b l i c a t i o n in w h i c h such material is r e p r i n t e d .
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