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Federal Reserve Bank
of Atlanta
Septem ber/October 1977
eral Reserve Bank of Atlanta
eral Reserve Station
inta, Georgia 30303
Bulk Rate
U .S. Postage
PAID
Atlanta, G a.
Perm it 292
Iress Correction Requested
Barbara Turnbull
Federal Reserve Bank of Philadelphia
P.O. Box 66
Philadelphia, Pa. 19105
FEATURES:
Banking Note: Bank Earnings
Recover Slightly in 1976 . .
Member bank earnings improved last year
despite lower returns on earning assets.
Energy Dependence and
Southeastern Economic
Growth: An Input-Output
A n a ly s is .........................
Component Ratio Estimation
of the Money Multiplier . .
103
The industrial composition of the south
eastern economy suggests that rising
energy costs may have a stronger impact
here than in the nation as a whole.
120
This abstract of a technical working
paper summarizes the results of an em
pirical investigation into (1) the relation
ship between the monetary base and
monetary aggregates and (2) the money
supply's sensitivity to interest rates.
D irector of Research: Harry Brandt
Expansion of the Miami Edge
Act Corporations....................
Editing: Patricia Faulkinberry
112
Rapid growth of Edge Act corporations
has added to Miami's international flavor
in recent years, furthering the city's de
velopment toward a full-service, spe
cialized Latin American banking center.
Productions and G raphics: Susan F. Pope
Eddie W . Lee, Jr.
E c o n o m ic R eview , V o l. LX II, No. 7. Free su b scription
and ad d itio n a l co p ies a v a ila b le upon req uest to the
R e se a rch D ep artm en t, Fed eral R ese rv e Ban k of A tlan ta,
A tla n ta , G e o rg ia
30303. M a te ria l herein
m ay be
reprinted or ab stracted , p rovided this R e vie w , the Bank,
and the au th o r are cred ited . P lea se p rovide this Bank's
R ese arch D ep a rtm e n t w ith a co p y of a n y p u b licatio n in
w h ic h su ch m aterial is reprinted.
NEW FEDERAL RESERVE BANK OF ATLANTA WORKING PAPERS:
Component Ratio Estimation of the Money Multiplier
by Stuart G. Hoffman
Convenience and Needs: Holding Company Claims and Actions
by Joseph E. Rossman, Jr., and B. Frank King
Interested parties may place their names on a subscription list for future studies in the series.
For further information, copies of or subscriptions to any of the publications men
tioned above, write to the Research Department, Federal Reserve Bank of Atlanta,
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ENERGY DEPENDENCE AND SOUTHEASTERN
ECONOMIC GROWTH: AN INPUT-OUTPUT ANALYSIS
by James T. Fergus
This past winter's brush with energy
shortages heightened our awareness of the
central role played by energy supplies in
econom ic growth. Recent proposals to
curtail energy consumption are likely to be
passed by Congress in the relatively near
future (see Box 1). Suggested energy-saving
measures have generally included raising
the price of fuels in shortest supply
(petroleum and natural gas) and providing
incentives to use alternative fuels, par
ticu la rly coal. How seriously would in
creased energy costs a ffe ct the Southeast?1
W ould prices of some goods and services
produced in the Southeast rise relative to
those provided by other regions? W ould
substitutes displace some of its products,
dampening the region's rate of economic
progress?
One cannot claim to present definitive
answers to these questions because of the
limited inform ation presently available and
the uncertainties surrounding key aspects
of future energy developments. This
analysis takes an initial step toward un
derstanding the regional impact of energy
price increases. First, the major U. S. in
dustries which are heavy energy users are
identified. Next, an exam ination of the
relative im portance of these industries in
the Southeast suggests that the region may
be somewhat more vulnerable to energy
cost increases than the country as a whole
because our region's industries are more
dependent on petroleum and natural gas
and less dependent on coal. A final section
sketches im plications for southeastern
econom ic growth and outlines various
uncertainties.
’ The Southeast is defined as those states contained either wholly or
partially within the Sixth Federal Reserve District —Alabama,
Florida, Georgia, Louisiana, Mississippi, and Tennessee.
ENERGY DEPENDENCE IN MAJOR
ECO N O M IC SECTORS
Table 1 and Chart 1 show the pattern of
energy usage by m ajor econom ic sectors.
The lower panel in Chart 1 pictures, for
seven m ajor sectors (industries) of the U. S.
economy, the total cost of energy inputs
expressed in cents per dollar of industry
output. Energy costs relative to production
value are greatest in the mining, excluding
fuels, sector, follow ed by nondurable
goods m anufacturing and agriculture.
Durable goods m anufacturing and the
combined transportation and trade
category consume relatively less energy.
The construction and services sectors have
the lowest energy cost components.
Industries' use of each of the major
categories of fuels exhibits the same
general pattern. Agriculture, nondurables
m anufacturing, and nonfuel mining are the
most intensive users of petroleum and
natural gas. Transportation and trade,
durables m anufacturing, and construction
are moderate consumers of these fuels; the
services sector again has the lowest cost
component. The pattern differs somewhat
for coal use, with durable goods manu
facturing leading in consumption.
Agriculture fa lls into the low-use category
for coal inputs, accom panied by con
struction, transportation and trade, and
services. Nondurable goods m anufacturing
and mining, excluding fuels, rely moder
ately on coal.
Ele ctricity is consumed most vigorously
by the mining sector, follow ed by the two
m anufacturing sectors and transportation
and trade businesses. Services, agriculture,
and construction require a relatively low
volum e of e lectricity.
In the follow ing section, these energy
input cost measures w ill be used to assess
CHART 1
CHART 2
A D JU S T E D D IR E C T AND IN D IR E C T
EM P LO Y M EN T S H A R E S O F M A JO R EC O N O M IC
R E Q U IR E M E N T S FO R E N E R G Y IN PU TS,
S E C T O R S : U .S. AND S O U T H E A S T
U N ITED S T A T E S , 1967
Input Cost in Cents,
Per Dollar of Output
Coal Mining
-
6.0
-
4.0
-
—
—
-
U.S.
Southeast
2.0
0
6.0
Petroleum and Natural Gas
— 4.0
-
—
Electric Utilities
-
2.0
6.0
2.0
6.0
-
4.0
-
2.0
Mining, excluding fuels
E.
Transportation and Trade
Nondurable Goods
Manufacturing
P-
Construction
C.
Agriculture
G.
Services
D.
Durable Goods
Manufacturing
A.
B.
SO U R C E: Computed from data contained in “The input-Output
Study of the U.S. Economy, 1967: Energy Model.” See
Technical Note for explanation of adjustment pro
cedure.
energy dependence in southeastern states.
Under ideal conditions, one would use
energy input measures specific to the
region under study. Regional energy
measures would reflect differences from
the national average in the processes and
e fficie n cy of industries in the region. How
ever, lacking su fficien tly precise, closely
com parable state data, the national in
form ation has been used (see Box 2 for a
description of the nature, source, and
lim itations of the data).
NONDURABLE GOOOS MFG.
MINING. EXCLUDING FUELS
CONSTRUCTION
TRANSPORTATION AND TRADE
SERVICES
DURABLE GOODS MFG.
OTHER
4.0
0
-
AGRICULTURE
8
SO U R C E: Computed from data contained in Employment and
Earnings, U.S. Department of Labor.
REGIO N AL ENERGY DEPENDENCE
Assessment of the regional im pact of
energy price changes requires a device
which relates national energy use data to
the econom ic structure of the region. One
significant measure of an industry's im
portance is the share of regional em
ployment it provides.2 Table 2 and Chart 2
present the shares of total employment
represented by the m ajor econom ic sectors
in the U. S. and the southeastern states.
Combining inform ation previously
presented about sectoral energy
requirements with the measures of their
significance in each geographical area
provided by these em ploym ent shares, we
can form some tentative impressions of
relative energy dependence.
Petroleum and Natural Gas Energy. The
emerging outlines of a national energy
policy suggest that users of oil and natural
gas w ill face more rapidly rising costs.
Employment is one of several standards which could be used to assess the
relative importance of economic sectors Alternative, possibly
preferable, measures include value added, wage and salary payments, and
physical output. Employment has been used in this study because
it is a basic determinant of regional economic activity
and because recent, reasonably comparable data are available by
industry and geographic division
Thus, a key facto r in evaluating the
potential im pact of energy costs is the
degree to which m ajor industries depend
on these fuels.
Chart 1 showed relatively high reliance
on petroleum and natural gas inputs in the
agricultural, nonfuel mining, and non
durable goods m anufacturing sectors.
There is little difference among geographic
areas in mining's share of employment. But
for both agriculture and nondurable goods
m anufacturing, the employment share in
the Southeast is appreciably greater. This
provides an initial hint that this region
may be subject to a greater degree to
energy-induced cost increases. The
remaining m ajor difference in employment
shares reinforces this interpretation, since
durable goods m anufacturers, moderate
users of petroleum and natural gas, are a
much less important source of em
ploym ent in the Southeast than nationally.
To the extent that em ploym ent con
centration in petroleum- and natural gas
intensive industries is greater in the
Southeast and its share of moderate-user
industries is lower, the region is more
vulnerable to energy-induced cost
increases.
W ithin the D istrict states, Florida's
position appears most advantageous at
first glance (Chart 3). Its employment
shares in both agriculture and nondurable
goods m anufacturing are the lowest of the
six states, w hile its share is greatest in the
services sector, the industry least hungry
for petroleum and natural gas inputs.
However, a sizable part of Florida's service
business is tourism -related. Although the
cost structures of these businesses may not
be greatly affected by energy cost in
creases, the volum e of their tourist
business could easily be eroded by higher
costs of auto and air transportation. The
transportation and trade industries, which
account for a relatively large proportion of
Florida em ploym ent because of the im
portance of to u rism ,3 w ill be affected even
more directly.
Louisiana's economy, like Florida's, has
important services, transportation, and
3ln economic terminology, transportation is a "complementary good to trade
and services because they are consumed together like shoes and shoelaces,
left and right gloves, etc.
CHART 3
EM P LO Y M EN T S H A R E S O F M A JO R EC O N O M IC
S E C T O R S : S IX S O U T H E A S T E R N S T A T E S
Alabama
Florida
Georgia
Louisiana
M ississippi
AGRICULTURE
NONDURABLE GOODS MFG.
MINING. EXCLUDING FUELS
CONSTRUCTION
TRANSPORTATION AND TRADE
SERVICES
DURABLE GOOOS MFG.
OTHER
SO U R C E: Computed from data contained in employment releases
from individual state labor departments.
trade industries, portions of which are also
dependent on tourism . This state would
probably experience sim ilar effects from
changing energy costs. It also has the
highest concentration of em ploym ent in
contract construction, another light
consumer of petroleum and natural gas.
O f course, Louisiana enjoys another great
advantage — its position as a major energyproducing and processing state.
TA BLE 1
A D JU S T E D D IR E C T AND IN D IR E C T R E Q U IR E M E N T S F O R E N E R G Y IN P U TS, U N ITED S T A T E S , 1967
(input co st exp ressed in cen ts per dollar of output)
PRODUCING
IN D U STR IES:
CONSUMING IN D U STRIES.
Mining,
Nondurable
Excluding
Goods
M anufacturing1
Fuels
Agriculture
Durable
Goods
Manufacturing
Transportation
and
Trade
Construction
Services
Total Petroleum
and Natural G as:
Crude Petroleum
and Natural G as _____
Petroleum R e fin in g __
G a s Utilities
1.1
0.8
1.2
1.4
1.2
0.8
1.6
1.6
0.3
0.7
0.5
0.8
1.0
1.0
0.4
0.9
0.8
0.4
0.6
0.5
0.4
Coal Mining
Electric Utilities
3.1
0.3
2.5
3.4
0.3
1.2
3.5
0.1
0.8
2.0
0.5
1.3
2.4
0.1
1.1
2.1
0.2
0.7
1.5
0.1
0.9
5.9
4.9
4.4
3.8
3.6
3.0
2.5
TO T A L E N ER G Y
R EQ U IREM EN TS
Foods, tobacco, textiles, apparel, paper and allied products, printing and publishing, chem icals, petroleum, rubber, and leather.
2
Ordnance, lumber and wood products, furniture and fixtures, primary m etals, fabricated metal products, machinery, transportation
equipment, instrum ents, and stone, clay, and glass.
Source: Computed from data contained in “The Input-Output Study of the U. S. Econom y, 1967: Energy Model," U. S. Dept, of Com m erce,
Bureau of Econom ic Analysis, mimeo, 4 pp. See Technical Note for explanation of adjustment procedure.
TA BLE 2
EM P L O Y M E N T S H A R E S O F M A JO R E C O N O M IC S E C T O R S : U. S ., S O U T H E A S T , AND IN D IVID U A L S T A T E S
(May 1977)
(percentage of total em ploym ent, by geographic division)
A griculture
Mining, Exclu ding
Fu e ls'
Transportation
and Trade2
Durable G o o ds
M anufacturing
N ondurable G o o ds
M anufacturing
C o n struction
S e rv ice s3
O ther
U .S .
Southeast
Ala.
Fla.
Ga.
La.
M iss.
Tenn.
4.8
5.6
6.9
3.3
4.5
4.4
11.3
7.6
0.3
0.3
0.3
0.3
0.4
0.3
0.1
0.5
24.2
24.5
21.5
28.6
25.3
26.2
19.4
19.9
13.4
8.7
11.2
6.2
7.5
6.3
14.5
11.6
9.5
4.5
19.2
24.1
11.1
4.8
19.1
25.9
13.9
5.1
15.9
25.2
5.6
4.7
24.0
27.3
16.0
4.2
16.9
25.2
7.5
6.6
18.9
29.8
10.8
4.6
14.6
24.7
15.7
3.7
18.2
22.8
Becau se of unavailability of data, the percentages for som e employment categories do not correspond exactly to the title of the category.
Exceptions in content occu r in the following c ase s:
’ Mining, Excluding Fuels:
Alabama - Mining, excluding only bituminous coal
Florida - Nonmetallic minerals, except fuels
Georgia and Tenn essee - Includes all mining
Lo uisiana - Nonmetallic m inerals
M ississippi - Mining, excluding oil and gas extraction
'Transportation and Trade:
Tenn essee - Trade only; transportation is included with services
’ Services, Including Com m unications, Water, and Sanitary Services:
Alabam a and Louisiana - Services, comm unications, and public utilities
Florida, Georgia, and M ississippi - Services, com m unications, and electric, gas, and sanitary services
Tenn essee • Includes transportation in addition to services, com m unications, and public utilities
Source: Computed from data contained in Employment and Earnings (Bureau of Labor Statistics, U. S. Department of Labor) and in employment
releases from individual state labor departments.
The other four states have notably larger
shares of industries w hich are heavily
dependent on petroleum and natural gas
inputs. Tennessee and Alabam a have large
shares of nondurable goods m anufacturing
em ploym ent and above-average shares of
jobs in agriculture. The agricultural
character of M ississippi's economy makes
the state vulnerable to cost increases. A
high concentration of nondurables
m anufacturing and a large share of touristrelated transportation and trade jobs place
Georgia among the more dependent states.
Furthermore, the services sector is below
average in im portance in each of these
states.
C o a l C o m fo rt? Another likely thrust of
future energy policy is encouragement of
conversion from petroleum-related sources
of power to alternative fuels such as coal.
BOX 1
CURRENT STATUS OF ENERGY LEGISLATION
r
The National Energy Act, with most of
President Carter's proposed energy pro
gram intact, was passed by the House of
Representatives in early August. The
most important provisions affecting in
dustrial energy costs are outlined below.
Since Senate com m ittee hearings have
just begun, these programs remain sub
ject to substantial alterations.
1. Crude O il Prices
The controlled price of dom estically
produced oil sold to refiners would be
increased by a tax to be applied in three
steps. By 1980, the price would reach a
level equal to the uncontrolled price of
crude oil sold in the international
market. The tax would term inate on
September 30, 1981, along with the
President's power to control oil prices.
Incom e tax credits and other payments
would o ffset the purchasing power loss
w hich consumers would suffer as a con
sequence of higher energy prices.
2. Natural Gas Prices
Natural gas price regulation would
continue. The ceiling price for newly
discovered gas would rise from the cur
rent level of $1.46 per thousand cubic
feet to $1.75 im m ediately. In the future,
the price of natural gas would corre
spond to the price of the amount of
dom estically produced crude oil which
would yield the same amount of energy.
To forestall regional gas shortages, the
ceiling price would apply to gas pro
duced and sold w ithin a state as w ell as
to gas sold for delivery to another state.
The im pact of rising natural gas prices
would be fe lt prim arily by industrial
users in itially.
3. Coal Conversion Penalties and
Incentives
New u tility and industrial plants
would be prohibited from burning oil or
natural gas, with some exceptions based
on environm ental or econom ic con
siderations. Existing utilities would be re
quired to cease burning natural gas by
1990. Plants w hich are now capable of
burning coal could be required to use
coal rather than oil or natural gas. A
system of penalty taxes would be ap
plied to industrial users of oil and
natural gas beginning in 1979 and to
u tility com panies beginning in 1983.
These taxes would increase year by year
to m otivate conversions to coal power.
Plants using sm all quantities of oil and
gas and firm s whose m anufacturing
process or product q u ality would be
seriously impaired by use of other fuels
could be exempt from the oil- and gasusers' tax. A com pany could credit
expenditures for conversion to alternate
fuel sources against its user taxes (dis
qualifying the investm ent for the 10percent general investment tax credit) or
it could take an additional 10-percent
tax credit for investments in energy
equipment. To hasten conversions, the
latter option would apply only through
1982. In addition, any oil- or gas-burning
boiler purchased after June 20, 1977,
would no longer q u alify for the regular
10-percent investment tax credit or for
depreciation at an accelerated rate.
For summaries of the provisions of the National Energy Act, see The
Wall Street Journal, August 8, 1977, p 4, and Congressional Quarterly
Weekly Report, Vol 35, No.2 (August 6.1977), pp 1624-1625
Since the costs of coal-burning processes
seem likely to fall relative to oil and
natural gas, an effort to assess potential
price effects must consider the reliance on
coal energy by major sectors.4
4This analysis does not include the influence of fuels used to generate elec
tricity, which is derived from a variety of primary energy sources Relative to
the U S., the Southeast derives a much higher share of its electric power from
coal and a much lo w e r proportion from natural gas. The shares of electricity
supplied by oil and nuclear power are about the same regionally as nationally,
while the national percentage of hydroelectric power is significantly greater
On balance, smaller cost increases in electric power are likely to be ex
perienced in the Southeast than in the nation as a whole See Table VI, pp
18-19, in 1977 Annual Electric Power Survey, published by the Edison
Electric Institute.
A lower price for coal relative to
petroleum-related fuels would favor areas
where coal-using industries are con
centrated. We can be fa irly sure that coalburning fa cilitie s are concentrated in the
older m anufacturing centers of the North
east and M idwest. The "n e w " centers in
the South, Southwest, and W est grew in
the postwar period of inexpensive, readily
availab le, e fficie n tly burning natural gas.
Therefore, the change in relative energy
cost in favor of coal w ill probably penalize
m anufacturers in these regions and
BOX 2
KEY TO THE ENERGY-DEPENDENCE RIDDLE
Input-Output Data. How does one spot a
heavily energy-dependent industry? "Inputoutput" studies provide a key to this prob
lem in the form of a detailed "shopping
list" for each major sector of the
economy. These data indicate the "ingre
dients" required for each sector's produc
tion, including the value of key raw
m aterials obtained from other industries,
labor compensation, profits, and taxes.
One variety of input-output data shows the
value in cents of each input directly con
sumed to produce one dollar's value of
output for each industry.1 A second variety
of "shopping list" shows the value in cents
of the direct input requirements plus the
indirect requirements generated by a onedollar increase in output for each industry.
The
in d u stry
energ y
re q u ire m e n ts
presented in Table 1 and Chart 1 of the ac
com panying article are based on such
input-output data.
Recency and Other Reservations About
the Data. Although the input-output in
form ation seems well suited for an in
vestigation of energy dependence, it has
been used with some reservations. First,
the data are not very current. The most
recently published data are for the 1971
calendar y e a r.2 Furthermore, even older
data have been used for this study. A
’ For a useful description of input-output data, see "The Input-Output Structure of
the U .S . Economy, 1967, Survey of Current Business, Vol 54, No 2 (February
1974), pp 24-56.
zPaula C. Young and Philip M. Ritz, ' Input-Output Table of the U. S. Economy,
1971" (Bureau of Economic Analysis Staff Paper No. 28), U. S. Department of
Commerce, March 1977
special tabulation of the 1967 input-outpi
data is available, w hich offers two majc
advantages: First, it provides greater deta
for energy-producing industries; second,
reduces the degree of detail for nonenerg
industries by aggregating them into majc
econom ic sectors.3
Use of ten-year-old data creates som
risks, of course. Changes in technology
prices, demand patterns, and product mi
may have significantly altered the patter
of industrial input use since 1967.
A second reservation concerns th
representativeness of the data. The inpul
output numbers discussed below are broai
averages w hich apply to the entire Unite<
States. However, conditions w ithin pai
ticu lar regions, states, industries, and firm
may cause input-output patterns to diffe
sharply from these average values. On
would expect fa irly wide variations be
tween areas in industry composition and i
the e fficie n cy of particular firm s. But i
the absence of su fficien tly precise stat
and regional data, the national inform atio
supplies a useful indication of sectore
energy dependence. In discussing thes
numbers, we do not wish to imply tha
they are typical of all areas.4
3' The Input-Output Study of the U. S Economy, 1967: Energy Model,” U. S.
Department of Commerce, Bureau of Economic Analysis, mimeo, 4 pp.
‘ Although input-output studies have been prepared for some states, most do not
provide a sufficiently detailed breakdown of energy usage to permit the type o
analysis pursued in this study. Also, studies for particular states are usually not
comparable. See W illiam A. Schaffer, Eugene A. Laurent, and Ernest M. Sutter,
Using the Georgia Economic Model, Atlanta, Ceorgia, Georgia Institute of
Technology, 1972.
enhance the com petitive positions of the
coal-burning fa cilitie s of the Northeast and
Midwest. However, use of national data on
industry coal requirements tends to ob
scure these regional differences.
As Chart 1 indicated, coal is used most
intensively in the durable goods
m anufacturing sector. But the share of
em ploym ent provided by durable goods
producers is significantly lower in the
Southeast. Industries w hich use coal to a
moderate degree include mining and
nondurable goods m anufacturing. As noted
D IRECT AND IN D IREC T ENERGY CONSUMPTION
BY S T E E L M ANUFACTURERS
Adjustment to Eliminate Understatement
r Overstatement. The input-output data
la t appear in Table 1 and Chart 1 have
een adjusted to avoid understating or
verstating energy requirements. The steel
idustry provides a convenient example of
le need for such adjustm ents.
Steel production processes use large
uantities of both coal and e lectricity,
'mitting other energy sources for the molent, how would one properly represent the
eel industry's energy dependence? One
Duld sum the values of the direct rejirem en ts for coal and ele ctricity (1 and 3
i the diagram). Although the value of coal
>ed to generate e le ctricity (2) is included in
le value of the e le ctricity used in steelmakg (3), this procedure would result in a
previously, mining's em ploym ent shares
vary little, either between the Southeast
and the nation or among the southeastern
states. Nondurables is a sector of con
centrated em ploym ent in the Southeast;
but this industry's moderate use of coal
only serves to soften somewhat the
disadvantage of its heavy reliance on
petroleum-related energy.
R elatively heavy concentrations of coalusing industries slightly improve the posi
tion of some southeastern states. Tennessee
and Alabam a, heavily dependent
serious underestim ate of energy consump
tion, since coal is also used to produce
numerous other "ingredients" for steelmaking. These inputs are represented in the
diagram by shipping, w hich is assumed to be
co al-po w ered.
M easurin g
the energy
dependence of steel m anufacturing by sum
ming only its direct energy inputs would
om it the energy content of these nonenergy
inputs (4).
Then, why not add together the direct and
indirect requirements for energy inputs? This
a p p ro a c h
w o u ld
overstate
energ y
dependence because of double counting. In
the preceding diagram, steel m anufacturers'
direct and indirect consum ption of coal (1,
2, and 4) would be included. But the value of
coal used to generate e le ctricity (2) would
be counted a second time as part of the
value of the e le ctricity input directly con
sumed in steel production (3).
The direct and indirect input coefficients
(cents per dollar of output produced) for
each m ajor energy source have been
modified to elim inate this source of
overstatem ent.
In sim ple term s,
the
m odification employed here takes the sum
of input flows (1) and (4) as the measure of
coal input dependency and classifies seg
ment (3) as the measure of dependence on
e le c tric ity .5 That is, the value of energy used
to produce energy is measured in its final
form as a direct input.
sFor a more detailed explanation'of the adjustment method used, please consult
the technical note at the conclusion of this article
on petroleum-related inputs, also
have greater-than-average employment
shares in durable goods and nondurable
goods m anufacturing. M ississippi, the
D istrict state with the largest durable
goods job concentration, should benefit to
some extent from any shift of energy
prices in favor of coal.
Despite the potential benefits to coal
users, the present role of coal inputs is
minor compared to that of petroleum and
natural gas energy sources. In the
m anufacture of durable goods, the value
of the coal used to generate one dollar of
output is one quarter of the cost of
petroleum and natural gas required. For
the other industries, it amounts to only
one-tenth or less. Unless the mix of fuel
consumption is altered m arkedly, coal
price incentives w ill cushion the im pact of
increasing energy costs only slightly.
IM PLICATIO N S FOR SOUTHEASTERN
GROW TH
Although producers throughout the
nation w ill face increasing energy costs,
incipient changes in energy prices and use
patterns w ill probably have a stronger
im pact in the Southeast than in the nation
as a whole. H eavy use of petroleum and
natural gas w ill be discouraged, but
southeastern industries are more depen
dent on these fuels than are their national
counterparts. Fuel consumption w ill be
shifted to nonpetroleum sources,
especially coal; and with the exception of
.-T E C H N IC A L NOTE-------------------As shown in the example in Box 2, the
problem of double counting arises when
energy sector A uses inputs from energy
sector B, resulting in an overlap of direct
consumption of sector A's product with
indirect consumption of sector B's
product. The key to identifying these areas
of duplication is Table T-1, w hich gives the
direct and indirect energy input
requirements of the five energy-producing
sectors.
The procedure used in this study to
adjust for double counting began by
summing the coefficients for the inputs
provided by the other four energy sectors
to the particular sector under con
sideration (calculating a total for each
colum n of Table T-1). Thus, adding the
requirements of the coal mining industry
from the crude petroleum and natural gas,
petroleum refining, electrical u tility, and
gas u tility industries provided a sum for
coal mining. This sum indicates the
relative importance of other energy inputs,
directly and indirectly required, in the
production of coal. Note that this fraction,
about 6 percent in the case of coal mining,
measures the extent to which another
sector's direct consumption of coal would
overlap the indirect consumption (via
direct use of coal) of the other four forms
of energy. That is, for each $1 of coal
supplied to coal-consuming industries,
approxim ately 6 cents would be counted
again as energy inputs obtained indirectly
by those industries from other energyproducing sectors.
The adjustm ent required to correct this
overlap is to reduce the value of coal
inputs by about 6 percent. The exact
facto r is obtained by subtracting the sum
of the energy input co efficients to the co;
industry from 1.0 (see Table T-1). In this
case, about 94 percent of the value of co.
inputs supplied to other industries is not
counted w ithin other energy sector input
coefficients. In each of the remaining
colum ns of the table, an identical
procedure is follow ed to obtain the ad
justm ent factors shown on the bottom Iin<
of the table.
This explains how the adjustm ent facto
were derived; but how were they applied?
For each of the five energy sectors, the
original requirement co efficie n t for each
input (shown in Table T-2) was m ultiplied
by the adjustm ent facto r for that input (a
given in Table T-1). The resulting adjusted
direct and indirect input requirements are
presented in Table 1 of the article. Thus,
for coal mining inputs, the agricultural
sector's co efficien t was changed from
.00125 to .00117 (= .9373 x .00125) and th
durable goods m anufacturing sector's
co efficie n t was altered from .00549 to
.00515 (= .9373 x .00549), etc.
enter new markets, offer new or improved
products, and increase production ef
ficie n cy via investm ent is hampered, at
least tem porarily. For some sm all-scale
producers, coal conversion may be so
costly as to be unprofitable and d ifficu lt
to finance. W ithout the conversion option,
higher prices of fuels presently used could
force them to curtail operations.
Thus, a number of uncertainties cloud a
definitive conclusion concerning the ef
fects of energy costs on the outlook for
southeastern econom ic growth. The most
certain aspect of the outlook is that
considerable turbulence is in store before
adjustments to the new realities of energy
supplies and prices are completed. ■
electrical power generation, coal-burning
fa cilitie s are relatively scarce in the
Southeast.
As their production costs begin to in
crease, relatively heavy users of petroleum
and natural gas w ill face an unappealing
choice. They can attem pt to absorb rising
energy costs by controlling other costs,
increasing prices, or sacrificing net income.
O r they can undertake m ajor capital in
vestment programs to convert to alter
native fuels, prim arily coal. But tax in
centives for coal conversion would only
partly offset the additional financing costs
incurred. Such investments would absorb
capital that could be invested in new or
expanded fa cilitie s. Producers faced with
conversion may find that their ab ility to
TA BLE
T-1
E N E R G Y S E C T O R S : D IR E C T AND IN D IR E C T IN PU T R E Q U IR E M E N T S , 1967
CONSUMING IN D USTRIES:
Coal
Mining
Crude Petroleum
and Natural G as
Petroleum
Refining
Electrical
Utilities
G as
Utilities
PRODUCING
IN D USTRIES:
Coal Mining
-
.00124
.00162
.06684
.00110
.00960
.01800
.03062
.00448
-
.49695
.00654
.01264
.00719
-
.02111
.02104
.01476
.02234
.28325
.00435
.00818
.06191
-
.06270
.02761
.53567
.17090
.29688
.93730
.97239
.46433
.82910
.70312
Crude Petroleum
and Natural Gas
Petroleum Refining
Electrical Utilities
G as Utilities
-
Sum of Energy
Input Coefficients
1.0 -(Su m of Energy
Input Coefficients)
Source: “The Input-Output Study of the U. S. Economy, 1967: Energy Model" and computations.
TA BLE
T-2
D IR E C T AND IN D IR E C T R E Q U IR E M E N T S P E R D O L LA R O F D E L IV E R Y TO F IN A L D EM AN D
CONSUM ING IN DUSTRIES:
Mining,
Excluding
Agriculture
Fuels
Construction
Durable
Goods
Manufacturing
Nondurable
Goods
Manufacturing
Transportation
and
Trade
Services
PRODUCING
IN DUSTRIES:
Coal Mining
Crude Petroleum and
Natural Gas
Petroleum Refining
Electric Utilities
G as Utilities
.00125
.00365
.00215
.00549
.00305
.00114
.00127
.01678
.03440
.00940
.00448
.01127
.01722
.03022
.01772
.00945
.01809
.00845
.00557
.00687
.01019
.01509
.01136
.01423
.02578
.01506
.01080
.01069
.02048
.01335
.00573
.00627
.01010
.01077
.00536
Source: “The Input-Output Study of the U. S . Economy, 1967: Energy Model.”
EXPANSION OF
MIAMI EDGE ACT
CORPORATIONS
by Donald E. Baer
In 1919, Senator W alter Edge successfully
sponsored a Federal Reserve A ct amend
ment w hich permitted banks, singly or
jo in tly, to establish international banking
subsidiaries outside their home states. The
resulting "Edge A ct corporations" were
confined to international a ctivity and
required to show a minimum cap italizatio n
of $2 m illio n .1 For 40 years, the provision
was v irtu a lly unused. Since 1960, however,
the number of Edge A ct corporations has
expanded rapidly as U. S. banks have
become increasingly involved in in
ternational finance. By June 1977, 113
Edge A ct corporations were operating in
U. S. cities.
The Edge A ct expansion came in two
distinct stages. In the first stage, banks and
bank holding companies, prohibited from
investing directly in foreign banks and
corporations, established "investm ent
Edges" to accom plish the same result
indirectly. These Edges were generally
located in the same city as the head
quarters of the parent bank. Subsequent
amendments in 1966 and 1970 to the
Federal Reserve and Bank Holding
Com pany A cts, however, elim inated some
of the major advantages of these
investment-oriented Edge A ct corporations
by allow ing bank holding companies to
invest in foreign companies under
guidelines sim ilar to those governing Edges
and further permitting national banks'
investment in foreign banks.
The second stage of Edge A ct cor
poration development has been con
centrated on "ban kin g" Edges, where a
parent bank (or banks) establishes in
ternational banking facilitie s in regional
fin an cial centers outside the parent's home
1A previous study on Edge Act corporations in the Southeast was published in
the Federal Reserve Bank of Atlanta's September 1974 Monthly Review.
state .2 By June 1977, there were 62 of
these Edges, 10 of which are in M iam i. The
Miam i Edges have all been established
since 1969 by parent banks in C alifo rn ia,
Georgia, Illino is, M assachusetts, and New
York (see Table 1), placing M iam i second
only to New York C ity in the number of
away-from-headquarters Edge A ct cor
porations (see Appendix).
f
TA BLE 1
MIAMI E D G E A C T C O R P O R A T IO N S
(as of A ugust 1977)
A
Commenced
Bu sin ess
•
•
•
•
•
•
•
•
C itize n s and Southern International Bank
Bank of A m erica International of Flo rid a
Citib ank Interam erica
Irving Interam erican Bank
W ells Fargo Interam erican Bank
Bank of Boston International of Miami
C h a se B ank International (Miami)
Bankers Trust International (Miami)
Corporation
• Northern Trust Interam erican Bank
• Morgan G uaranty International
Bank of Miami
3-24-69
3-8-71
5-3-71
8-2-71
8-16-71
5-15-72
10-19-72
8-19-74
9-16-74
2-15-77
V__________________ J
Latin America and the Miami Edge
Corporations. Latin Am erican linkages
have drawn the Edge corporations to
M iam i. Its bilingual population, relative
proxim ity to Latin Am erica, and heavy
South and Central Am erican visitor tra ffic
make it an attractive and convenient site
for the Latin Am erican operations of large
U. S. banks. Indeed, nearly all of the
foreign loans and deposits of M iam i Edges
involve Latin Am erica or the Caribbean.
H isto rically, much of Latin Am erican
international fin an cial transactions has
been handled directly by the largest U. S.
banks, p articu larly those in New York.
Now M iam i banks provide not only
traditional servicing of deposits but also
trade and medium-term financing. In
terbank com petition and increased
fin an cial sophistication of international
clients are stim ulating M iam i's develop
ment into a full-service, specialized Latin
Am erican banking center.
^ Banking" Edges are defined as subsidiaries whose aggregate
demand deposits and acceptance liabilities exceed capital and surplus
A ll M iam i Edge corporations operate as
subsidiaries of their parent bank, with
activities in M iam i dependent on their
parents' network of international offices.
W here the parent bank m aintains a
substantial number of branches in Latin
Am erica, M iam i Edge activities are
necessarily coordinated with those
branches and with the Latin Am erican
headquarters of the parent bank. For some
banks, the M iam i Edge serves as the Latin
Am erican headquarters itself. O ther M iami
Edges deal only with clients in specific
countries, sharing Latin Am erican
responsibilities with other Edge cities with
Latin Am erican links (e.g., Houston, Los
Angeles, and New Orleans).
Edge Act Corporation Regulations3 and
Effect on Activity. By law, Edge A ct
corporation activities are confined to
servicing the international financing
requirements of U. S.-based customers and
accounts of foreigners. The Edges may
o ffer demand and time deposits to
foreigners but not passbook savings
accounts.
Edge deposits are subject to reserve
requirements no less than those prevailing
for Federal Reserve System member banks.
The reserve requirement on aggregate Edge
deposits, however, can never be less than
10 percent. This reserve requirement is not
a severe constraint in the case of demand
deposits. Due to their size, their parent
banks are subject to higher than 10-percent
marginal requirement rates on demand
deposits (see Table 2). Some of the Edge
demand deposits may a ctu ally represent
accounts previously held at the parent
bank and now subject to lower marginal
reserve requirements at the Edge. Tim e
deposits, however, are also subject to the
minimum 10-percent reserve requirement.
Since Federal Reserve member bank
reserve requirements on time deposits vary
from 1 to 6 percent (see Table 2), the Edge
A ct corporations' cost of m aintaining time
deposits surpasses that of com m ercial
banks. This is im portant to M iami because
time deposits represented nearly half of
M iam i's 1976 Edge total liabilities and
capital.
3Edge Act corporations are regulated by Section 25(a) of the Federal
Reserve Act and by the Federal Reserve System's Regulation K
T O T A L L IA B IL IT IE S , R E S E R V E S , AND C A P IT A L
A C C O U N T S , MIAMI E D G E A C T C O R P O R A T IO N S
December 1976
(Mil.$)
A. Demand Deposits Due to Other than Directly Related Institutions
B. Tim e and Savings Deposits Due or Issued to Other than
Directly Related Institutions
C. Other Liabilities, Reserves, and Capital Accounts
V ______________________________________________ S
As with national banks, banking Edges
cannot lend more than a tenth of their
capital and surplus to one borrower. Since
most M iam i Edges were established with
close to the $2-million minimum ca p ita l
ization, their initial loan lim it was approx
im ately $200,000. This lim itation has
played an important part in shaping the
character of the Edges. Some large loans
are arranged by a M iam i Edge, with
participations by the head o ffice or other
subsidiaries. M any Edges, however, direct
larger credit requests im m ediately to head
o ffices, particu larly large-scale public
sector credits. Likew ise, few Edges pur
chase participations from nonrelated
institutions; however, they do join sub
sidiaries or branches of their parent
institutions in some participations. The
capital and reserves of the M iam i Edges
are expanding as they receive new capital
infusions from parent banks and plow
back earnings into reserves. This growing
fin an cial base gives the Edges greater
independence and enables them to make
larger individual loans.
Growth of Miami Edge Corporation
Liabilities. Both the number of M iam i Edge
A ct corporations and the level of M iam i
Edge fin ancial a ctivity have expanded
rapidly in recent years. Growth of
liab ilities was greatest in 1974, when
liab ilities, reserves, and capital grew more
than 70 percent. Even the more modest 25percent 1976 growth was striking (see
Table 3).
Edge A ct corporation growth has in
creased com petition for foreign accounts
w ithin M iam i's fin ancial com m unity; local
banks have also benefited from the rising
level of international activity. One index
of M iam i's com m ercial bank international
expansion is the growth of demand and
time deposits maintained by foreign banks,
foreign governments, o fficia l institutions,
and central banks. Such deposits increased
some 85 percent between Decem ber 1973
and Decem ber 1976. M iam i's com m ercial
banks in mid-1976 maintained nearly tw ice
the volum e of foreign deposits of the Edge
corporations and approxim ately equal
amounts of foreign loans and foreign trade
financing activity.
Uses of Miami Edge Act Funds. The
M iam i Edge A ct corporations have con
sistently accepted more deposits than
could be placed lo cally. Deposits and
loans to parent or other related institutions
have constituted from a quarter to a third
of M iam i Edge asset portfolios since 1973.
In June 1977, about 17 percent of M iami
Edge A ct assets were deposits and loans to
directly related institutions in the U. S.,
with another 12 percent allocated to
directly related institutions abroad (see
Table 4).
Still, an increasing proportion of the
M iam i Edge assets has been committed to
loans abroad; the share had reached 40
percent by June 1977. The bulk of these
foreign loans is made to firm s and in
dividuals, although loans to nonrelated
foreign banks and foreign public in
stitutions have also expanded in relative
significance. Loans to U. S.-based entities
have declined in importance; in June 1977,
such loans represented less than 10 per
cent of Edge assets. Miami Edges have
found trade financing opportunities in Flori
da and the Southeast but generally have
placed greater emphasis on foreign loans.
Conclusion. Edge A ct corporations are
increasingly performing as international
TA BLE 2
FE D E R A L R E S E R V E SYSTEM
M EM B ER B A N K R E S E R V E R E Q U IR E M E N T S 1
(percent of deposits)
R equirem ents in Effect
Ju n e 30,1977
Type of Deposit and
Deposit Interval
(million $)
Net Demand:2
0-2............................................
2 - 1 0 .......................................
1 0 - 1 0 0 ..................................
1 0 0 - 4 0 0 ................................
Over 4 0 0 ................................
Time:23
S a v in g s ..................................
Other Time:
0-5, maturing in
30-179 d a y s ....................
180 days to 4 years. . . .
4 years or m o re...............
Over 5, maturing in
30-179 d a y s ....................
180 days to 4 years. . . .
4 years or m o re...............
Percent
Effective
Date
7
9 ’/2
1%
12%
16%
12/30/76
12/30/76
12/30/76
12/30/76
12/30/76
3
3/16/67
3
42 V t
41
3/16/67
1/8/76
10/30/75
6
42 ’/2
41
12/12/74
1/8/76
10/30/75
'Fo r changes in reserve requirements beginning 1 96 3, see Board’s
Annual Statistical Digest, 1971-1975, and for prior changes, see
Board's Annual Report for 1976, Table 13.
2{a) Requirement schedules are graduated, and each deposit interval
applies to that part of the deposits of each bank. Demand deposits
subject to reserve requirements are gross demand deposits minus cash
items in process of collection and demand balances due from domestic
banks.
(b) The Federal Reserve Act specifies different ranges of requirements for
reserve city banks and for other banks. Reserve cities are designated
under a criterion adopted effective November 9, 197 2, by which a bank
having net demand deposits of more than $ 4 0 0 million is considered to
have the character of business of a reserve city bank. The presence of
the head office of such a bank constitutes designation of that place as a
reserve city. Cities in which there are Federal Reserve Banks or
Branches are also reserve cities. Any banks having net demand deposits
of $ 4 0 0 million or less are considered to have the character of business
of banks outside of reserve cities and are permitted to maintain reserves
at ratios set for banks not in reserve cities. For details, see the Board's
Regulation D.
(c) Member banks are required under the Board's Regulation M to
maintain reserves against foreign branch deposits computed on the basis
of net balances due from domestic offices to their foreign branches and
against foreign branch loans to U. S . residents. Loans aggregating
$ 1 0 0 ,0 0 0 or less to any U. S . resident are excluded from computations,
as are total loans of a bank to U. S. residents if not exceeding $1 million.
Regulation D imposes a similar reserve requirement on borrowings from
foreign banks by domestic offices of a member bank. A reserve of 4
percent is required for each of these classifications.
Negotiable Orders of Withdrawal (NOW) accounts and time deposits such
as Christmas and vacation club accounts are subject to the same
requirements as savings deposits.
4The average of reserves on savings and other time deposits must be at
least 3 percent, the minimum specified by law.
Note: Required reserves must be held in the form of deposits with Federal
Reserve Banks or vault cash.
Source: Federal Reserve Bulletin, July 1977.
banking rather than international in
vestment entities; each M iam i Edge has a
banking Edge perspective. The character of
the Edge A ct corporations is shaped by
Edge A ct regulations as well as by the
local environment. Regulations necessarily
lim it a ctivity to international finance.
Reserve requirements and loan lim itations
tied to capital accounts also affe ct the
character of Edge operations. The M iami
Latin Am erican linkages--both locational
and demographic--have been prime in
ducements for Edge A ct corporations'
operations in the city. The rapid growth of
international finance in M iam i, shown by
Edge A ct corporations and com m ercial
banks alike, is increasingly giving the city
the character of a specialized Latin
Am erican banking center *
TA BLE 3
MIAMI E D G E A C T C O R P O R A T IO N L IA B IL IT IE S AND C A P IT A L
S E LE C T E D ACCO UN TS
(million $)
December
1973
Foreign Individuals, Partnership s,
and Corporation Demand D ep o sits.
December
1974
December
1975
December
1976
June
1977
24.5
35.8
55.2
76.8
95.8
71.9
165.7
212.3
285.6
288.1
O ther Lia b ilitie s.
76.8
99.7
152.8
166.2
159.0
C ap ital A cco u n ts (Stock, S urplus,
and Undivided P ro fits)____________
28.7
47.8
52.2
59.5
88.3
. 201.9
349.0
472.5
588.1
631.2
72.9
35.4
24.5
Foreign Individuals, Partnership s,
and Corporation Tim e D e p o sits____
.
Total L iab ilitie s and
C a p ita l_____________
A nnual Growth R a te , Total Liab ilities
and Capital A cco u n ts (Percent)_____
7.3*
‘ Sem iannual
TA BLE 4
MIAMI E D G E A C T A S S E T S
(percent distribution)
Foreign Lo an s O ther than to
Directly R elated Institutions
a. To Foreign B a n k s.
b. To Foreign G overnm ents, Central Banks,
and International Monetary In stitu tio n s—
c. O ther Lo a n s O ther than to
D irectly Related In stitu tio n s.
d. Sum of Foreign Lo a n s O ther than to
D irectly Related In stitu tio n s__________
U. S . Lo a n s O ther than to D irectly
Related In stitu tio n s______________
C u sto m e rs’ L ia b ilitie s on
A cce p ta n ce s O utstand in g.
December
1973
December
1974
December
1975
December
1976
June
1977
4.1
4.4
4.8
5.8
6.2
1.6
2.0
1.8
2.1
2.3
26.2
30.1
30.1
29.1
31.8
31.9
36.5
36.7
37.0
40.3
13.5
12.0
11.1
7.5
9.2
1.7
12.8
5.6
7.9
8.4
12.7
13.1
12.4
14.9
15.0
18.8
13.5
20.2
11.8
17.1
25.8
27.3
33.8
33.7
28.9
27.1
11.4
12.8
13.9
13.2
100.0
100.0
100.0
100.0
100.0
D ep o sits Due from and Lo an s to
D irectly Related Institutions
a. In Foreign C o un tries
b. In U .S .
c. Sum of D ep o sits from and Loan s to
D irectly Related In stitution s
O ther A s s e ts (Inclu des R eserve
Rfiquirpmfintfi)
V
Total A ss e ts
Appendix
E D G E S B Y C IT Y
C O R P O R A T IO N S L O C A T E D O U T S ID E H E A D Q U A R T E R S C IT Y (as of Jun e 1977)
CH ICA G O
HOUSTON
LO S A N G E LE S
MIAMI
NEW YORK
SAN FR A N CISC O
O TH ER
Allied Bank
International
Bank of Am erica
International of
Chicago
Bank of America
International of
Texas
Bank of America
International of
Florida
Bank of Am erica
Bank of
California
International
Bankers Trust
International
(Midwest)
Bankers Trust
International
(Southwest)
Bankers Trust
International
(Pacific)
Bankers Trust
International
(Miami)
★
Central
Cleveland
International
Bank
Chase Bank
International
Chicago
Ch ase Bank
International
Houston
Chase Bank
International
Los Angeles
Chase Bank
International
Miami
Chem ical Bank
International of
Chicago
Citibank
International
Chicago
*
*
Citibank
International
Houston
Citibank
International
Los Angeles
Citibank
Interamerica
Chem ical Bank
International of
San Francisco
Citibank
International
San Francisco
Citizens and
Southern
International
Bank
Citibank Overseas
Investment
Corporation
(Wilmington)
Citizens and Southern
International Bank of
New Orleans
Connecticut Bank
International
*
Continental Bank
International
(Texas)
Continental Bank
International
(Pacific)
Continental Bank
International
Crocker MidAmerica
International
Bank
Crocker
International
Bank
★
Fidelity
International
Bank
Bank of Boston
International of
Los Angeles
*
First Chicago
International
Los Angeles
Bank of Boston
International of
Miami
Bank of Boston
International
First Chicago
International
Banking
Corporation
First Chicago
International
San Francisco
First W isconsin
International
Bank
New York
Girard
International
Bank
Harris Bank
V
*
116
International
Corporation
★
H eadquarters C ity
_
J
CH ICA G O
HOUSTON
LO S A N G E LE S
Irving Trust
Company
International
Pacific
MIAMI
NEW Y O RK
SAN FR A N C ISC O
O TH ER
Irving
Interamerican
Bank
Manufacturers
Hanover Bank
(Los Angeles)
*
Marine Midland
International
Corporation
Mellon Bank
International
I
Morgan Guaranty
Morgan Guaranty
International
Morgan Guaranty
International
Bank of Houston
International
Bank of
Bank of Miami
San Francisco
North Carolina
National Bank
(NCNB)
International
Banking
Corporation
Northern Trust
International
Bank
Northern Trust
International
Banking
Corporation
Philadelphia
International
Bank
Rainier
International
Bank
New York
Rainier
International
Bank
Los Angeles
Security Pacific
International
Bank
*
State Street Bank
of Boston
International
United California
Bank
International
United Virginia
Bank International
(Norfolk)
Wachovia
International
Banking
Corporation
(New York)
6
6
*H e a d q u arters C ity
9
W ells Fargo
Interamerican
W ells Fargo
Bank
Bank
International
10
(SU M TO TA L BY C ITY)
24
4
3
SIXTH DISTRICT BANKING NOTES
Bank Earnings Recover Slightly
in 1976
Sixth D istrict member banks took a sm all
step tow ard a recovery in earnings last
year. A ccording to their operating ratios,
returns on equity cap ital advanced to 6.8
percent from 6.3 percent in 1975. Despite
the im provem ent, the earnings rate
rem ained sig n ifican tly below the 10
percent experienced in the early part of
the Seventies.
The earnings advance resulted from
expenses rising more slow ly than revenues.
The ratio of total operating incom e to
total assets a ctu a lly declined from 7.59
percent to 7.46 percent. But expenses
charged against that income dropped even
further, from 7.05 percent to 6.84 percent
of total assets.
The relative decline in operating incom e
reflected lower rates of return on earning
assets. M em ber banks sharply increased
holdings of U. S. Treasury securities, in
vestm ents that earn much less than loans,
to 14 percent of total assets from 9.3
percent in the previous year. A t the same
tim e, the interest return on these in
vestm ents averaged 6.73 percent, down
from 7.1 percent in 1975. Because of the
shift toward governm ent securities, such
interest incom e com prised nearly 13
percent of total operating incom e,
com pared to a 9-percent share in the year
before.
Lagging loan demand pulled loan in
come down from 64.2 percent of operating
incom e to 62.2 percent last year. A
reduction in the proportion of earning
assets accounted for by lending out
weighed a slightly higher rate of return on
loans. The im portance of total loans
dim inished despite sustained increases in
real estate and consum er loans; com
m ercial and industrial loans continued
w eak until late in the year.
O perating expenses consumed a sm aller
proportion of total operating incom e last
year. Reduced interest costs fo r borrowed
m oney and lower interest paym ents on de
posits contributed to the savings. Average
interest paid on tim e and savings deposits
dropped as banks experienced inflow s of
lower cost funds. This helped to counter
the increased expense of additional
interest-bearing deposits. Provisions for
loan losses, w h ile still high, w ere sm aller
last year. W age and salary expenses, the
second largest bank expense, remained
unchanged as a percent of total operating
incom e.
There continues to be considerable
variatio n in earnings among banks in the
d ifferen t Sixth D istrict states. W hile
member banks in the D istrict part of
Louisiana still lead the Sixth D istrict in
earnings perform ance, their earnings
declined slightly last year. Banks in
A lab am a, Georgia, and the Sixth D istrict
portions of M ississippi and Tennessee
posted a m oderate earnings gain. However,
Florida's member banks had below-average
earnings of 3.5 percent, a bit less than in
the previous year.
Poor perform ance by Flo rid a's member
banks reflects in part the large number of
very sm all member banks in that state.
Sm aller banks have tended to earn lower
rates of return than medium- and large
sized banks. W hile the sm aller D istrict
banks had slightly higher operating
income/asset ratios, they also spent
sig n ifica n tly more for em ployees' salaries,
o ccu p an cy of their fa c ilitie s, and "a ll
o ther" operating expenses. M any of these
types of expenses are re la tive ly fixed and
in divisible, and the larger banks can
spread them over a larger asset base.
N early 50 percent of the Sixth D istrict
mem ber banks w ith assets of less than
$10 m illion failed to generate su fficie n t
incom e to meet all of their expenses last
year. In contrast, less than 15 percent of
banks w ith total assets of $10 m illion to
$50 m illion earned less than they spent.
M em ber banks apparently have turned
the corner on earnings and, according to
prelim inary reports fo r the first half of
1977, are on the w ay back toward the
higher returns of previous years. Sharply
im proved earnings, however, w ill depend
on banks' a b ility to expand their most
pro fitable a ctiv ity , lending, w h ile reducing
provisions fo r loan losses.
Note. D ata based on "1976 O perating Ratios, Sixth D istrict
M em ber B an ks" now a v a ila b le upon request.
John M, Godfrey
COMPONENT RATIO ESTIMATION
OF THE MONEY MULTIPLIER
by Stuart G . H offm an
This article summarizes a staff analysis that may interest those in the economics
and banking professions as well as others. It is more technical than the typical
Economic Review article. The analysis and conclusions are those of the author. Studies
of this kind do not necessarily reflect the views of the Federal Reserve Bank. The
complete study is available as part of a series of Federal Reserve Bank of Atlanta
Working Papers. Single copies of this and other studies are available upon request to
the Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30303.
The notion that money growth significantly
influences econom ic activity is the heart
of much recent economic doctrine. A c
cordingly, the Federal Reserve System
selects monetary aggregate growth ranges
consistent with the goals of price stability,
low unem ployment, and sustained real
econom ic growth. The Federal Reserve's
emphasis on money supply growth
necessitates research on procedures for
controlling the rate of money growth.
The “ m ultiplier-base" fram ework is one
approach to the analysis of money stock
behavio r.1 This fram ework is so called
because the money stock is viewed as a
m ultiple of the "m onetary base." Sp e cifi
cally, the money stock (M) is related to the
monetary base (B) through the following
identity:
M = mB
The monetary base is the sum of member
bank deposits at Federal Reserve Banks,
member and nonmember bank vault cash,
cash in the hands of the nonbank public,
and a reserve adjustm ent.2 An important
assumption in this fram ework is that the
Federal Reserve is capable of controlling
the magnitude of the monetary base. The
’ See, for instance, Karl Brunner and Allan Meltzer, "Some Further Investi
gations of Demand and Supply Functions of Money, journal of Finance,
May 1964, pp 240-283, and Albert E Burger, The Money Supply Process,
Belmont, California, Wadsworth PublishingCompany, 1971.
It is important to point out that the Federal Reserve does not use the
"multiplier-base” approach to controlling money at this time.
2The reserve adjustment accounts for reserve requirement ratio changes
and shifts in deposits between classes and sizes of banks over time
This paper was completed prior to the recent change in the method by
which the reserve adjustment magnitude is computed. See Albert E. Burger
and Robert H Rasche, "Revision of the Monetary Base, Review,
Federal Reserve Bank of St. Louis, July 1977.
"m oney m u ltip lier" (m) is the link con
necting the base to the stock of money.
This study is prim arily concerned with the
predictability of the money m ultiplier. The
assumption of a controllable monetary
base, combined with a predictable money
m ultiplier, suggests that the Federal
Reserve should be able to control the
money stock.
Predicting the Money Multiplier. To help
explain the determ ination of the money
m ultiplier, the D efinitional-Behavioral
technique is em ployed.3 Starting with the
above "m ultiplier-base" identity, the
m ultiplier is defined in terms of ten
component ratios w hich specify the in
fluences of the behavior of the U. S.
Treasury, com m ercial banks, and the
nonbank public on the money stock (see
Appendix). The actual values of these
component ratios can be computed at any
moment in time. However, the essence of
the "m ultiplier-base" fram ework is that the
public, banks, and U. S. Treasury have a
desired value for each ratio under their
control. Each desired value depends on the
values of other econom ic, institutional,
and policy variables. When actual ratio
values d iffer from desired values, the
sectors respond by taking actions to
elim inate the discrepancy, bringing the
ratios back toward their desired levels.
After the money m ultiplier form ulas
3Albert Burger, Lionel Kalish, 111, and Christopher Babb, "Money Stock
Control and Its Implications for Monetary Policy, Reprint No 72 from
the Review, Federal Reserve Bank of St Louis, October 1971, p 8
have been developed (see Appendix), the
D efinitional-Behavioral technique requires
specifying the structural relationship
between each component ratio and its
causal determ inants. Each behavioral
equation is then estimated with regression
analysis using monthly, seasonally
unadjusted data from January 1969 to
Decem ber 1975.4 (This sample period
encompasses most of the period since the
September 1968 Amendment to Regulation
D of the Federal Reserve Act, which in
stituted lagged reserve accounting.) A post
sample "fo re c a st" of values of each
component ratio for the first nine months
of 1976 was constructed using the
estimated reduced form regression
coefficients, the actual post-sample values
of the explanatory variables, and the
predicted values of the lagged ratio.
The final step in the DefinitionalBehavioral method is to substitute the
predicted values for each component ratio
from its estimated reduced form equation
into the money m ultiplier form ulas
(equations (1) and (2) in the Appendix) to
calcu late the predicted values for the
m ultipliers associated with the narrowly
and broadly defined money sto cks.5
Summary results of this final calculation
for the sample and post-sample periods are
presented in Table 1. Comparing predicted
with actual m ultipliers shows that the
model's predictive accu racy in the sample
period is com parable for the narrow and
broad money m ultipliers (m, and m2,
respectively). The in-sample average
monthly prediction error equals 0.37
percent for both m ultipliers, which is
nearly equal to their respective average
quarterly prediction errors. The model
consistently overpredicts each m ultiplier
before mid-1971 and consistently under
estimates them thereafter. This result
implies that monthly misses do not
cum ulate nor do they offset one another.
Still, the annualized prediction error for
any month would be greater than the
4The specification and empirical estimation of the behavioral equation
for each component ratio are not discussed in this summary article A
thorough discussion of this important step in the Definitional-Behavioral
method can be found in Sections II and III of the Working Paper
5The narrow money stock, M ,, equals currency and demand deposits held by
the nonbank public. The broad money stock, M 2. equals M,
plus time and savings deposits other than large negotiable certificates
of deposit (CDs) held by the public
TA BLE 1
SU M M A R Y S T A T IS T IC S F O R T H E
M U L T IP L IE R P R E D IC T IO N E R R O R S 1
Period
(m? - m,)/m?
(mi1- m2)/ m!
(percent)
(percent)
0.37
0.71
0.78
0.37
0.74
0.79
0.38
0.69
0.69
0.37
0.70
0.72
0.58
0.58
0.39
1.69
1.69
0.41
S A M P L E (Monthly)
ME
M AE
R M SE
S A M P L E (Quarterly)
ME
MAE
R M SE
PO ST -S A M P LE (Monthly)
ME
M AE
R M SE
M E = Mean (Average) Error
M AE = Mean (Average) A bso lute Error
R M S E = Root Mean Sq uare Error
1m^ and
denote the actual values of the narrow and broad money
stocks, respectively, divided by the nonborrowed monetary base, m,
and m2 denote the predicted values of the multipliers calculated from
Appendix equations (1) and (2), respectively, using the predicted
values for each component ratio.
annualized error for any q u arter.6
In the post-sample period, the average
monthly prediction errors for the narrow
and broad money m ultipliers are 0.58 and
1.69 percent, respectively (see Table 1). For
the narrow m ultiplier, the error is only
slightly higher than the in-sample
prediction error. However, the broad
m ultiplier estimation error is nearly five
times as great as the com parable in-sample
average error. The model performs much
less satisfacto rily for the broad than the
narrow money m ultiplier in tracking post
sample movements because the broad
m ultiplier is more sensitive to the public's
holdings of time and savings deposits
relative to demand deposits (t1)--a ratio
that was relatively d iffic u lt to predict in
the post-sample period.
The Federal Reserve would be interested
in estimating the money m ultiplier because
it is the connecting link between the
money stock and the presumed con
trollable nonborrowed monetary base. The
6For example, the narrow multiplier s monthly mean absolute error of
0 71 percent equals an annualized error of 8 5 percent while the
quarterly mean absolute error of 0 69 percent equals an annualized
error of only 2 8 percent
'"■
........
"\
F IG U R E 1
A CTU AL AND P R ED IC T ED
NARROW M ONEY STO C K
VALU ES
F IG U R E 2
A C T U A L AND P R E D IC T E D V A L U E S F O R T H E
BR O A D M O N EY S T O C K
FOR T H E
(January 1969-September 1976)
(January 1969-September 1976)
Seas.Adj.
B i 1.$
S'~ 300
— Mi
— M*
- 250
- 200
r
i
1969
i
i
1971
i
1
1973
1
1
1975
—
J
ab ility of the Federal Reserve to control
movements in M, and M 2 is related to the
accu racy of the money m ultiplier
predictions. M ultiplying the predicted
m ultipliers by the actual nonborrowed
monetary base produces predicted values
for the narrow and broad money stocks
(Mi and M 2, respectively). These predicted
values can be compared to the actual
values of each money stock, with the
difference between the two measuring the
dollar prediction error. These results are
graphed in Figures 1 and 2 and sum
marized in Table 2 .7 The predicted values
of the seasonally adjusted narrow and
broad money stocks deviate from their
actual values by $1.1 billion and $2.4
billion, respectively, on both a monthly
and quarterly average basis for the 1969-75
period. In the post-sample period, the
average monthly Mi and M 2 prediction
errors rise to $1.8 billion and $11.7 billion,
resp ectively.8 The big increase in the
average M 2 error reflects the large post
sample (under)prediction error for the
broad money m ultiplier.
7Note that the table and figures compare the actual and predicted
values for the seasonally a dju sted money stocks The predicted
seasonally ad|usted values were computed in the following manner
The predicted seasonally unadiusted money stock (the predicted
seasonally unadjusted multiplier times the actual seasonally
unad|usted nonborrowed monetary base) was multiplied by the
implicit seasonal factor for that month. This seasonal factor was
computed by dividing actual seasonally adjusted money stock by its
actual seasonally unadjusted value.
8The average percentage error between the actual and predicted
money stock is. of course, equal to the average percentage error
between the actual and predicted money multiplier in both periods.
Multiplier Interest Rate Elasticity. The
main issue in this study is the feasib ility of
money stock control by the Federal
Reserve, given its ab ility to determine the
magnitude of the nonborrowed monetary
base through open market operations. In
conducting an open market purchase, the
Federal Reserve induces the com m ercial
banks and the nonbank public to sell U. S.
Governm ent securities in exchange for
reserves or demand deposits, respectively,
by bidding up the price of the securities
(or forcing down the yield). In an open
market sale, the Federal Reserve prompts
just the opposite exchange by forcing
down the price of the securities (or forcing
up the yield).
In this analysis, the m arket yield on
three-month U. S. Treasury bills (TB R ) is
used as a proxy for the many different
yields on government securities of varying
m aturities. Estim ation of the behavioral
equations for the m ultiplier component
ratios revealed that certain ratios were
significantly related to the Treasury bill
rate.9 Thus, open market operations,
undertaken to control the magnitude of
the nonborrowed monetary base, nec
essarily involve changes in the bill rate.
Those changes, in turn, alter the values of
the related ratios and, thus, the values of
the money m ultipliers. Are these interest
S p e c ific a lly, the h, k, t1, t2, e, and b ratios were found to be
significantly related to the three-month Treasury bill rate
TA BLE 3
TA BLE 2
SU M M A R Y S T A T IS T IC S FO R T H E
M O N EY S T O C K P R ED IC T IO N E R R O R S
(billion $)
Period
M, - M,
\
IM PA CT AND LON G-RUN IN T E R E S T R A T E
E L A S T IC IT IE S O F T H E M O N EY M U L T IP L IE R S 1
Period
Im pact*
Long-Run'
0.016
0.005
0.055
-0.018
0.014
0.003
0.034
-0.051
M2-M 2
Jan . 1969- April 1973
S A M P L E (Monthly)
ME
M AE
R M SE
S A M P L E (Quarterly)
ME
M AE
R M SE
P O ST -S A M P LE (Monthly)
ME
M AE
R M SE
1.1
1.8
2.0
2.4
3.9
4.0
1.1
1.8
1.8
2.4
3.7
3.7
1.8
1.8
1.2
11.7
11.7
3.0
M E = Mean (Average) Error
M A E = Mean (Average) A bso lute Error
R M S E = Root Mean Sq uare Error
E(m ,,T B R )
E(m2, TBR)
May 1 973-D ec. 1975
E(m ,, TBR)
E(m2, T B R )
’ The elasticity coefficient of the narrow money multiplier (m,) with
respect to the Treasury Bill Rate (TBR), denoted by E(m,, TBR), is
defined as the p e rc e n t change in m, divided by th e p e rc e n t change
in TB R . The larger the elasticity coefficient the greater the
response of the multiplier to a given change in the bill rate.
* Valued at sample means
TA BLE 4
rate-induced changes in the money
m ultipliers large enough to offset the
effects of Federal Reserve policy on the
monetary aggregates?
To answer this question, the interest rate
e la stic ity 10 of each m ultiplier was ca lcu
lated over the sample period using the
money m ultiplier form ulas and the
behavioral equation specified for each
component ratio. Likew ise, the elasticity of
each money m ultiplier with respect to the
Federal Reserve Discount Rate (D ISC) was
calculated. These results are summarized
in Tables 3 and 4 .11 The impact elasticity
measures the immediate or initial response
of each m ultiplier to a change in the
Treasury bill or discount rate. The long-run
e lasticity measures the fu ll or complete
response of each m ultiplier after all
subsequent adjustm ents have taken place.
The results confirm the hypothesis that the
narrow money m ultiplier is positively
related to the bill rate and inversely
related to the discount rate, although the
m ultiplier's response to movements in
either rate is sm a ll.12 In both the January
' “Elasticity measures the degree to which one variable (multiplier)
responds to a change in another variable (bill rate).
"F o r a detailed description of the calculation of the money
multipliers' interest and discount rate elasticities, see Section V and
Appendix 11 of the Working Paper.
’ zThe low interest and discount rate elasticities for the narrow money multiplier
found in this study are consistent with the results of previous empirical studies of
the money supply process. For a summary of the results of these other studies, see
Table 7 of the Working Paper
IM PA CT AND LON G-RUN D ISC O U N T R A T E
E L A S T IC IT IE S O F T H E M O N EY M U L T IP L IE R S 1
Period
Im pact*
Long-Run'
-0.016
-0.017
-0.059
-0.061
Jan . 1969- Dec. 1975
E(m ,, D ISC)
E(ma, D ISC)
’ The elasticity coefficient of the narrow money multiplier (m,) with
respect to the Federal Reserve Discount Rate (DISC), denoted by
E(m,, DISC), is defined as the p e rc e n t change in m,divided by the
p e rc e n t change in DISC. The larger the elasticity coefficient the
greater the response of the multiplier to a given change in the
discount rate.
'V alued at sample means
1969-April 1973 and M ay 1973-December
1975 subperiods,13 the narrow m ultiplier's
im pact interest e lasticity is very low and
even its long-run response to changes in
the bill rate is very inelastic. Likewise, for
the fu ll sample period, the narrow
m ultiplier's initial and long-run responses
to changes in the discount rate are slight.
In contrast to the narrow m ultiplier, the
broad m ultiplier's long-run interest rate
e lasticity is negative, although also very
sm all. A rise in the bill rate ultim ately
13The May 1973 suspension of the Regulation Q ceiling rate on 90-day, large
negotiable CDs caused a shift in each multiplier's responsiveness to bill rate
changes Therefore, each multiplier's interest rate elasticity was calulated
separately for the subperiod prior to ceiling suspension (January 1969-April 1973)
and the subperiod after the suspension (May 1973-December 1975).
causes a significant reduction in the
public's ratio of time and savings to
demand deposits (t1), which leads to a
sm all decline in the broad money
m ultiplier. This inverse relationship tends
to reinforce the im pact of changes in the
monetary base on M 2. However, the im
pact interest e lasticity of the broad
m ultiplier in both subperiods is slightly
positive. For the total sample period, the
broad m ultiplier's impact and long-run
discount rate elasticities are nearly equal
to the com parable discount rate
elasticities of the narrow m ultiplier. That
r
is, discount rate movements have sim ilar
minor impacts on each m ultiplier.
These results confirm very low interest
and discount rate elasticities for the
money m ultipliers, implying that feedback
effects on m, and m 2 via changes in the
bill rate induced by open market oper
ations w ill be quite sm all. Therefore, the
use of open m arket operations by the
Federal Reserve to determine the magni
tude of the nonborrowed monetary base in
an attem pt to control Mi and M 2 w ill not
induce large offsetting changes in the
money m ultipliers. ■
APPENDIXThe narrow money multiplier (mi) linking the nonborrowed monetary base with the narrow
money stock, Mi (currency and demand deposits held by the nonbank public), is approximated
by the following formula:
1 + k
(1)mi = 7 Z -------- IT----------------------------r
(h + dg)
+
r n (t1 + t2 )
+
(e — b)[h + dg + n (t1 + t2 ) ]
+
ck
where h, n, and g are the fractions of total private demand deposits, time and savings deposits,
and U.S. Government demand deposits, respectively, held in member banks; k, t1, t2, and d are
the ratios of public currency holdings, consumer time and savings deposits, large negotiable
CDs, and U.S. Government demand deposits, respectively, to the demand deposit component
of the money stock; e and b are the ratios of member bank excess reserves and Federal Reserve
Bank borrowings, respectively, to total member bank liabilities subject to reserve re
quirements; and c is the ratio of currency outside member banks to public currency holdings. rd
and r* are the average reserve requirement ratios against demand and time and savings
deposits, respectively. They are held constant at their August 1954 levels, since the reserve ad
justment magnitude included in the nonborrowed base presumably captures changes in
reserve requirement ratios.
The general form of equation (1) is
m t = f (rd, r l, h, n, g, d, k, t1, t2, e, b, c),
where
d ' = component ratios determined by the behavior of the U. S. Treasury,
g.
e
b
component ratios determined by the behavior of commercial banks, and
c _
h'
n
k
component ratios determined by the behavior of the nonbank public.
t1
t2
The broad money multiplier (m 2 ) linking the nonborrowed monetary base with the broad
money stock, M2 (Mi plus time and savings deposits less large negotiable CDs held by the non
bank public), is approximated by the following formula:
1
(2 ) m a =
~7
r d (h + dg)
+
7
+
+
t1
-----------
r ln(t1 + t2 ) + ( e - b ) [h + dg + n (t1 + t2 ) ] + ck
where all component ratios are defined above.
k
@FedFRASER