Full text of Economic Review (Federal Reserve Bank of Cleveland) : December 1965

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D E C E M B E R 1965

THIS

ISSUE

Survey of Changes
in Interest Rates on
Savings and Time
D e p o s it s ..............................3

Sources of Coal Consumed
in O h i o ..............................16

M anagement of Cash Assets
at Fourth District Reserve
City and Country
Member Banks . . .
24

FEDERAL

RESERVE

BANK

CLEVELAND

A dditional copies of the E C O N O M IC

R EV IEW

m ay be obtained from the Research Department,
Federal Reserve Bank of Cleveland, Cleveland,
O h io 4 4 1 0 1 . Permission is granted to reproduce
any material in this publication.

DECEMBER 1965

SURVEY OF CHANGES IN INTEREST
RATES ON SAVINGS AND TIME DEPOSITS
(Fourth District)
The importance of savings and time d e
posits has increased substantially in recent
years. A s a general matter, the growth of
savings and time deposits has accom panied
(and/or been a partial response to) changes
in the environment within which banks oper
ate and has reflected modifications in tradi
tional methods of conducting bank operations.
More specifically, a number of important
developments have influenced the financial
system and banking activity during recent
years: increased sensitivity on the part of the
public to interest rate differentials on similar
types of liquid assets; increased innovating
activity on the part of commercial banks as
reflected by the introduction and growth of
new methods to attract funds; and successive
increases in the maximum rates of interest
that banks are permitted to pay on savings
and time deposits, among others.1 O ne result
1 For a review of recent innovations in methods of at
tracting funds, see "Sources of Commercial Bank Funds:
An Example of Creative Response," E con om ic Review ,
Federal Reserve Bank of Cleveland, Cleveland, Ohio,
November 1965.

of these developments has been increased
em phasis on analysis that seeks to interpret
and evaluate the rapidly shifting financial
environment.2
This article attempts to shed some light on
how a limited group of banks have responded
to some of the developments cited above, by
presenting the results of a recent survey of
interest rates offered by Fourth District mem
ber banks on their savings and time deposits.3
The survey was conducted by the Research
Department of the Federal Reserve Bank of
Cleveland in April-May 1965. Eighty-five
2 An example is a recent study of the role of time de
posits in the financial process: L. E. Gramley and S. B.
Chase, Jr., ''Time Deposits in Monetary Analysis,"
Federal Reserve Bulletin, October 1965, pp. 13801406.
3 The rates offered on savings and time deposits, dis
cussed in this article, are not necessarily equal to the
actual rates paid by reporting banks. The actual rate
paid to a depositor is determined basically by the fre
quency with which interest is compounded and, in the
case of savings deposits, by the willingness of the de
positor to maintain his deposit for the required period
of time.

ECONOMIC REVIEW
TABLE I
M a x im u m Interest Rates Authorized Under
R egulation Q on S a v in g s and Time Deposits
Percent per annum
Type and Maturity of
Deposit

Effective Date
Jan. 1,
1957

Savings Deposits:
1 year or more . . .
Less than 1 year . .
Time Deposits:*
1 year or more . .
6 months to 1 year
90 days to 6 months
Less than 90 days .

.
.
.
.

Jan. 1,
1962

July 17, Nov. 24,
1963
1964

3
3

4
3'/2

4
4

3
3

4
3Vi

4'/2
4/2

2'A

4
4
4
1

AVl

*Rates authorized for foreign-owned time deposits not considered
here.

In this discussion of the survey results, the
timing of chan ges m ade by District banks in
interest rates on both savings and time de
posits and the resulting rate levels are pre
sented first. Then, the influence of bank size
and location upon rate chan ges and levels
are discussed. Tabular summaries of the rates
reported by District banks, against various
background factors, are contained in Tables
II-V. In addition, six m aps are presented in
order to highlight locational patterns of rates
offered by District banks on selected dates, as
well as differences in the responses of banks
on savings as opposed to time deposits.

Note: Changes made in December 1965, increasing the maximum
rates that member banks are permitted to pay on time
deposits, are not included in the table.

THE NATURE OF TIME AND
SAVINGS DEPOSITS

Source: Board of Governors of the Federal Reserve System

Rates on savings and time deposits have
generally risen since 1960. However, there
have been differences in the timing and
amount of change in rates offered on savings
deposits, as com pared with time deposits. In
addition, there is evidence of differing in
fluences of bank size and location on rates
offered on savings and time deposits. Because
of these differences, and because savings and
time deposits are essentially not the same
type of deposits, it might be helpful in inter
preting the results of the survey to first com
ment briefly on the major characteristics of

percent of the member banks in the Fourth
District participated in the survey. The survey
results provide some indication of the re
sponse of banks to recent changes in the
general financial environment and, specific
ally, to chan ges in Regulation Q, under which
maximum perm issible rates on savings and
time deposits are governed by the supervisory
authorities.4 The time period for which the
banks reported levels of rates extended from
December 1960 through the first quarter of
1965. This time span is important because it
includes, as of this writing, all the occasions
when recent changes in Regulation Q becam e
effective. Table I lists these effective dates of
changes in rates permissible on savings and
time deposits.
4 For earlier nationwide survey results of rate changes
by member banks, see Caroline Cagle, "Interest Rates
on Time Deposits, Mid-January 1962," Federal R eserve
Bulletin , February 1962, and "Interest Rates on Time
Deposits, Mid-February 1963,'' Federal Reserve B ul
letin , June 1963.

holders of the two kinds of deposits.
Savings deposits, evidenced by a passbook
or written receipt or agreem ent, are held only
by individuals and nonprofit organizations.
Reasons for holding savings deposits vary
widely am ong individuals, although a number
of motivating forces have been found to be
major influences. These include the accum u
lation of funds for em ergencies or in antici
pation of future expenditures for houses,

DECEMBER 196 5

durable goods, or education, as well as the
attempt to increase the flexibility of expendi
tures beyond the limits imposed by current
incom e.5 An important reason for holding
savings deposits at commercial banks is that
of convenience, that is, "one-stop" banking.
That the .rate of return on savings deposits
may not be a major consideration to ''savers''
is suggested by the existence of the multi
plicity of savings objectives. In addition, the
moderate average size of savings deposits
(estim ates vary b etw een ap p ro x im ate ly
$ l,0 0 0 -$ 2 ,0 0 0 ) tends to limit the number of
saving or investment alternatives available to
holders of such deposits. In the survey cited
in footnote 4, only one out of twelve sam pled
savings-account owners reported the rate
paid on savings accounts influenced their
holdings of such deposits. In households with
annual incomes of $10,000 or more, the
group logically expected to be most sensitive
to yield differentials on similar forms of liquid
assets, only one family in ten said that the
yield on savings deposits would influence the
form of savings they desired.6
In contrast, holders of time deposits, e s
pecially in the form of negotiable certificates
of deposit (CD's), are considered to be in
vestors that are more sensitive to differences
in rates available on competing forms of
liquid assets. (One indication of this sensi5 The results of a comprehensive survey of consumer
attitudes toward savings deposits can be found in E.
Mueller and H. Osborne, "Consumer Time and Savings
Balances: Their Role in Family Liquidity,” Am erican
E con om ic Review , May 1965, pp. 265-275. The survey
w as conducted by the Survey Research Center of the
University of Michigan for the Board of Governors of
the Federal Reserve System.
6 Ibid ., pp. 273-275.

tivity is the relative conformity in movement
of rates on various types of money market
instruments, for exam ple, CD's, short-term
U.S. Treasury securities, and commercial
paper, am ong others.) In order to attract the
funds of such investors, it would seem that
banks have to offer competitive rates of in
terest.
The greater sensitivity of time deposit
holders to yield differentials reflects in part
the identity of these holders, largely business
firm s, state an d lo c a l g o v e rn m en ts, an d
foreign official institutions.7 B ecause time
deposit holdings tend to be relatively large,
the investment alternatives available to hold
ers of time accounts often are greater than
those available to holders of savings accounts.
At the same time, efforts to achieve efficient
cash management, plus the potential earnings
on large dollar amounts invested at slightly
higher rates, encourage the typical time de
posit holder to search out the highest paying
investment outlet.
Thus, in general, differences in the behav
ior of holders of savings as com pared with
time deposits essentially reflect the different
motivations of the two types of depositors, as
well as the alternative outlets available to
each. Considerations other than the rate of
return and the small average size of savings
deposits tend to limit the alternatives available
to holders of such deposits to a smaller group
of liquid assets, for exam ple, savings and
loan shares and U .S. Treasury savings bonds,
7 A portion of time deposits at commercial banks is
accounted for by deposits accumulated for the repay
ment of personal loans, and open-account deposits
which include those made by Christmas and vacation
clubs. Such deposits account for a small share of total
time deposits held by commercial banks.

ECONOMIC REVIEW

among others. Holders of time deposits, on the
other hand, tend to be more interest-rate concious and have a greater number of alter
native outlets in which to invest temporarily
idle funds. Basic differences between the
behavior of the two types of depositors were
reflected in the interest rates offered on sav
ings and time deposits by Fourth District
member banks during 1960-65, particularly
with reference to bank size and location.
This was reported in the recent survey and is
discussed in the following presentation ot the
survey results.

TIMING OF BANK RESPONSE
S a v in g D ep o sits. A noticeable shift to
higher rates on savings deposits by Fourth
District member banks occurred during the
first quarter of 1962, following the January
1962 change in Regulation Q. This marked
the first change in the regulation since 1957.
As the upper portion of Table II shows, 19
percent of the reporting banks moved to rates
of 3}/2 percent or more during the first quarter
of 1962; 13 percent of the banks moved to
the new 4 percent maximum permissible
rate. The majority of banks offering the 4
percent maximum at that time were those
which had been paying 3 percent—the pre
vious maximum.
From the end of the first quarter of 1962
until 1964, few adjustments were m ade in
rates on savings deposits by District banks.
By the fourth quarter of 1964, however, the
proportion of reporting banks offering rates
of 3Y2 percent or more had in creased to 42
percent. At the end of the first quarter of
1965, the latest period covered by the survey,
slightly over one-half of the reporting banks

offered rates on savings deposits of 3 ^ per
cent or more, with 3 8 percent of the reporting
banks at the 4 percent maximum. The pro
portion of banks at the 3 percent maximum in
effect at the end of 1961, however, had been
80 percent. Thus, fewer banks seem to have
taken advantage of the higher maximum per
mitted in 1965 than was the case before the
1962 change in Regulation Q, perhaps b e
cause of the shorter lapse of time since the
latest change in authorized rates. In brief,
major shifts to higher rates on savings d e
posits occurred during the first quarter of
1962, not again until 1964, and then steadily
through the first quarter of 1965.
T im e D e p o sits. In contrast, a larger pro
portion of reporting banks quickly moved to
higher rates on time deposits after the January
1962 change in Regulation Q. Table III shows
that 47 percent of District banks moved to
rates of 3 }/i percent or more on time deposits
during the first quarter of 1962. At that time,
41 percent of the banks reported the 4 per
cent maximum authorized.
A further contrast between bank actions
on time as com pared with savings deposits is
evident in the behavior of banks from the
first quarter of 1962 until 1964. Banks did
not adjust rates on savings deposits to any
great extent during this period, whereas the
proportion of banks that reported higher rates
on time deposits increased at a slow but steady
pace. It is interesting that no m a jo r adjust
ments in rates were reported by Fourth Dis
trict member banks following the July 1963
change in Regulation Q, which applied only
to time deposits having maturities of less than
one year.

TABLE II
M a x im u m Rates Offered on S a v in g s Deposits
Survey of Fourth District Member Banks
Selected Q uarters,0 1 96 0 -6 5
4Q
1960

Size of Bank and
Rate Levels b

4Q
1961

IQ
1962

4Q
1962

3Q
1963

4Q
1963

4Q
1964

IQ
1965

Percentage Distribution of Banksc
All Reporting Banks
(390 banks)
Under 3 percent p.a................
3 p e rc e n t...........................
3'/2 p e r c e n t ........................
4 p e rc e n t...........................

. . . .

19
80

15
66
6
13

15
63
10
14

14
62
9
15

13
62
10
15

11
47
12
30

10
39
13
38

. . . .

100

. . . .

25
75

20
69
5
5

18
66
10
6

17
65
9
8

14
53
11
23

13
45
12
29

. . . .

100

12
59
12
17

12
60
12
16

11
61
12
16

10
46
17
28

Reporting Banks by Size of Total Deposits
Under $10 million
(203 banks)
Under 3 percent p.a................
3'A p e r c e n t ........................

$10-under $25 million
(114 banks)
Under 3 percent p.a.............................
3 p e rc e n t.......................................
3'/2 p e r c e n t ....................................
4 p e rc e n t.......................................
All rates....................................

22
78

100

16
84

12
63
10
15

8
37
16
40

100

6
94

2
64
4
30

2
62
4
32

-0 49
2
49

-0 43
4
53

100

19
81

8
50
8
35

8
8
19
65

8
-0 19
73

100

$25-under $100 million
(47 banks)

$100 million and over
(26 banks)
. . . .
. . . .

19
81

a Included are fourth quarter of each year covered by the survey, quarters in which a change in Regulation Q became effective, and
most recent quarter covered by the survey.
b Rate levels represent maximum rates reported on savings deposits regardless of maturity; banks were grouped according to size of
total deposits outstanding on December 31, 1964. The 3’/2 percent and 4 percent rate classifications apply to the first quarter of 1962
and subsequent periods.
c Components may not add to totals because of rounding.
Source: Federal Reserve Bank of Cleveland

TABLE III
M a x im u m Rates Offered on Time D eposits
Survey of Fourth District Member Banks
Selected Q uarters,0 1 9 60-65
Size of Bank and
Rate Levels b

4Q
1960

4Q
1961

IQ
1962

4Q
1962

3Q
1963

4Q
1963

4Q
1964

IQ
1965

Number and Percentage Distribution of Banksc
All Reporting Banks
Number of B a n k s ..............................

. .

346

345

359

361

359

362

365

366

Under 3 percent p.a....................... . .
3 and under 3’/2 percent d ............ . .
3'A and under 4 p ercen t...............
4 percent and o v e re .....................

15
85

11
89

6
47
6
41

4
43
7
45

4
40
8
48

4
39
8
49

3
18
7
72

3
9
7
81

100

174

182

183

186

17
83

11
89

7
51
5
37

5
46
7
42

5
41
7
47

4
19
7
70

3
12
7
77

100

102

106

107

108

12
88

9
91

6
41
6
48

3
38
7
52

3
36
7
54

2
19
7
71

2
8
6
83

100

. .

Under 3 percent p.a.......................
3 and under 3 Vi p e r c e n t d ............ . .
2Vi and under 4 percent...............
4 percent and o v e re .....................

11
89

7
93

4
46
—0—
50

2
46
-0 52

2
39
2
57

2
17
4
77

2
6
9
83

100

. .

Under 3 percent p.a....................... . .
3 and under 3'/2 percent d ............ . .
3Vi and under 4 p ercen t...............
4 percent and over e .....................

24
76

12
48
20
20

8
48
24
20

-0 40
32
28

-0 12
16
72

-0 —0—
4
96

100

All rates..............................
Reporting Banks by Size of Total Deposits
Under $10 million
Number of B a n k s ..............................
Under 3 percent p.a....................... . .
3 and under 3'/2 percent d ............ . .
3'/i and under 4 percent...............
4 percent and over e .....................

$10-under $25 million
Number of B a n k s ..............................
Under 3 percent p.a......................
3 and under 3 Zi p e r c e n t d ............
3'/i and under 4 percent...............
4 percent and o v e re .....................

. .

All rates..............................
$25-under $100 million
Number of B a n k s ..............................

All rates..............................
$100 million and over
Number of B a n k s ..............................

“ Included are fourth quarter of each year covered by the survey, quarters in which a change in Regulation Q became effective, and
most recent quarter covered by the survey.
b Rate levels represent maximum rates reported on time deposits regardless of maturity; banks were grouped according to size of total
deposits outstanding on December 31, 1964.
'Components may not add to totals because of rounding.
d Only the lower limit (3 percent) is applicable through the end of 1961.
e Only the lower limit (4 percent) is applicable from January 1962 through the third quarter of 1964; the 4 Vi percent ceiling became
effective November 24, 1964.
Source: Federal Reserve Bank of Cleveland

Finally, substantial shifts to higher rates on
time deposits occurred in late 1964 and
through the first quarter of 1965. About
four-fifths of the reporting banks offered 4
percent or more on time deposits at the end
of the first quarter of 1965, as com pared
with 49 percent at the 4 percent maximum
at the end of the fourth quarter of 1963. Thus,
the tim in g of major shifts in rates on time d e
posits coincided with the timing of movements
to higher rates on savings deposits, but a
larger number of banks shifted to higher
time deposit rates.
The distribution of rates paid on savings
and time deposits resulting from the forego
ing changes is illustrated in the table below:
Percentage of Banks
Rate Level
Under 3 percent . .
3 and under 3Yi percent
2 /i and under 4 percent
4 percent and over . . .
All r a t e s ...............

Dec. 1961
Savings Time

March 1965
Savings Time

19
80

11
89

10
39
13
38

3
9
7
81

100

Note: See footnotes. Tables II and III.

Although the proportion of banks offering the
3 percent maximum on the two types of de
posits was similar at the end of 1961, the
structure of rates on time deposits was sub
stantially higher than on savings deposits at
the end of March 1965. In addition, the dis
persion of banks offering less than 4 percent
was much smaller for time deposits.

BANK SIZE
C hanges in rates offered on savings de
posits at District banks over the survey period
were clearly associated with bank size, in

that larger banks adjusted rates upward more
quickly than smaller banks. In addition, larger
banks offered higher and more uniform rates
than smaller banks. In contrast, the relation
between size of bank and chan ges in rates
offered on time deposits was less clear, with
rate changes tending to be less associated
with bank size. In other words, rate increases
on time deposits during the survey period
were dispersed throughout all size groups of
reporting banks. Tables II and III contain re
ported rates on savings and time deposits
classified according to bank size.
S a v in g s D ep o sits. Table II indicates that,
following the lanuary 1962 change in Regu
lation Q, 43 percent of reporting banks with
deposits of $ 100 million or more offered rates
above 3 percent on savings deposits, while
only 10 percent of the banks with deposits of
less than $10 million offered similar rates. In
the two other size groups, the proportion of
banks offering more than 3 percent increased
from one-fourth of the banks with $10-$25
million in deposits to one-third of the $25$100 million banks. In addition, the propor
tion of banks offering the 4 percent maximum
rate increased with bank size, ranging from
5 percent in the smallest size group to 35 per
cent in the largest size group. Thus, not only
was the incidence of upward movements in
rates greater at larger banks, but also the
level of rates offered tended to be both higher
and more uniform at larger banks.
Similar rate patterns prevailed at the end
of the first quarter of 1965. At that time, only
8 percent of the banks with deposits of $100
million or more offered rates of 3 percent or
less, while almost three-fifths of banks with
deposits under $10 million offered rates of
9

ECONOMIC REVIEW

3 percent or lower. Similarly, the proportion
of banks reporting the 4 percent maximum
again varied directly with bank size. To illu
strate, about three-fourths of banks with d e
posits of $ 1 0 0 million or more reported the
maximum rate, while the proportion of banks
in smaller size groups reporting the 4 percent
maximum declined with bank size to 29 per
cent in the under-$ 10-million deposit-size
group.
T im e D e p o sits. In contrast, upward adjust
ments in rates offered on time deposits over
the survey period were more w idespread
throughout all size classes of banks (see Table
III). In addition, rates offered on time de
posits tended to be higher and more uniform
than rates offered on savings deposits within
given size classifications.
At the end of the first quarter of 1962, at
least 40 percent of the banks in each size
group offered rates of 33^ percent or more on
time deposits. The proportion of banks in
each size group that reported 4 percent,
however, varied substantially, ranging from
20 percent of banks with deposits of $100
million and over to one-half of banks with de
posits of $25 to $ 100 million. It is perhaps
somewhat surprising that only 20 percent of
banks with deposits of $100 million or more
reported the 4 percent maximum at the end
of the first quarter of 1962. This was primarily
because banks in central and southwestern
Ohio did not raise rates until mid-1964.
Major shifts to higher rates on time de
posits had occurred at banks in all size groups
by the end of 1964. At that time, 70 percent or
more of the banks in each size group reported
rates of 4 percent or more. The first quarter
of 1965, the latest period covered by the
Digitized forTO
FRASER

survey, found 9 6 percent of the banks with
deposits of $ 100 million or over offering 4 per
cent or more on time deposits, with slightly
over three-fourths of the banks with deposits
under $10 million offering similar rates. In
addition, the smallest size group showed the
greatest increase in the number of banks that
instituted time deposit services during the
survey period. The number of smaller banks
offering time deposits increased from 174 at
the end of 1960 to 186 at the end of the first
quarter of 1965 (see Table III).

LOCATION AND BANK RESPONSE
Rate levels on savings and time deposits
reported by member banks of course were
not uniform throughout the Fourth District.
By the end of the first quarter of 1965, a 4
percent rate on savings deposits was repre
sentative in many of the major metropolitan
areas and surrounding counties. But at the
same time, banks in a number of other Fourth
District counties continued to offer a 3 per
cent rate on savings deposits. In contrast,
increases in rates on time deposits were geo
graphically w idespread throughout the Fourth
District, especially by the end of the first
quarter of 1965.
Levels of rates on savings deposits are illus
trated geographically in Maps 1-3, and rates
on time deposits are illustrated in Maps 4-6.
The m aps show rate patterns as of June 1961,
June 1962, and March 1965, in order to re
flect rates prevailing prior to the January
1962 change in Regulation Q, the adjust
ments in rates m ade at reporting banks by the
end of June 1962 (six months after the 1962
Regulation Q change), and rate levels in
effect in the most recent period for which data

DECEMBER 1965
TABLE IV
Representative Rates on S a v in g s D eposits
Fourth District Cou nty Patterns
Selected Periods, 1961-65

TABLE V
Representative Rates on Time D eposits
Fourth District C ou nty Patterns
Selected Periods, 19 61-65

County Group and
Rate Levels0

June 1961 June 1962 March 1965

Percentage Distribution of Counties b
All Reporting Counties
(127 counties)
Under 3 percent p.a. .
3 percent...............
3'/2 percent............
4 percent...............
All r a t e s ............

All Reporting Counties
Number of counties . . .
23
76

17
61
13
8

11
38
13
39

100

SM SA Counties
(41 counties)
Under 3 percent p.a. .
3 percent...............
3'/2 percent............
4 percent...............
All r a t e s ............

Number and Percentage Distribution
of Counties*3

Under 3 percent p.a. .
3 and under 3'/2 percent
3'A and under 4 percent
4 percent and over . .
All r a t e s ............
SM SA Counties
Number of counties

. .

119

122

7
92

3
48
11
38

- 012
7
81

100

15
85

10
51
20
20

7
24
17
51

Under 3 percent p.a. .
3 and under 3'A percent
3Vi and under 4 percent
4 percent and over . .

8
92

3
44
13
41

-0 8
3
90

100

All r a t e s ............

100

. .

8
92

2
51
10
37

-0 14
8
77

100

Other Counties
(86 counties)

Other Counties
Number of counties

Under 3 percent p.a. .
3 percent...............
3Vi percent............
4 percent...............

28
72

21
66
10
2

12
44
12
33

Under 3 percent p.a.
3 and under 3Vi percent
3 /i and under 4 percent
4 percent and over . .

All r a t e s ............

100

All r a t e s ............

1 See footnote b, Table II.
1 Components may not add to totals because of rounding.
Source: Federal Reserve Bank of Cleveland

° See footnotes d and e, Table III.
k Components may not add to totals because of rounding.
Source: Federal Reserve Bank of Cleveland

are available. The color assign ed to each
county indicates the rate reported by the
majority of responding banks located in the

cussion. (Counties in which there were no
banks reporting in the survey are shown in
white.) Although reported rates did not in-

county.8 The rate reported by the majority
of banks in each county is referred to as the

dicate a high degree of dispersion within
counties, rates were not as uniform as might

"representative" rate in the subsequent dis-

be implied by the single rate assign ed to each
county. Finally, Tables IV and V contain rate

8 In a few cases, an average rate was computed for

counties in which there were the same number of banks
offering different rates.

levels grouped accordin g to counties comprising Standard Metropolitan Statistical A reas
11

ECONOMIC REVIEW

(SMSA's) and all other counties in which

presentative rates on savings deposits, high

banks responded to the survey.9
S a v in g s D ep o sits. M aps 1-3, in showing re-

light the prevalence of the 3 percent maxi
mum reported by banks for the end of June

9 A total of 43 counties are included in the 15 complete
and 4 partial SMSA's located in the Fourth District; 39
of the 43 SMSA counties are included in the discussion
of time deposits, while 41 SMSA counties reported rates
on savings deposits.

1961 (Map 1), a geographical concentration
of counties with representative rates of 4 per
cent at the end of June 1962 (Map 2), and the
spread of higher rates by the end of the first

Digitized12
for FRASER

DECEMBER 1965

quarter of 1965 (Map 3). The proportion of
counties with representative rates of 3 per
cent or more increased from about threefourths at the end of June 1961 to over fourfifths at the end of June 1962, and to 90 per
cent at the end of March 1965 (see Table IV).
As indicated in Map 2, at the end of June
1962 a representative rate of 4 percent (the
legal maximum) was reported in only 10
counties, concentrated in north central Ohio
(Cleveland and surrounding counties), and
in the Lexington, Kentucky area. A somewhat
lower rate of 3 ^ percent was representative
of reporting banks in 16 counties scattered
throughout Ohio and Kentucky, and concen
trated in western Pennsylvania around Pitts
burgh. By the end of the first quarter of 1965,
however, a representative rate of 4 percent
was reported for 39 percent of the Fourth
District counties in which banks responded
to the survey.
Table IV shows that representative rates in
SM SA counties were higher, on the average,
than in other counties. This was true for all
time periods. At the end of March 1965, for
example, a representative rate of 4 percent
was recorded for over one-half of the SM SA
counties, while only one-third of all other
counties in which banks responded to the
survey had similar rates on savings deposits.
Many of these "oth er" counties classified at
4 percent were contiguous to SM SA's. Thus,
representative rates of 4 percent on savings
deposits were characteristic mainly of eco
nomically integrated areas including large
population centers and surrounding counties.
T im e D ep o sits. A gain in contrast to the ex
perience for savings deposits, representative
county rates on time deposits reflected a

greater degree of uniformity throughout the
Fourth District. Only 7 percent of the counties
at the end of June 1961, for example, had
representative time-deposit rates of under 3
percent, as com pared with 23 percent at rates
under 3 percent on savings deposits (com
pare Maps 1 and 4).
By the end of June 1962, six months after
the legal maximum on time deposits with
maturities of one year or more was increased
from 3 percent to 4 percent, representative
rates of 4 percent were reported by banks in
almost two-fifths of all reporting counties.
Map 2 shows the location of such counties;
at that time, rates of 4 percent were predomi
nant in counties in southwestern Pennsyl
vania, in a large number of counties located
in north central and eastern Ohio, in a group
of counties north of Dayton, Ohio, and around
Lexington and Corbin, Kentucky. Banks lo
cated in non-SMSA counties seem ed to have
been as active in raising rates on time d e
posits during the first six months of 1962 as
banks in SM SA 's (see Table V). In central and
southwestern Ohio, banks did not increase
rates on time deposits until mid-1964.
Map 6 illustrates representative county
rates on time deposits as of March 1965.
Slightly over four-fifths of the reporting coun
ties in the Fourth District had representative
rates of 4 percent or more by then, and none
of the counties were reported as having rates
under 3 percent at that time. Furthermore,
in only 4 of 39 reporting counties located in
SM SA 's were representative rates under 3 Yi
percent on time deposits reported for March
1965.
Thus, shifts by reporting banks to higher
rates on time deposits were more widespread,
13

ECONOMIC REVIEW

geographically, than those on savings de
posits. At the end of the first quarter of 1965,
the latest period for which data are available,
banks in almost all areas in the Fourth Dis
trict offered rates of 4 percent or more on
time deposits. The influence of bank location,
although important with respect to the changes
in rates and levels of rates reported by banks

on savings deposits, apparently was minimal
with regard to time deposits.

CONCLUSION
Results of the Fourth District survey provide
evidence on the importance of bank size in
relation to changes in rates on savings and
time deposits, but one must realize that many

J U NE 1961

REPRESENTATIVE RATES on
TIME DEPOSITS
Fourth District C oun tie s

\ rJ—-HTVrfl

tfrVQ.1

[

I Under 3.0%
J 3 . 0 % to 3 .5 %
]

3 . 5 % to 4 . 0 %
4 . 0 % and over

□

S o u r c e of d a t a :

F e d e r a l R e s e r v e B a n k of C l e v e l a n d

Digitized for
14FRASER

N o n re p o rtin g

DECEMBER 1965

elements in turn influence both bank size and
decisions to adjust rates. Such factors include
the general economic environment in which
a bank is located and the policies and objec
tives of bank management. In addition, the
number and importance of competing financial
institutions are likely to have played a major
role in influencing the decision of bankers to
adjust rates offered to depositors. The asso
ciation between bank size and bank perfor
mance, therefore, is by no means a clear-cut
relationship—size is both the cause and effect

of a number of characteristics of individual
banks and banking markets. Similar consid
erations apply to the discussion of bank lo ca
tion. Further statistical analysis of the per
formance of banks as indicated by the results
of the survey, incorporating some of the vari
ables cited above, is currently under way at
the Federal Reserve Bank of Cleveland. It is
hoped that the research in progress will result
in a better understanding of the relationship
between banking structure and bank per
formance.

RECENTLY PUBLISHED
The Board of Governors of the Federal Reserve System has an
nounced a new publication entitled Monetary Theory and P olicy: A
Bibliography, Part 1 : Domestic Aspects. The publication is available
from, the Board’s Division of Administrative Services, Washington,
D .C . 20551, at a price of $1.00.

ECONOMIC REVIEW

SOURCES OF COAL CONSUMED IN OHIO
C oal consumption in Ohio increased from
1958 to 1963 due to larger amounts of coal
required by electric utilities and industrial
users. This increase more than offset an un
changed level of coal consumption by coke
producers and a decline in sales to retail
u sers.1 The near-term outlook appears bright
for total coal consumption in Ohio (barring
technological changes that might result in
the replacem ent of coal as a fuel), although
individual markets are likely to exhibit di
vergent trends as they did from 1958 to 1963.
This article exam ines the sources of coal used
in Ohio and, in that context, is concerned
with coal production in the state.
Ohio ranks as the second largest coal con
sumer in the U.S., accounting for over 10 per
cent of national coal consumption. At the
sam e time, the state is the fifth largest coal
producer, following West Virginia, Kentucky,
Pennsylvania, and Illinois in descending
order. The 37 million tons of coal produced

PART OF THE APPALACHIAN
COAL FIELD
The Ohio coal field is part of the A ppala
chian coal field, lying in the eastern and south
eastern one-third of the state, as shown in
Chart 1. It extends over 25 counties whose
individual coal production ranged in 1963
from less than 100,000 tons to over eight mil
lion tons. Most of the coal in Ohio is mined in
l.

OHIO COAL FIELD

in Ohio during 1963 represented 8 percent
of all coal mined in the nation, a proportion
that has changed little in recent years. In
terms of at-mine value, coal production in
Ohio totaled $ 1 3 6 million in 1963, one-third
of the value of the state's total mineral pro
duction.
N ot e: C o u n t i e s t h a t p r o d u c e d more t h a n 2 mil li on ton s

1 See "Consumption of Coal in Ohio," E con om ic
R eview , Federal Reserve Bank of Cleveland, Cleveland,
Ohio, October 1965.
Digitized for16
FRASER

of c o a l in 1 9 6 3 o u t li n e d b y h e a v i e r b o r d e r

S o u r c e of d a t a : U.S. D e p a r t m e n t of the I nt er io r

DECEMBER 1965

only five counties, which are located near the
central portion of the coal field (heavily out
lined in the chart), and whose production in
each case exceeded two million tons in 1963.
Like the A ppalachian coal field as a whole,
the areas in Ohio have large coal reserves.
Although approxim ately four billion tons of
coal had been either mined or lost in mining
by the end of 1963, an estimated 42 billion
tons rem ained in the state's coal field, which
is enough to last 600 years based on present
levels of coal production and current tech
nology.
The Ohio coal field differs in several im
portant aspects from most other areas of the
A ppalachian coal field. First, coal found in
Ohio is of relatively low quality, containing
too much sulfur and ash to be suitable for coke
production or other special applications re
quiring high-quality coal. However, in cases
where coal of widely varying quality can be
used, such as for electric power production
or general industrial use, Ohio coal is satis
factory.
Locational and geological factors that tend
to influence the cost of mining and transport
ing coal provide a further distinction between
Ohio and other portions of the A ppalachian
coal field. With reference to location, major
coal-producing areas in Ohio are nearer the
industrial centers and the large electric util
ities in the state than are those of Pennsylvania,
Kentucky, or West Virginia, thereby giving
Ohio coal an advantage in lower transporta
tion costs to such users. In addition, the pres
ence of navigable water on both the north and
south sides of the state provides low-cost,
easily accessible routes for shipment of Ohio
coal to other states.

With reference to geological factors, the
Ohio coal field has the further advantage of
lying in an unglaciated area, where the land
is gently rolling or hilly, making coal less
difficult to mine than in the mountainous
sections of Pennsylvania, Kentucky, and West
Virginia. Partly due to the absen ce of glacial
deposits, virtually all coal reserves in Ohio
are found within strip mining depth where
coal can be mined more productively than
by underground methods.

INTERSTATE TRADE PATTERNS
C oal flows within and in and out of Ohio in
a complex pattern. Despite extensive coal d e
posits and a substantial volume of coal pro
duction, Ohio is a net importer of coal. This
is largely b ecause Ohio coal is unsuitable for
coke production and some other industrial
uses. On the other hand, the central location
of Ohio coal on the western edge of the A ppa
lachian coal field facilitates exportation of
Ohio coal to markets in states mainly north
west of Ohio.
Although total consumption of coal in Ohio
during 1963 (49.2 million tons) exceeded
total production (36.7 million tons) by only
12.5 million tons, slightly more than one-half
of total consumption (25.7 million tons) rep
resented coal that was imported into the state.
To complete the picture, it should be noted
that 13.2 million tons of Ohio-produced coal
were exported to other states.
Coal
production
in Ohio

Coal
im ports

Coal
consum ption +
in Ohio

36.7

25.7

49.2

m illion tons

Coal
exports

13.2
m illion tons

ECONOMIC REVIEW
TABLE I

Coal Consumption in Ohio by Source and Use, 19518-63
(thousands of tons)
Change
1958-63

1958

1959

I9 6 0

1961

1962

1963

T o ta l.................................................
Im ports..............................................

44,390
24,735

50,069
28,278

49,624
27,865

44,998
24,893

48,324
25,894

49,157
25,718

+ 10.7%
+ 4.0%

O h io P r o d u c e d ....................................

1 9 ,6 5 5

2 1 ,7 9 1

2 1 ,7 5 9

2 0 ,1 0 5

2 2 ,4 3 0

2 3 ,4 3 9

+ 1 9 .3 %

44%

44%,

45%

46%

48%

18,306
6,370

20,599
6,923

21,375
7,631

20,243
7,312

21,918
7,736

22,991
8,163

+2 5.6%
+2 8.1%

1 1 ,9 3 6

1 3 ,6 7 6

1 3 ,7 4 4

12,9 31

1 4 ,1 8 2

1 4 ,8 2 8

+ 2 4 .2 %

66%

64%

65%

64%

12,475
12,475

11,880
11,880

9.129
9.129

9.482
9.482

9.061
9.061

All Markets

A s % o f t o t a l ..............................

Electric Utilities
T o ta l.................................................
Im ports..............................................
O h io Prod u ce d

.................................

As % of t o t a l ..............................

65%

Coke Producers
T o ta l......................................................8,886
Im ports............................................. .....8,841
O h io Prod u ce d

.................................

+
+

2.0%
2 .5 %

—

0 .5 %

—

T o ta l.................................................
Im ports..............................................

12,093
5,489

13,043
6,023

12,898
5,908

12,713
6,425

13,822
6,675

14,482
6,958

O h io Prod u ced

.................................

6 ,6 0 4

7 ,0 2 0

6 ,9 9 0

6 ,2 8 8

7 ,1 4 7

7 ,5 2 4

As % of t o t a l ..............................

55%

54%

49%

32%

5,105
4,035

3,952
2,857

3,471
2,446

2,913
2,027

3,102
2,001

2,623
1,536

— 4 8 .6 %
-6 1 .9 %

1 ,0 7 0

1 ,09 5

1 ,0 2 5

886

1,101

1 ,0 8 7

+ 1-6%

21%

28%

30%

35%

41%

A s % of t o t a l ..............................

Other Industries
+ 19 .8 %
+ 2 6 .8 %
+ 1 3 .9 %

Retail Sales
T o ta l............... .................................
Im ports..............................................
O h io Prod u ced

.................................

As % of t o t a l ..............................

Source: U.S. Department of the Interior

Table I shows that the volume of Ohiomined coal consumed in Ohio rose by almost
20 percent from 1958 to 1963 (19.7 to 23 .4
million tons). That gain was due primarily to
increased use of Ohio-produced coal by electrie utilities (plus 2.9 million tons) and, to a
lesser extent, by general industrial consumers
(plus 0.9 million tons). As shown in the table,
during the same five-year period total coal
imports increased by only 4 percent, with reductions actually sustained in the retail mar
18

ket. As a result, the proportion of all coal consumed in Ohio that was mined in the state,
increased from 44 percent to 48 percent. At
the same time, the volume of exports of Ohiomined coal rose 28 percent,
Over 90 percent of the coal imported into
Ohio originates in the A ppalachian coal field,
with the remainder coming from western Kentucky, as shown in Chart 2. By far the largest
source within the A ppalachian coal field,
supplying nearly one-half of the total tonnage

DECEMBER 1965
2.

SOURCES of COAL IMPORTED into OHIO
By Producing District a nd by M a jo r Industry

M illio n s of tons
x

District
1

Of the 23.0 million tons of coal consum ed
during 1963 by electric utilities in Ohio as a
group, 14.8 million tons (64 percent) cam e
from Ohio mines (see Table I). Most of the
rem ainder was imported from Kentucky and
West Virginia (see Chart 2). The sources of
coal used by individual electric utility com
panies in Ohio are depicted in Chart 3. While
there is no clear pattern as to sources of sup
ply, a few general observations can be made.
Utilities located in or near the Ohio coal field,
as might be expected, use Ohio coal exclusively
except for imports from West Virginia and
Pennsylvania by some power com panies lo
cated along the Ohio River. As for other parts
of the state, coal from Kentucky and West
Virginia is also used by electric utilities in
southwestern Ohio, while the power com
panies located along Lake Erie import some

E L E CT RI C U T I L I T I E S
OTHER INDUSTRIES

District

EL E CT RI C U T I L I T I E S
COKE a n d GAS P L A N T S
OTHER I NDUSTRI ES
R E T A I L SAL ES
ELECTRI C UTI L I T I E S

D istricts
3

OTHER I NDUSTRI ES

R E T A I L SAL ES

District
7

District

SOURCES OF COAL FOR
ELECTRIC UTILITIES

C OK E a n d G A S P L A N T S
OTHER I NDUSTRI ES
R ETAI L SALES

S OURCES of COAL CON S U MED
by ELECTRIC UTILITIES in OHIO

F 1

E L E CT RI C U T I L I T I E S
CO K E a n d G A S P L A N T S
OTHER I NDUSTRI ES
R E T A I L SAL ES

District
9

ELECTRI C UT I L I T I E S

M illio n s of tons 0
S o u r c e of d a t a :

1 2

U.S. D e p a r t m e n t of the I nt er io r

shipped into Ohio, is District 8, which in
cludes parts of West Virginia, Kentucky, Vir
ginia, and Tennessee. Western Pennsylvania
(District 2), which accounted for one-fourth
of the total tonnage imported in 1963, is also
a major supplier, particularly of coking coal.

H N ot a va ila b le
No te:

D iv i s i o n of b l o c k s not in t e n d e d to d e n o t e p r o p o r t io n
of c o a l from a n y st at e; t h e y a r e u s e d o n l y to s ho w
so u rc e of c o a l

S o u r c e of d a t a : F e d e r a l P o w e r C o m m is s i o n

ECONOMIC REVIEW

coal from those two states as well as from
Pennsylvania.
On the surface it may seem incongruous
for electric utilities in Ohio to import coal
from other states, considering that coal mined
in Ohio is plentiful, of suitable quality and, in
many cases, located closer to the importing
utilities. However, electric utilities, more than
most other industrial users, are tied to the
lowest cost fuel in an area—which in the case of
Ohio is coal—becau se fuel expenditures con
stitute 50 percent of total production expenses.
A power company, therefore, is importantly
concerned with the delivered price of coal,
and not with the place of mining. Out-of-state
coal fields are apparently able to offset pre
sumed advantages of the Ohio coal field in
some cases either by lower mining costs, by
more favorable transportation rates, or by a
combination of the two.
Although mining costs are not the only de
terminants of selling prices of coal, and al
though data on the cost of coal mined are not
available by state, some indication of differ
entials in cost of mining coal can be derived
from information on mine size and w age scales.
L arge mines, for exam ple, are generally able
to produce coal at a lower cost becau se of
better utilization of manpower and capital re
sources and greater operating efficiencies
resulting from economies of scale that do not
exist in a small mine. Hence, since there are
a greater number of large mines in West Vir
ginia, Kentucky, and Pennsylvania than in
Ohio, it is conceivable that a larger volume
of coal is being mined at lower average costs
in the states other than Ohio. In 1963, there
were 2 2 7 large m ines2 in West Virginia, pro
2 Mines that produce more than 100,000 tons of coal
annually.
Digitized for 2
FRASER
0

ducing 110 million tons of coal; Pennsylvania
had 113 com parable mines producing 54
million tons; and Kentucky had 98, with an
output of 53 million tons. In Ohio, by contrast,
there were only 68 large mines, whose 1963
production was 28 million tons.
Mining costs may also differ becau se of
differences in w age rates and productivity.
In 1963, output per man-day in Kentucky
strip mines averaged 47 tons, or nearly double
that of all Ohio strip mines.
Transportation costs are a large part of the
delivered price of coal becau se the mineral is
heavy and bulky. Consequently, freight costs
are an important determinant of the place
where an electric utility purchases coal. Some
of the electric utilities in northeastern Ohio,
for instance, may turn to Pennsylvania coal
b ecause of the proximity of the Pennsylvania
coal field rather than to the major producing
areas of Ohio. Those utilities located along
the Ohio River, on the other hand, can utilize
low-cost river rates in transporting coal and
are able to ship coal farther by barge than by
rail at com parable costs.
The bargaining position of an electric utility
is also a factor in determining its source of
coal b ecause it can affect both the at-mine
price and transportation costs. An electric
utility using large amounts of coal is generally
able to negotiate a lower price per ton than a
small electric utility and will purchase coal
wherever the most favorable price can be ob
tained without regard to state origin. Since
there is a greater number of large mines in
West Virginia, Kentucky, and Pennsylvania
that can supply the needed volume of coal, it
is likely that a lower price could be negotiated
at more mines in those states than in Ohio.

DECEMBER 196 5

Moreover, large electric utilities have been
able to negotiate lower freight rates on volume
shipments of coal as railroads have turned to
the use of unit trains.

1963 as in 1958, there was a significant shift
in sources, as the amount of coking coal ship
ped from western Pennsylvania in creased and
that from Kentucky and West Virginia declined.

SOURCES OF COKE AND
COKING COAL

COAL SUPPLIED TO
INDUSTRIAL CONSUMERS

Ohio is the second largest consumer of coke
in the nation, which reflects O hio's position
as a leading iron and steel producer. How
ever, since Ohio coal contains too much sul
fur and ash to be suitable for coking purposes,
all coal consumed in this market must be im
ported or the coke itself must be shipped to
Ohio from outside the state. In recent years,
steel producers have tended to bring more
coke than coking coal to Ohio so that, although
coke consumption in Ohio increased 8 percent
from 1958 to 1963, coke production in the
state declined 3 percent. The volume of coal
consumed by Ohio coke producers, however,
was nearly the sam e in 1963 as in 1958, as

The amount of coal used by industrial con
sumers in Ohio (other than electric utilities
and coke plants) in creased significantly b e
tween 1958 and 1963, as shown in Table I.
However, the rise of almost 20 percent in total
industrial consumption was accom panied by
only a 14-percent gain in the Ohio-produced
portion, while the tonnage of coal shipped
from out-of-state sources rose by 27 percent.
Reasons for the failure of Ohio-mined coal
to maintain its share of the industrial coal
market in Ohio cannot be determined from
available data. However, the fact that the
chem icals and allied products and stone, clay,
and glass products industries accounted for
one-half of the entire gain in industrial coal
consumption from 1958 to 1963 points to
quality requirements and transportation costs
as possible reasons for the relative loss.4 The
stone, clay, and glass industry requires a
higher quality coal than is produced in Ohio
for many of its industrial processes. The chem
ical industry, on the other hand, has been ex
panding at locations along the Ohio River,
particularly in the Cincinnati area, and may
find it more econom ical to purchase coal in
an adjoining state.

shown in Table I.3
While the total volume of coking coal im
ported into Ohio was virtually the same in
3 The increased volume of coke shipments into Ohio
has resulted in part from more favorable freight rates
for coke than for coal. The process of coking coal re
duces the weight of coal about 30 percent, and coal
freight rates would have to be 30 percent below those of
coke to be competitive. Since a 30-percent rate differ
ential has not existed in recent years, shipment of coke
instead of coal has been more economical. The shipment
of coke has been further encouraged by better methods
of loading and handling coke so as to prevent damage in
transit. Spokesmen for some steel companies also cite
additional reasons for shipping coke from Pennsylvania
coke ovens to Ohio blast furnaces: the reduction of perunit coke requirements through greater blast furnace
efficiency, closer proximity of the Pennsylvania coke
ovens to the coking coal mines, consolidation of by
product operations, and more efficient operation of coke
plants in face of changing steel mill production.

By far, most out-of-state coal for industrial
consumption in Ohio originates in Kentucky
and West Virginia, as shown in Chart 2. From
4 See Table II on page 17 of the October 1965 issue of
the E con om ic R eview , Federal Reserve Bank of Cleve
land, Cleveland, Ohio.

ECONOMIC REVIEW

1958 to 1963, most supplying areas increased
shipments about in proportion to their earlier
share of the market. There was some shift
am ong West Virginia suppliers, however,
with shipments from the southern part of the
state sharply increasing, while those from the
northern section declined slightly.

THE RETAIL MARKET
The retail market is the smallest of the four
coal markets in Ohio. It is also a net importer,
having, in fact, the largest margin of imports
am ong the four markets, even though that
m argin declined sharply from 1958 to 1963
(see Table I). With total retail sales dropping
significantly, the Ohio-produced portion of
the market held its own in absolute tonnage
and gained as a percent of total sales.
West Virginia and Kentucky, which are the
major out-of-state suppliers of coal for the
Ohio retail market (see Chart 2), suffered the
largest declines in sales to Ohio retail con
sum ers from 1958 to 1963, although the vol
ume of coal shipped from all out-of-state
sources declined during that period.

THE EXPORT MARKET
Slightly more than one-third of the coal pro
duced in Ohio in 1963 (13.2 million tons) was
shipped to other states. Such exports increased
28 percent between 1958 and 1963 and main
tained about the sam e proportion of total pro
duction in Ohio. As Table II indicates, states
which either adjoin Ohio or are accessible by
G reat Lakes shipping are among the major
consumers of Ohio coal.
Most coal exported from Ohio is destined
for the electric utility market, as would be ex
pected in view of the suitability of Ohio coal
2
Digitized for 2
FRASER

TABLE II
Destination of C oal Exports from O hio , 1963
(thousands of tons)
Electric
Other
Retail
Utilities Industries0 Sales
M ic h ig a n ...............
West Virginia . . . .
W isconsin...............
Minnesota...............
New Y o r k ...............
Pennsylvania . . . .
Other.....................
T otal...............

5,994
927
336
351
215
41
228
8,092

2,167
408
403
248
212
132
508
4,078

136
4
467
154
4
11
300
1,076

Total
8,297
1,339
1,206
753
431
184
1,036
13,246

° Except electric utilities and coke plants.
Source: U.S. Department of the Interior

for producing electric power. Electric utilities
in M ichigan are by far the largest out-of-state
market for Ohio c o al—consuming 6.0 million
tons in 1 9 6 3 —and were responsible for a
large part of the 35-percent gain in shipments
to electric power producers outside Ohio
from 1958 to 1963.
M ichigan also is the largest buyer of Ohio
coal for general industrial use, with imports
from Ohio totaling 2.2 million tons in 1963, or
16 percent more than in 1958. Retail ship
ments of coal from Ohio, although very small
in volume, were more than four times as large
in 1963 as in 1958.

CONCLUDING COMMENTS
Ohio coal producers' growing share of the
state's coal market from 1958 to 1963 reflects
divergent developments in the three major
markets for which Ohio-mined coal is used.
Consumption of Ohio-produced coal by elec
tric utilities in the state in creased at about the
sam e rate as consumption of coal from all
sources. Due to the large amount of Ohiomined coal used, the increase in total coal
consumption by power com panies in Ohio

DECEMBER 1965

resulted in a rising percentage of Ohio coal
in the state's total consumption. The increase
in consumption by general industrial users
tended to have the sam e effect upon total con
sumption of Ohio-produced coal, albeit to a
lesser extent, because consumption of Ohio
coal increased at a slower pace than total con
sumption. Retail sales indirectly contributed
to the rise in the proportion of Ohio-produced
coal used in the state, by maintaining steady
tonnage from Ohio mines despite a sharp de
cline in total consumption by retail consumers.
It does not appear likely that Ohio-mined
coal will continue to gain as rapidly in pro
portion to the state's total coal consumption
in the near-term as was the case from 1958 to
1963. Although Ohio coal production will
probably continue to grow in absolute terms
as total coal consumption moves up, growth
may be tempered somewhat by increasing
em phasis placed on abating the air pollution
problem. Burning coal, or any other fossil
fuel, with a high sulfur content such as that

mined in Ohio, has been identified as a prime
contributor to air pollution through the release
of sulfur dioxide into the air. Although methods
are being studied to reduce the sulfur content
of coal before burning and to remove flue
gases after burning, the most immediate and
seemingly economical m eans of reducing such
pollution may be to use coal with a lower sul
fur content. In the short run, electric utilities
may attempt to avoid the expense of sulfur re
moval facilities by purchasing higher cost
coal from out-of-state coal fields.
Ohio coal producers will probably continue
to ship more coal to general industrial users
as they did from 1958 to 1963, but it is likely
that consumption of imported coal will rise
even faster. In that case, Ohio-mined coal
would continue to ed ge down as a percent of
total coal consumption in the industrial m ar
ket. The outlook for shipments of Ohio-mined
coal to retail consumers depends on how far
this market declines before the dem and for
Ohio-produced coal is also reduced.

ECONOMIC REVIEW

MANAGEMENT OF CASH ASSETS
AT FOURTH DISTRICT RESERVE CITY
AND COUNTRY MEMBER BANKS

This article concludes a series of articles on
bank managem ent of cash assets appearing in
the R eview .1 The first article considered the
managem ent of cash assets by all member
banks of the Federal Reserve System for the
period 1954 through the middle of 1963. The
second contrasted cash management of all
Reserve City member banks to that of Coun
try banks. This final article com pares cash
m anagem ent at Fourth District Reserve City
and Country member banks with that of simi
larly classed member banks throughout the
nation.2 The first section briefly reviews the
major findings of the more recent of the two
preceding articles.3
1 See "Bank Management of Cash A ssets" and ''Man
agement of Cash Assets at Reserve City and Country
Member Banks," E con om ic Review , Federal Reserve
Bank of Cleveland, Cleveland, Ohio, April 1965 and
July 1965, respectively.
2 For reasons mentioned in the July article, Reserve City
banks in New York City and Chicago are excluded from
consideration.
3 The first study is summarized in "Management of Cash
Assets at Reserve City and Country Member Banks,"
op. cit., pp. 3-4.
Digitized for24
FRASER

RESTATEMENT OF
EARLIER CONCLUSIONS
For the long-term period 1954 through mid1963, Reserve City and Country member
banks succeeded in reducing the proportion
of cash assets4 to total assets. Such su ccess as
was achieved resulted almost entirely from
reductions in the m an aged,5 or discretionary,
component of cash assets. Though m anaged
4 Similar to the earlier articles, "cash assets" are defined
as the sum of vault cash (sometimes referred to as cur
rency and coin), reserves maintained with regional
Federal Reserve banks, balances with other commercial
banks in the U.S., and cash items in process of collection.
5 For reasons discussed in the April article, the defi
nition of "m anaged cash assets" for the subperiod 1954
through mid-1960 differs from that for the subperiod
from mid-1960 through mid-1963. For the first subperiod,
managed cash assets are defined as vault cash plus cor
respondent balances with commercial banks in the U.S.
plus the difference between balances maintained at the
regional Federal Reserve banks and the volume of re
quired reserves (that is, excess reserves). For the second
subperiod, managed cash assets include correspondent
balances plus excess reserves, which are redefined as
the difference between the total of balances maintained
at Reserve banks plus vault cash and the volume of re
quired reserves.

DECEMBER 196 5

cash declined as a proportion of total assets
throughout the long-term period 1954 through
mid-1963, rates of decline were more pro
nounced in the period after mid-1960 (the
end of 1960 in the case of Country banks).
The more pronounced declines in the latter
period followed largely from changes in the
regulation affecting reserve requirements
that took effect between December 1959 and
November 1960. The change permitted mem
ber banks to count vault cash as part of legally
required reserves, and, as explained in the
first article, enabled substantial additional
reductions in m anaged cash to be effected.
The data revealed that throughout the long
term period Reserve City banks held propor
tionately more cash assets than Country banks.
That situation, however, was the result (direct
and indirect) of factors beyond m anagerial
control: larger required reserve ratios on de
mand deposits, greater proportions of demand
deposits, and more active turnover (velocity)
of dem and deposits at Reserve City banks.
(The latter two cause a relatively large share
of assets being allocated to cash items in the
process of collection.) With respect to the
m anaged cash ratio, which is perhaps a truer
m easure of m anagem ent's efficiency, Reserve
City banks fared much better, allocating con
siderably sm aller proportions of assets to non
earning discretionary cash balances.
Several factors, which are discussed in some
detail in the previous article and are only enu
merated here, account for the cash m anage
ment efficiencies realized by Reserve City
banks. First, deposit instability is greatest at
small banks—typically Country banks. To cope
with this instability, Country banks are usually
willing to hold relatively large cash balan ces

—in the vault, at the regional Federal Reserve
bank, or at city correspondents. Second, for
various reasons, Country banks make con
siderable use of Reserve City correspondents,
and as compensation for services received,
Country banks keep large deposits with such
correspondents. A final factor considered was
the possibility that Country bankers place less
em phasis on efficient cash m anagement than
do their Reserve City counterparts. A rather
extended argument was m ade in support of
this contention. It was su ggested that limited
m anagerial resources together with the rela
tively high opportunity cost of m anaging cash
cau ses Country bankers to concentrate their
efforts in other directions. Put otherwise, the
lower m anaged cash ratio experienced by
Reserve City banks does not necessarily re
flect "better” management but, instead, a
different optimum asset mix.

CASH MANAGEMENT AT RESERVE
CITY AND COUNTRY MEMBER
BANKS IN THE FOURTH DISTRICT
The present analysis begins with a consid
eration of the data plotted in Chart 1, which
shows the relationship between cash and
total assets for Reserve City and Country
member banks in both the U.S. and the Fourth
District. Similar to national patterns, the data
reveal that Reserve City banks in the Fourth
District held larger proportions of cash to
total assets than did Country banks in the
District. A gain similar to national patterns,
Fourth District member banks (both Reserve
City and Country banks) experienced declin
ing cash to total asset ratios over the long-term
period 1954 through mid-1963. Finally, again
paralleling national experience, these declines
25

ECONOMIC REVIEW

l.
RATIO of CASH AS S ETS to TOTAL ASSETS
R e serve City a n d C o u n try M e m b e r B a n k s -U n it e d States a n d Fourth District
Percent
35

E S E R V E C ITY

RE SERVE CIT Y

25
-

U.S.(,>

1 i

-----

►________
l \ . -

-*'

COUNTR Y

1 1 1

R A T I O SC iLE

1.. 1 1
1954

1 1 1

1 1 I
1956

1 1 1

—, / i

►

U.S.
COUNT RY - 4 D
11 1
.. I I .1

1958

19 6 0

3 uarterly

1 1 1 _1_L..i

19 62

A V E R A G E A N N U A L R ATE of D E C L I N E
RESERV E CITY B A N K S - U.S.<2>
RESERV E CITY B A N K S - 4 D (2)
C O U N T R Y B A N K S - U.S.(3)
C O U N T R Y B A N K S - 4DU)

1 9 5 4 -1 9 6 3
2.0 0 0 %
2 .8 9 1 %
3 .2 7 8 %
2.9 5 0 %

1 9 5 4 -1 9 6 0
1 .0 2 8 %
1 .2 2 4 %
2 .4 7 5 %
2 .6 3 9 %

1 9 6 0 -1 9 6 3
4.2 0 3 %
6 .7 1 9 %
6 .3 9 2 %
4 .5 3 5 %

(1) E x c l u d i n g R e s e r v e Ci ty B a n k s in N e w Y o r k Cit y a n d C h i c a g o
(2) 1 9 5 4 , first h a l f ; 1 9 6 0 , first h a lf ; 1 9 6 3 , first h a lf
(3) 1 9 5 4 , first h a l f ; 1 9 6 0 , s e c o n d h a lf ; 1 9 6 3 , first h a lf
S o u r c e of d a t a : B o a r d of G o v e r n o r s of th e F e d e r a l R e s e r v e Sy st em

becam e more pronounced beginning in mid1960 (the end of 1960 in the case of Country
banks), reflecting in large part regulatory
changes that enabled member banks to count
vault cash as part of legal reserve require
ments. It should be noted that Fourth District
Reserve City banks succeeded in reducing the
cash ratio faster (both over the long-term per
iod and in each of the sub-periods) than did
Reserve City banks in the U.S. as a whole. On
the other hand, Fourth District Country banks
showed smaller rates of decline in the cash
ratio in the long-term period and in the 19601963 subperiod.
As shown in Chart 1, Fourth District mem
ber banks (both Reserve City and Country
banks) consistently allocated smaller portions
of total assets to cash categories than did sim
ilarly classed member banks throughout the
Digitized for26
FRASER

nation. This situation, in itself, is not n eces
sarily indicative of any differences in m ana
gerial quality between Reserve City and
Country banks located in the Fourth District
and in the nation. For example, part of the
observed differences in the magnitude of the
cash ratio may reflect factors over which
management exerts little or no control. Such,
in fact, is suggested from data plotted in Chart
2, which shows for the various categories the
relationship of nonm anaged (nondiscretionary) cash holdings—cash items in process of
collection and required reserv es—to total
assets. It is evident from the chart that operat
ing circum stances permit Fourth District mem
ber banks to commit relatively less cash to
nondiscretionary uses. This was the case over
the long term for Fourth District Country
banks and from about 1958 on for District

DECEMBER 1 9 6 5
TABLE I
Time Deposits as a Percent of Total Deposits
(Subject to Reserve Requirements)
Based on December Figures
Reserve City Banks
Fourth
District

U.S.*
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964

28 .4 %
29.4
29.9
32.3
33.9
34.4
35.5
38.3
42.4
45.9
47.7

2 7 .9 %
28.2
28.7
29.8
31.0
34.1
35.9
38.8
43.1
48.3
51.0

Country Banks

U.S.

Fourth
District

3 5 .3 %
35.2
35.6
38.0
39.7
40.3
42.8
43.9
46.4
48.2
49.3

4 2 .6 %
42.1
42.1
43.6
45.1
46.1
48.7
49.4
50.8
52.2
53.8

* Excluding Reserve City banks, New York City, and Chicago.
Source: Board of Governors of the Federal Reserve System

Reserve City banks.
Why this is so is not altogether clear at this
time, and is currently under further investi
gation. O ne tentative explanation reflects the
differences in deposit composition between
Fourth District banks (Reserve City and Coun
try) and banks in the nation (in each reserve

class). From Table I, it can be noted that
Country banks in the District have derived a
larger portion of their deposit liabilities from
time and savings deposits than have Country
banks in the U.S. However, while time and
savings deposits are generally growing faster
than total deposit liabilities (demand plus time
and savings deposits), growth is more pro
nounced for Country banks in the U.S. as a
whole than for those in the Fourth District
(note the narrowing of the gap in Table I).
Until 1959, time and savings deposits at
Fourth District Reserve City banks accounted
for slightly smaller proportions of total de
posits than was the case at Reserve City banks
in the nation. Beginning in 1960, however,
the situation was reversed, with Reserve City
banks in the Fourth District holding propor
tionately more time and savings deposits than
their counterparts in the nation.
This turn of the data helps explain the be
havior of the nonmanaged cash ratio shown
in Chart 2. Legal reserve requirements are
substantially lower on time and savings de-

2.
RATIO of N O N M A N A G E D CASH AS S ET S to TOTAL AS S ET S
R e se rve City a n d C oun try M e m b e r B a n k s - U nited States a n d Fourth District

1 9 54

1 9 56

19 58

1960

1962

* E x c l u d i n g R e s e r v e Cit y B a n k s in N e w Y o r k Cit y a n d C h i c a g o
S o u r c e of d a t a :

B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y st em

ECONOMIC REVIEW
TABLE II
C ash Items in Process of Collection as
a Percent of Total A s s e t s 1
Reserve City Banks

1954
1955
1956
1957
1958
1959
1960
1961
1962
1963

Country Banks

U.S.2

Fourth
District

U.S.

Fourth
District

6 .5 1 %
6.34
6.58
7.12
6.79
7.15
8.61
8.18
6.92
7.98

5 .8 1 %
5.55
5.19
6.69
5.85
6.04
7.10
6.15
5.37
6.26

2 .3 4 %
2.25
2.08
2.19
2.22
2.05
2.49
2.31
2.29
2.57

1.31 %
1.51
1.18
1.52
1.32
1.44
1.75
1.47
1.59
1.81

1 First call date in each year.
2 Excluding Reserve City banks in New York City and Chicago.
Source: Board of Governors of the Federal Reserve System

posits than on demand deposits. Since the
former have accounted for a larger share of
deposit liabilities of Fourth District Reserve
City banks (since 1959) as well as of Country
banks, it follows that the av erage required
reserve ratio applicable to these banks would
be lower than that for banks in the nation.
Prior to 1959, the magnitude of the nonman
ag ed cash ratio at Fourth District Reserve City
banks more or less coincided with the m ag
nitude of the ratio for all Reserve City banks.
Since that time, the ratio evidenced a larger
decline at Fourth District Reserve City banks,
reflecting in part the relatively more rapid
expansion of time and savings deposits.
In addition to legally required reserves,
cash items in process of collection are in
cluded in the total of nondiscretionary cash
holdings. Differences in the magnitude of the
latter are, as in the case of required reserves,
partly the result of differences in deposit com
position. As checks are written only against
dem and deposits, cash items in process of

collection understandably make up a sm aller
proportion of the total assets of Fourth District
member banks (see Table II). In addition, the
gap is proportionately wider in the case of
Country banks, reflecting the fact that Coun
try banks in the Fourth District hold (though
to a diminishing extent) significantly larger
proportions of time and savings deposits than
do Country banks in the nation.
The categories of cash over which m anage
ment can exert some discretion in matters of
magnitude and composition are presented in
Chart 3, where m anaged (discretionary) cash
assets are plotted as a proportion of total a s
sets. Here, too, the behavior of the m anaged
cash ratio for Fourth District Reserve City and
Country member banks is found generally to
conform to the national patterns discussed in
the preceding article of this series. In step
with national behavior, Fourth District Reserve
City and Country banks su cceeded in re
ducing discretionary cash balan ces as a pro
portion of total assets over the long-term period
1954 through mid-1963, with the rates of d e
cline much in excess of those recorded by the
total cash ratio (see Chart 1). Further evidence
of Fourth District correspondence to national
patterns is found in the accelerated declines
recorded after mid-1960 (the end of 1960 for
Country banks). This development, again,
reflected in large part a response to the
changes in regulations affecting vault cash,
which were initiated in late 1959. Similar to
national patterns, Fourth District Reserve City
banks operated with considerably smaller
m anaged cash ratios than did Fourth District
Country banks.
Despite these basic similarities, however,
some interesting contrasts are apparent re-

DECEMBER 196 5
3.

RATIO of M A N A G E D CASH AS SET S to TOTAL AS S ETS
R e serve City a n d C oun try M e m b e r B a n k s - U nited States a n d Fourth District
Percent

A V E R A G E A N N U A L R A TE of D E C LI N E
R E SE R V E CITY B A N K S - U .S. (2)
R ESERV E CITY B A N K S - 4D (2)
C O U N T R Y B A N K S - U.S.(3)
C O U N T R Y B A N K S - 4D(3)

1 9 5 4 -1 9 6 0
2 .9 1 8 %
0 .1 4 0 %
3.8 8 0 %
4 .1 8 8 %

1 9 5 4 -1 9 6 3
5 .5 1 9 %
6 .8 9 0 %
5 .3 2 6 %
4 .6 2 4 %

1 9 6 0 -1 9 6 3
1 3 .0 0 0 %
2 0 .5 6 3 %
12 .1 52%
7 .9 1 4 %

(1) E x c l u d i n g R e s e r v e C i t y b a n k s in N e w Y o r k Ci t y a n d C h i c a g o
(2) 1 9 5 4 , first h a lf ; 1 9 6 0 , first h a lf ; 1 9 6 3 , first h a l f
(3) 1 9 5 4 , first h a lf ; 1 9 6 0 , s e c o n d h a l f ; 1 9 6 3 , first h a lf
S o u r c e of d a t a : B o a r d of G o v e r n o r s of th e F e d e r a l R e s e r v e S y st em

garding cash m anagement at Fourth District
member banks (Reserve City and Country)
and at banks in the nation. Reserve City banks
in the District clearly m anaged cash more
closely than did Reserve City banks in the U.S.
as a whole, as evidenced by the almost con
sistently smaller proportion of assets placed
in non-earning m anaged cash. In the case of
Country banks, performance is not as clearcut. Through 1958, as suggested by the lower
m anaged cash ratios, Fourth District Country
banks were more efficient than Country banks

in the nation. Since that time, however, no
significant differences are noticeable in the
corresponding ratios, indicating that cash
m anagement at Country banks in the U.S.
improved relative to cash managem ent at
Country banks in the Fourth District.
A complete explanation of the foregoing is
not presented here, as a research project in a
closely related area is currently under way
and should shed some light on these relation
ships. However, one factor that does suggest
itself as an explanatory variable is that of
29

ECONOMIC REVIEW
TABLE III
Bank Size— A v e ra g e V a lu e of A sse ts Per Bank
(millions of dollars)
Reserve City Banks

1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964

Country Banks

U.S.*

Fourth
District

U.S.

Fourth
District

$223.9
241.4
252.1
266.9
291.2
307.3
384.6
440.8
496.9
524.4
599.2

$356.7
389.8
391.8
396.6
429.3
467.7
484.9
519.2
515.9
629.3
720.6

$10.2
10.8
1 1.4
1 1.8
12.8
13.4
14.2
15.4
16.6
17.6
18.8

$ 9.2
10.0
10.5
10.9
1 1.4
12.0
12.5
13.4
13.4
15.5
17.4

* Excluding Reserve City banks in New York City and Chicago.
Source: Board of Governors of the Federal Reserve System

bank size. Table III shows that the average
size of Reserve City banks in the Fourth Dis
trict is more than $ 100 million larger than the
average size Reserve City bank in the nation.
Although most studies have found that cash
m anagem ent improves with bank size, it has
not been confirmed that perform ance in
creases step-by-step with bank size, particu
larly as relatively large bank size, say, assets
of over $ 2 0 0 million, is reached. In other
words, whatever efficiencies larger bank size
may permit could becom e exhausted beyond
a certain size. Nevertheless, it would seem
that an average bank size differential of more
than $ 1 0 0 million leaves room for the intro
duction of additional practices that have made
possible more efficient cash management at
Fourth District Reserve City banks.
No such size advantage favors Country
banks in the Fourth District. It is evident from
Table III that the av erage size of these banks
is smaller than the average for the nation. The
average differential of about $1.5 million,

however, implies that cash managem ent poli
cies would not be significantly different, as is
indicated in Chart 3, at least for the period
since 1958. Undoubtedly there are other var
iables that explain differences in cash man
agem ent policies, for exam ple, deposit com
position, deposit volatility, and loan demand.
But for reasons cited earlier, the matter is not
pursued further in this article.

CONCLUDING COMMENTS
The preceding discussion suggests that
com parisons with national counterpart figures
reflect more favorably on Fourth District Re
serve City banks than on District Country
banks. It may be, however, that the seemingly
better perform ance of Fourth District Reserve
City banks is related more to structural fac
tors, for example, size, deposit composition,
rate of change in deposit composition, and
strength of loan demand, than to "b etter"
management.
Although not necessarily conclusive, data
in Table IV tend to support this contention.
The table illustrates the response of the var
ious categories of banks discussed in this
article to the vault cash change referred to
earlier. Since the response was discussed in
detail in the preceding articles of this series,
it need only be pointed out here that Fourth
District Country banks experienced a greater
response than did Country banks in the U .S.
—a 50-percent reduction in m anaged cash
against a less-than-40-percent reduction by
the latter — and performed relativ ely better
than did Fourth District Reserve City banks,
which experienced slightly smaller declines
in m anaged cash than did Reserve City banks
in the U .S. as a whole.

TABLE IV
M a n a g e d C ash A sse ts
(A verage Q uarterly Dollar Volume — in Millions of Dollars)

Reserve City B an k s— U.S.

667

$2,071

2,192

839

2,1 13

760

— 612

+ 172

825

(2)

Vault Cash

First Quarter 1954
through Second Quarter 1960

$2,804

Third Quarter 1960
through Second Quarter 1963
Net Change . .
(1) as a % of (4)

(4)
Maintained Reserves

(3)
Balances with Other
Commercial Banks

( 1)

Managed
Cash Assets

(74.2%)

Reserve City B an ks— Fourth District
(2)

(4)
Maintained Reserves
— Required Reserves

(3)
Balances with Other
Commercial Banks

(1)
Managed
Cash Assets

Vault Cash

First Quarter 1954
through Second Quarter 1960 . .

$ 288

$ 102

Third Quarter 1 960
through Second Quarter 1963 . .

206

122

197

113

— 82
(69.5%)

+ 20

118

Net Change . .
(1) as a % of (4)

181

Country B an ks— U.S.

First Quarter 1 954
through Fourth Quarter 1960
First Quarter 1961
Through Second Quarter 1963
Net Change . .
(1) as a % °f (4)

( 1)
Managed
Cash Assets

(2)
Vault Cash

(3)
Balances with Other
Commercial Banks

(4)
Maintained Reserves

$5,999

$1,310

$4,296

5,384

1,652

4,929

1,197

—615

+ 342

633

1,590

$ 393

(38.7%)

Country B an k s— Fourth District
( 1)
Managed
Cash Assets

First Quarter 1954
through Fourth Quarter 1960

(2)
+

(3)
Balances with Other
Commercial Banks

129

$ 307

Vault Cash

(4)
Maintained Reserves

. . .

$ 478

First Quarter 1961
through Second Quarter 1963 . . .

403

154

357

107

— 75
(50.3%)

+25

149

Net Change . .
(1) as a % of (4)

.....................
.....................

* Excluding Reserve City banks in New York City and Chicago
Source: Board of Governors of the Federal Reserve System

Fourth Federal Reserve District