Full text of Economic Review (Federal Reserve Bank of Kansas City) : March-April 1963

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March - April

1963

ONi· LY REVIEW
KAN S.

Developing Foreign Markets
for Farm Products Through
Promotional Activities
. .

page

Banking Structure and Reactions
to Monetary Stringency or Ease

page

Current Statistics

page 16

FEDERAL RESERVE BANK
OF KANSAS UITY

S11hscriJJlio11s to tl,c

Io TIILY H.Evrnw are a ailahlc> to th e public without charge. A dditional
cop ir>s of any issu e may be obtained from the
Researcl1 D epartment, Fed eral Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.

Developing Foreign Markets

For Farm Products
Through
Pro1notional
Activities
cap acity o f fa rm s in th e
United States is one of the m arvels of the
century . Abundant supplies of agricultural
products are both a blessing and a problem.
Surpluses are costly to store and tend to depress prices below levels tolerable to farmers.
Solution s to th e problem of overprod ucti on
may tak e one o f two fo rm s- red ucin g th e supply of farm produ cts by re movi ng p roducti ve
res urccs from ag ri cultu re o r increasin g domes ti c or forei gn demand fo r ag ri c ul tura l products- or a combina ti on o f the two . E fforts
have bee n directed towa rd each of th ese olution . Thi s a rticle will di cuss several actions
taken to increase foreign demand- pa rticul arly
" market development," a program designed to
increase dollar sales of U . S. agricultural products in foreign countries . A d iscussion of some
of the promotional activities ca rried out under
th e program will be foll owed by a statement
of their ffectivcne .
In 1954, Congrcs passed the A gricultu ra l
Trade Development and Assi ta nce Act known va riou sly as Public Law 4 80 a nd F ood
for Peace. Its purpose is ". . . to increa e th e

II E PRODUCT I VE

Monthly Review • March - April 1963

consumpti o n o f U. S. ag ri cultu ra l comm odi ti es in fo re ign co unt ries, imp rove th e fo reign
rela ti ons of th e United Sta tes, and for o th er
purposes.'' Ti tle I a uth o ri zes th e sa le o r ce rta in commodities for foreign currencies to
fr ie ndly co untri es th a t are short on doll ars.
T itles I I and I 11 of th e A ct authori ze the President to negoti ate and ca rry out agreements
with fri endly countries to use U. S. farm products fo r di saster and fam ine relief, voluntary
aid progra ms, and certain types of barter
tra nsactions. T itl e IV, subsequently added,
provides fo r sales of agric ultural commodities
on a lo ng- te rm , do llar-c redit basis.
Th e "so ft currency" sa les, donation s, and
barter tra nsac ti o ns of Public Law 4 80 h ave
helped redu ce surplu ses, but th eir direct e ffect
in increas in g do ll a r sa les of U. S. farm products is ques ti ona ble. However, a program auth o ri zed and carri ed out under Section 104(a)
of T itle I probably is helping to build dollar
markets. A portion of the funds generated by
T itle I sales -recently established at no less
th an 5 per cent- is to be available, " . . . to
develop new ma rkets abroad for U. S. agricultura l co mmodities on a mutu ally be nefitin g
ba is." The promotional and edu cati ona l activitic und erta ken have th e twofold objective of
developing solid doll ar m arkets for U . S. farm
produ cts a nd improving th e welfa re of the people in th e country involved.

Developing Foreign Markets
MARKET DEVELOPMENT AC"flVITIES

The greatest emph as is on market development has been in Japan, West G ermany, and
Italy, although activities have been carried out
on a sm aller scale in many other countries.
Activities exist for a number of commodities:
whea t, cotton, soybeans, tob acco, feed grains,
poultry, hid es and ski ns, tallow, and others.
The agency re ponsible i the U. S. D epa rtment of Agriculture, which approves projects,
writes th e project statements, approves budgets,
and condu cts other admini strative tasks. However, th e USDA is not usually th e action
agency .
Active participation of U. . farm produ r
groups is cncourag d . For xamplc, Wh c't t
As ociat s, .S. ., Inc. r pres ntin g W st rn
wh at producers, and the Great Pl ai n Wheat
M a rket Development A sociation, cooperate by
contributing personnel, suppli es, and money.
So do th e American Soybean A ssociation, the
Cotton Council, National R enderers' Association, Tobacco A ssociates, Inc. , and several
other associations representing producers.
The cooperation of processors of agricultu ral products in the foreign countries is also
solicited. These "third-party" cooperators contribute money as we ll as advice based on years
of expe ri ence in their resp ctive fields. Examples o f third -party cooperato rs are the AllJapan
otton Spinners' A ssociation, J apan
Monopoly Corporation (tobacco), National
Association of Livestock Feed Products in
Italy, and the G erman Oilmillers Association.
Market development activities are organized
on a commodity basis in each participating
country, with th e three interests-the U. S.
Departm ent of Agriculture, U. S. producers,
and foreign processor -cooperating. For some
comm od ities, th e action agency is simply a
foreign office of th e cooperatin g U . S. producer
association. The wheat program activities in
Japan, for instance, are directed from the
Tokyo office of Wheat A ssociates, U.S.A., Inc.

A new organization has been establi hed for
other commodities, such as the JapaneseAmerican Soybean Institute, to direct the promotional and educational activities . In all cases,
the trade gro ups receive guid ance and assistance from the office of the agricultural attache, th e re pon ible person for the U. S.
Government in the country concerned.
Of co ur c, it i ncces a ry to have the approval of the gove rnm ent of th foreign country
bcfore initi ating activities. T hi seldom pre ents
a problem, ince the effects of activ ities are
mutu all y beneficial.
Types of Activities

The types of market development act1v1t1 s
vary am ng c untri cs and among commodities,
a illu strated in th e foll wing exam pl s:
l- ood Grains. T h wheat and soybean offices
in J apan h ave cooperated with the Japan Nutrition Association in a unique approach to market development. In 1956, eight buses, custom
made in Japan, were purchased and equipped
with modern kitchen facilities. Each bus is
mann ed by a driver and two trained nutritionists. Following preannounced chedules in rural
village , the facilities arc used to teach the
rudim ents of nutrition and to dem n trate
balanced mea l preparation to Japan sc h u cwivcs. At least one wh at a nd one oybea n
di sh is included in each demonstration. The
approac h is ed uca ti onal rath er th an " h ard sell"
promoti on, wh ich appeals to Japanese homemakers . The activity is helping to improve
dietary habits and to increase understanding
of both wheat and soybean foods.
Cotton. The Cotton Council International
was formed by th e National Cotton Council of
America to supervi se cotton promotion in foreign countrie , u ing m any of the sa me kinds
of techniqu e th at th e National otton oun cil
has used in th e United States for m any year .
The Cotton ouncil Inte rnation al is th e U. S.
cooperator in the market development program

For Farm Products

in several co untries. Third-party cooperators
in some coun tries consist ot Cotton lnstitutes
which have been organized to serve as the
action agencies.
Market development activities usually consist of a threefold program of market research,
sales promotion, and public relations. ln the
initial stages, market research is usually a major portion o f the market development program . F or in tance, the German Cotton Institute- the third-party cooperator in Germany
-collects data and analyzes basic trends and
relationships in the textile indu try . An alyses
include determination f mark t shares of vari ou s end uses, inc me-consumption relati onshi ps, and c nsumcr prcfcren ·cs. Research rep rt th n provide a basis for prom tional
a tivities.
Particul arly in Japan and Italy, promotional
activities have centered on fashion, empha izing cotton fa brics. All the usual media are
used- publications, leaflets, design contests,
TV shows, pictures and press releases, and
conferences. Activities are sometimes centered
on " cotton weeks," climaxed by the crowning
of a national cotton queen chosen from among
several city or district cotton queens. Other
activities incl ude sales training and seasonal
concours to show new fabrics and product lines.
To complement sales promotion endeavors,
public relat ions activities are conducted by the
Cotton In sti tute staff of the particular country.
These activities consist largely of supplying the
textile industry with educational material, press
service, and bulletins.
Feed Grains. The United States Feed Grains
Council was incorporated in 1960 to coordinate and direct the efforts of feed grain produ ce rs and oth r as ociatcd bu iness interests
into un ified market development. Initially ,
tea ms from other countrie , with interests in
anim al nutrition and feed-grain merchandising,
vi sited the Uni ted States, and American teams
visited other coun tries to survey the problems
Monthly Review • March-April 1963

and possibilities of developing new markets.
The next step was to conduct market research,
market analysis, and sales promotion activities.
More recent projects consist of livestock feeding demonstrations and production research to
establish facts and to disseminate knowledge
concerning livestock feeding.
Historically, Japan's comparatively limited
experience with livestock feeding has been built
around the use of byprod ucts, garbage, table
scraps, and vegetables not used for human
consumption. Since the quantities of these
types of feeds are limited, they are becoming
a smaller proportion of total feed requirements
as livestock numbers increase. Feed grains,
largely import d, arc becoming more important, creating a need for knowledge of f cding. Personnel of the feed grains market development staff in Japan are attempting to
supply this knowledge. These offices serve also
as a source of technical information to feed
manufacturers by dissemi nating information
about U. S. feed grains.
Advertising. While the market development
activities for most commodities are largely educational, for some commodities the approach
is strictly advertising. This is particularly true
of tobacco in Japan. Brand advertising rather
than commodity adverti ing receives principal
emphasis, with brands containing a percentage
of U. S. tobacco leaf being promoted in the
market development program.
Advertising of soap plays a part in the tallow
program in Japan. To a large extent, though,
soap is promoted on a commodity basis and
the efforts are educational rather than strictly
advertising.
Trade Fairs. The Foreign Agricultural Service of the U. S. Department of Agriculture
spon ors U. S. participation in food and agri cultural fairs in several major cities of the
world , mostly in Europe and Japan . Various
techniques are used to present U. S. fa rm
products to current and potential fo reign cus-

Developing Foreign Markets

tomers. Commodities featured in a given fair
are selected on the basis of their importance
to U. S. agriculture and potential sales in the
country concerned. Cooperating U. S. organizations are invited to send persons to a fair to
represent an entire industry, such as cotton or
soybeans, although a particular firm or special
segment within the industry usually is not invited in an official capacity.
Accomplishments

How effective are th e market development
activities? This is a difficult question to answer.
lt would be n aive to assume that all the
chan ges in imports arc directly associated with
th e cxi ' tcncc of mar ket development e fforts
in a coope ratin g country . Many o th er factors
act to chan ge a co untry's patterns of consumption and imports.
For instance, J apa n, West Germany, and
Italy have all enjoyed rapidly rising per capita
incomes since World War II. Rising incomes
are associated with increased consumption of
certain commodities. Perhaps poultry, soybeans, and feed gra ins are in this category in
most countries. For other commodities-say,
wh ea t food s- per capita consumption may decline with a ri se in in co me. Thi s depends on
th e sta ge o f developm ent of the country and
the level o f per capita income. Jn countries
with re latively hi gh per capita inco mes, di ets
tend to be upgra ded as incomes ri se by using
more high -priced , hi gh-protein foods and fewer
wheat and other starchy foods. In low-income
countries , consumption of wheat may increase
with rising incomes because wheat foods are
substituted for foods made from coarse grains
or are substituted for traditional foods, such as
ri ce, to add variety to th e diet.
The changin g price of a co mmodity may also
affect consumpti o n. Or if the price of a commodity ri ses rel ative to the price of a substi tute product , more of th e latter m ay be purchased at the expense of the former commodity.

Changes in the level of tariffs and quotas
affect a country's consumption and imports .
Tariff changes probably res ult in a shift in the
price of the commodity to the consumer, resu ltin g in altered consumption and imports .
Changes in import quotas would, of course,
directly affect imports and consumption of the
commodity for which a quota exis ted . This
raises a question a bo ut th e feas ibility of attemptin g to increase demand in a foreign co un try for a commodity for which import quotas
ex ist. Market development activities may be
justified if there is a chance that the pressure o f
th e in creased demand would ca use o ffi cials to
in crease import qu o tas.
;\ country's fi1r111 policy is likely to affect
co nsumpti on and import s o f certa in farm products. Self-sufficiency in food production is
one of the goals of ma ny countri es. To thi s
end , production is often encouraged with hi gh
price supports and other m eas ures. To the extent that these policies have changed in a country during the period being considered, the demand for agri cultural imports will have
changed irrespec tive of a market development
program.
A co untry with a favorab le balance of payments may be disposed toward a more liberal
trade policy, whereas a co untry with a persistent defi c it may adopt mo re protective
meas ures. In eith e r case, imports and consumpti on arc likely to be a ffected .
The above points emph asize the difficulty
of trying to eva lu ate the effectiveness of promotional and educational efforts to increase
consumption an d imports in a particular
country. Cha nges in consumption and imports can stem from m a ny factors. Nevertheless , severa l gene ra li zat io ns ca n be made as
to apparent accomp li shm ents of market development efforts .
In 1960, studi es were m ade by three university teams, at the invitation of th e U. S.
Governm ent , of the effec tiveness of the mar-

For Farm Products
AGRICULTURAL EXPORTS
United States
Billions of Dollars

Total
5

Dollar Soles
I

O~-~--~- '57
~ --~ -'59-60
-~ - ~ - '6~1-62
58
1954 -55

F i scal

Years

SOURCE : U. S. Department of Agriculture .

ket development programs in Japan, West
Germany, and Italy. The three independent
reports expressed similar conclusions. Each
pointed out ways that the program might be
strengthened, and each suggested areas of accompli shment.
Reported Benefits

xports of U. S. agricultural products are
probably at a higher level than they would have
been in the absence of a market development
program. Other accomplishments of the program are also significant-perhaps they will
be as significant in the long run as export
sales, both to the United States and to the
cooperating countries. This is especially true
when the r latively small cost of the market
development program is considered. Less than
2 per cent of Title l receipts were used for
market development from 1955 to June 1962.
The program has tended to create an interest
in and a better understanding of foreign trade
Monthly Review • March - April 1963

among Americans who have been associated
with the program. This is desirable. It also
has had a favorable influence on the level of
education of the people in the recipient countries- particularly with regard to health and
nutrition.
Working relationships between personnel of
the foreign and U.S. governments have benefited from market development projects. The
projects place the agricultural attache and his
staff in direct contact with their foreign counterparts. These relationships deepen into more
than mere negotiating sessions. Person-to-person understanding is broadened. The exchanges
of survey teams and the contacts among U.S.
produc rs and traders and am ng foreign procc sors and trad rs have aided in a better understanding of each other's problems. With
understanding, arbitration is easier.
New associations or trade groups have been
formed, both in foreign countries and in the
U. S., largely because of market development
programs. These associations of business people center their activities on common problems.
Accomplishments of the market development program are measured in more ways than
in mere physical quantities. While it is impossible to say just what quantities of agricultural product the United States would now be
U. S. EXPORTS OF SELECTED AGRICULTURAL
COMMODITIES AS A PER CENT
OF TOT AL PRODUCTION
1954-60 Average; years ended June 30, 1961, 1962

Per Cent of Production Ex orted
verage
Commodity
Wheat*
Rice
Tallow
Nonfat dry milk
Cotton
Soybean st
Tobacco

1954-60
36
43
40
35
34
32
28

1961
49
56
38
33
49
41
29

1962
58
54
44
39
34
34
29

• Includes grain equivalent of flour.
t Includes bean equivalent of oil.
SOURCE: U. S. Department of Agriculture.

Developing Foreign Markets For Farm Products

exporting if there were no formal market development program, the program is exerting
a positive influence.
CONCLUSION

Whether largely because of the market development program or not, exports of U. S.
farm products have increased in recent years
( see chart). As an indication of their importance to U. S. agriculture, exports represented 15 per cent of total cash receipts from
farm marketings in fiscal 1961-62. Sixty million acres, or one acre out of every five harvested, were devoted to production for export.
xports ace unt for large proportion
of th e output of many individual agric ultural
c mmoditi es. For th e fi scal year ended June
30, 1962, over half of the Nation 's production
of wheat and rice was exported ; over one third
of the tallow, nonfat dry milk, cotton, and soy-

beans ; and nearly one third of the tobacco
(see table). For most of the important commodities, these proportions have increased
during the last year or two.
About 70 per cent of the $5.1 billion of
agricultural exports for fiscal 1961-62, or $3 .5
billion, represented sales for dollars. The other
30 per cent was exported under Food for
Peace and the Mutu al Security Act. Exports
for dollars and exports under Government programs both have increased. The increase in
total exports has tended to relieve the stress
creat d by th productive capacity of U. S.
agriculture. Added dollar sales abroad are
significa nt in anoth er way- throu gh their po itive co ntribution to th e economy's balance of
pay ments. To the ex ten t that market devclopm nt ha eo ntribut d to increased dollar sales
of agricultural products, it has also contributed
to relieving the balance-of-payments deficit.

BANKING STRUCTURE AND REACTIONS
TO MONETARY STRINGENCY OR EASE
1scuss10Ns of monetary policy often convey the impres ion that banks respond
to shi ft in mon etary tightness o r ease, emanatin g from th e central bank, in a rather simple mechani stic ma nner. Such an impres ion
tend s to mask th e fact that banks' reaction s
to :.lit red mon tary co nditi ons arc co mplex
phenom ena co nditi o ned by diverse environ mental factors. 'I he st ru turc o f bank ' ma rkets i one s uch factor th at m ay have an important bearing on the reactions of banks to
external forces.
In particular, certain attributes frequently
ascribed to branch banking systems might be
reflected in p atterns of cyclical portfolio adjustment. For example, branch banking, in
fostering the growth of large banks th at operate over wide geographical areas, may di semin ate the effect of monetary changes more
uniformly and pervas ively than unit banks.
nh anccd mobility of lo anable funds is frequently cited as a concomitant of branch banking. ln addition , greater portfolio diversification and m anagerial specialization may permit a more efficient use of reserves by large
branch systems. On the other hand, the Federal Reserve System, correspondent bank relation ships, and various other institutional arrangements may integrate the banking system
an d impo e a certain degree of uniformity in
behavior th a t tend to miti ga te differences
t mmin g from the factors mentioned above.
If bank s' reaction to altered monetary condition s are tempe red by the structure of banking prevalent in an a rea, the ramifications can

Monthly Review • March - April 1963

be numerous a nd important. For example,
con ider th e possibility that when the central
bank effects a tighter monetary policy, credit
ava il abi lity is curtai led more or less severely
in a unit banking area than in a comparable
branch banking nviro nm ent. Such secto ral
differe nces may hav ' consi derabl relevance
to prob! ms of r gio na l grow th a nd stabili zati 11.
While an enum eration of facto rs affect ing
bank beh avior has a place in this discussion,
ultimately the question remains to be answered
empirically. A s is the case with so m any economic problems , th e empirical analysis proves
to be highly complex. This, in part, may explain the dearth of research in this area. However, the potential importance of thi s problem for public policy warrants an attempt at
its olution. This a rti cle ana lyzes a small body
of data in a n attempt to make a modest step
in thi s direction.
A co mpa ri son of th e cyclical fluctuation s of
variou components of commercial banks'
asset portfolios under varied structural conditions serves as the evidence from which differences in behavior, if any, will be inferred.
Alterations of portfolio accounts will be interpreted as reactions to changes in monetary
stringency .
It hould be noted th at observed differences
in portfoli o ad ju tm ents m ay stem from a
variety of ca uses. There m ay be differences in
the types of pressure brought to bea r on the
various bank when the central bank initiates
a change in policy. For exampl e, unit banks,
9

Banking Structure and Reactions

being predominantly small and locally oriented, may not find it profitable to trade extensively in the Government securities market, or to participate at all in the Federal
funds market. Moreover, the occasional need
for unit banks to supplement their reserves
may be satisfied by their correspondents, irrespective of normal changes in the degree of
monetary stringency enforced by the central
bank. Such factors may , to some extent, insulate unit banks from the vicissitudes of
monetary stringency and may be reflected in
differences in observed portfolio adjustment.
Howeve r, the e consideration would not indica te that branch banks react differently than
unit banks when co nfro nt d with the same
pressures. In fact, unit and branch banks may,
in any given instance, be reacting to pressures
of varying severity. On the other hand, the
pressures sustained by the various banks as a
result of changed monetary conditions may be
essentially the same. If this is the case, then
differences in portfolio adjustment may be observed because the structure of banking affects the way in which banks react to a given
type of pressure.
PROCEDURE
Structure

Banking systems of 45 states and the District of Columbia were classified into three
groups-statewide branch banking permitted,
limited area branch banking prevalent, and
unit banking prevalent. 1 The traditions which
most pervasively influence the structure of
state banking systems appear to be largely
regional in origin. This suggests that the behavior of aggregated structure groupings of the
1
New York , Califo rni a, a nd Illinois were deleted from
the samp le because there was evidence to suggest
th at for various reasons their behavior may be somewhat atypical. Moreover, their size grea tly influenced
the aggregates. Hawaii and Alaska were deleted because data were not readily available for the entire
period studied.

Table 1.
THE STRUCTURE
OF STATE BANKING SYSTEMS
Statewide Branch
Banking Permitted

Limited Area Bran ch
Banking Prevalent

Unit Banking
Prevalent*

NEW ENGLAND
Maine
Vermont
Rhode Island
Connecticut
MIDEAST
Delaware
Maryland
SOUTHEAST
North Carolina
South Carolina
Louisiana
SOUTHWEST
Arizona
ROCKY MOUNTAIN
Idaho
Utah
FAR WEST
Wa shington
Oregon
Nevada
California

NEW ENGLAND
Massachusetts
MIDEAST
New York
New Jersey
Pennsylvania
Dist.of Columbia
GREAT LAKES
Mi chi gan
Ohio
Indiana
Wisconsin
PLAINS
South Dakota
SOUTHEAST
Virgi nia
Kentucky
Tennessee
Georgia
Alabama
Mississ ippi
SOUTHWEST
New Mexico

NEW ENGLAND
New Hampshire
GREAT LAKES
Illinois
PLAINS
Minnesota
Iowa
Missouri
North Dakota
Nebraska
Kansas
SOUTHEAST
West Virginia
Florida
Arkan sas
SO UTHWEST
Oklahoma
Texas
ROCKY MOUNTAIN
Montana
Wyoming
Colorado

*Some st ate s among this group do have a small number of
branches that were in existence prior to the passage of prohibitory legislation or are limited function offices.
SOURCE : 98th Report of the Comptroller of the Currency, 1960;
Annual Report of the F. D. I. C., 1960.

kind made in the table may be subject to complex regional influences which may obscure
effects attributable to banking structure.
Variables

Differences in the behavior of the three
groups were studied by comparing the cyclical
fluctu ations of four as et variables : loans,
cash , U. S. Government securities, and loan s
and securities combined. While a number of
variables might have been used, these four
were selected because of their obvious sensitivity to changes in monetary stringency.
The period covered was from April 20,
1953 , through March 26, 1962. There were
37 qu arterly observations of each variable,
taken from Federal Reserve member bank
condition reports, for each structure.
Adjustments of Data

In order to permit comparisons of the cyclical component of fluctuations in the various

To Monetary Stringency or Ease

Chart 1.
LOANS

appeared to be marked erratic fluctuations.
Three-quarter moving averages smoothed out
a large part of the erratic movements, but this
presented the danger of suppressing fluctuations relevant to the analysis. For that reason ,
both the smoothed and unsmoothed versions
of the time series were analyzed. Since the
analysis of the smoothed and unsmoothed

Per Cent of Trend

105

100

Chart 2.
U. S. GOVERNMENT SECURITIES

105

Per Cent of Trend

100

Statewide Branch Banking
t

110
95

tl
105
10 5

Unit Banking
100

100
95

t*
95
'56

1953
-

'58

'60

'62

Smoothed
- - Unsmoo1hed
*t - Turning Points

NOTE : Numbers
in
measured in per cent.

brackets

represent

standard

Limited Area Branch Banking
t

110
deviations

105

series, it was necessary to eliminate extraneous
influences. Toward this end, the following adju tment were applied to each of the 12 cries:
(I) The trend factor in each se ries was
isolated by linear least squares regression and
then the raw data were ex pressed in terms of
ratios to trend values.
(2) The series were ad justed to eliminate
purely seasonal fluctuations. 2
( 3) In some instances the series corrected
for trend and seasonal variation displayed what
Census II method of seasonal adjustment was
employed. See J. Shiskin and H. Eisenpress, Seasonal
Adjustment hy E lectronic Computer Methods, Na tional Burea u of conomic Re earch, Technical Pa per
12, 1957 . In a ppl y ing th e seaso nal adjustment
process, it i generally assumed th at observations arc
taken at corresponding d a tes in each year. Condition
reports are not submitted on the ame dates each
year. However, thi s did not appear to co nsti tute a
serious problem . See accompanying charts.
2 The

Monthly Review • March-April 1963

100

90 .____.____.____.____.____.____.__..__..__.___,

Unit Banking
t

110

105

100

_L_

'56

1953
-

'58

'60

'62

Smoothed
- - Unsmoothed
t - Turning Points

NOTE : Numbers
in
brackets
measured in per cent .

represent

standard

deviations

Banking Structure and Reactions

Chart 3.

CASH
Per Cent of Trend
11 0

Statewide Branch Banking

105

100

Limited Area Branch Banking
105

100

95
10 5

Unit Banking

100

' 56

1953
-

NOTE : Numbers
in
mea sured in per ce nt.

'5 8

' 60

' 62

Smoothed

* -

- - Unsmoothed
Turning Points

brackets

represent

standard

deviat i ons

se ries indicated the same conclusions, only the
former set of results a rc presented . Charts 1,
2, and 3 arc presented to illustrate the results
of th e various processes of adjustment. These
are th e seri es on which the following analysis
is based.

react to tightened monetary conditions, peaks
or troughs presumably would occur later than
corresponding turning points for the statewide
branch banking or limited area branch banking series. Unfortunately, the series span too
hort a period- two cycles in most cases- to
pe rmit a reasonable test for the existence of
systemati c leads or lags. However, a test was
made in whi ch the ratios of simultaneou sly
timed turning points to total turning points
were compared.
The results of this test a re shown in T able
2. Th e loan and cash variables prove to be
es pecia lly intcrc ting. In the case of loa ns, five
turnin g points ar observed . The sta tewide
branch banking a nd th e limited a r a branch
banking series ac hi vcd four or the fi ve turn ing poi nts simultaneo usly, but th e timing of
the unit banking series was completely different from the other two.
In the case of th e cash variable, the statewide branch banking and limited area branch
banking series display two peaks and three
troughs. However, the unit banking series
rather clearly di splays four peaks and at least
three troughs, which p recludes a comparison
of corresponding turning points. Suffice it to
say th at th e unit banking cash se ri s di splays
a decidedl y different timing of turning points
th an the two branc h banking ca h series.
The remaining two variables- earning assets
and U. S. G ove rnm ent securities-do not suggest clear-cut differences among structures.

TESTS
Turning Points

One way in which the structure of banking
might affect bank behavior is in the speed of
reaction to changed conditions. It would seem
reasonable to expect such diffe rences to be
reflected in the timing of cyclical turning
points of the vari ables-loans, cash, U. S.
Governmen t sec urities, and loans plus securities. For example, if unit banks were slower to

Table 2.

COMPARISON OF TURNING POINTS
Number of Times Turning Points Were Simulta neous
Statewi de and
Statewide
Limited Area
Limited Area
Branch and
Branch and
Bran ch Banking Unit Banking
Un it Banking

Loans & Securities
Loans
Cash
U. S. Govt.
Securities

1 of 5
4of5
3 of 5*

2 of 5
Oof5
N.C.

3 of 4

N.C. - not co mparab le .
* Th e two remaining pairs of turning points were sepa rated by
one quarter .

To Monetary Stringency or Ease
Table 3.

FIRST DIFFERENCES
Statewide and
Limited Area
Branch Banking

Loans and
Securities
Loans
Cash
U. S. Govt.
Securities

vs
vs
vs
vs

Statewide
Branch and
Unit Bank ing

Limited Area
Bran ch and
Unit Banking

vs
s

NOTE: VS -

indicates a very significant degree of asso ci ation be-

int~~:resse;ies\gnifi canl degree of associ ation between

f~~ii~! -tes no significant degree of associ ation between
series .

First Differences

Oiff r ncc s in patt rn s of adjustment may
be shown in the direction of movcm nt of the
s 'ries.
si ng th smooth 'd series for each
banking structure gro u1 ing, quarter-to-quarter changes- r fcrr d to a fir t differ nccswcre obtained. Only th plus or minu sign
of the first diff rences were recorded. The
seri s were then paired- statewide branch
banking and limited area branch banking,
statewide branch banking and unit banking,
limited area branch banking and unit banking
-a nd the number of matched signs was
counted for each pairing of series. The ratio
of matched quarters t total quarter indi cat th prop rti on of the time that any two
cries m ve in th sa me direction an I can be
onsidercd a mea ure of the imilarity of patterns of fluctuations. If no y tematic relationsh ip exi ts between a given pair of eries, it
would be expected that the signs would match
approximately half of the time. A statistical
test was made to determine whether the number of matched signs ob erved for each pair of
seri es could rea onably be expected on the
basis of chance alone. 3 The result of this test
arc pre cntcd in Table 3. Again, it i fou~d
th at th e loan and cash variable sugge t difference among banking structure while the
3The " t" test, employing the normal approximatio n
to the binomial distribution , was used.

Monthly Review • March-April 1963

earn ing assets and
. S. ecurities variables
provide no such evid nee. While a si~nificant
degree of relationship between the unit ba~king loan series and the two branch bankmg
loan series is found, these relationships are
more tentative than that found between the
statewide branch banking and limited area
branch banking loan erics. -i In the case of
the ca h variable, th differences are more dramatic . There appears to be no significant relationsh ip between the unit banking and branch
banking erie , while the relationship between
th e two branch banking series i very signifiant.
Amplitude

o far , the various series have be n compared in term
f th e timing of p aks and
troughs and in term of the direction of movement of quarter-to-quarter changes. A third
way in which the senes may be compared is
in terms of th e volatility or amplitude of
movements. To gauge amplitude or volatility,
some measure of dispersion must be employed. Frequently used measures of dispersion
include the range, average deviation, and standard deviation. Becau e of certain desirable
stati stica l propertie , the la t of these measures was selected. The tandard deviati ns for
the 12 cric wcr compared by u ing a technique for testing the statistical ignificance of
difference between pairs of tandard deviations. "
-i A difference is referred to as "significant" when the
hypothesis being tested i~. reject~d _a~ the,, 5 per ~e~t
level of ignificance and very s1gmf1cant when 1t 1s
rejected at the 1 per cent level.
;;The "F" distribution was employed for testing differences between variance estimate . Both the "F"
and " t" tests assume the data are random sa mples
drawn from normally distributed populations. It is
believed that the bia introduced as a result of failure to meet thi s requireme nt would tend to indicate
a relation hip between two erie in the fir t diff~rence te t and to ob cure a difference between senes
in the case of the amp litude test.

Banking Structure and Reactions

Table 4.
AMPLITUDE

Loans and
Securities
Loans
Cash
U. S. Govt.
Securities

Statewide and
Limited Area
Branch Banking

Statewide
Branch and
Unit Banking

Limited Area
Bran ch and
Unit Banking

0
0
0

0
UB < SWBB
UB < SWBB

LABS< UB
UB < LABS
UB < LABS

NOTE : O - indi cates no sig nifi cant difference in amplitude .
A B - indicates A is significantly less than B in amplitude .

Th re ults are presented in Table 4 . Once
again the loa ns and cash variables prove most
revea ling. In th e c,Le of loans, the unit banking se ri es di sp lays significantly less amplitude
than either of th e branch banking series. In
contrast, th ere appears to be no significant
diffcrcnc in amplitude between the tatewid
branch banking and limited area branch banking series. The cash series indicates similar conclusions.
Neither the earning assets nor the U. S.
securities series provide sufficient grounds for
distinguishing among structures. In the case
of earning assets, the unit banking series is
significantly more volatile than the limited area
branch banking series, but neither is signifi cantly different from the statewide branch
banking se ric in ampl itude. Hence, the resu lts arc conside red ambiguous.

CONCLUSIONS
This study has attempted to present a small
body of evidence that might be useful in determining whether the effects of monetary
stringency or ease may be tempered by the
structure of banking in any given area.
In order to attribute differences in portfolio behavior to structural characteri tic of
the market, a number of a sumptions must be
made. Most important, perhaps, are these:
(I) conditions to which banks are re ponding arc either uniform for all state banking
sy terns, or, such differences as do exist can

be attributed to st ructural factors; (2) average size of banks is not independent of structure; and (3) regional influences do not affect the cyclical variation of the asset accounts
of the grouped state banking systems. No attempt was made to subject the validity of these
a sumptions to rigorous empirical te ts . It
might be added, however, th at the first assump ti on would be extremely difficult to evaluate empirically and may very well be th e most
precariou s of the group. On the other h and,
there is ev idence to uggest that the assumpti n rega rdin g the independence of bank size
and structure can be ·orroborat d with little
difficulty. In addition , ~111y di stortions introdue ·d ~ts a re sult of re gional influences, particularly difrcrcn cs in paltcrns of demand , arc
bcli vcd to b of minor importance.
Given these assumptio ns, the findings lend
support to the argument that banking structure is a factor affecti ng the response of the
banking system to changes in monetary stringency. All three tests of the loans and cash
variables indicate a clear distinction in the
pattern of cyclical adjustment between branch
and unit banking systems. It sho uld be added,
however, th at analys is of the U. S. Government securities and loans plus sccuritic vari ables revealed no evide nce of uch diffcrcnces .
The U . S. Government securities series indicate a hi gh degree of si milarity among banking structures while the results of tests on th e
earning assets serie were omewhat mixed.
While systematic leads or lags were not in
evidence, their existence cannot be ruled out.
The number of cycles observed was small and
relatively little effort was devoted to analyzing the nature of th e differences in response
observed. Indeed , the analy sis had the limited
objective of idcntifyi ng diff ren ce in cyclical
adj ustm ent
of various portfolio account
associated with differences in the structure of
banking. Hence interpretation of the differences observed must await further research .

To Monetary Stringency or Ease

The one point that emerges rather clearly
from thi s investigation is that there are grounds
for questioning the assumption that the impact
of mon etary stringency or ease permeates the
economy without selective effects.
Whil e others have discove red thi s point by
studyin g particular industri es suc h as hou in g
onstructi n, or small as compared with large
borrowers, this article ha s focu ed on the
structure of banking as a factor conditioning
th e impact of monetary stringency . The find in gs suggest that th e stru ctu re of banking

Monthly Review • March-April 1963

prevalent in an area may be instrumental in
tempering the impact of monetary policy, but
the prescriptive implications of the findings
are quite limited . Certainly, this aspect of the
structure of banking deserves the recognition
and evaluation of regu latory authorit ies . However, an inte1ligent evaluation of this problem
requires a more complete under tanding than
is now possessed. Hence, the pre ent findings
point to the need for a more intensive effort
to study the relationship between the structure
of banking and th e effects of monetary policy.

BANKING IN THE TENTH DISTRICT
Loans
Re serve
Ci t y
Member
Bank s

Di str ic t
and
Sta te s

Country
Member
Banks

Re serve
Ci ty
Member
Banks

Feb .

Jan ]

FebJ

Ja n.

Feb .

Jan .

Country
Member
Banks

Reserve
City
Member
Banks

Feb . De c.

Jan .

De c. Jan .

De c.

Jan .

Reserve
Ci ty
Member
Bank s

Country
Member
Banks

Country
Member
Ban ks

De c. 1962 Per centage Chan ge From

Jan . 1963 Per centage Change From

Feb. 1963 Percentage Change From
Jan .

Country
Member
Banks

Re serve
Ci t y
Member
Banks

Depo si t s

Loans

Depo sits

Loans

Depos i ts
Re serve
Ci t y
Member
Banks

Dec . Jan .

Nov .

Dec .

Nov .

De c. Nov .

Dec.

Novl

Dec .

1963 1962 1963 1962 1963 1962 1963 1962 1962 1962 1962 1962 1962 1962 1962 1962 1962 1961 1962 1961 1962 1961 1962 1961
Tenth F. R. Di st.
Colorado
Kan sas

Missouri*
Nebraska

+ 3

New M exico*
Oklahoma*

- 1

1
+ 9
+ 12 - 1

10 + 1
12
3

#
~2

11
12 + 1
-f 19 #
3
+ 11

Wyo ming

+ 1

- 1
I1

2
+ 7 - 1

+ 2

-f 2
2

+ a

+ 1

• Tenth Dist r i ct portion only.
#Less than 0 5 per c n t.

::t

+ 7
9
+ 9
+ 10
10

+ 15

+ 19
+ 14
-f 13

+ 14

I1 + 1

+ 18

+ 15
+ 12

-f 1
2
- 2

#
j- 1

+ 6

-f 2 #
I1 - 2
1

-f 14 1 2
19
12

I7
15 - 1

+ 14

I 10

H
1

I7
16

#
#

+ 7

I4 + 3

+ a

17
7

I2
1

** No reserve ci t ies in thi s sta t e.

PRICE IND EXES, UNITED STATES
Index
Consume r Pr ice Index (1957-59 = lOOl ............................................
Wholesale Price Index 0957-59 = lOOl ...........................................
Pr ices Received by Farmers 11910-14 = 100)..............................-··1
Prices Paid by Fa rmers (1 910-14 = 100l... .................. ==.-_...........

Feb.
1963

Jan.
1963

Dec.
1962

Nov.
1962

Feb.
1962

Jan.
1962

Dec.
1961

106.1
100.2

106.0
100.5
244
311

105.8
100.4
242
309

106.0
100.7
245
307

104.8
100.7
243
305

104.5
100.8
242
304

104.5
100.4
240
302

242

311

TENTH DISTRICT BUSINESS INDICATORS

District
and Principal
Areas

Feb.
1963

Jan.
1963

Tenth Federal Rese rve District... .....................
Denver -. . ... -. -. --.. -. -... --.. -. ---... -.. -.. -. ------.. --.. --Wichita -----------·····-·· --------- ------ --- --- --······ ·····-- ·Kansas City ...................................................
Omaha ··········-···················· ----- -- --- -----------------Oklahoma City ..............................................
Tulsa -----------------------··········· ------ ---- --------- ------ ---

+5
+ 7
0
+5
+5
+8
- 4

+3
- 1
- 1
+4
+ 14
+9
- 3

Value of
Department
Store Sales
Percentage change from previous year

Metropolitan

---

Value of
Check
Payments

Two
Mos.
1963
+4
+2
- 1
+4
+ 10
+8

- 3
~

I
Dec.
1962

Year
1962

Feb.
1963

Jan.
1963

+4
- 8
+6
+7
+4
0
+3

+6
+6
+4
+6
+8
+9
+4

+3
+3
- 2
+3
+ 10
- 3
0

+4
0
+8
+9
- 1
+9
+10
--

l l

-------

Two
Mos.
1963

Dec.
1962

Year
1962

+3
+1
+3
+6
+4
+3
+5

+6
+3
+5
+12
+5
+5
+5

+3
+1
+1
+8
+2
+5
+4

Full text of Economic Review (Federal Reserve Bank of Kansas City) : March-April 1963

FRASER