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International FinanceRecurrent Crises Plague
World Monetary System

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I

Part I

Functional Cost AnalysisA New System Approach
To Gauging Profitability

August 1971
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This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

International Finance-

Recurrent Crises Plague
World Monetary System

PART I: MECHANICS AND PROBLEMS
The. international monetary crisis
earlier this year was only one of
seVeral since the start of the 1960's.
~peculation hit the German mark
In 1961, 1968,1969, and 1971; the
fre~ch franc in 1968 and 1969; the
talian lira in 1963; the British
POUnd in 1961, 1964, 1967, and
11 968 ; and the U.S. dollar in 1960,
968, and 1971.
Although the international
tn,onetary system was able to
WIthstand these onslaughts, the
German mark was revalued in 1961
and 1969, and earlier this year the
German central bank abandoned
SUpport of the mark, allowing it to
~o~~ in the exchange market. The
ntIsh pound was devalued in
1967, and the French franc in 1969.
d As a result of these and other
evelopments in world finance,
pro~osals for facilitating the interbatlonal adjustment process have
omeet;t discussed-officially and uncIallY-for more than a decade.
This first-part article describes the
Current system and some of the
problems encountered. Next
tnfo nth , Part II will discuss some
o the proposals for reform.

have since been supplemented by a
variety of treaties, financial institutions, and special arrangements
for handling particular situations.
The establishment of the Gold
Pool in 1962 and the two-tier gold
system in 1968 represents two of
these supplemental efforts.
But in addition, a general
agreement to borrow was added
to the articles in 1961, allowing
the IMF to borrow from member
countries. A new international
reserve asset--SDR's (special
drawing rights) - was established
and used in 1970. And central
banks have established an elaborate system of reciprocal credits.
The international monetary system has also been influenced by
institutional elements. One of these
has been the role of central importance of the U.S. dollar in international finance. Another has been
the development of the Eurodollar
market.

Exchange rates in theory
Under the current system, countries try to adjust their balanceof-payments positions without
changing fixed parities, which set a
The current system
country's currency in relation to
The'
C ~nternational monetary system gold or the dollar. To ensure that
f onslsts of various arrangements
countries will not raise or lower
or the settlement of imbalances in their exchange rates merely to
bayments (deficits or surpluses)
match the revaluation or devaluaetWeen countries and for the
tion of other currencies, members
bad'JUstment of imbalances. The
of the IMF, having once estaboi~s of this system are the Articles lished the parities of their curM greement of the International rencies with gold (or the dollar),
are committed to a specific
Onetary Fund, which were for~Ulated at the Bretton Woods
exchange rate that, except in
onference in 1944. Representing
rare instances, they must maintain within 1 percent of parity.
~ eff~rt to set standards of
t ehaVlor in international finance,
They are absolved of this responsihe articles establishing the IMF
bility only when a country faces a
llUsiness Review / August 1971

severe and persistent imbalance. In
this case, a deficit country can
devalue its currency or a surplus
country can revalue.
As an illustration of how imbalances in the international accounts
are corrected under a system of
fixed exchange rates, assume that
imports to a country increase more
than its exports, while the capital
account and other components of
the international accounts remain
unchanged. With more goods
coming in than going out, the
country develops a deficit in its
balance of payments. Initially, the
country can draw on its reserves,
such as gold, reserves of the currencies of other countries, and
SDR's. Or it can borrow from other
countries or from the IMF.
Theoretically, the deficit itself
will set in motion a self-correcting
mechanism that would ordinarily
be expected to adjust the imbalance, at least partially. It is generally reasonable to assume that
a relative increase in imports will
cause income in the deficit country
to contract. And the contraction in
income causes imports to fall. Also,
the deficit can cause the country to
lose international reserves. If, as a
result, monetary authorities allow
the domestic money supply to decline, interest rates will tend to
rise, further contracting not only
income but also investment. With
the country no longer able to buy
as much abroad as before, imports
and the payments deficit are
reduced.
In practice, however, labor and
many other costs are fairly rigid.
Because these costs in most countries cannot be lowered easily
there is often not enough decline
in prices to eliminate a deficit in
the balance of payments. Often the
1

dollar is widely used as a unit of
account and means of payment in
transactions not involving the
United States, it serves as a
vehicle currency.l
The dollar serves the international monetary system as the
principal medium for malting payments. Not only is it the single
most important c,urrency in the invoicing of foreign trade, but with
the growing importance of the
Eurodollar and European dollar
bond markets, still more of the
world's transactions involve the
dollar.
The reason for the vehicle role
is clear. The key-currency position
of the dollar under current institutional arrangements implies a
lower potential range of exchange
fluctuations in terms of the dollar
than any other currency. Currency
pegged to the dollar can fluctuate
about 1.5 percent in terms of the
dollar, which means a possible
3-percent margin in terms of each
other. The dollar, therefore, provides a potentially better short-run
store of purchasing power than
other currencies.
Although the dollar is the
cornerstone of the international
monetary system, its relative
dominance has tended to diminish
over the years. A series of virtually
uninterrupted deficits in the U.S.
balance of payments has, from
time to time, caused some to question the continued ability of the
Role of the dollar
dollar to fulfill its important international
functions-at least, unThe importance of the U.S. dollar
.
in the international monetary sys- assIsted.
. Partially as a result, seritem results from its performance of ous mternational currency crises
have erupted. These crises, which
three functions. Because many
have tended to become more frecountries hold the dollar as an
quent in recent years, continue to
international reserve asset, it
serves as a major reserve currency. reflect developments that began
Because many countries use dollar in the early 1950's.
Until the 1950's, the United
balances to support the value of
States went unchallenged as the
their own currencies in the foreign
world's leading postwar economy.
exchange market, the dollar is a
With its main prewar competitorskey currency. And because the

decline in imports (and possibly
the increase in exports) is not
enough to restore equilibrium to
the balance of payments.
Unless a country can maintain a
fairly close' equilibrium in its balance of payments, its currency
tends to depreciate relative to the
value of other currencies. To keep
depreciation within the I-percent
margin agreed upon, monetary authorities intervene in the exchange
market to buy their currency with
reserves. If the deficit is merely the
temporary result of random or
cyclical variations or if other offsetting disturbances reestablish
equilibrium, no deliberate adjustment policy is needed. The
country can finance its short-run
deficit by borrowing or falling back
on reserves.
But if the deficit persists, the
country will eventually have to
adopt policy measures designed to
restore equilibrium. The appropriate policies may include more
restrictive monetary and fiscal
measures than those of surplus
countries. However, a country may
also impose controls on the flow of
trade or capital, although the
former is not recognized as appropriate under IMF rules. If the
situation is one of severe and
persistent imbalance, the deficit
country can devalue its currency.
Conversely, surplus countries can
revalue their currencies upward.

Europe and Japan-all but knocked
out and its own productive machinery still turning out goods at
wartime capacities, this country
exported to markets throughout
the world. And a large dollar shortage developed abroad.
From 1950 to 1956, the United
States had moderate deficits in its
balance of payments-averaging a
little over $1 billion a year on the
liquidity basis. And these deficits
were welcomed because they allowed European countries to
replenish their war-depleted reserves with dollars. In 1957, the
year after the Suez crisis, the
United States had a small balanceof~payments surplus-one of only
two between 1950 and the present.
The following year, a large deficit
of $3.4 billion appeared. And in.
1959 and 1960, even larger deficlts
of about $3.9 billion appeared.
By the start of the 1960's, the
U.S. deficit was beginning to b~
viewed with some concern. Until
then, the country's international
reserve assets had exceeded its
liquid liabilities to foreigners. But
in 1960, liquid liabilities to foreigners rose above the level of U.S.
gold stock and other reserve assets,
resulting in speculation about the
ability of the United States to continue malci.ng good its policy of
selling gold to foreign monetary
authorities at the rate of $35 an
ounce.
.
This uncertainty culminated III
a confidence crisis in 1960, popularly referred to as "the Gold
Rush of 1960." The speculative.
wave of gold buying in anticipation
of an increase in the official price
of gold was turned aside through
'the coordinated efforts of the
United States and principal
European countries. But the uneasiness in international markets
persisted.
, Beginning early in the decade,
the U.S. Government undertook

1. V ehicle cur rency is a f or eign currency meeting three general criteria : (1) dea ler s in foreign exchange hold sig nificant working balances in the

currency; (2) denIers ta ke tempora ry positions in that currency; and (3) the currency is one through which a nonvehicle currency can be excbanl1
for another. A vehicle currency. therefore. is more than a means of excbnnlre.

Net U.S. capital outflows accelerate
as trade balance declines

several programs to correct the
balance-of-payments deficit.
Measures were enacted to slow the
BILLION DOLLARS
_______________________________________
flow of funds abroad, and monetary
and fiscal policies were directed
BALANCE OF PAYMENTS
toward improvement of the bal(EXCLUDING SDR'S)
ance of payments. Where, on the
liquidity basis, the deficit had
reached $3.9 billion in 1959 and
1960, it fell to $1.4 billion in 1966.
But the next year it rose again,
increasing sharply to $3.5 billion.
With increasing reluctance, cen-8_
tral banks in Europe continued
absorbing the surplus dollars flowing
into their national markets.
-12~1________- l________-L________- L________~
After the sterling crisis in 1967,
stronger steps were taken to eliminate the U.s. balance-of-payments
9deficit. And the next year, the
NET CAPITAL FLOWS
United States achieved its second
PLUS TRANSFERS AND OMISSIONS
surplus since 1950. On the liquidity
basis, the surplus was very small,
OFFICIAL SETTLEMENTS BASIS
however, reflecting mainly a mas0 .. · ......................................................................................................... .
sive inflow of capital and an unusually large volume of special
Government transactions that were
only slightly more than needed to
-9offset a sharp drop in the U.S.
trade balance.
A severe deterioration in the
-15i~________~________-L________~__________
country's balance-of-payments
position was partially avoided in
1969 by a sharp tightening of
9domestic
monetary conditions.
CURRENT ACCOUNT
In an effort to accommodate strong
loan demand in the face of domestic deposit shortages, banks in this
country began borrowing dollars
MERCHANDISE
abroad.
TRADE BALANCE
As a result, on the official transaction basis, the United States recorded a surplus year as foreign
central banks lost reserves in meeting the heavy demand for dollars.
On
the liquidity basis, however,
01
the balance of payments was essen1950
1965
1955
1970 tially unaffected by Eurodollar
1960
borrowings. On this basis, the
1970 figures preliminary except merchandise trade balance
deficit jumped to $7.0 billion as the
SOURCE:U.S. Department of Commerce
balance on goods and services
dropped again in response to rising
domestic demand and accelerating
price increases.
As monetary conditions in the
.......
United States eased in 1970 and
4~

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llUsiness Review I August 1971

early 1971, U.S. banks began repaying their Eurodollar borrowings, and at an increasing rate.
Superimposed on the underlying
deficit, this flow greatly increased
the supply of dollars in the hands
of foreigners, raising the nation's
deficit, on the official transaction
basis, to a record $10.7 billion for
1970 and $5.7 billion for the first
quarter of 1971, excluding SDR's.
Searching for a profitable return
on these accumulating balances,
foreign holders of dollars turned to
the markets offering the highest
return on short-term investments.
The money markets in countries
where authorities were maintaining
tight monetary policies in their
bout with domestic inflation were
primary candidates. Large volumes
of dollars began to be exchanged
for foreign currencies in these
markets, and central banks tended
to absorb the surplus supply. Reserves of central banks rose
sharply, particularly in Germany,
giving rise to speculation that these
countries might undertake to stem
further inflows by revaluing their
currencies. And this prompted
still more inflows.
These conditions culminated in
the closing of foreign exchange
markets in Germany, Switzerland,
the Netherlands, Belgium, and
Austria in early May. When the
markets reopened, the German
mark and the Dutch guilder were
floating, and the Swiss franc and
Austrian shilling had been
revalued.
Three main problems
Three distinct but related problems have developed under the
system established at Bretton
Woods. These involve international
liquidity, payments adjustments,
and confidence. In addition, other
complicating problems have arisen
from the rapid development of the
Eurodollar market.
The problem of liquidity relates
principally to the inadequacy of
official international reserves in
4

supporting the full potential for
growth in world trade over the long
run. It does not relate to the adequacy of the reserves of anyone
country. Any national inadequacy
may reflect, of course, the depletion
of a country's international reserves as a result of persistent
deficits in its balance of payments.
The institution of the special drawing rights program was largely a
result of the general recognition of
the need for consistent growth of
reserves under the arrangements
adopted at the Bretton Woods
Conference (and, subsequently,
amended).
The problem of adjustment relates to the system of restoring
balance to a country's international accounts. Adjustment programs to correct payments deficits
by creating enough unemployment
to reduce demand for imports have
been generally unacceptable in all
countries since World War II. An
adjustment for the sak-e of a country's balance of payments is considered satisfactory only if the
deficit country can reduce its
domestic prices and income with
minimum sacrifice of growth and
output. Since this is a difficult
criterion, the adjustment mechanism of the Bretton Woods system is not permitted, in practice,
to work fully.
The problem of confidence relates to the transfer of funds from
one country to another. In essence
this problem affects the stability of
the whole international system.
The system has been subject to
confidence crises increasingly in
recent years as individuals and
businesses have come to think a
particular parity was about to
change. There have been large
speculativ.e flows, for example,
from sterlmg to dollars that placed
the Bank of England under great
pressure. There have also been
massive transfers of funds from
dollars into German marks.
In both cases, massive infusions
of funds were needed to defend

against these speculative attacks.
In the case of Britain, the devaluation of the pound in 1967 may have
been forced by heavy flows of
speculative capital. In the case of
Germany, large conversions into f
marks were an important cause o.
the revaluation of that currency 1n
1969. Similar pressures in 1971
caused Germany to resort to a
floating mark.
Exchange rates in practice
In response to needs for liquidity,
confidence, and adjustment, the
international monetary system has
undergone significant change .
several times in recent years-w1th
the acceptance of special agreements, new institutional arrangements, and formal modifications.
t
Although the introduction of
SDR's has no doubt been the mo S
innovative change in the system,
others have also been extremely
important.
d.t
To cope with shortages of cre 1
available to members with balanceof-payments problems, resources
of the IMF were expanded more
than $6 billion in 1961 by establishment of a general agreement
to borrow. The Bretton Woods
agreement provides that the IMF
can borrow from members willing
to lend. But under this additional
agreement of 1961, ten members
were formally committed to support the IMF with large loans 10
their currencies. The United Sta~es
committed itself to loans up to $ to
billion, and the United Kingdom
loans up to $1 billion. So far, thil_
fund has borrowed around $2 b t
lion under this general agreemen .
Many changes in the system
have been made to deal with special circumstances. The Federal.
Reserve System entered into recIProcal credit arrangements with
other central banks in 1961 to
provide swaps of currencies. On
March 10, 1971, the Federal Reserve System's reciprocal currencY
arrangements included swap. a~ree
ments amounting to $11.2 billion.

Dnder an arrangement with the

Bank of England, the Federal Re-

s:~e System can obtain up to $2

~Illion in sterling. Similarly, the

I
r

I
I

an~ ?f England can obtain up to
$2 bIllion in dollars. All told, 15
central banks were involved in the
SWap arrangements in March.
I~ 1961, the U.S. Treasury began ISsuing securities to foreign
central banks denominated in
~~eir ~urrencies. In addition to
ese l11struments-known as
Roosa bonds-the Treasury began
S~Uing nonmarketable bonds paya Ie in dollars. At the end of
~arch 1971, outstandings amount~ t? more than $1 billion in
oreIgn-denominated bonds and
more than $2.5 billion in dollar~enominated bonds. With these
~nstruments, the United States
nanced part of its deficit without
~eUing gold to foreign central
tanks .not wanting to add further
a then dollar holdings.
Changes in international arr~ngements for gold transactions
WIth individuals began with the
~stablishment of the Gold Pool
In 1962. The pool acted as the
tr.nt for seven countries-the
d nIted States, the United King10m, France, Germany, Switzerl:nd, ~elgiu~, and the Nether. nds-l11 bUYl11g and selling gold
In the London market. Participants
~greed not to deal in gold directly.
~ the pool sold gold to keep the
PrIce from rising, it exhausted its
?Wn holdings and sold gold belongIng to the members.
f In 1968, when private demand
tor gold again threatened the syshe~, some members of the pool
lteSltated in supplying more gold.
ather than dissipate monetary
r~serves to hold the market price
gold at $35 an ounce, the memth rs devised a two-tier gold system
of at marked the end of operations
the pool.
b Dnder the two-tier system, memells agreed to deal in gold with
eich other at $35 an ounce. They
a So agreed not to supply the free

llUs'
lIless Review

I August 1971

market with gold at a higher price.
The result was a two-tier system,
with the price of monetary gold
stabilized at the level on which
exchange rates are based and the
price of gold in the open market
free to vary with demand.
Because South Africa, the
world's largest producer of gold,
was not a party to the agreement,
there was some uncertainty for a
while. For the first year or so after
the agreement, the market price of
gold stayed well above the official
price, largely because South Africa
was able to withhold supplies from
the market but also because uncertainties in the value of currencies helped sustain demand.
Conditions changed abruptly in
1969, however, as South Africa
suddenly moved from a position
of surplus in external payments to
one of deficit and was forced to
sell gold not only from its current
production but also from its reserves. With most of these sales in
the open market and world exchange conditions improved, the
market price of gold eased back to
the official price. Also contributing
to this easing was a sharp increase
in interest rates that raised the
cost of holding gold.
In these circumstances, it became possible in late 1969 to reach
a formal agreement on the marketing of South Africa's gold. South
Africa agreed to sell its current
production on the free market only
when the market price is higher
than $35. Such sales were to be
orderly and limited to the country's current payments needs. In
addition, South Africa would make
gold available to the IMF.
For its part, the IMF agreed to
buy South African gold out of current production to the extent
needed to meet that country's
current exchange needs. Purchases
would be at the official rate, regardless of the market rate. The arrangement effectively provided a
floor of $35 an ounce to the price
South Africa gets for its gold.

These changes in the monetary
system-a network of swap agreements, sales of Roosa bonds
b?~rowing arrangements, and proVISIOns for dealings in the gold
market-strengthened the system
against the instability resulting
from lack of confidence in currencies. These changes also altered
the mechanics of the exchange-ra te
system-a system greatly influenced
by still another institutional
development.
The Eurodollar market
Growth of the Eurodollar market
has greatly complicated the operation of the international monetary
system, impacting directly on interest rates and the availability of
funds in different countries. Banks
in almost any country can accept
dollar-denominated deposits from
the market, convert them into local
currency, and make loans to domestic borrowers. Banks and corporations can also liquidate dollar
deposits in the Eurodollar marketin much the same way they would
liquidate short-term investments
to provide funds for expansion.
During periods of tight credit in
the United States, such as in 1966,
1969, and early 1970, banks in this
country have relied heavily on the
Eurodollar market as a source of
loanable funds that could not be
borrowed readily in the domestic
market. Similarly, in periods of expansionary monetary policy, banks
and companies have absorbed
liquidity by investing in the Eurodollar market. Such placements of
dollars may tend to counteract
somewhat central bank efforts to
increase liquidity at home.
The Eurodollar market has not
only increased the problems of
domestic monetary management
but also complicated the monetary
management of foreign central
banks. Because of the general
sensitivity of international finance
to changes in interest rates, the
Eurodollar market has come to
function as a transmission belt
5

linking money markets in the
United States and Europe.
From 1969 through the first half
of 1971, changes in the volume of
Eurodollars used by banks in the
United States were crucial in the
transmission of U.S. monetary
influence to Europe. When the
Federal Reserve System adopted
a restrictive policy in 1969, banks
in the United States increased
their Eurodollar borrowings by $7
billion. Eurodollar rates rose
steeply, and funds flowed out of
European banking systems into
the Eurodollar market.
The drop in short-term rates in
the United States during the period of expansionary policy in 1970
and early 1971, together with the
return flow of Eurodollars released
by U.S. banks, depressed Eurodollar rates, creating an incentive
for companies in Europe to borrow
Eurodollars. Throughout this period, interest rates were generally
higher in Europe than in the
United States and currency was
generally tighter. The resulting
inflow of funds to Europe hampered monetary efforts to cope
with inflation there. This was
especially true in Germany.

Development of the Eurodollar
market has also led to other complications. Some reports suggest
that during recent attacks on the
dollar, low margin requirements for
financing gold purchases were apparently met by Eurodollar credit.
Since the collateral was of the
highest grade, Eurodollars became
readily available for speculation.
Moreover, there is some indication
that the Eurodollar market has
also been used as a vehicle for
speculating in foreign currency.
As a result of these problems,
central banks in several countries
have imposed controls intended to
keep banks and corporations from
pursuing practices inconsistent
with domestic monetary objectives.
By 1969, banks in Austria, France,
Italy, Belgium, the Netherlands,
and the United Kingdom were
operating under various types of
regulations intended to limit lending in the Eurocurrency market.
Also that year, the Board of
Governors of the Federal Reserve
System moved to influence use of
Eurodollars by U.S. banks. To slow
the flow of Eurodollars into the
United States during a period of
restrictive monetary policy, the

board placed marginal reserve requirements on Eurodollar borroWings.
Then in late 1970, as monetary
policy in the United States eased
and the difference in interest rates
in the United States and Europe
widened-causing large U.S. banks
to repay their Eurodollar borroWings-the board moved to slow the
consequent deepening in the official settlements deficit by slowing
the return flow of Eurodollars. To
enhance the value of a bank's
reserve-free base, the board raised
the reserve ratio required on marginal Eurodollar borrowings from
10 percent to 20 percent.
-Lacy H. Hunt, II

New member bank
The Village Bank (National Association), Dallas, Texas a newly organized
institution located in the territory served by the Head Office of the Federal
Reserve Bank of Dallas, opened for business June 30, 1971, as a member of the
Federal Reserve System. The new member bank has capital of $200 000 surplus of
$200,000, and undivided profits of $100,000. The officers are: Charl~s M. Steele,
President; Cam F. Dowell, III, Vice President; Don O. Monroe, Vice President
and Cashier; and A. T. Webb, Assistant Cashier.

Functional Cost Analysis-

A New System Approach
To Gauging Profitability

~he complexity of bank operations
as greatly increased with the
~evelopment of full-service bankIng, adding further to the diffiCulties of analyzing bank profits.
Income and operating costs have
always been hard to identify by
function. With the growth of variOUs functions and their increase in
n~mber, the profitability of indi~ldual functions has become even
arder to determine.
r In response to these complexiles, the Federal Reserve System
~as developed a program of func~lonal cost analysis to help memer banks analyze the profitability
of various operations. Designed to
provide individual banks with
Information on the income, exihn.ses, and current earnings of
en specific functions, the program also provides data for use

in comparing their operations with
averages drawn from a group of
banks in the same deposit size and
with functions of about the same
size. Data are reported for banks
of three groups:
• Small-total deposits up to $50
million
o Medium-total deposits from $50
million to $200 million
• Large-total deposits over $200
million
This article describes the functional cost analysis program-what
it is, the information it provides,
and its uses and limitations. A
later article will present a detailed
analysis of data collected under the
program from 1966 through 1970.
The analysis will be on both Eleventh District and national bases.
Aggregate data will show differences in specific functions accord-

ing to bank size, as well as differences in the relative profitability
of various functions.
An expanding program
The program is of fairly recent
origin. Pioneering work in functional cost analysis was first undertaken by the Federal Reserve
banks of Boston and New York in
the late 1950's. The Federal Reserve Bank of Philadelphia joined
the effort in 1964, followed the
next year by the Reserve banks of
Chicag~, Cleveland, Minneapolis,
St. LOUIS, and San Francisco. In
1966, the Reserve banks of
Atlanta, Richmond, and Dallas
joined the program. And in 1970
the Federal Reserve Bank of Ka~
sas City joined, making the program available to member banks
in all 12 Federal Reserve districts.

--Participation in Each District (1970)

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SOURCE: Federal Reserve Bank of New York

'-~--------~-----------------------------a ltless Review I August 1971
Us •

There is no charge for participation. Member banks need only provide the data required as input to
the program. The Federal Reserve
bank of each district provides the
work sheets needed and compiles
and processes the data. Banks
participating in the program receive individual reports on their
operations for the most recent fullcalendar year. If the information
is available, they also receive figures for their operations in the
previous year.
In addition, the Federal Reserve
publishes a national report showing average operating costs and
earnings for all participating
banks, as well as district reports
showing regional averages. There
is also a national report, available
through Federal Reserve banks,
entitled Performance Characteristics of High Earning Banks.
This report includes functional
cost data on the top 25 percent of
the nation's banks participating in
the program.
Bank participation
Over 16 percent of the more than
5,700 member banks participated
in the program last year. Of those,
59 were in the Eleventh Federal
Reserve District.
One reason for the limited participation could be the uniform
reporting procedure used in the
program. Because banks must report data according to a specified
format, they may have to allocate
additional personnel time to the
preparation of reports. This is
especially true for banks that are
not computerized. Another reason
could be that many large banks
already maintain their own cost
programs.
Many banks, however, probably
do not participate in the program
because they are not aware of its
potential advantages. Improvements in operational efficiency help
everyone concerned. As banks become aware of excessive costs or
unnecessary expenses, they are
8

better able to improve their competitive positions, passing on some
of the benefits to the public in the
form of higher savings rates, lower
lending rates, or more efficient
service.
The functional approach
Banks taking a functional approach to cost accounting are in a
position to evaluate the costs of
specific services with considerable
thoroughness. They can compare
costs and profits of different functions in their bank or those of a
single function over time. They can
also compare the performance of
functions at their bank with those
at other banks of similar size.
Income and expense data are
developed for 12 functions, allowing comparisons to be made for
both the asset and liability sides
of the balance sheet. Data are included for• Three fund-supplying functionsdemand deposits, time deposits,
and nondeposit funds
• Five fund-using functions-real
estate mortgage loans, instalment loans, commercial and
agricultural loans, investments,
and credit-card operations
(Collection of data on creditcard operations is due to start
with the report for 1971. Previously, only four fund-using
functions have been analyzed.)
• Four departmental functionscomputer services, trust operations, safe deposits, and such
non banking departments as insurance and real estate agencies,
travel bureaus, farm management departments, and holding
companies
Bank earnings and expenses are
allocated according to function.
In the determination of the net
earnings of a function, portfolio
income is assigned to each fundsupplying function. For example,
if a bank had a portfolio income
of $5,000 and 40 percent of its
funds came from demand deposits,
the demand deposit function would

have gross earnings of $2,000 in .
portfolio income, plus some addItional income from service charges.
In the computation of the profit
of various fund-using functions,
earnings, expenses, and the "c~s~
of money" (or the cost of acqUIrIng
and processing funds) are assigne~
to each function. A "pool of funds
approach is used, rather than any
effort to match specific sources of
funds on the liability side with
specific uses on the asset side.
With this approach, the "cost
of money" is figured as the cost of
acquiring and processing demand
deposits, time deposits, and nondeposit funds, minus any service
charge or fee income. For example,
if a bank had $100,000 in demand
deposits, $100,000 in time deposits,
and $50,000 in net capital funds
and if the cost of obtaining these
funds were 2 percent, 4 percent,
and 1 percent, respectively, the
cost of money for this bank would
be $6,500, or 2.6 percent of the
funds available to it.
With a figure for the cost of
money, the cost of a function can,
be found by multiplying the bank s
average percentage cost by the
amount of funds a function used.
For example, if the average money
cost of a bank's funds were 2.6
percent, the cost of a $50,000 instalment loan portfolio would be
$1,300.
This method is especially helpful in comparing costs between
banks. Since accounting procedures vary widely, cost compari- .
sons would have little value were It
not for the uniform procedure
used in functional cost analysis.
Although all banks cannot be
forced into a common mold, some
loss of flexibility may be justified
in the interest of allowing
comparisons between banks.
The loan function
For the sake of the analysis of
loans, portfolios are broken down
not only into the three main functions (mortgage loans, instalment

loans, and commercial and agriCultural loans) but also into subsets for each of these functions.
They include• Volume of loans made
• Income received
• Net earnings after the cost of
money
• Number of loans made
• Average size of outstanding
loans
• Number and volume of loans
serviced per employee
th Banks participating regularly in
e functional cost analysis progfram ?an compare the profitability
° theIr loan operations over the
rears, profitability of various
Ypes of loans in a single year, or
profitability of their loans comp,ared with those of other institu~lons ,of comparable size and with
unctlOns of similar volume. The
cOmparisons can be either national
?r regional. By allowing banks to
Identify functions with earnings
that fall substantially below average, such information can be very
Useful in the structuring of loan
portfolios.
The Functional Cost Analysis
report includes a special table for
ea7h bank, showing the break-even
f°Int on its consumer instalment
oans. This table, by showing the
smallest loan that can be granted
at various interest rates and
matUrities to generate enough in~hme to cover the average cost of
t e !oan, provides a rough guide to
he Interest charges needed for a
profitable lending program.
The investment function
The investment function includes

aU'
th Interest-bearing assets of a bank
f at are not included in the loan
dUnction. Investments are broken
OWn into• Long-term and short-term Government securities
• Tax-exempt securities and loans
(Which, for purposes of the analhSi~, are converted to a taxable
aSIS so that uniform comparisons can be made)
nUsiness Review I August 1971

The Functional Cost Equation
INCOME

From:

Loans
Investments
I~
,
Other Functions

- EXPENSES

Salaries

- COST OF MONEY

PROFITS

Cost of Processing:

Postage

Demand Deposits

Advertising

Time Depos its

Occupancy Expense

Nondeposit Funds

Other

• Other security investments
• Liquidity loans-which include
such fund-using items as Federal
funds sold, purchased commercial paper, bankers' acceptances,
purchased certificates of deposit, and Commodity Credit
certificates of interest
By grouping banks according to
the size of their deposits, the
functional cost study allows an
individual bank to focus on average investment earnings of banks
of similar size and to compare
earnings of different investments
according to types and maturities.
Moreover, the study provides data
that allow a bank to compare the
performance of each of its functions with the average performance
of the ten banks with the closest
volume in that function. The internal data furnished for each
bank also allow comparison of the
profitability of various investments relative to other investments
and loans.
The deposit functions
Since the cost of money is necessary in gauging the profitability
of a bank, the relative costs of
different types of deposits are
highly important, In trying to hold
down their costs of money, bankers
may want to make internal, as
well as external, comparisons.
Demand deposits are broken
down in functional cost analysis,
on the source side, by the type of
deposit-regular checking accounts,
special checking accounts, and

other demand deposits-and on the
use side, into the portion invested
in the portfolio and the portion
in "cash and due from banks."
(Beginning with the 1971 report
demand deposits will be broken '
down for .analysis by type, such as
commercIal, personal, and minimum balance-no service charge)
Because it does not earn a retur~
bankers are interested in holding'
the "cash and due from banks"
item as low as possible without
foregoing the liquidity required
for sound management.
Income from demand deposits is
mainly portfolio income. The income from service charges is comparatively small. Special checking
accounts (those for which a depositor is charged a specific
amount for each check) make up
only a small part of the total volume of demand deposits-substan_
tially less than regular checking
accounts.
Time deposits-which have
accounted for more than half the
volume of total deposits at the
banks in the program in recent
years-are broken down into regular savings accounts, club accounts
school savings accounts, and CD's'
and other time deposits. Of these
regular savings accounts and CD~s
and other time deposits, of course,
make up most savings at banks
With time deposits, most of the
income is provided by the port~olio. ~nte~e~t is the major expense
m mamtammg such deposits.
Because of high interest costs, net
9

earnings on time deposits are
usually less than earnings on demand deposits.
Other departmental functions
Most banks also have departments
that are not fund-using in a banking sense. When occupancy costs
or other expenses, such as advertising, are allocated to computer
services, for example, the function
may show a net loss.
A net loss, however, does not
necessarily mean a function should
be discontinued. On the contrary,
for banks trying to portray a fullservice image, these auxiliary
departments may actually add to

the overall profitability of the
bank. A bank could overestimate
expenses of a function-which
would partially account for its poor
performance. Allocation of costs
to functions could, on the other
hand, show that such charges as
service fees and safe-deposit rents
are lower than they should be and
that the bank could improve its
net profitability by increasing its
charges for these services.
Limits of interpretation
Functional cost analysis-while
providing a measure of the profitability of bank operations-must,
nevertheless, be used with caution.

Flows of Bank Funds
SOURCES

USES

DEMAND DEPOSITS
REAL ESTATE
LOANS
TIME DEPOSITS

NONDEPOSIT FUNDS

COMMERCIAL
AND

TMENTS

Because participation is voluntary, banks included in the study
do not constitute a random sample
of either commercial banks or
member banks.
As with most statistical information, the usefulness of the data
generated by functional cost
analysis depends primarily on
their intelligent interpretation.
After final data are released each
year, Federal Reserve banks hold
meetings with representatives of
participating banks in their
districts to help interpret the
results.
The program deals with comparisons of average earnings and
expenses. It does not give marginal measures. A bank might d?
well, for example, to continue WIth
a function that has greater fixed
costs than earnings. To recover
even some of the cost could be
better than to abandon the function and recoup nothing.
The table of break-even points
on instalment loans provides
another example of the need for
careful interpretation. The figures
in this table are not intended to
suggest that smaller loans are .
necessarily unprofitable. In makIng
a new loan, a bank must give consideration to the incremental costs
of the loan. Because many costs
are fixed, they are not changed
by additional loan activity.
t
All banks differ in some respec .
Bankers looking at average figures must realize that each of
their institutions is, in some sense,
unique-in location, seasonality 1of deposits, managerial goals, qua
ity of assets, local conditions
s
(including competition), and need
of the community-and evaluate
its performance in light of these
unique characteristics.
.
An operation entailing a hIgh
initial fixed cost may show little,
if any, net profit in the first feW
years. In terms of long-range
growth and overall profitability, .
however, a bank may need to sacrIfice short-term profits. For that

~easo~, in eValuating specific

UnctIOns, it is best to focus always
on the bank's overall performance.
. As long as decisions regarding
Income and cost allocations are
~ubjective, biases will be reflected
M: any program of profit analysis.
ore?ver, because many bank
~ncbons are interrelated, it is
ard to allocate costs directly to
sPecific functions. But the program does have the very real
adVantage of offering uniform
rep ort·I~g of ?ost and income. And
th.
IS UnIfOrmIty allows a series of
comparative figures.
OveralI_a useful program
FUnctional cost analysis-despite
some data and other limitationsProvides a valuable tool of bank
management. Internal cost, exense, and earnings data allow a
to compare the profitability
th Its various operations and define
th
of greatest profitability. If
a e ank finds some of its charges
pre out of line with functional exa~~ses, it can begin making
of ~ustments. Likewise, comparison
t ~ta Over time allows the bank
PInpoint improvements as it
c anges operating policies.

Information on the average
costs and profits of other banks
provides management with guidelines for the operations of its own
bank. By comparing its operations
with those of other institutions of
similar size, management can find
areas to improve profitability by
making better use of the bank's
resources.
The profitability of any business
depends on its ability to increase
income and hold down costs. By
giving banks the means of evaluating the performance of their
various functions in terms of costs
and earnings, functional cost
analysis provides a tool for measuring profitability.
-Carla M. Warberg

b
ark

°b

.........
New par banks

The Southeast Bank, Houston, Texas, an insured nonmember bank located in the
territory served by the Houston Branch of the Federal Reserve Bank of Dallas,
was added to the Par List on its opening date, June 21, 1971. The officers are:
W. Merriman Morton, President, and Louis A. Hartman, Jr., Cashier.
The Webster Bank and Trust Company, Minden, Louisiana, an insured
nonmember bank located in the territory served by the Head Office of the Federal
Reserve Bank of Dallas, was added to the Par List on its opening date, July 19,
1971. The officers are: J. H. Cox, Jr., President, and Robert H. Davis, Vice
President and Cashier.
llUs·lIless Review I August 1971

Research Department
Federal Reserve Bank of Dallas
Station K, Dallas, Texas 75222

Federal Reserve Bank of Dallas

August 1971

Statistical Supplement to the Business Review

Total nonagricultural wage and
salary employment in the five
SOuthwestern states continued its
FOdest rise in June, reaching a
eVel 0.2 percent higher than both
~tnonth before and a year before.
?nth-to-month employment
f8.I~s Were made in both manufac~rlng and nonmanufacturing.
f ost of the increase was accounted
r by manufacturing, which of.ered 0.6 percent more jobs than
~ May. However, even with this
llJ.crease, manufacturing employInent was 4.6 percent less than a
Year before. Employment in non~~nufacturing categories rose only
. Percent.
A.lthough the increase in jobs
0h!side manufacturing was small,
; ost all categories of nonmanua<;turing employment showed
~B.In~ over May. The only exception
wa~ In government employment,
d hich was off 2.2 percent-probably
\' Ue l~rgely to the start of school
. acatlOns. The largest increase was
~ .t~~nsportation and public
tilitles, which employed 2.1 per~ent more workers than in May.
Onstruction followed closely with
an '
sh In?rease of 1.9 percent. Although
In OWIng gains over the previous
inon~h! levels of employment
p tninIng, construction, and transst~rtation and public utilities
b ~ lagged behind those of a year
tre ~re. Employment levels in
era e, finance, service, and govthntnent were only slightly higher
an a year before.
Oredi.t at weekly reporting comIn
t/rc1a! banks in the Eleventh Disth1Ct declined contraseasonally in
c e four weeks ended July 21. The
f~ll~raction, in line with a sizable
by ~n deposits, was accounted for
SIgnificant reductions in total

loans and in bank holdings of securities other than U.S. Government
issues.
The decrease in loans resulted
mainly from a marked decline in
business loans-which may have
partly reflected the cessation of
financing needs associated with the
buildup of automobile and steel
inventories. But with the increase
in construction activity, the demand for real estate loans was still
strong.
Total security holdings were
reduced slightly, despite significant
acquisitions of Treasury notes and
U.S. Government bonds maturing
in one to five years. Holdings of
other securities declined sharply
after expanding substantially in
recent months.
The fall in bank deposits was
due primarily to a contraseasonal
decline in demand deposits. A
net increase in sales of large CD's
more than offset a reduction in
other time and savings deposits .
On balance, reporting banks reduced their borrowings in the
Eurodollar market.
The oil allowable in Texas for
August was dropped to 66.2 percent of maximum efficient production marking the fourth reduction
in a~ many months. The level in
April before the slide began, was
82.1 ~ercent. Other producing
states in the Eleventh District held
their August allowables unchanged
from July rates.
Texas production will probably
not decline as much as the 2.5percent drop in allowables from
July might indicate. This is because production has not been able
to reach the levels implied by the
higher allowables of recent months,
particularly in some older fields.

!he Government has set up an
mteragency committee in Dallas to
coordinate emergency drouth-help
programs and adjustments in regular agricultural programs made
necessary by the drouth in the
Southwest. In addition, the
Department of Agriculture has
stepped up payments of more than
$1.1 billion to wheat, feed grain,
and cotton farmers having complied with 1971 set-aside programs.
Drouth has cut the planting of
cotton in South and West Texas
by about 20 percent. Despite this
cutback, plantings in the Panhandle and North Texas place the
state's total cotton acreage 2 percent over last year.
The wheat harvest is turning out
better than expected in Oklahoma.
At about 70 million bushels, the
forecast on JUly 1 was 15 percent
higher than on June 1. The crop
this year also has a higher protein
content than last year.
Poor range conditions and continued shortages of water still
encourage the rapid placement of
cattle in feedlots. A record 1.7
million head were on feed in Texas
on June 1-30 percent more than a
year earlier and 7 percent more
than a month earlier. In Arizona,
the number of cattle on feed was
up 11 percent over a year before.
Although unchanged from a
month earlier, agricultural prices
on June 15 averaged 6 percent
higher than a year earlier. Most
of this rise was offset, however, by
a 5-percent rise in the average
prices farmers paid.
Registrations of new passenger
automobiles in the four major
reporting areas of Texas were 21
percent higher in June than in
(Continued on back page)

CONDITION STATISTICS OF WEEKLY REPORTING COMMERCIAL BANKS

Eleventh Federal Reserve District
(Thousand dollars)

ASSETS
Federal funds sold and securities purchased
under agreements to resell • .•. ••• ••• • • •• •• ••
loans and di scounts, gross . ......•.•..•..•

Oth~r

Commercial and industrial loans ••.. ...•••.•••
Agricultural loans, excluding
certiflcates of interest •••••.. .... .. ........
Loans to brokers and dealen for

ece

~~S~hG~~:r~~:~r~~~:~lties ................ .

Other securities • • • •. . ...........•........
Oth er loans for purchasing or carrying:
U.S. Governm ent securities •.• ..•.•...•.•••.
Other securities •.•.....•..••••.•.•••••.••
Loan s to nonbank Anancial Institutions:
Sales flnance, personal Anance, factors,
and other busine ss credit companios •......

Other ................................ .
Real estate loan s . ......•.....•..•••..•••••
Loans to domestic commercial banks .. . .•••••••
Loans to foreign banks ••• •. •......... .......
Consumer instalment loans ...... . .. .•.....•••
Loans to foreign governments, offlclal
Institutions, central banks, and international
institutions .•••...•. .... . . . .••..••••••• • •
Other loans ••• •.. .........•..• •.••.•. ..•. •
Total investments ..•.. •. . • ... . ......•.. •• • . ••
Total U.S. Governm ent securities ••.•.•••.•••••

Troa.ury bill ••••••.•••.••••.••••••••••••
Trea sury certiflcates of indebtedness • •••..••
Treasury notes and U.S. Government
bonds maturing:

Wilhin 1 y.ar ........... ......... .... .
1 year to 5 years ••••.. . . .. •• •••••••• ••

After 5 years •••• • ••••••••••••••••••••
Obligation. of .tate. and political .ubdiyl.lons:

July 21,
1971

June 23,

1971

July 22,
1970

556,426
6,863,616

631,408
6,950,763

543,600
6,072,709

3,127,936

3,310,580

2,915,868

123,915

125,244r

102,624

556
55,482

500
57,056

515
33,765

4,838
428,984

5,195
426,271 r

813
379,779

195,164
490,565
816,842
13,137
22,022
771,892

183,807
519,999
716,075r
15,475
24,798
764,315

208,772
363,055
611,988
5,685
9,826
724,563

0
812,283
3,187,288

0
801,448r
3,191,450

0
715,456
2,567,146

1,051,110
132,960
0

995,507
119,476r
0

865,765
36,639
0

194,807
577,905
145,438

185,510r
544,996
145,525

123,875
615,268
89,983

94,507
1,871,874

24,824
1,501,275

81,163
146,209
1,256,149
975,402
93,394
483,967
8,955

93,883
135,679
1,264,067
926,983
91.689
510,028
8,756

108,437
66,845
1,121,630
724,546
89,193
444,104
8,899

471,401

471,829

489,090

TOTAL ASSETS...................... . ... 13,896,598

14,046,973

12,060,917

All other .............................. .

All o,her (Including corporat •• tock.) ••••.••••
Cash itoms in process of collection • . •.••.•.•..•.•
Reserves with Federal Reserve Bank ••.• •••••••••
Currency and coin • ••.•...•.••.....•••...• . •.

Balanc •• with bank. In the Unlt.d State •••• • •••••
Balances with banks In foreign countries ••••.• • •.•
Other assets (including investm!,nts in subsidiaries

not con.olidated) •••• ••• •••••••..•••• ••••••

Total depo.it .. ....... . ... . .................. 10,914,638
Total demond d. po.lts ....... . ..............
Individuals, partnerships, and corporations •.• .

(Averages of dally figures. Thousand dollars)

Item
Total reserve. held ••.••••••••••

Wilh F.deral R•• erye Bank ••••
Currency and cotn •••••• • ••••
Required reserves ••••••• •••••••
Excess reSerVeS • • ..• .•••••.•• • •
Borrowings •• ••• • ••.••••••••.•
Froe reserves • • .• • • • • • ..•• •• ••

COUNTRY BANKS
Total ro.erYe' held .............
With federal Reserve Bank •• • •
Currency and coin •••• • •••• . •
Required reserves •••. •• . . ••••••
Excess reserves • . .•....•••••..•
Borrowings ••. ••.•..•••.•••.••
Free reserves ••..•• • . . .••••.•.

ALL MEMBER BANKS
Total reserves held ••. .• .•..•..•

With Federal R••• ry. 8ank ••••
Currency and coin . . . •. ..• . • .
Required rese rves •• •. ..•••.... •
Excess reserves ••. • •. ..• •... ..•
Borrowings ••.. ...••.• ... ••. .•
Free reserves ••.• • •. .• ••••• . . •

9270,163
~
5752,94 4

2,321
34,603
107,105
4,632,590

1,060,371
2,444,995
1,034,785
24,296
59,697

1,072,127
2,459,623
996,813
20,096
64,346

18,800
1,100

18,485
1,100

14.385
1,100

1,386.283
64,591
320,805
131,554
21,342
1,057,385

1,420,126
91,116
369,782
130,137
20,753
1,051,203

1 090,382
'180,630
375,732
130,679
14.807
998,52 4

TOTAL LIABILITIES, RESERVES, AND
CAPITAL ACCOUNTS ................. .. 13,896,598

14,046,973

Governments, official institutions, central

banks, and international institutions ......
Commercia l banks •••... ..•.•••....••.•

Certified and officers' checks, etc ....... . ....
Total time and savings deposits .• . . .. . . . ......
Individuals, partn ers hips, and corporations:

O,her tim. d.po.i,••.•• • •..••••...•••.•
States and political subdivisions .... .. . .....
U.S. Government {including postal savings) •.••

Bank. in the Unit.d State •••••••••••• . ••• ••
Foreign:
Governments, ofAcial institutions, central
banks, and internationa l institutions ••.• . •
Commercial banks •••••••••••••••••••.•
Federal funds purchased and securities sold
under agree ments to repurchase ••••.•••. •.•..
Other liabilities for borrowed money •.. •••..•...

Oth.r lIabiliti .... .. ...................... . ...
Reserves on loans••. ••...........••....••.•.•
Reserves on se curities••• • • ••.• .• .....•.... . ...
Total capital accounts .• .• , ..... . .••... . ..... .

3;951 ,~~~
264,
156,415
1,257,6 13

4,782
24,883
92,792
3,517,219
922,3 41
1 803,172
'735,797
22,63 3
17,791

::::-

12,060J.!Z,

CONDITION STATISTICS OF ALL MEMBER BANKS

Eleventh Federal Reserve District
(Mill/on dol/ars)
Jun.30,
1971

May 26,
1971

Balances with banks in foretgn countrles o ••••
Cash items in process of collection ••••••••••
Other assetso ••••••••••••••••••••••••••

13,612
2,401
4,255
1,334
271
1,438
11
1,570
995

13,152
2,330
4,160
1,458
276
1,333
10
1,397
919

TOTAL ASSETSe ..................... .

25,887

25,035

Demand deposits of banks •••• ••••••.•.••
Other demand deposits • •••••.•....• .. ...
Time deposits •• •••••••••••••• •••• •••• • •

1,907
9,889
10,123

1,660
9,568
9,545

Total depo.lt............ . ............
Total capitol accountse • •• . •. .. • • ••• • •• ••

21,919
1,536
563
1,869

20,773
1,292
1,102
1,868

TOTAL LIABILITIES AND CAPITAL
ACCOUNTse ..... . .......... . .....

25,887

25,035

Item
ASSETS

LIABILITIES AND CAPITAL ACCOUNTS

Eleventh Federal Reserve District

RESERVE CITY BANKS

10,963,856

3,405
32,020
85,789
4,644,044

Bonks in th e United States•• . •.••• ••..••• •.
Foreign,

Balanco. with bank. in the United S'ate •••••

RESERVE POSITIONS OF MEMBER BANKS

July 22,
1970

6,331,266
4,319,119
413,375
142,387
1,312,356

Loans and discounts, gross •••••••••• ••••••
U.S. Government obligations •••••.•• . .•. •.
Other securities •• • •• •..•.•••••••••••••••
Reserves with Federal Reserve Bank ••.•..••
Cash in vault •••••••.•.•••••••••••• • ••••

r - RevIsed

June 23,
1971

6,270,594
4,101,381
564,186
195,678
1,288,135

States and political subdivisions . • .•........
U.S . Govern ment ...•. . .......... . .... . ..

Savings deposits • ................ ......

63,663
1,845,143

Tax warrants and short-term notes and bills •••
Other bond s, corporate stocks, and securities:
Certificates representing participations in
Federal ag ency loons •••• •...•••..•••••

July 21,
1971

LIABILITIES

Borrowings •.••..•••. ••••. .. •••••••••••

5 week. ended
July 7, 1971

4 week. endod
June 2, 1971

4 w.ek. ended
July I, 1970

826,530
772,530
54,000
831,257
-4,727
8,908
-13,635

816,747
761,206
55,541
825,994
-9,247
1,928
-11,175

740,727
687,270
53,457
749,434
-8,707
51,775
-60,482

866,588
674,020
192,568
846,858
19,730
3,954
15,776

875,439
682,960
192,479
844,281
31,158
48
31,110

769,558
585,326
184,232
749,665
19,893
8,658
11,235

1,693,118
1,446,550
246,568
1,678,115
15,003
12,862
2,141

1,692,186
1,444,166
248,020
1,670,275
21,911
1,976
19,935

1,510,285
1,272,596
237,689
1,499,099
11,186
60,433
-49,247

Other lIabilltl........... . . . . .. .... . .....

e - Estimated

CONDITION OF THE FEDERAL RESERVE BANK OF DALLAS
(Thousand dol/ars)
July 22,
July 21,
June 23,
1970
Item
1971
1971
~
---------------~--------42 8.663
Total gold cerliAcate r•• ery.... • • • • • • • • • • • • •
379,718
454,714
54,3~00
Di.counts for m.mber bank. . • • • . . . • • • • • • • • •
80,598
14,700
2,2O'h.r dl.counts and adyonc......... ...... ..
0
0
2501,403
U.S. Goyornment •• curill.s.... • . • • • . • • • • • • • • 3,056,498
2,940,793
'557 993
Total .arning a ... '.... ••• •• ••• .• . . • .• • . • •• 3,137,096
2,955,493
~'269'332
Memb.r bank ro •• ry. d.po.it.... . ........ . . 1,584,807
1,532,168
'810'632
Fedoral Re •• ry. not•• In octual circulotion .. . . • 2,076,682
2,029,833
1,'

------------------------------------~

BANK DEBITS, END.OF.MONTH DEPOSITS, AND DEPOSIT TURNOVER
SMSA' s in Eleventh Federal Reserve District

(Doll a r a mounts In thousa nds, seasona lly a dlusted)
DE81TS TO DEMAND DEPOSIT ACCOUNTS'
DEMAND DEPOSITS'
Percent change

t97i

Annual rote

June 1971 from

6 monlh.,

of lurnoyor

Standard metropolitan

(Annua l-rote

May

June

1971 from

June 30,

June

M ay

June

slali.lieal ar. a

ba.i.)

1971

1970

1971

1970

16
23

3
19
16
3

281 ,893
93,527
274,416
40,748

27.0
35.0
43.6
24.5

29.4
37.6
41.0
24.9

26.5
33.1
39.1
25.1

m:m

26.4
24.8
24 .3

25.0
23.8

ifi

it!

~{6
l ~·t

~~:~

ii~~

~
~N~A-'T-u------~~~~=-----------------~~~--------%
--------15-%-------2--%------$------------~~----~~----~~~-

lOUISIAN~. :;on. . . . .. .... . . ............. . .. . ... ...
. onroo.... .. ............ .. .... .. .......
NEW
Shreyeporl ...... .. .. ................ ....
Tex MeXICO, Roswell' .. ... .. .. .. .... .. . .. ..... . .. ..
AS:

~;:~~I!~.: :::::::::::::::::::: :::::: ::::: ::::

8. aumonl.Porl Arlhur-Orang... .. ............ .. .
croWnsyill.-Harlingen-San 8.nilo.. .... .. .... .....
C~r~u. Ch,'isli.. .. .. .. .. .. • .. .. .. .... .. .. .. .. .

$ 7,343,208
3,246,732
11,823,444
973,824

-5
- 7
10
0

Jm:m
6,751,980
2,187,144

1
4

6,~3~'m

2~
7
17

8
16

2~~:m

2 ~g,t~g

~~~~1~~':': ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1:~:l~~~2~~

H r~

~bi~~nk·
.:.::: : : :: : :::: : :::: : : :: :: : : :::::::::: "l:1~6:r~g
M~~"ed- Pharr-Edinb urg.... . .................. .
1,886,~g~

l~1~

-g

2'm:m
'l#m
l~g:6~g

69,433

H~IYt··lon-Texos City...... .. .... .... .. .. .. ....

2,90~,:~~

r~~·~~~o~L· ; ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ J~m~m

r erman-D.nlson .. .. .. ...................... .
r;jarkana {Toxa.-Arko n.as).. .. .. .. ....... .. ...

1,260,360

~~iil~:~~I:I;.:.::: : : : :::::::::::::::::::::::::

Hg~:6~~

-l~

eenl.rs.... ...... ...... ...... ...... .. .. ...

$395,123,760

', cDe posits of Individuals
Ounty basis

1 ,6~~,~~~

26.8
25.2

~~.~

~g.~

7~~:m

14%

13%

250,528
86,094

n:g

~X:~

26.3

25.4

l 8.~

in
18.3

16.8

17.0

17.7
21 .8

I~::~g~

~~:~

~i:i

$10,096,345

39.3

38.5

37.8

m:~~~

~~:~

partne rsh ips and corpo rati o ns and of states and political subdivisions
'
,

TOTAL OIL WELLS DRILLED

BUILDING PERMITS
VALU ATION (Dollor omounts in Ihou.ands)
Percent chango

Juno 1971
from

NUM8ER

TUcson

June

6 mos.

June

1971

6 mos.
1971

June

May
1971

1970

1,730
302
75
227
82
315
1,03 1
0
1,031
3,314

1,619
251
111
140
97
35 1
920
3
917
3,140

louisiana . . •. . ..• • ..

Off. hore .. .... . ..
Onshore .. . .... . .

6 months,

1971 from
1970

614

4,324

$ 10,990 $

52,949

6% 130%

105%

152
572

647
3,229

2,596
5,599

11,537
28,852

111
-4

313
31

56
74

61
152
591
8eoumo·nt · · . · .
188
8rown.y·lI · • . . .
CO
I e . .. .
145
DoIIPu• Chri.tI • .
965
1,902
Den~~" •• • •••
20
EI Pa.:·· · ·· · ·
564
Fori W · ......
G I orlh ....
456
99
H~u:t:s~on • . . . .
la redo . . . . . .. 3,679
58
lubb .. .. .. .
169
Mld l~~k • •• . • .
82
Od."od . • •...
97
Pori Arl" · · ·· ·
So
hur ....
88
So n ~ng elo •• • •
73
Sh~rm~~onio • • • 2,281
41
~xarka~d : : : :
61
aeo.
428
Wlchlla·Fdli.:: :
81
TOlol_
26 '1'
-_ _CII . . . . . 13 ,6 19

311
829
3,1 56
958
594
5,197
11 ,412
205
2,959
2,548
43 8
23,017
304
1,308
426
542
444
402
9,324
386
259
1,736
486

2,852
1,46 1
15,1 27
1,586
376
5,142
22,397
90
10,699
15,990
493
82,009
696
12,813
712
618
314
1,145
14,209
202
591
2,903
813

6,796
14,296
77,418
6,252
3,210
33,908
142,983
1,789
60,665
65,912
7,566
345,677
4,706
45,225
6,960
4,23 1
3,2 19
5,648
61,404
3,700
5,642
14,682
11 ,191

26
-37
58
96
- 1
-44
- 15
-49
-6
_42
-48
49
-38
275
-26
-36
-76
62
119
-49
45
53
-64

1,083
37
143
11
-71
128
-24
-88
42
2
67
88
72
172
29
-23
-94
19
39
-89
-41
-33
40

80
-35
38
8
25
127
-23
_28
29
39
123
52
12
71
192
-25
-49
-4
21
-49
9
-37
86

~bllen • • • • .• .•
A:~i~il.lo •••• . •

1970

FOUR SOUTHWESTERN
STATES . . . .. .... . ..

Okla homa ..... ... ..
Te xa s .. . ... .. . .. . .

Off. hore •. • . ••• ••

Onshore . • . .. .. ..

UNITED STATES • .•••..

onroe. West

Sh Monroo • • •. •
Tex;;voporl . •• .

quarter

New Me xico . .. .. •..

ARIZONA
lQ~ISIAN~··· · · .

Socond

Area

---

Third
quart er

75,441

-------$2 12,423 $1 ,026,418

16%

41%

26%

Percent
change

6.9%
20.3
-32 .4
62.1
-15.5
- 10.3
12.1
12.4
5.5%

Percent
chang e

1970

from 1969

cumulative

3,349
553
186
367
179
666
1,95 1
3
1,948
6,454

- 10.8%
7.2
31.0
- 1.9
-57.3
-6.5
-7.3
50.0
- 7.4
- 6.5%

SOURCE: American Petrol eum Institute

GROSS DEMAND AND TIME DEPOSITS OF MEMBER BANKS
E le ve n t h Fed eral R eserve Distri c t
(Averages of dall y figures . Million dollars)
GROSS DEMAN D DEPOSITS
Reserve

Country

TIME DEPOSITS
Re serve

Date

Tolal

city bank.

bonks

Toiol

city bank.

1969: Jun • • . •• . •
1970:June • . • . .•
1971 : January ....

10,209
10,265
11,532
11,272
11,219
11,555
11 ,348
11 ,354

4,758
4,748
5,236
5,118
5,11 7
5,274
5,216
5,224

5,451
5,517
6,296
6,154
6,102
6,281
6,132
6,130

7,634
7,391
9,038
9,299
9,548
9,575
9,516
9,573

2,925
2,651
3,635
3,689
3,788
3,736
3,688
3,691

February , • •

March .. ...
April ......
May . . .. ..
June .• • •• •

Country

ban k.
4,709
4,740
5,403
5,610
5,760
5,839
5,828
5,882

VALUE OF CONSTRUCTION CONTRACTS

NONAGRICULTURAL EMPLOYMENT

(Million dollars)

Five Southwestern States'

Percent change

January-June
Juno

Area and type

FIVE SOUTHWESTERN
STATES' ............ .. ..
Resid entia l building .•.....
Nonres id e ntia l building •• • •

Nonbuilding construction ••••
UNITED STATES ............
Resid e ntial building • •.. • ••
Nonres id e ntial build ing •• • •

Nonbuilding construction ••••

1971

May
1971

April
1971

1971

1970r

713
387
193
134
7,555
3,3 10
2,264
1,981

864
400
312
153
7,743
3,168
2,080
2,495

4,352
2,153
1,428
771
38,993
16,13 1
12,666
10,196

4,091
1,404
1,290
1,397
34,603
11,648
12,455
10,500

Jun.
1971p

May
1971

June
1970r

6,334,900
1,123,200
5,211,700
232,600
391,200

6,323,000
1,116,200
5,206,800
228,300
383,100

6,321,400
1,177,700
5,143,700
236,200
403,300

Tr:J:~I~ .U~i~i~i~~::::: : :: 1,~~~:~~~

1,!~~:~~~

I,m:~~~

Typ. of employm.nt
922
464
276
182
8,077
3,485
2,800
1,792

Numb.r of p.rsans

Tota l nonagricultural
wage and sa lary workers. .
Manufacturing..... .... ..
Nonmanufacturing .. .. . .. .
Mining.. . .. ..• . ••.•.. .
Construction. . • . . . . . . . .
Transportation and

Arizona, Louisiana, New Mexico, Oklahoma, and Texas
r - Re vise d
NOTE. - Details may not add to totals because of rounding.
SOURCE: F. W. Dodge, McGraw-Hili , Inc.

Finance .. ............ .
Servic.. • . • . • . . .. • • . . .
Gov.rnment... .. . . ....

333,000
1,028,000
1,285,600

328,100
1,020,600
1,314,500

May
1971

323,400
1,012,500
1,256,900

June

0.2% 0.2%
.6 _4.6
13
.~ _ 1:5
t1
_3 .0
.7

_ .2

~:~

1.5
_2.2% 2.3%
__

~------------------~------~-----------Arizona, Louisiana, New Mexico, Oklahoma, and Texas
p - Preliminary
r - Revised
SOURCE : State employment agencies

INDUSTRIAL PRODUCTION

=100)

Juno

Area and type of index

1971p

(Thousand barrels)
May
1971

April
1971

June

1970
1971

May
1971

Juno
1970r

6,989.9
2,592.6
339.0
606.0
3,452.3
704 .3
1,641.5
226.8
67.8
811.9
9,731.6

7,070.4
2,643.2
338.5
603.9
3,484.8
714.1
1,655.2
22B.B
67.9
818.8
9,797.2

6,571.9
2,380.2
35Q.9
622.4
3,218.4
636.8
1,563.2
169.7
78 .0
770.7
9,356.5

J une

TEXAS

Total Industrial production ••• • ••
Manufacturing ••••••••• • • •• ••• •
Durable • • • • • ••••• • •• • • •• • •••
Nondurable .... . . . . ...... •• • •

Mining •••••••••• •• ••• • •• •• ••• •
Utilltl.s ... . ... .. ...... ··•··•·•
UNITED STATES
Total Industrial production .•.•••
Manufacturing • • • • ••• • •• • •• •• • •

Durable .... . ........ · ••• · · ..
Nondurable • .............. . ..
Mining •••••••• • •• • • • • • • • • • •• ••
Utilities •• • ••••• • •••. • • • •••••• •

DAILY AVERAGE PRODUCTION OF CRUDE OIL

(Seasonally adjusted Indexes, 1957-59

Area

180.1
199.5
196.0
201.8
135.8
270.5

181.3
199.3
197.4
20Q.6
139.4
270.5

179.0r
196.4r
196.5
196.3r
137.6r
270.5r

174.9r
196.5
208.2
188.7r
128.6r
257.1r

FOUR SOUTHWESTERN
STATES . .. .. •.••••.•••••
louisiana • • •• • •••• • •••• • •
New Mexico • • •••••• • ••• •

Oklahoma .............. .
Texas • •• • •. . • • •••••• • • •

167.9
165.9
159.7
173.5
137.4
248.0

167.3
165.2
159.3
172.7
136.4
247.3

166.2
163.9
157.4
172.0
138.8
246.0

p - Preliminary
r - Revised
SOURCES: Board of Governors of the Federal Reserve System
Federal Reserve Bank of Dallas

May. Increases were 25 percent in
San Antonio, 22 percent in Dallas,
and 19 percent in both Houston
and Fort Worth.
Total registrations were 17 percent greater than a year earlier.
Cumulative registrations through
June were 11 percent greater than
in the first half of 1970.
Department store sales in the
Eleventh District were 8 percent
higher in the four weeks ended
July 24 than in the corresponding
period a year earlier. Cumulative
sales through that date were 8
percent higher than a year before.
The seasonally adjusted Texas
industrial production index eased
slightly in June, dropping to 180.1

168.8
168.0r
167.3
168.9r
135.5r
235.4r

Gulf Coast ••...•••.•.•
West Texas ••••••• •• ••

East Texas (proper) •.•..
Panhandl ........ . .... .
Rest of state •••••••••••

UNITED STATES .. .. ...... ..

~
Ma y
1971

JunO

~
6.4%

-1 .1%
-1.9
.1

.3
- .9
- 1.4
_.8
-.9
_.2

-.9

-:1%

8.9
_3.A
_2.6

7.3
10.6
5.0
33.6
_ 13.1
5.3

--A.O%

--~-----------------------------r - Revised
SOURCES: American Petroleum Institute
U.S. Bureau of Mines
Federal Reserve Bank of Dallas

percent of its 1957-59 base. The
drop-a decline of 0.7 percent from
the record level reached in Maywas due primarily to the abrupt
cutback in production of crude oil.
Total manufacturing output was
unchanged, as was the output of
utilities. And even with this drop
in total production, the state was
able to post a 3.0-percent gain over
June 1970.
Manufacturing of durable goods
fell 0.7 percent from the level in
May, largely as a result of declines
in the production of furniture and
fixtures, electrical machinery, and
transportation equipment. Production of transportation equipment,
still the weakest category of durable manufacturing, has fallen
20.0 percent since June 1970.

The decline in production of
durable goods was largely offset,
.
d'
however, by a contmue
rlse 1'n the
output of nondurable goods. An
advance of 0.6 percent over the
previous month, the rise in non- d
durable production was acco unte
for largely by strong surges inJh~
output of leather products an~ d
the printing, publishing, and e
industries.
'n
The important downturn waS 1
mining, which fell 2.6 percent
below the level of output in Ma~.
All this drop was due to reduce
production of crude oil caused bY
cuts in the state's oil allowables .
Despite this sharp month-tod
month decline, mining still poste
an increase of 5.6 percent over
the output for a year before.

Full text of Review (Federal Reserve Bank of Dallas) : August 1971

FRASER