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The Plateau in Business Activity
Although key indicators o f business activity show ed m oderate
improvement in March and early April, the output o f the economy
since mid-1% 2 has risen no m ore rapidly than the growth in
its resources .

Earnings and Expenses of
Eighth District Member Banks
Excess Reserves

Volume 45 • Number 4
P. O. Box 4 4 2 • St. Louis 66, Mo.

M ovements in excess reserves do not appear to reduce significantly
the Reserve System’s control o f bank credit and the money supply.
It is also questionable if the level o f excess reserves can be re­
garded as a reliable indicator o f w hether the monetary system
is likely to expand or contract.

C h a rt 1

Gross National Product - Selected Components
Billi. ns of D o lla rs

1954 D o lla rs - S e a s o n a lly A d ju s t e d

Billio ns of Dolllars






































































1 0
d a t a plotted: 1st q u a rte r 1963

The Plateau in Business Activity

I HE ECONOMY has been characterized as having
been on a plateau since mid-1962. Whether the word
"plateau” is the most appropriate description of the
economy depends on the nature and scope of the
analysis employed in studying the data. Real output
of the economy, i.e., gross national product measured
in constant dollars, increased at an annual rate of
about 3 per cent from the second quarter of 1962
to the first quarter of this year. On the surface this
increase does not seem descriptive of a “plateau.” In
order to give meaning to the term it is instructive to
look somewhat deeper into the performance of the
One approach is to analyze those dynamic segments
of our economy which are the chief source of cyclical
variation in activity. Consumer expenditures on dur­
ables and business spending on inventories and fixed
investment typically vary substantially in the course
of a business cycle (upper tier, Chart 1, page 2). Ex­
penditures by the Federal Government on goods and
services are also of a dynamic character. These expendi­
tures tend to vary in a countercyclical manner. The tQtal of these components has risen at an annual rate
of 2 per cent since the second quarter of last year,
considerably less than the 8.5 per cent average rate
of increase for periods of business expansion during
the 1951-62 period. In contrast, a large number of
GNP components—
such as consumer spending on ser­
vices and nondurables, and spending of state and local
governments—tend to move upward at a rather steady
rate quarter after quarter. The sum of these compo­
nents, which accounts for about two-thirds of total
GNP, also rose at an annual rate of 3 per cent from
the second quarter of 1962 to the first quarter of 1963.
This rate of increase may be compared with an av­
erage rate of 3.9 per cent for periods of business ex­
pansion in the 1951-62 period.
The impression of a plateau emerges more vividly
in comparing the actual performance of the economy
with measures of its potential performance.1 Since
1 For a study of the problem of measuring potential growth see:
James W . Knowles and Charles B . Warden, Jr., The Potential
Economic Growth in the United States, Joint Economic Committee,
Congress of the United States, I960.

mid-1962, actual GNP (in constant dollars) has re­
mained about 7 per cent below what might have been
achieved if resources had been more fully utilized
(Chart 2).
C h a rt 2

Actual G N P as a Per Cent of Potential GNP
Per C e nt

Per Cent

Thus, it appears that the term “plateau” describes
a situation in which the dynamic factors in the econ­
omy are no longer demonstrating buoyancy, a situa­
tion in which the economy is not moving toward the
level of activity of which it is capable. It is within
this context that the term "plateau” may describe the
performance of the economy since mid-1962.
Productive Activity
The general stability in the economy is reflected
prominently in the index of industrial production, a
measure of the output of the nation's mines, factories,
and utilities. Since August of 1962, output has in­
creased only fractionally, at a 1 per cent annual rate.
Since the beginning of this year, however, the rate
of increase has quickened.
Although total industrial output has been relative­
ly stable since mid-1962, there have been substantial
shifts in its composition. Production for consumers,
especially of household goods, appliances, and other
durables, has risen markedly since November of last
year (see Chart 3). During this same period output
of business equipment has declined. Output of ma­
terials drifted downward from the fall of 1962 to
January and then rose sharply through March.
Construction, particularly in the private sector, has
declined sharply in recent months. From June 1962
to January of this year outlays on new construction
hovered about the $62.6 billion level. From January

C h a rt 3

195 7-59=100

Industrial Production


cent. The length of the average workweek in manu­
facturing has edged downward from the levels pre­
vailing in the spring of 1962. D uring the second quar­
ter of last year the average workweek was 40.6 hours;
during the first quarter of this year it averaged 40.3

Consumer Incom e and Spending

to March, the annual rate of expenditures declined
$1.8 billion, to a level 3 per cent below the earlier
plateau. Residential construction, which has shown
considerable weakness since the middle of last year,
declined 2.4 per cent from January to March. Housing
starts during the early months of this year have av­
eraged about 1,250 thousand units (at seasonally ad­
justed annual rates); this represents a sharp decline
from the March-November 1962 pace when housing
starts averaged just less than 1,500 thousand units.

Em ploym ent— Unem ploym ent

shows, instalment credit has increased rapidly in other
periods during the past 12 years, usually during pe­
riods of business expansion. The most recent rise is
about the same as the 1959-60, 1955-57 increases, but
C ha rt 4

Status of the N ation al Labor Force
M illio n s o f P e rs o n s

1 1 1


M illio n s of P e r s o n s


„ ...

. .

Sea son a lly Adjusted

i i i



1 i 1

The relatively high level of unemployment has
been accompanied by increases in other measures of
joblessness. Man-hours lost to the economy because
of unemployment and economic part-time employ­
ment (expressed as a proportion of total potentially
available man-hours) held stable at 6.6 per cent in
the spring of 1962, began edging upward in the sum­
mer and fall, and reached 7.1 per cent in February of
this year.2 In mid-March the rate declined to 6.6 per

To a considerable degree consumer spending has
been maintained by an increase in consumer credit.
Since spring of last year outstanding instalment credit
has risen at a 12.2 per cent annual rate. As Chart 5


There were 68.6 million persons employed in midMarch of this year, 550 thousand above the seasonally
adjusted February level. Employment had fluctuated
within a narrow range from February 1962 to Febru­
ary of this year, increasing less than 1 per cent on
balance. W ith the inclusion of March, however, the
rate of increase is 1.5 per cent. The proportion of
the civilian labor force unemployed, which fluctuated
near the 5.5 per cent level during the spring of 1962,
and averaged nearly 6 percent in January and Febru­
ary of this year, returned to a 5.6 per cent rate in midMarch (Chart 4).

Reflecting the stability in productive activity and
employment, payments to wage and salary workers
were about unchanged during the summer of 1962
and have increased only moderately since last fall.
Total personal income increased at a moderate pace
last fall and has been virtually unchanged on balance
since December.3 Retail sales were approximately un­
changed on balance from July to October, increased
sharply in November, and then rose moderately from
November to March 1963.

Civilian Liibor force







Total Employment




----- n
Per C e n t



Per C e n t

1----------- ! ■
Liabor Forcei Time Loiit


l t 1"


Unemiployment Rate


---------2Potentially available man-hours is the sum of actual hours
worked, hours lost by those with a job but not working (as­
suming a 37.5 hours workweek), hours lost by the unem­
ployed (assuming a 37.5 hours workweek), and hours lost by
those working part-tim e for economic reasons (lost time being
the difference between 37.5 hours and actual number of hours

Page 4









S o u r c e ; U n i t e d States B u r e a u of L a b o r S tati sti cs
Lat est d a t a p lo tt ed : M a r c h p r e l i m i n a r y

3 Total income includes wage and salary payments; dividend and
interest payments; business, professional, and rental income; farm
proprietors’ income; and transfer payments.

C ha rt 5

Consumer Credit

B illi o n s o f D o l l a r s

considerably smaller than the 1952-53 experience, as
shown by the table below.
P erio d s o f R a p id In cre a se in
C o n su m er C red it

March 1962—February 1963
February 1959—December 1960
February 1955—December 1957
March 1952—December 1953

Average Annual Rate
of Increase

B illio n s o f D o l l a r s

Because of the relative stability in sales and orders
since the spring of 1962, manufacturers appear to have
shown little disposition to add to their inventories
(see Chart 6). Should activity turn up in the near
Chart 6

Sales, Inventories and Orders
R a tio S c a l e

M a n u fa c tu re rs'

R a t io S c a |e

One way to view developments in consumer credit
is to relate the repayments burden to some measure of
income. It appears as if people are now using about
the same portion of their after-tax income to make
instalment payments as they did last year (Chart 6).
Indeed, there has been little change in this percent­
age for the past eight years.

Business Income and Spending
Preliminary estimates of corporate profits ( after
taxes) for the year 1962, at $26 billion, show an in­
crease of 21 per cent from 1961. However, the esti­
mates also indicate that corporate profits during the
final quarter of 1962 were little changed from the
level which has prevailed since the final quarter of

future the inventory situation might provide a factor
in business expansion; current inventory levels could
prove inadequate to meet an expanding volume of
production and sales. On the other hand, if activity
should turn down, the inventory situation may not be
exceptionally vulnerable.
Plant and equipment expenditures in 1962 were
8.6 per cent above the 1961 level. Since mid-1962,
Page 5

however, business spending on new plant and equip­
ment has been cautious. D uring the fourth quar­
ter of 1962 these expenditures, just under $38 billion,
were down fractionally from the previous quarter and
are estimated to have continued at about this same
level during the first quarter of 1963.

serves available to support private demand deposits
(i.e., total reserves less reserves behind Treasury de­
posits and time deposits) declined at a 2.5 per cent
annual rate from January to March. These reserves
have expanded at a 0.6 per cent rate since March last

The cost of long-term borrowing has edged down­
ward during much of the 1961-63 period of business
expansion. D uring other periods of expansion over the
past twelve years, long-term interest rates rose
markedly. Despite the fact that rates have declined
for more than a year and a half, the current level of
rates remains higher than the levels which prevailed
during most of the past decade. H igh interest rates
are generally considered to be a depressant to invest­
ment, but other factors are also important. There is a
view that business investment may be stimulated, at
least in the short-run, by expectations of a rising price
level. To the extent that expectations of a rising price
level have been dampened during recent years, any
given cost of borrowed capital may have become a
more inhibiting factor in investment decisions.

Excess reserves, which normally increase during
the early months of the year, have drifted downward
since February (Chart 8).4 Excess reserves averaged

Chart 8

Excess Reserves & Borrowings of Member Banks

Monetary Developments
Member bank reserves available to support all pri­
vate deposits (i.e., total reserves less reserves behind
Treasury deposits) increased at an annual rate of 1.1
per cent from January to March. Over the past year
these reserves increased 3.1 per cent (Chart 7). Re­
I9 6 0


Latest d a ta plotted: M a rc h

196 2


p re lim in a ry

Chart 7

Reserves of Mem ber Banks
B illio n s o f D o l la r s

B illio n s o f D o l la r s
M o n th ly A v e r a g e s of D a i l y F ig u re s

$443 million in March and remained near this level in
early April. This was about $26 million below the av­
erage level of late January and February and about
$140 million below the last two months of 1962. Bor­
rowings averaged $155 million in March, slightly high­
er than earlier this year, and about $50 million above
the average level during 1962. In early April borrow­
ing averaged about $90 million.
Total bank credit increased at an annual rate of
12.8 per cent in the first quarter. Both loans and in­
vestments rose during the period. The money supply
(demand deposits plus currency), seasonally adjusted,
increased $200 million from January to March, or at
an annual rate of 0.8 per cent. From March 1962 to
March 1963, the money supply has increased 2.2 per

L atest d a t a plotted: M a r c h p r e lim in a r y

Page 6

4See p. 11 this Review.

Continued on page 10

Earnings and Expenses
of Eighth District Member Banks

ET EARNINGS of member banks in the Eighth
Federal Reserve District were virtually the same in
1962 as in 1961. A large increase in total expenses
was matched by a nearly equal rise in total earnings,
leaving net earnings about unchanged.

Chart 1

Earnings and Expenses
E ig h th D istrict M e m b e r B a n k s
M il lio n s o f D o lla r s
q, « u
M illio n s of D o l la r s
4 0 0 ------------------------------- R atio S c a le ----------------------- ------ 40Q





Rapid Increase in Both Expenses
and Earnings
Total expenses of member banks in the
district were 12 per cent higher in 1962 than in 1961,
continuing the postwar rise (Chart 1 and Table I). An
increase in interest paid on time and savings deposits
constituted the largest rise in any major expense item
m 1962 as in each of the past six years. Salaries






196 2


Earnings and Expenses of Eighth District Member Banks
(In millions of dollars)
Percentoge C hange



+ 7.1
+ 16.8
+ 6.1
+ 4.4
+ 7.6



$ 1 8 0 .2
$ 1 0 9 .0

+ 4.0
+ 31.9
+ 7.0
+ 11.9
- O .l



-8 .5
— 1.8
-6 .9
$ 9 9 .9

— 6.9
-1 .7
-1 .3
$ 1 0 7 .8

+ 55.9
+ 18.8
-2 7 .8
— 11.6
+ 0.6

— 54.1
+ 430.8

$ 23.9
$ 33.9

$ 24.0
$ 37.8

— 2.1
+ 2.8
+ 4.6
+ 1.5


$ 187.0

$ 181.6


$ 2 9 7 .4

$ 2 8 9 .2

$ 1 9 0 .6
$ 1 0 6 .8

+ 5.3
- 1.3
- 6.1

Taxes on net profits.................
N e t profits after ta x e s
Cash dividends on common stock . .. . $ 25.0
Net retained earn ings................... $ 34.4

Interest and discounts on loans .. . . . . $ 200.6
Interest on securities
a. U.S. Government............
b. O th e r...........................
Service charges on deposits.......
Other earnings .......................
Total e a r n i n g s ..................

Salaries and w a g e s...................
Interest on time deposits............
Other expenses........................
N e t e a r n i n g s ....................
Net recoveries and profits (+),
losses (— ):
a. On securities.................
b. On loans ....................
c. O th e rs......................... . ..
Total net recoveries and profits . . . ..

N o te:


0 .7



Detail may not add to totals due to rounding.

Page 7

Chart 2

and wages and other current expenses also increased
from 1961 to 1962.
The amount of interest paid on time and savings
deposits rose 32 per cent from 1961 to 1962 compared
with a 22 per cent rise in the previous year and an
average annual increase of 23 per cent from 1956 to
1960. The substantial rise in interest payments re­
flected a continuation of the secular increase in the
average rate paid on time and savings deposits and a
rapid growth in volume (see Chart 2).
Effective January 1, 1962, the Board of Governors
of the Federal Reserve System amended Regulation Q
by increasing the maximum allowable rate from 3 per
cent on all savings deposits to 4 per cent on savings
that remain on deposit 12 months or more and to 3Ja
per cent on all other savings deposits (see Table II).
The maximum permissible rates of interest paid on
time deposits with maturities of 12 months or more
was raised to 4 per cent and on those with maturities
of more than 6 months but less than 12 months to SH
per cent.

Tim D sits
e epo
E ig h th D is tric t M e m b e r B a n k s
M illio n s o f D o lla rs
M illio n s of D o lla rs

Per C en t

Table II

J ____ 1
____ I
____ I
____ I
____ I
____ I ___ 1
____ 1
____ I
____ I ___ L


Maximum Interest Rates Payable on Time
and Savings Deposits1
(Per cent per annum)
Effective Date
Time Deposit
Savin gs deposits held for:
1 year or m ore................. i
Less than 1 y e a r ................)

Jan. 1

Jan. 1

Jan. 1

z /2

Other time deposits payable in:
1 year or m ore................. i
months -1 y e a r.............. J
90 days - 6 m onths............ ........2
Less than 90 d a y s .............. ........1







3 Vi

1 Beginning October 15, 1962, time deposits of foreign governments
and certain foreign institutions have been exempt from regulation as to
the maximum rates of interest which banks may pay on tffese deposits.

Most district member banks increased their rates
on time or savings deposits.1 Some banks moved to
the new maximum on all or a portion of the categories
of deposits while others made increases short of the
permitted maxima. The average rate paid on time
1See "Interest Rates on Time Deposits, Mid-January 1962,” Fed­
eral Reserve Bulletin, February 1962, and "Changes in Rates on
Time Deposits at District Banks,” in the March 1963 Review of
this bank.

Page 8

Per C ent

Average Rate Paid







J ____ L



and savings deposits increased .14 of one percentage
point, from 2.41 per cent in 1961 to 2.55 per cent in
1962. This rise in the average rate paid on time and
savings deposits was about the same as the previous
years increase of .15 of one percentage point, from
2.26 per cent in 1960 to 2.41 per cent in 1961 (see
Chart 2).
The public responded to the higher rates paid on
time and savings deposits in much the same manner
as to the lower interest rates in the previous year.
These deposits increased 16 per cent from 1961 to
1962 compared with a 13 per cent increase from 1960
to 1961. Time and savings deposits as a per cent of
total deposits have risen markedly in the postwar
period. They constituted 19.6 per cent of total de­
posits in 1946, 22.7 per cent in 1951, 24.3 per cent in
1956, 30.9 per cent in 1961, and 32.9 per cent in 1962.2
Salaries and wages of district member banks rose
4 per cent from 1961 to 1962. Other expenses, which
2 For a discussion of changes in the rate of growth of time deposits
see: "Movements in Time and Savings Deposits 1951-1962,” in
the March 1963 issue of this Review .

include such items as advertising, depreciation, and
local taxes, increased 7 per cent. Total expenses in
1962 were equal to 2.86 per cent of assets compared
with 2.77 per cent in 1961, 2.05 per cent in 1956, 1.64

aged 6.37 per cent compared with 6.31 per cent (see
Chart 3).
Chart 3

Y ie ld s o n E a r n in g A s s e t s

per cent in 1951, and 1.20 per cent in 1946.
Earnings— Total earnings of district member banks
increased about 8 per cent. This rise reflected largely
the increase in earning assets, but it also reflected a
somewhat higher return on them. The growth in time
and savings deposits went into higher yielding assets
in which these deposits are traditionally invested. The
ratio of total earnings to total assets increased from
4.01 per cent in 1961 to 4.09 per cent last year. Most
of the gain resulted from a rise in the amount of inter­
est and discounts received on loans. D uring 1962,
outstanding loans averaged 10 per cent more than the
previous year, and the return on these loans aver­


Selected Operating Ratios of Eighth District Member Banks

per cent)1

Banks G rouped according to Average Deposits
(In millions of dollars)
Up to $3

$3 - $25


N et e a rn in gs to c a p i t a l ............
N e t profits (after taxes) to capital



C a sh divid en d s to c a p i t a l ........
Total e arn in gs to total assets . . .




$25 and O ver













2.7 7








3 .3 4



3 .0 7


3 .2 7

6 .3 7


4 .1 0

4 .06





0 .7 7


3.3 6




3.4 7







Interest on U. S. G overn m ent
securities (Chart 3 ) ..............
Interest a n d dividen ds on
other securities ....................
Earn ings on loans (C h art 3) . . . .




3 .9 7
2 .72

Total expenses to total assets . . .
N et e a rn in gs to total assets . . . .
N et profits (after taxes)
to totql a s s e t s ......................

All Mem ber Banks



C a p ita l to total a s s e t s ..............
Time to total d e p o s i t s ................
Interest p a id to time deposits . . ,


27 .5




U. S. G overn m e nt securities
to total a s s e t s ......................
O th e r securities to total assets . .
Loans to total a s s e t s ................
C a sh assets to total a s s e t s ........







3 2 .0




1 1 .0



3 7 .7


4 4 .4

9 .7
3 8 .0

3 7 .7



N u m ber o f b a n k s ................








2.6 0





1 A more detailed breakdown of m em ber bank operating ratios is available in the report: “M em ber Bank Operating Ratios/*
This report will be furnished upon request to the Research Department, Federal Reserve Bank of St. Louis.

Page 9

The higher average returns on loans reflect the in­
crease in the volume of consumer loans and real estate
and other longer term loans relative to total loans. Such
loans generally earn a higher return than loans with
shorter maturities. W ith the rise in time and savings
deposits, bank liabilities are thought to be more stable,
reducing somewhat the need for liquidity.

C h a rt 4

R a tio s o f P ro fits a n d D iv i d e n d s to C a p i t a l

Interest on securities increased 9 per cent from 1961
to 1962, with incomes from both Government and
other securities rising. The increased return was due
to an increase in bank holdings of securities, a rise in
some rates, and a lengthening of the average maturity
of bank investment portfolios. Increased holdings of
long-term Government and state and local bonds,
which are less liquid than shorter term securities, re­
flect, in part, the growth of time and savings deposits.

Profits Up Slightly
Reflecting the almost equal increases in total ex­
penses and total earnings, net earnings of district
member banks were practically the same in 1962 as
in the previous year (see Table I). Larger net losses
on loans were more than offset by bigger capital gains
on security transactions, and net profits were a little
larger than in 1961. Nevertheless, income taxes were
about 2 per cent less in 1962 than in 1961, reflecting,
in part, the increased holdings of tax exempt munic­

ipal securities. Net profits after taxes increased 3 per
cent from 1961 to 1962, and relative to total capital
accounts net profits increased from 8.5 per cent to 8.7
per cent (see Chart 4). The ratio of cash dividends
to capital remained unchanged at 3.0 per cent; both
the amount of dividends paid to stockholders and
capital invested increased over the 1961 level. Earn­
ings retained to strengthen capital structures were
1.5 per cent greater during 1962 than in 1961 and
amounted to 5.7 per cent of capital accounts in 1962.

The Plateau in Business Activity -Continued from page 6
Stock M arket D erelop m en ts
Although stock prices changed little during the
first quarter of 1963, the rise from mid-1962 was rela­
tively steep. Standard and Poors composite index of
500 stocks averaged 55.63 in June 1962, climbed to an
average of 65.06 in January 1963, and remained near
that level through March. The March level of 65.67

Page 10

compares with a level of 70.29 in March 1962. Since
the end of March, stock prices have moved upward,
averaging 67.91 in the first two weeks of April. Since
rising stock prices either may provide realized profits
or may add to a holders feeling of wealth, these in­
creases tend to stimulate spending and have been con­
sidered by some as a stimulus both to consumption
and investment.

Excess Reserves
Why Banks Hold Excess Reserves

C o m m e r c ia l BANKS are required by law and
custom to hold as reserves an amount of uninvested
funds equal to a portion of their deposits. For member
banks in the Federal Reserve System, these reserves
must be either cash in vault or deposits in their Re­
serve Bank.1 Historically, reserve requirements were
imposed to assure that banks maintain a cash fund to
meet temporary drains caused by depositor withdraw­
als. Other methods, such as Reserve Bank credit, have
been developed to provide banks with temporary
liquidity, but bank reserve requirements have been
retained as a method of influencing the volume of
bank credit and money.2
Banks generally do not find it practical to hold
exactly the prescribed amount of reserves. Reserves
held beyond those legally needed for existing deposits
are called excess reserves. Both reserve balances and
deposits of banks are subject to daily inflows and out­
flows, and banks attempt to avoid reserve deficiencies.
Hence, banks generally find at the end of a reserve
computation period (one week in the case of the re­
serve city banks and two weeks in the case of other
member banks) that their daily average of actual re­
serves has exceeded their daily average of required
reserves, i.e., they have had excess reserves.
Bank Management of Reserves
Since excess reserves are noneaming assets, each
individual bank has an incentive to keep them at a
practical minimum in view of all pertinent circum­
stances. A bank must continuously manage its reserve
balance to avoid shortages on the one hand and to
avoid loss of earnings by leaving funds uninvested on
the other. As a result, monthly average total and re­
quired reserves of member banks have, in general,
moved together as can be seen in Chart 1, covering the
period since 1951.
1 Reserve

requirements at present for member banks are I 6 V2 Per
cent of net demand deposits in reserve city banks, 1 2 per cent of
net demand deposits in other banks, and 4 per cent of all time

The Federal Reserve System: Fur poses and Functions, Board
of Governors of the Federal Reserve System, Washington, D. C.,
Chapter II.

2 See:

A bank has several means of changing its assets and
liabilities to minimize excess reserves. If a bank has
redundant funds, it can expand loans, buy securities,
or reduce indebtedness. Conversely, by selling secur­
ities, reducing loans, or borrowing funds, a bank can
replenish its reserves. Banks are constantly adjusting
their assets and indebtedness to keep their nonearn­
ing excess reserves at a practical working minimum.
Since the deposits of a bank fluctuate widely and
unpredictably from day to day and week to week,
both reserve balances and required reserves fluctuate
greatly. Only by meticulous daily study of its re­
serve balances and requirements and skillful adjust­
ment of its assets and liabilities can a bank achieve
close correspondence between reserve period averages
of required and actual reserves. Movements of funds
from one bank to another cause huge gains and losses
for individual banks, but cancel out for the banking
system as a whole. Many transactions, however, pro­
duce movements in excess reserves for both individual
banks and the entire banking system. Factors which
affect the volume of total reserves, such as flows of
gold, currency movements into and out of banks,
changes in Treasury cash balances at Reserve Banks,
and System open market purchases and sales, cause
changes in the level of excess reserves. Also, fluctua­
tions in the volume of required reserves (caused by
changes in bank credit and deposits) result in move­
ments in the level of excess reserves both for an indi­
vidual bank and the banking system as a whole.
Despite the many forces causing daily fluctuations
in excess reserves of all banks combined, offsetting
movements plus continuous bank management of re­
serve balances reduce greatly the monthly average
fluctuations of excess reserves (see Charts 1 and 2).
In the past two years, the average movement from
month to month in excess reserves has been $85 mil­
lion, compared with an average daily fluctuation of
$250 million.
Some banks are more efficient at keeping excess re­
serves at a minimum than others. Large banks, be­
cause of the volume of funds involved, usually find it
more expedient to watch closely their reserve balances
Page II

C ha rt 1

Reserves of Mem ber Banks
B illi o n s o f D o l la r s

M o n t h l y A v e r a g e s of D a i ly F igu re s

B illio ns o f D o l l Q T S






f o r s e a s o n a l f l u c t u a t i o n s a n d f o r c h a n g e s in r e s e r v e r e q u i r e m e n t s .
p e r i o d s of tim e r e p r e s e n t e c o n o m i c r e c e s s i o n s .

L at e s t d a t a p l o t t e d : M a r c h p r e l i m i n a r y

than do small banks. The largest money market banks
are able to maintain nominal excess reserve balances.
During 1962 excess reserves of the reserve city banks
(larger banks) averaged about % of 1 per cent of re­
quired reserves while excess reserves of other member
banks averaged 7 per cent of required reserves.
Even among banks of similar size, there are differ­
ences in the amounts of excess reserves typically held.
These variations may reflect differences in deposit sta­
bility, in loan demands, in accounting systems, in
bank attitudes toward borrowing, in size of corre­
spondent bank deposits, in amount of effort devoted
to minimizing excess reserves, and in aggressiveness
of management
Trend and Cyclical Movements in Excess Reserves
Excess reserves have trended downward during the
past twelve years. D uring 1951 excess reserves of all
member banks averaged $760 million, of which re­
Page 12

serve city banks accounted for $210 million and
other banks accounted for $550 million. In the first
quarter of 1963 excess reserves averaged $460 million
for all member banks, $40 million for reserve city
banks, and $420 million for other banks. In 1951, ex­
cess reserves averaged 4.1 per cent of required re­
serves. In early 1963, excess reserves averaged 2.5 per
cent of required reserves.
This secular decrease of excess reserves over the
past dozen years has been the result of many factors.
One major factor may have been the rise in interest
rates (Chart 3). By holding excess reserves a bank
sacrifices returns available on interest-bearing assets.
Thus, the cost of holding excess reserves varies direct­
ly with changes in interest rates. From 1952 to 1962
over half of the variations in excess reserves were
associated with variations in short-term rates.3
3 Fluctuations in monthly averages of daily excess reserves and
three-month Treasury bill rates had a correlation coefficient of
— .73.

C h a rt 2

Excess R e se r v e s

C h a rt 3

T h re e -M o n th Treasury Bill R ate
Per C ent

P e r C e nt

M o n th ly A v e ra g e s of D a ily Figures

5 ---------



Lates t d a t a p lo tt e d : M a r c h





195 5


The development of the Federal funds market prob­
ably has contributed to the secular reduction in ex­
cess reserves. This market permits larger banks which
otherwise would have excess reserves to lend funds
on a day-to-day basis to other large banks that other­
wise would be temporarily deficient in reserves. This
means of utilizing redundant funds enables banks to
dispose of what might otherwise be excess reserves.
Also, with this additional access to reserve funds,
banks may hold smaller amounts of precautionary re­
The growth in the size of banks from 1951 to 1962,
as the economy has expanded and as banks have
merged and established branches, may have tended
to reduce the volume of excess reserves. In 1951 the
average deposit holdings of member banks amounted
to $16 million; 184 member banks held deposits of
$100 million or more. B y 1962, the average deposit
holdings more than doubled to reach $35 million, and




I9 6 0


196 3


288 member banks held deposits of $100 million or
more. As mentioned earlier, bigger banks generally
hold a smaller proportion of excess to total reserves
than do the smaller banks.
Cyclical movements of excess reserves have been in
a magnitude of $200 or $300 million, falling in the
expansionary phases of business activity and rising in
the contractions. Such movements are related in
considerable measure to changes in interest rates.
Demands for credit and interest rates generally fall
during recessions (Chart 3), making the retention
of excess reserves less expensive. Then, too, with un­
certain conditions and a pessimistic outlook, banks
probably feel more comfortable holding larger excess
reserve balances, just as individuals frequently desire
to hold more cash during recessionary periods. Most
of the changes in reserve requirement regulations
during the past decade have been reductions during
recessions, and there is probably a time lag in util­
Page 13

izing all of the “freed” reserves. During periods of
business expansion the outlook is more optimistic and
both interest rates and the demand for loans rise, pro­
viding motivations for banks to hold less excess re­

C hart 4

Cum ulative C h an ge s in M e m b er Bank Reserves
D u rin g P e r io d s o f R a p id In c re a se in Total R e se r v e s
a n d S ix M o n th s T h e re a fte r

Effect of Increase in Total Reserves

One question in monetary theory and central bank
management is whether an increase in total reserves,
especially in time of economic recession, results in an
expansion of bank credit and money or whether it is
merely accompanied in large measure by an increase
in excess reserves. There have been three periods
since 1951 in which total reserves have been increased
markedly for sustained periods.4 Each of these pe­
riods began in a time of economic recession.
These periods were December 1953-November 1954,
November 1957-June 1958, and April 1960-February
1961. Chart 4 shows cumulative dollar changes in
total, required, and excess reserves of member banks
during these periods of rapid expansion in total re­
serves and for six months thereafter.
From December 1953 to November 1954 total re­
serves (adjusted for seasonal influences and to take
account of reserve requirement reductions) were ex­
panded $1,040 million, required reserves rose $920
million, and excess reserves increased $120 million.
Similarly, from November 1957 to June 1958, total
reserves were expanded $1,060 million, required re­
serves rose $945 million, and excess reserves increased
$115 million. In the April 1960 to February 1961
period, total reserves were increased $905 million, re­
quired reserves rising $660 million, and excess reserves
rising $245 million. The expansion in excess reserves
near the end of 1960 probably reflects a lag in util­
izing some of the additional reserves which resulted
from the change in the regulation permitting banks
to count all of their vault cash as legal reserves.
During these periods of rapid expansion in total
reserves, changes in excess reserves have normally
been small compared with changes in total reserves.
During the initial stages of each period, total reserves
rose rapidly and required reserves rose also, but usu­
ally at a slightly lesser rate (meaning that excess re­
serves rose). After a few months, total and required
reserves increased in a parallel fashion, and there was
little change in excess reserves. When the rate of ex­
pansion in total reserves declined, required reserves
usually continued to rise somewhat and excess re­
serves declined.
4 See Chart 1, bottom panel, and also "Member Bank Reserves and
the Money Supply” in the March 1962 issue of this Review.

Page 14

Excess reserves have risen during each of the three
most recent business contractions (Chart 2 ). In­
creases in the early parts of recessions were associated
with modest rises in total reserves and declines in re­

quired reserves. Sharp increases in total reserves
usually occurred late in recessions and early in recov­
eries, after excess reserves had already risen some­
what (Chart 1). Hence, when total member bank
reserves have been increased rapidly in time of eco­
nomic recession, bank assets, bank deposits, and the
money supply have also increased markedly. The in­
creases in total reserves have not been manifested in
any considerable measure in increases in excess re­
Use of the term "excess reserves” to indicate a sup­
ply of readily available funds or unused lending power
is probably misleading. Evidence suggests that each
bank attempts to keep excess reserves at a practical
minimum in view of all pertinent circumstances. For
practical purposes, these reserves are excess in a legal
sense only, since the bulk of them seem to be needed
for smaller banks to operate efficiently.
Fluctuations in excess reserves do not appear to re­
duce significantly the Reserve System’s control of
bank credit and the money supply. Trend and cycli­
cal movements in excess reserves have been moderate
and have been related to items such as movements in
interest rates, changes in banker demands for liquid­

ity, bank growth, and technological changes. Appro­
priate Federal Reserve System actions can offset these
movements, according to the evidence available.
When tofal reserves have been increased sharply in
periods of recession and early recovery, only a small
fraction of the increase has generally taken the form
of excess reserves. Increases of total reserves in times
of recession or early recovery have for the most part
been accompanied by increases of bank credit, bank
deposits, and the money supply.
The concept of the magnitude of excess reserves as
an indication of whether the monetary system is likely
to expand or contract is questionable.5 A relatively
high average level of excess reserves that persists for
several months does not necessarily indicate that there
is an expansive force on bank credit and money;
instead, it may reflect a weak credit demand, low.
interest rates, or an increased desire for liquidity by
bankers. Similarly, a relatively small average volume
of excess reserves is not a signal that total bank re­
serves are being provided stingily and that bank
credit and money are rising slowly (or declining).
5 Another indicator of ease or tightness often used (but inversely)
is the volume of member bank borrowing from Reserve Banks.
Some analysts employ as an indicator of monetary conditions the
net of the two concepts, called "net free” or "net borrowed”


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