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FEDERAL RESERVE BA*JK YJLLE Februaryl967 CONTENTS P a ge Changing Credit Conditions.................... 2 The Federal Budget and Economic Stabilization .............................................. 5 Annual Report of Operations of the Federal Reserve Bank of St. Louis ■■ Bank Deposit Growth in the Eighth Federal Reserve District ...................... 13 20 evievs Changing Credit Conditions . A . G R EA T CHANGE has occurred in credit conditions in the past two or three months. Tim e and sav ings deposits in commercial banks and other financial intermediaries have risen significantly; the nation’s money supply has stopped declining; most interest rates have declined sharply; and credit has apparently become more readily available. These developments may be most appropriately appraised by comparing recent experience with somewhat longer-run trends and by considering changes in specific factors under lying expansion of money and credit, such as Federal Reserve actions. F e d e r a l R eserv e C red it a n d R eserv e E xp a n sio n Federal Reserve credit, as measured by System hold ings of securities plus member bank borrowings from the System, has grown very rapidly since October. This indicator of monetary action grew at an annual rate of 12 per cent from October to January after increasing at only a 4 Ratio Scale per cent rate from April to October Bi l l i o n s o f D o l l a r s (adjusted for changes in requirements for reserves on time deposits). This credit increased 8 per cent in the 12 months ended in April 1966 and at an average 9 per cent rate from 1961 to 1965. The recent rapid rate of increase in Federal Reserve credit was large enough to provide a 5 per cent rate of growth in total reserves of member banks from October to January. R e serves for member banks are cash in vault and deposits in Reserve Banks, and, since banks must support their deposits with reserves, the volume of reserves is a restraint on the volume of bank deposits. From April to O c tober total reserves had decreased at an annual rate of about 2 per cent Page 2 following a 5 per cent increase in the year ended in April. Most of the gains in reserves were used to support Government and time deposits. Reserves available to support private demand deposits (the major com ponent of the money supply) have shown little change since October following a decrease at a 4 per cent annual rate from April to October and a 5 per cent increase in the preceding year. M o n ey S to ck The nation’s money stock—private demand deposits plus currency held by the public—showed little net change from October to January. From April to October money declined at a 1.5 per cent rate. Money increased 6 per cent in the 12 months ended in April 1966 and at an average 3 per cent rate from 1961 to 1965. Money Stock M o n t h ly A v e r a g e s o f D a ily F ig u re s S e a s o n a lly A d ju ste d P e r c e n t a g e s a r e a n n u a l r a t e s o f c h a n g e b e t w e e n m o n t h s in d ic a t e d . L a t e s t d a t a p lo t t e d : J a n u a r y p r e l im i n a r y Ratio Scale Bi l l i o n s o f D o l l a r s by large banks, for example, rose at a 25 per cent annual rate from late D e cember to early February after re maining relatively stable from August to December and rising 20 per cent in the year ended in August. I n te r e s t R ates Most interest rates have moved low er in recent months after rising sharply in the last half of 1965 and the first three quarters of 1966. Yields declined moderately from September to No vember, perhaps in part as a technical reaction to the marked rise that oc curred during the summer. In December and January the de crease in interest rates accelerated. The lower rates probably reflected in S o u r c e s : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m a n d M o o d y ’s In v e s t o r s S e r v ic e L a t e s t d a t a p lo tte d : J a n u a r y part a lessening in the demands for credit. Sales and production have risen at slower rates O th e r B a n k in g D ev elo p m en ts in recent months, and demands for credit usually par The volume of large certificates of deposit at major allel these developments. Seasonally, there has gener commercial banks rose markedly (almost $3 billion) ally been a smaller demand for credit in January than from late December to early February. By contrast, in the fall when crops move to market and inventories these C D ’s fell $3 billion from late August to Decem are expanded for Christmas. ber after rising only moderately from the end of April to August. In the year ending last April C D ’s It is not apparent that the renewed intermediation went up 20 per cent. Movements in market interest role of the commercial banks since December and the rates relative to the legal maximum of 5% per cent consequent increase of bank credit provides an expayable on C D ’s have probably been Industrial Production the chief factor fostering the fluctua tion of growth trends. Reflecting both the CD fluctuations and continued growth in other time deposits, total time deposits in com mercial banks rose about $5 billion or at a 19 per cent annual rate from early Decem ber to early February. These deposits had changed little from late August to Decem ber after rising 12 per cent in the previous year. Preliminary data from other financial institutions indicate that their savings accounts have also risen markedly in the past three months. With their greater role in the inter mediation of funds since December, commercial banks, savings and loan associations, and other institutions have improved their liquidity and have had somewhat more resources to lend and invest. Loans to business 1959 1960 1961 1962 1963 1964 1965 1966 1967 P e r c e n t a g e s a r e a n n u a l r a t e s o f c h a n g e b e t w e e n m o n t h s i n d ic a t e d . L a t e s t d a t a p lo tte d : J a n u a r y p r e l im i n a r y Page 3 planation of the general downward movement of in terest rates. Rather, the market interest rate decline relative to the rates banks are permitted to pay on time deposits explains the growth of bank credit and pre sumably an eclipse of some other avenues of financial intermediation. Despite the decline since last September interest rates still remain at high levels relative to most past periods. SELECTED INTEREST RATES A v e r a g e s of D a ily Yield s 1950 the end of the year the rate was about 13 per cent, while from then to late summer 1966 growth was at a 10 per cent rate. The recent growth rate of 7 per cent in consumer instalment credit is low compared with the 8.5 per cent rate growth in personal income in the same period and with the 12 per cent annual growth in in stalment credit from 1961 to 1965. It is about the same as the rate of credit growth from 1955 to 1961. Growth in the late 1950’s was sharply down from the extremely rapid 17 per cent a year increase from 1949 to 1955. Sep tem b er Feb ru ary 17, 196 7 1966 1965 3-m onth Treasury bills 1 .2 2 % 3 .9 5 % 5 .3 6 % 4 .6 2 % Long-term G ove rn m en t b on d s 2.32 4.21 4.79 4.49 H ig h e st-g ra d e corporate b on d s 2.62 4.49 5.49 5.01 4 - to 6-m onth com m ercial paper 1.45 4.38 5.89 5.38 C O N S U M E R INSTALMENT DEBT A n n u a l Rates of Increase A u g u st 19 6 6 -D e ce m b e r 1 9 6 6 ...................................... Decem ber 1 9 6 5 -A u g u st 1966 C o n s u m e r C red it D e v elo p m en ts Consumer instalment debt has continued to in crease in recent months, but much less rapidly than a year ago. From August to Decem ber this indebted ness rose at a 7 per cent annual rate compared with a 13 per cent rate of increase in the like period a year earlier. This slowing in the rate of growth of consumer debt has been rather steady for a year and a half. Around mid-1965 this debt was growing at about a 14 per cent annual rate. From the summer of 1965 to .................................... 6.9 10.2 July 1965-Decem ber 1965 .......................................... 12.8 M a rch 1 9 6 5 -Ju ly 19 6 5 ................................................. 13.9 1 9 6 1 -1 9 6 5 ............................................................. 1955-1961 .............................................................. 12.0 7.1 1 9 4 9 -1 9 5 5 .............................................................. 16.5 Credit for the purchase both of automobiles and of other consumer goods increased less rapidly in the last four months of 1966 than a year earlier. However, the decline in the rate of growth appeared considerably earlier for automobile paper than for other consumer goods credit. Automobile credit outstanding rose from the spring of 1965 to the end of the year at about a 15 per cent annual rate. From then to March 1966 growth was Consumer Instalment Credit at a 10 per cent pace. From March to December Ratio S cale Ratio S c a le automobile credit expanded at a 7 per cent rate. M i l l i o n s of D o liars M i l l i o n s of Dol S e a s o n a lly A d ju ste d This recent rate of expansion compares with a 14 100 100 per cent rate in the 1961-65 period, 4 or 5 per cent 90 from 1955 to 1961, and about a 20 per cent rate from 90 1949 to 1955. 80 +6.9/ + 1 0 .2 % ^ +12.8% 70 80 73.7 70 + AUTOM O BILE INSTALMENT DEBT A n n u a l Rates of Increase 60 60 +17.7% A u g u st 1966-D e ce m b e r 196 6 ...................................... M a rch 1 9 6 6 -A u g u st 19 6 6 ........................................... Decem ber 196 5 -M a rch 50 50 ( 40 40 30 3 3 3 1 1 i Dec '61 * 1961 1962 1 1963 1964 4 1965 1 $ a> 3 < c ♦ ♦ 1966 P e r c e n t a g e s a r e a n n u a l r a t e s o f c h a n g e b e t w e e n m o n t h s in d ic a t e d . L a t e s t d a t a p lo tte d : D e c e m b e r Page 4 1967 30 5.9 7.2 1966 ...................................... 10.0 M a rch 1965-D e ce m b e r 1965 ........................................ 14.6 1 9 6 1 -1 9 6 5 ............................................................. 1955 -1 9 6 1 ............................................................. 13.8 4.2 1 9 4 9 -1 9 5 5 ............................................................... 19.8 Credit for the purchase of consumer goods other than autos showed no decline in the rate of expan sion until September. This credit grew at a rate of about 14 per cent a year from the spring of 1965 to August 1966; growth then lessened to an annual (Continued on page 24) The Federal Budget and Economic Stabilization I h E P R E SID E N T ’S Council of Economic Advisers forecasts 1967 gross national product at $787 billion in current prices, an increase of about 6.5 per cent over 1966. This increase consists of an advance of nearly 4 per cent in real output and an increase of slightly more than 2.5 per cent in prices.1 The Council’s forecast, or plan, is constructed in large measure on a Federal budget program that pro duces in calendar 1967 about a $4 billion deficit on a national income accounts basis.2 A 14.3 per cent in crease in Federal spending and an 11.3 per cent rise in revenues underlie this projected deficit. The ex pected increase in revenues will result from several factors, including continued advance in total income and a proposed 6 per cent surcharge on personal and corporate income taxes effective July 1. The Federal budget program and the Annual Re port of the Council of Economic Advisers (CEA) together can be viewed as a national economic plan in the spirit of the Employment Act of 1946. The pres entation of the CEA is based, in considerable meas ure, on the popular theory that Federal budget policy to a major degree can control total demand and thereby exert a primary influence on changes in real output and prices. Budget policy is presumably designed to achieve an optimum level of demand com patible with the goals of high employment, real growth, relative price stability, and equilibrium in the nation’s balance of payments. In contrast with the fiscal policy theory of eco nomic stabilization there is an alternative school of thought which places primary emphasis on control of monetary variables as a vehicle for influencing total 1 Annual Report o f the Council of Econom ic Advisers (January 1967), pp. 62-63. 2 The national income accounts budget summarizes the receipts and expenditures of the Federal Government sector as an integrated part of the recorded activities of all sectors of the economy. For expanded discussion of this and other fiscal measures, see the appendix, “Budget Concepts and Definitions,” p. 11. spending. It is the belief of this school that monetary factors play a dominant role in the determination of total demand.8 The theory implicit in the following presentation is that the combination of stabilization policies, rather than fiscal or monetary policy alone, in large part determines total demand. Consequently, this dis cussion of the Federal budget alludes frequently to the role of monetary policy in national economic devel opments. The purpose of this article is to summarize the proposed Federal budget program for calendar 1967 and to examine its implications as a part of total stabilization policy. Although the Federal budget receives considerable attention at this particular time of year, it seems that in the interest of a dynamic and effective sta bilization policy, or even of a neutral policy, the budget program should be reviewed continuously throughout the year. Evaluations are made privately on a continuous basis, but an official midyear budget review (with revised projections) was not released to the public in 1966. To assure a free and fully-informed discussion and interchange of ideas both inside and outside of Government, it would be desirable to have official revised projections frequently, possibly on a quarterly basis.4 A midyear review in July or August after Congress has made most of its decisions would seem more reliable for the ensuing year than the 12month forecast made in January. The CEA Report focuses primarily on the immediate 12 months, while 3 The 1967 Report pays considerable homage to the role that monetary policy played in restraining total demand in 1966. The appearance of such an acknowledgment distinguishes the 1967 Report from previous ones, in which monetary policy was seemingly considered supportive ( for fiscal policy) rather than active in affecting total demand. 4 A similar recommendation has recently been made by the Joint Economic Committee of Congress. Although revised budget projections are not made available, data on realized expenditures and revenues are readily available. See, e.g., the Survey o f Current Business. For a brief quarterly analysis of these data, see “Federal Budget Trends,” a release of the Federal Reserve Bank of St. Louis. Page 5 the Budget concentrates on the 12-month period be ginning next July 1. 5 To form a basis for a discussion of budget policy in future months, this article summarizes and evaluates economic developments, budget conditions, and mon etary developments in calendar 1966. The budget program through June 1968 is then summarized and analyzed within a framework emphasizing total sta bilization policy. An appendix is provided that dis cusses alternative budget measures. Budget Policy and Econom ic and Monetary Conditions in 1 9 6 6 Real economic activity advanced rapidly in 1966, but advances were constrained by the size of the labor force and limitations on plant capacity. Employment, production, and income all increased, though less rapidly than in 1965 when some economic slack re mained.8 As a result of total demand pressing on available resources, prices rose significantly, par ticularly early in the year. In an attempt to limit excessive total demand and price increases, mone tary expansion was restricted beginning in the spring. Intense demands for credit produced rising interest rates early in the year, while limitations on credit ex pansion accelerated the rise during the summer. The Federal budget, on balance, was a strong force underlying the buoyant economic situation in 1966. Government expenditures grew rapidly as spending for defense and health, education, and welfare pro grams rose sharply. Federal revenues also increased rapidly, partly in response to rising money incomes but also in some measure because of increases in tax rates. dollars) rose 4.1 per cent in the year ended in the fourth quarter of 1966, with the advance most rapid in the first quarter. The year 1966 was marked by the necessity to allocate resources to military use more rapidly than total available resources were growing. Such a trans fer of resources is facilitated if there is a considerable quantity of unused resources in the economy, as was the case at the outbreak of the Korean conflict. The Vietnam war was escalated at a time when there was very little slack in the economy. At times of high employment and near-capacity levels of output, a resource transfer from civilian use to military use is normally effected by either tax in creases or a system of Government controls. Neither route was followed with respect to the Vietnam build up in late 1965 and 1966. Instead, the price mechanism was utilized to effect the resource transfer, i.e, the Federal Government bid away goods and services from civilian use for the war effort. SELECTED EXPENDITURES A S A PER CENT OF G N P Q u a rter N a tio n a l D efe nse C on su m e r D u ra b le G o o d s Residential Structures 1 964 1 8.1 9.3 4.6 2 8.2 9.5 4.4 3 7.8 9.6 4.3 4 7.5 9.1 4.1 196 5 1 7.3 9.9 4.2 2 7.3 9.6 4.2 3 7.4 9.7 4.0 4 7.5 9.7 3.9 1 966 1 7.6 9 .7 4.0 2 7.8 9.2 3.8 3 8.3 9.4 3.3 4 8.6 9.2 2.9 S ou rce: U. S . D epartm en t o f Com m erce. R e s o u rc e T ra n sfers in 1966 Total income and output showed advances sub stantial enough to keep the economy at high employ ment during 1966. Real output (GNP in constant 5 Since there is some evidence to support the view that the budget affects economic activity with some lag, see, e.g., Albert Ando and E. Cary Brown, “Lags in Fiscal Policy,” Stabilization Policies, Research Studies prepared for the Commission on Money and Credit (Englewood Cliffs, N .J.: Prentice-Hall, Inc., 1963), it would seem that the budget for fiscal 1968 (year ending June 30, 1968) must afford a basis for an eco nomic plan for a year beginning in, say, October 1967 or January 1968. If the primary concern of the Economic Report is the state of the economy in calendar 1967, it would seem that the budget for the year ending June 30, 1967, is more relevant than the budget for the year ending June 30, 1968. c For an extended discussion of economic developments in 1966, see the December 1966 issue of this Review. Page 6 Overall price increases thus operated as a silent tax in the absence of more restrictive fiscal or monetary actions. The growth of real after-tax personal income slowed as prices rose faster relative to money incomes than previously. Associated with the slowdown in the growth of real spendable income was a decline in real demand for civilian goods, in particular for auto mobiles and housing. In response to excessive dollar demand for goods and services, and thereby for loan funds, and to some extent to restriction on monetary expansion beginning in the spring of 1966, interest rates rose. This in crease in the price of credit helped to effect the transfer of resources by discouraging demand for those goods where capital and interest are important come taxes, and rescission of scheduled excise tax cuts—came too late to thwart n .• c I Ratio Sc a le 7 1 Ratio S c a le the inflationary pressures of the first B illio n s of D o lla r s Billions of D o lla rs quarter.7 In fact, there is some question whether the 1966 first quarter experience could have been avoided (or offset) by budget actions as late as January and February of that year. Because of lags in the effect of stabilization policies, the stage may have been set for an inflation ary period by a very stimulative fiscal situation in late 1965 supplemented by rapid monetary expansion in late 1965 and early 1966. The Vietnam buildup in the last half of 1965 was accompanied by excise tax reductions and a large retro active increase in social security benefits. The money stock expanded at a 6 per cent annual rate from April 1965 to April 1966. Other key monetary variables, such as commercial bank credit and member bank reserves, also increased very rapid ly during the year ending in April 1966. This combination of monetary and fiscal N o te : Real after-tax incom e is p e rson al inco m e a d ju ste d for ta x c h a n g e s a n d b y the implicit forces may have been sufficient to cause p rice d e flato r fo r p e r s o n a l c o n su m p tio n e xp e n d itu re s. So u rc e : U.S. D e p a rtm e n t of C om m e rce the first quarter 1966 excesses and the S h a d e d a r e a s r e p r e s e n t p e r io d s o f b u s in e s s re c e ssio n a s d e f in e d b y the carryover with respect to prices in the N a t io n a l B u re a u of E c o n o m ic R e s e a rc h . La te st d a ta plotted: 4th q u a rte r p re lim in a ry second quarter (even though the advance elements of total cost, e.g., housing and commercial of GNP slowed substantially in that quarter). and industrial buildings. The restrictive budget measures that were effected The resultant rise in interest rates affected housing —increased social security taxes, accelerated tax col more than if the resource transfer had been effected lections, and rescinded excise taxes—may have helped by taxes. Housing probably would have been affected to slow the economy after the unsustainable advance if incomes had been reduced by tax increases, but the in the last half of 1965 and the first quarter of 1966. extent would probably have been less. Interest rates These fiscal actions represented restraining factors in would not have risen so rapidly, and the cost of new addition to the April turnaround in monetary growth housing services would not have increased as much if and the implicit tax increase through inflation. Al a more restrictive course of fiscal action had been though Government expenditures rose substantially followed. in the first half of 1966, these increases were more Any transfer of resources in a high-employment than offset by the increase in tax revenues, and the economy involves a cost, and some groups gain at the national income accounts (NIA) budget showed a expense of others. However, transfer by tax increases surplus of $3.1 billion compared with a $1.4 billion permits the effects to be planned and regulated while deficit in the last half of 1965. maintaining the advantages of free markets. The price P e rso n a l Income Q u a r t e r ly T otals at A n n u a l R ates c __ S e a s o n a ll y A d ju s t e d inflation mechanism causes inequities that are often unpredictable and creates distortions that may be in conflict with national goals of efficient resource al location and equilibrium in the balance of payments. S ta b iliza tio n Policy in 1966 The fiscal actions that were supposed to restrain demand in 1966—social security tax increases, speed up in the collection of individual and corporate in During the second half of 1966 Federal expenditure increases outpaced the growth in receipts, resulting in a $2.7 billion deficit in the NIA budget. Expendi tures for the Vietnam war continued to rise, and some 7 Normally a change in collection procedures is not viewed a restrictive action because individuals and firms supposedly re act to changes in liabilities rather than collections. The speed up is mentioned here, however, because the 1966 CEA Report listed this action as restrictive in its effect on total demand. See pp. 53-54. Page 7 domestic nondefense expenditures also rose, particularly those related to the medicare program. No direct tax increases became effective in the second half, although in October the investment tax credit was rescinded and depreciation allowances for tax purposes were tightened. These meas ures probably had little effect on tax revenues in 1966, although they may have affected total demand via in vestment decisions. H igh-Em ploym ent Budget (+( S u r p lu s ; (-) D e f ic it For the year 1966 the NIA budget ran a small $0.2 billion surplus, and since the economy was at full em ployment the h ig h -e m p lo y m e n t budget showed the same result.8 On this high-employment basis, this 1956 1958 1 9 60 1962 19 64 19 66 small budget surplus in 1966 indi S o u rc e s: U.S. D e p a rtm e n t of C o m m e rc e , C o u n c il o f E c o n o m ic A d v is e rs , a n d the F e d e ra l R e se rv e B a n k of St. L ou is cated the most stimulative budget in Latest d a ta plotted: 1 967 e stim a te d fo r h a lf y e a r s b y F e d e ra l R e se rv e B a n k of St. L ou is m o re th a n a d e c a d e . T h e h ig h from F is c a l 1 9 6 8 B u d g e t employment budget ran about an $8 billion average surplus from 1961 to 1965. Budget Program for Fiscal 1 9 6 7 - 6 8 The stimulative budget situation in 1966 was ac companied by very restrictive monetary actions after April. The money stock showed little change from then to late fall. W ith loan demand fueled by rapid growth in total demand for goods and services, interest rates rose rapidly until September. The economic outlook for 1967 depends in large measure on the course of recent, present, and future monetary and fiscal developments. Such developments in turn are influenced by the unfolding of economic events. A forecast of economic conditions and policy must take into account this simultaneity. Presumably the Council’s forecast is based on this simultaneous 8 For further discussion of the high-employment budget, see the interaction. This section discusses in some detail the appendix. budget program for the 18-month period ending June 30, 1968 and examines budg M o n e y Stock et policy in light of expected economic R atio S c a le M o n t h ly A v e r a g e s o f D a ily F ig u r e s R atio S c a lo and monetary conditions. B illio n s of D o lla rs S e a s o n a ll y A d ju s t e d B illio n s o f D o lla rs T h e B u d g e t P r o g ra m : A F a c tu a l S u m m a r y Budget plans for the next 18 months indicate a larger average deficit than in calendar 1966. This conclusion obtains for the national income accounts budget, considered to be the most complete and reliable measure of the Federal Govern ment’s a c t iv it ie s and t h e ir economic impact. P e rc e n ta g e s a re a n n u a l rate s of c h a n g e b etw e en m onths in d ica te d . Late st d a ta p lotted : J a n u a r y p re lim in a ry Page 8 The following summary of the fiscal program for the remainder of fiscal 1967 and fiscal 1968 is presented as general b a c k g ro u n d and centers on the NIA budget. Fiscal year figures are given because the budget document is presented on that basis. N ew O b lig a tio n a l A u th o r ity . Obligational authority on a cash budget basis, i.e., authority pro vided by Congress to obligate the Federal Government to pay out money, increases to an estimated $194.2 billion in fiscal 1968 from $190.4 billion in fiscal 1967. This fiscal measure is considered by some to be a key variable in any analysis of the Federal budget.” The reason for this is that expendi tures must be preceded by granting of obligational authority by Con gress. The $3.8 billion increase in obli gational authority planned for fiscal 1968 compares with an increase of $27.3 billion in the previous fiscal year. Last year’s January budget plan (i.e., for fiscal 1967) called for a $3.5 billion increase in new obli gational authority. These plans went awry, partly because of sup plemental appropriations requested in January 1967 for Vietnam, but also because of larger-than-expected appropriations for housing, community development, health, education, and welfare. Expenditures. Federal NIA ex penditures in fiscal 1968 are esti mated to increase 10.2 per cent over fiscal 1967, which in turn is expec ted to be 16.1 per cent above fiscal 1966. Fiscal 1967 expenditures are estimated at $153.6 billion, 7.6 per cent above the figure projected a year ago for the fiscal 1967 period. C H A N G E S IN O BLIG ATIO N A L AUTHORITY Cash Budget D efe nse Fiscal 196 6 to Fiscal 1 967 Fiscal 196 7 to Fiscal 1968 Billions of D ollars B illions of Dollars Per Cent Per Cent 8.6 12.5 2.2 2.8 — 1.1 — 10.1 0.3 3.1 19.8 23.7 1.3 1.3 10.8 27.9 3.7 7.5 Education, h o u sin g and com m unity developm ent, national resources. commerce, a n d trans portation 6.6 36.1 — 3.0 — 12.1 Interest on p ub lic debt 1.4 11.6 0.7 5.2 O th e r* 1.1 7.7 — 0.2 — 1.3 27.3 16.7 3.8 2.0 International a n d space Dom estic Health, labor, and w elfare Total * A griculture, v eterans’ benefits and services, general governm ent, civilian and m ilitary pay increases. S ou rce: T h e B u dget o f th e U n ited States G overn m en t fo r th e F iscal Y ear En din g Ju n e 30, 1968, p. 44. C H A N G E S, IN FEDERAL S P E N D IN G National Income Accounts Budget D efense International a n d space Dom estic Fiscal 1 9 6 6 to Fiscal 1 967 Fiscal 1 9 6 7 to Fiscal 1968 B illions of D ollars Per Cent B illions of D ollars 11.8 20.9 5.8 8.5 — — — 0.2 — 2.3 Per Cent 9.5 14.2 10.0 13.1 6.2 18.8 7.2 18.4 Education, h o u sin g an d com m unity developm ent, natural resources, commerce, an d trans portation 2.0 16.7 0.9 6.4 Interest on p ublic debt 0.9 9.2 0.2 1.9 O th e r* 0.4 3.3 1.8 14.3 21.3 16.1 15.6 10.2 Health, labor, a n d w elfare, Total * A griculture, veterans’ benefits and services, general governm ent, civilian and m ilitary pay increases. S ou rce: T h e B u dget o f th e U n ited States G overn m en t fo r th e F iscal Y ear Ending Ju n e 30, 1968 . p. 43. C H A N G E S IN FEDERAL RECEIPTS National Income Accounts Budget Fiscal 1 9 6 6 to Fiscal 1 967 Billions of D ollars C h a n g e s due to ch a n ge s in tax law Personal income Per C ent of 1 9 6 6 Receipts Fiscal 1 9 6 7 to Fiscal 1968 Billions of Per Cent of D olla rs 1 9 6 7 Receipts 7.0 5.3 5.8 3.9 1.2 0.9 3.4 2.2 C orp orate incom e — — 1.9 1.3 Excise a n d other — — — .5 — 0.3 Fiscal 1968 expenditures include Soc ial security 4.4 5,8 1.0 0.7 increases over presently estimated C h a n g e s due to grow th in econom y 10.2 11.5 7.7 7.7 1967 expenditures of $5.8 billion or Total 17.2 11.6 13.0 17.3 8.5 per cent for defense and $9.8 Source'. Estim ated by F ed era l Reserve B an k o f S t. Louis from T h e B u dget o f th e U nited States billion or 11.5 per cent for non G overn m en t fo r th e F iscal Y ear Endin g Ju n e 30, 1968. defense spending including expand ed social security benefits. The increases in fiscal 1967 12.5 per cent for nondefense programs. over fiscal 1966 are 20.9 per cent for defense and Receipts. Federal NIA receipts are expected to rise less rapidly than expenditures from fiscal 1967 to 9See the writings of Murray L. Weidenbaum, e.g., “The Timing fiscal 1968, thereby increasing the deficit. Increases in of the Economic Impact of Government Spending,” National receipts were large in fiscal 1966 and even larger in Tax Journal (March 1959), pp. 79-85. Page 9 N a tio n a l Income Accounts Budget stability. The budget is pre sumably designed to provide just the right amount of fiscal stimulus or restraint at the ap propriate time. The success of the proposed budget program depends on the v a g a r ie s of private demand and the re sponse of private demand to monetary and fiscal a c tio n s . F u n d a m e n ta l to s u c c e s s is whether budget policy is suf ficiently fle x ib le to move in accordance with changing eco nomic and monetary conditions. The budget program for the first half of calendar 1967 is essentially determined. Forces Sou rce: U.S. D ep artm en t of C o m m e rc e governing the course of expen P e rce n ta g e s a re a n n u a l ra te s o f c h a n g e b etw e en p e r io d s in d ica te d . ditures and receipts are already Latest d a ta p lotted: 1 9 6 7 a n d first h a lf 1968 estim ated b y F e d e ra l R e se rv e B a n k of St. Louis from F iscal 1968 Budget. in motion. The CEA indicates that the sizable stimulus of a $5 billion NIA deficit fiscal 1967. Such increases have resulted primarily be will be appropriate in its timing and magnitude of cause this was a period of rapidly expanding money impact on an economy characterized by weakening incomes and inflation. Receipts were also accelerated, however, by faster collections and increases in social private demand. security tax rates during this period. Included in the budget program for the second NIA receipts are anticipated to increase by $17.3 billion or 11.6 per cent in fiscal 1968 over the previous fiscal year. Growth in receipts will result mainly from continued economic expansion but will also reflect the proposed 6 per cent surcharge on personal and corporate income effective July 1, 1967 and a sched uled increase in social security tax rates on January 1, 1968. B u d g e t Policy in its E c o n o m ic S e t t in g Budget plans for calendar 1967 are predicated on a forecast of sluggish growth in private demand in the first half of the year with a resumption of more rapid growth in the second half. The purpose of this sec tion is to examine Federal budget plans within the economic setting expected in calendar 1967. An evaluation of the Federal budget plan at this particular time is replete with problems. The Council of Economic Advisers probably has access to more in formation than anyone else at the time of the budget’s preparation. Consequently, this examination of the budget centers more on assumptions than on the in ternal consistency of the proposed total economic plan. The economic plan, as presented in the Fiscal 1968 Budget and the CEA Report, is to keep the economy on a full-employment growth path with relative price Page 10 half of 1967 is a proposed surtax which is supposed to provide restraint on strengthening private demand at that time. Such plans provide flexibility in that the surtax proposal could be dropped if economic condi tions do not warrant fiscal restraint. Furthermore, if inflationary pressures intensify, the surtax rate could be increased above that which is proposed. The 1966 experience suggests that budget policy was not sufficiently flexible to counter movements in private demand. During the first quarter of 1966, when it was quite obvious that further monetary or fiscal restraint was required, budget policy fell short as an instrument of stabilization. Fiscal restraint was not forthcoming because of the slow and cumbersome nature of the budget machinery. It was not possible to implement a tax increase because of the slowness of the Congressional process. Furthermore, most Gov ernment spending programs are of the type that can not be slowed or speeded in accordance with the desire of the policymaker. Because of the relative inflexibility of fiscal policy, it was necessary for mon etary policy to carry the burden of stabilization in 1966. Taking these considerations into account, it appears that monetary policy may again be assigned a critical role in the total of stabilization policy in 1967. Mone tary policy is flexible in its implementation, though there is a question about flexibility in its impact. Incom plete knowledge of the magnitude and timing of monetary actions on economic activity indicates that it should be used carefully as a tool of stabilization policy.10 Uncertainty about the length and variability of time lags in the implementation and effect of monetary and fiscal policy suggests that stimulus or restraint be ap plied in moderate doses when the economy is at high employment. Large adjustments in policy variables 10 Some evidence has recently been presented to support the view that monetary actions may affect total demand quite quickly via portfolio behavior of holders of liquid assets. See Donald P. Tucker, “Dynamic Income Adjustment to Money Supply Changes,” American Econom ic Review (June 1966), pp. 433-449. may cause instability, which is precisely what policy makers are trying to avoid. The economic situation in early 1967 is believed to dictate a need for more stimulative economic policy. An indication that the fourth quarter 1966 increase in GNP contained some involuntary accumulation of in ventory portends further slowing of production and attempts to reduce inventory. Since fiscal and mone tary policies tend to affect total demand with lags, excessive stimulation in the next few months might be too late to avert a slowdown in the first half of 1967 but might create serious inflationary problems in the second half. On the other hand, insufficient stimula tion might cause the slowdown to continue well into the second half. K e i t h M. C a r l s o n APPENDIX Budget Concepts and Definitions The fiscal activities of the Federal Government can be summarized in several ways. Some alternative budget con cepts and the relationships between them are discussed in this appendix. A table reconciling these budget concepts is given, with data for fiscal 1966-68 used for illustration. A dm inistrative Budget The administrative budget is the basic planning docu ment of the Federal Government, covering receipts and expenditures of funds that it owns. Its main purpose is to serve as a guide to executive and legislative program plan ning, review, and enactment. The administrative budget is in fact the only Federal “budget” in the sense of a financial plan. All other “budgets” discussed here are summary statements of receipts and expenditures classified in various ways for purposes other than administrative planning. Those agencies for which Congress makes regular appro priations are included in the administrative budget. Public enterprises1 are included while trust funds2 and Govern ment-sponsored agencies3 are not. Expenditures and receipts are generally recorded on a cash basis, i.e., on the date of actual receipt or payment. Interest expense is on an accrual basis. Cash B u d g e t The consolidated cash budget is a summary statement 1 Commodity Credit Corporation, Federal National Mortgage Association, Export-Import Bank, etc. 2FederaI Old-Age and Survivors Insurance, Unemployment Trust Fund, Highway Trust Fund, etc. 3 Federal Home Loan Banks, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. of cash flow between the Federal Government and other sectors of the economy. Included are activities of the reg ular Government agencies found in the administrative budg et plus the activities of trust funds and Governmentsponsored agencies. Because activities of some agencies (e.g., the post office) are recorded on a net basis, the full magnitude of cash flows between the Federal Government and other sectors of the economy is not measured by the cash budget. The cash surplus or deficit serves as a measure of the direct impact of Federal Government spending and taxa tion on the financial assets of the private sector of the economy (including state and local governments). Sur pluses or deficits in this budget indicate changes in the public debt and/or changes in the Treasury’s cash balance. N a tio n a l I n c o m e A c c o u n t s B u d g e t The national income accounts budget summarizes the receipts and expenditures of the Federal Government sector as an integrated part of the recorded activities (i.e., the national income accounts) of all sectors of the economy. Primary differences between the cash budget and the na tional income accounts budget are (1) on the expenditure side, spending is recorded when delivery is made to the Government, and purchases and sales of existing real and financial assets are excluded, and (2) on the receipts side, taxes are in large measure recorded when the tax liability is incurred. H igh-E m ploym ent Budget The high-employment budget is an estimate of expend itures and revenues in the Federal sector of the national Page 11 Incurring obligations does not necessarily mean immedi ate cash expenditures. When the Government buys goods and services produced by the private sector, the lag of expenditures behind obligations may be substantial. In the case of items not usually kept in inventory, like military hardware, it usually takes time for private producers to draw plans, negotiate subcontracts, produce, and deliver the product. income accounts for a level of high employment.4 It is an attempt to correct the distortion introduced by the impact of the economy itself (through the effect of changing levels of economic activity on Government expenditures and tax receipts) on the realized surplus or deficit. The smaller the surplus or greater the deficit in this budget, the more stimulative is the impact of Federal fiscal activities and the less is the dependence on private demand to maintain high employment. l\eiv O bligation al A u th o r ity Another measure of partic ular importance in evaluat ing the impact of the Federal Government on the economy is “new obligational author ity.” This is legislation by Congress permitting a Gov ernment agency or depart ment to commit or obligate the Government to certain ex penditures. Congress does not vote on e x p e n d itu res; it determines new obligational authority. Before funds can be spent, an agency must sub mit and have approved by the Bureau of the Budget an apportionment request. This determines the rate at which obligational authority can be used. An agen cy u sually incurs obligations, i.e., com mits itself to pay out money, after apportionment by the Bureau of the Budget. RECO N CILIA TIO N OF V A R IO U S M EASURES OF FEDERAL RECEIPTS A N D EXPENDITURES Billions o f D ollars Fiscal Y e ar 196 6 1967 1968 Actual Estimate Estimate R E C E IP T S ...................................................... 1 0 4 .7 1 1 7 .0 1 2 6 .9 Plus: Trust fu nd r e c e ip t s ................................................................... 34.9 44.9 48.1 Less: Intragovernm ental transactions ................................................. 4.5 6.2 6.5 Receipts from exercise of m onetary a u t h o r i t y ......................... .6 1.1 .5 1 3 4 .5 1 5 4 .7 1 6 8 .1 1.3 1.8 2.0 A d m in is t r a t iv e b u d g e t r e c e ip t s E q u a ls : F e d e r a l r e c e ip t s f r o m t h e p u b l i c .......................................... Less: C a sh transactions e x clu d e d from Federal receipts account (District of C olum b ia, financial transactions, etc.) ...................................................... Plus: Items a d d e d to Federal sector account but not in cash receipts (netting differences, tim ing differences, etc.) ........................................ E q u a ls : F e d e r a l re c e ip t s , n a t io n a l in c o m e a c c o u n t s ........................ — .6 1 3 2 .6 — 3.1 1.0 1 4 9 .8 1 6 7 .1 Plus: Adjustm ent for tax receipts b ecause of d eviation of econom y from h igh e m p lo y m e n t ......................... E q u a ls : H i g h - e m p l o y m e n t r e c e ip t s ................................................. .3 .2 0 1 3 2 .9 1 5 0 .0 1 6 7 .1 1 0 7 .0 1 2 6 .7 1 3 5 .0 34.9 40.9 44.5 4.5 6.2 6.5 E X P E N D IT U R E S A d m i n i s t r a t i v e b u d g e t e x p e n d i t u r e s ............................................... Plus: Trust fund e xpe nd itu re s Less: In trago vernm en ta l .......................................................... transactions ............................................... D ebt issuance in lieu o f checks an d other adjustm ents ................................................................... E q u a ls : F e d e r a l p a y m e n t s t o t h e p u b lic .......................................... .4 .6 .7 1 3 7 .8 — 1 6 0 .9 1 7 2 .4 7.3 8.7 5.0 Less: C a sh transactions exclu d ed from Federal 4 The President’s C o u n cil of Economic Advisers defines a high-employment level of eco nomic activity as that level associated with a 4 per cent unemployment rate. The highemployment budget could be computed for other budget concepts, but, for an analysis of the economic impact of the budget, the national income a cco u n ts b asis seem s m ost appropriate. For a description of techniques and procedures for calculating high-employ ment b u d g et e st i ma t e s , see Nancy H. Teeters, “Estimates of the Full-Employment Sur plus, 1955-1964”, T he Review o f Econom ics and Statistics, XLVII (August 1965), pp. 309-321. Page 12 e xpe nd itu re s account (District of C olum b ia , financial transactions, etc.) ...................................................... Plus: Items a d d e d to Federal sector account but not in cash paym ents (netting differences, tim ing differences, etc.) .......................................................... 1.8 1.5 1.8 E q u a ls : F e d e r a l e x p e n d i t u r e s , n a t io n a l in c o m e a c c o u n t s ................ 1 3 2 .3 1 5 3 .6 1 6 9 .2 Plus: Adjustm ent for e x pe nd itu re s b ecause of deviatio n of econ om y from h igh e m p lo y m e n t ......................... E q u a ls : H ig h - e m p l o y m e n t e x p e n d itu re s SU RPLU S A d m in istrative b u d g e t C a sh b u d g e t OR ........................................ 0 0 0 1 3 2 .3 1 5 3 .6 1 6 9 .2 D E F IC IT .......................................................................... ....... — 2.3 — 9.7 — 8.1 ................................................................................................ — 3.3 — 6.2 — 4.3 .3 — 3.8 — 2.1 6 — 3.6 — 2.1 N a tio n a l incom e accounts b u d g e t H igh -em p loym e nt budget ........................................................ ....... + ............................................................................ ~ h S ou rces: T h e B u dget o f th e U nited States G overn m en t fo r th e F iscal Y ear En din g Ju n e 30. 1968 and F ed era l R eserve Bank o f St. Louis. Annual Report of Operations of the Federal Reserve Bank of St. Louis I n A D D ITIO N TO R E S P O N S IB IL IT IE S involving the formation of monetary policy, the Federal Reserve Bank performs supervisory functions and a variety of services for the public, the United States Govern ment, and commercial banks. Background information on monetary actions is frequently provided in this R evieiv (for an analysis of 1966 see the Decem ber issue). Supervision by the Federal Reserve Bank is exercised principally through examination of statechartered member banks. This review of the year con centrates on the service functions of the bank. Among its service operations, the bank furnishes currency for circulation, facilitates the collection and clearing of checks, handles the legal reserve accounts of member banks, and acts as fiscal agent of the Gov ernment. Most operations of the b a n k —in c lu d in g th o s e a t th e branches in Little Rock, Louisville, and Memphis — increased in 1966, C o in counted reflecting growth in economic ac C urren cy counted C he cks collected2 tivity in the Central Mississippi N o n ca sh collection items Valley.1 Transfers of fu nd s Money Operations. S u p p l y i n g coin and currency to commercial banks and thereby to the general public is carried out through the Money Department of the bank. Rs major activities include receiving, sorting, counting, wrapping, storing, paying out, and shipping coin and currency. Money handling oper ations in 1966 rose from year-earlier levels. Both the number of pieces 1 Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee. With the exception of Arkansas, only a portion of each of these states is in the Eighth Federal Reserve District. For a review of district economic activity dur ing 1966, see the lanuary 1967 issue of this Review. and the average denomination of coins and bills han dled were up, resulting in a sizable increase in dollar volume. Coin handling continued to rise sharply in 1966, re flecting a greater availability of supplies following the severe shortage in 1964. The number of pieces handled rose from a low of 227 million in 1964 to 318 million in 1965 and to 387 million in 1966, increases of 40 and 22 per cent for 1965 and 1966, respectively. The dollar value rose 10 and 46 per cent in these years. Coin handled in 1966, however, was still well below the 1961 peak, when 490 million pieces valued at $48 million were counted and sorted. Since the coin VO LU M E OF O PE R A T IO N S1 U.S. S a v in g s Bon d s h a n d le d 3 O th e r G o ve rn m en t securities h a n d le d 3 U.S. G o ve rn m en t co up o ns p aid D olla r A m o un t Per Cent C h a n g e ____ (M illions)__________ A n n u a l Rate 1 9 6 5 -6 6 196 5 1 966 1956-6* 2.0 39.5 27.0 46.3 1,508.9 1,421.9 6.1 2.4 113,825.9 102,900.2 10.6 7.2 626.0 566.2 10.6 6.1 135,844.9 109,066.4 24.6 12.6 669.5 624.3 7.2 — 1.2 17,168.1 16,282.6 5.4 8.0 154.6 136.6 13.2 8.2 31.8 15.3 107.8 Loans to m em ber b a n k s— d a ily a v e ra g e ou tstand in g Num ber (M illions) 196 6 196 5 C o in counted 387.3 317.5 22.0 0.9 Curren cy counted 224.3 218.8 2.5 0.9 C he cks collected2 2 6 6.7 244.6 9.0 6.7 N o n ca sh collection items .835 .587 42.2 5.5 Transfers o f fund s .214 .200 7.0 4.9 9 .270 8.784 5.5 2.8 O th e r G o ve rn m en t securities h a n d le d 3 .665 .564 17.9 10.5 U. S. G o ve rn m en t co up o ns p aid .755 .733 3.0 1.9 U.S. S a v in g s Bon d s h a n d le d 3 1 T o ta l for th e St. Louis office and the L ittle R ock, Louisville, and Mem phis branches. - Excludes G overnm ent checks and m oney orders. 3 Issued, exchanged, and redeem ed. Page 13 shortage still existed in the early part of 1966, the operations for the year as a whole were less than at any time during the 1960-63 period. C o i n C o u nt e d M illio n s M illio n s no change from 1955 to 1963. The number of pieces counted and sorted totaled 224 million in 1966, 2.5 per cent more than a year earlier. Pieces handled have increased at an annual rate of 5.5 per cent since 1963 in contrast to a moderate decline during the previous eight years. Check Collections. Federal Reserve Banks receive checks from member banks, other Federal Reserve offices, and Government agencies for collection. Checks received may be drawn on banks in the Eighth Dis trict that remit at par, all par-remitting banks in other districts, Federal Reserve Banks, and the United States Treasury. The number of checks passing through the bank rose from 245 million in 1965 to 267 million in 1966, an increase of 9 per cent. Since the average check drawn was for a greater amount, dollar volume of these collections rose 11 per cent to $114 billion in 1966. The number and dollar value of checks col lected increased every year from 1956 to 1966. The number rose at an average rate of 6.7 per cent per year, and the dollar value, at a 7.2 per cent rate. B illio n s 1954 1956 1958 1960 1962 1964 C h e c k s Collect ed* B illio n s 1966 The dollar value of currency handled rose to $1.5 billion in 1966, 6 per cent above the year-earlier level. The value of currency counted has increased at an annual rate of 8.6 per cent since 1963 after virtually B illio n s Digitized for Page FRASER 14 Cur r ency C o u n t e d B illio n s “ E x c lu d e s G o v e r n m e n t c h e c k s a n d p o s t a l m o n e y o r d e rs . Noncash Collections. In addition to maintaining facilities for check collections, Federal Reserve Banks handle numerous other items for collection. These noncash collections include drafts, promissory notes, bonds and bond coupons, and various other docu ments. The combined dollar value of these collections was up 11 per cent from 1965 to 1966 and at a 6 per cent average rate from 1956. The number of items jumped 42 per cent from 1965 to 1966 and have risen at a 5.5 per cent average rate since 1956. N o n c a s h Collection Items M illio n s M illio n s States Savings Bonds valued at $670 million. The number of bonds was up 5.5 per cent from a year earlier, and their value was up 7 per cent. From 1956 to 1966 dollar volume declined at a 1.2 per cent annual rate, while number of pieces increased at a 3 per cent rate. Other Government securities issued, U.S. S a v i n g s B o n d s Issued, E x c h a n g e d , 1954 1956 1958 1960 1962 1964 1966 Transfer of Funds. W ire transfers of funds are largely movements of member bank balances between Federal Reserve Banks, resulting for the most part from Federal funds transactions, check collection settlement, and transfers in connection with transac tions in U. S. Treasury obligations. This bank partici pated in 214,000 such transfers in 1966, up 7 per cent from the previous year. The dollar value, totaling $136 billion, was up 25 per cent. a n d Redeemed M illio n s M illio n s Fiscal Agency Operations. Each Federal Reserve Bank acts as depository and fiscal agent of the United States Government. The Reserve Banks carry the principal checking accounts of the Treasury, issue and redeem Government securities, administer the Treas ury tax and loan deposit accounts at commercial banks, and perform various other Government finan cial duties. In its capacity as fiscal agent, the bank in 1966 issued, exchanged, and redeemed 9.3 million United 1954 1956 1958 1960 1962 1964 1966 Page 15 DIRECTORS AND OFFICERS Directors Chairman o f the B oard and F ederal Reserve Agent F r e d e r i c M. P e i r c e , President General American Life Insurance Company St. Louis, Missouri Deputy Chairman o f the B oard S m i t h D. B r o a d b e n t , Jr . Broadbent Hybrid Seed Co. Cadiz, Kentucky B r e t t , President, The First National of Mexico, Mexico, Missouri B r a d fo rd Bank W. R ic h a r d s , Senior Vice President, Laclede Steel Company, St. Louis, Missouri R ola n d W. C u p p , Jr., President, Arkansas Bank and Trust Company, Hot Springs, Arkansas W F. H a r r in g t o n , Chairman of the Board, The Boatmen’s National Bank of St. Louis, St. Louis, Missouri S h erw oo d C e c il il l ia m K in g Self, President, Riverside Industries, Marks, Mississippi H arry J. S m i t h , Vice President, Whirlpool Corpora tion, Evansville, Indiana o w n s e n d , Chairman of the Board Townsend Lumber Company, Inc. Stuttgart, Arkansas M ark T M ember, Fed eral Advisory Council A. Chairman of the Board and Chief Executive Officer Citizens Fidelity Bank and Trust Company Louisville, Kentucky M . B r i n k l e y , J r ., Officers D a r r y l R . F r a n c is , D ale M . L ew is , Vice President Vice President J o h n F. B r e e n , Vice President G e r a l d T . D u n n e , Vice President W o o d r o w W . G i l m o r e , Vice President D o n a l d L . H e n r y , Vice President H o m e r J o n e s , Vice President S t e p h e n K o p t i s , Vice President J o h n W . M e n g e s , Vice President H o w a r d H . W e i g e l , Vice President and Secretary J o s e p h C . W o t a w a , Vice President O r v i l l e 0 . W y r i c k , Vice President G e o r g e W . H i r s h m a n , General Auditor F. G a r l a n d R u s s e l l , J r ., Counsel and Assistant Secretary President First Vice President Assistant Vice President Assistant C hief Examiner E d g a r H . C r i s t , Assistant C hief Examiner G e o r g e W . D e n n is o n , Assistant Vice President J . M . G e i g e r , Assistant Vice President J o h n J . H o f e r , Assistant Vice President W i l b u r H . I s b e l l , C hief Examiner W i l l i s L. J o h n s , Assistant Vice President R ic h a r d 0 . K a l e y , Assistant Vice President E u g e n e A . L e o n a r d , Assistant Vice President W i l l i a m R . M u e l l e r , Assistant General Auditor P a u l S a l z m a n , Assistant Vice President W . E . W a l k e r , Assistant Vice President L eo n a ll C. A n d ersen , N orm an N . B o w sh e r , M a r v in L . B e n n e t t , E a r l H . C h a p in , Digitized forPage FRASER 16 L IT T L E ROCK BRAN CH Directors Ross E. A n d e r s o n , Chairman of the Board, The Com mercial National Bank of Little Rock, Little Rock. Arkansas E. R i t c h i e , President, Arkansas Power & Light Company, Little Rock, Arkansas E l l i s E . S h e l t o n , President, The First National Bank o f Fayetteville, Fayetteville, Arkansas C a r e y V. S t a b l e r , President, Little Rock University, Little R o c k , Arkansas W a y n e A. S t o n e , President, Simmons First National Bank o f Pine Bluff, Pine Bluff, Arkansas R eeves Jr., President, Jacob Hartz Seed Co., Inc., Stuttgart, Arkansas J a k e H artz, Louis E. H u r l e y , President, The Exchange Bank & Trust Company, El Dorado, Arkansas Officers J ohn F. B reen , J J o h n W . D r u e l in g e r , ohn Vice President and Manager K. W ard, Cashier Assistant Cashier M ic h a e l L O U IS V IL L E T. M o r ia r t y , Assistant Cashier BR AN CH Directors Executive Vice President, The CourierJournal & Louisville Times Company, Louisville, Kentucky L i s l e B a k e r , J r ., C h a s e , President, The Bedford National Bank, Bedford, Indiana C. Vice President, Southern Bell Tele phone and Telegraph Company, Louisville, Kentucky Hu n ter G reen , Chairman and President, The Louis ville Trust Company, Louisville, Kentucky J o h n H . H a r d w ic k , P aul Wm. G. D e a t h e r a g e , President, Planters Bank & Trust Co., Hopkinsville, Kentucky J. E. M i l l e r , Executive Vice President, Sellersburg State Bank, Sellersburg, Indiana R ic h a r d T. S m it h , Farmer, Madisonville, Kentucky Officers Vice President and Manager D on ald L . H e n r y , J R o bert E. am es E. C onrad, Cashier Assistant Cashier (Effective March 1, 1967) H arlo w , L o u is A . N e l so n , M E M P H IS Assistant Cashier BR AN CH Directors C . C a s t l i n g , President, First National Bank at Marianna, Marianna, Arkansas L eon S am C o o p e r , President, HumKo Products Division, National Dairy Products Corporation, Memphis, Tennessee W L . G i l e s , President, Mississippi State Univer sity, State College, Mississippi il l ia m W. W. H o l l o w e l l , President, The First National Bank of Greenville, Greenville, Mississippi A l l e n M o r g a n , President, The First National Bank of Memphis, Memphis, Tennessee C o n T. W e l c h , President, Citizens Bank, Savannah, Tennessee J a m e s S. W i l l i a m s , Assistant Vice President, American Greetings Corporation, Osceola, Arkansas Officers J ohn W. M en g es, Vice President and Manager B e n ja m in B . M on a g h a n , P aul I. B la ck, J r ., Assistant Cashier Cashier J o seph P . G a r b a r in i, Assistant Cashier Page 17 O t h e r G o v e r n m e n t Securities Issued, Servi ced, rate. Government coupons paid in 1966 were up 3 per cent in number and 13 per cent in dollar value. Loans. Federal Reserve credit is generally extended on a short-term basis to a member bank to enable it to adjust its asset position when necessary because of developments such as withdrawal of deposits or shortrun requirements for credit beyond those which can reasonably be met by use of the bank’s own resources. Federal Reserve credit is also available for longer periods when necessary to assist member banks in meeting unusual situations resulting from national, regional, or local difficulties or from exceptional cir cumstances involving particular member banks. The discount rate, the rate charged member banks which borrow from a Federal Reserve Bank, is es tablished by the bank’s directors, subject to review and determination by the Board of Governors. The last rate change was an increase from 4 to 4% per cent in December 1965.2 D i sc ou nt Rat e F e d e r a l R e s e rv e B a n k o f St. L o u is Per Cent 5 .0 serviced, and retired rose 18 per cent from a year earlier, and their value was up 5.4 per cent. Since 1956 the number of such securities has risen 10 per cent per year, and the dollar volume, at an 8 per cent U.S. G o v e r n m e n t C o u p o n s Pai d Page 18 Per Cent 5 .0 4 .5 4 .5 4 .0 4 .0 3 .5 3 .5 3 .0 3 .0 Is 2 .5 2.0 1.5 E 2 .5 2.0 2 1 .5 1.0 1.0 .5 .5 0 1954 1956 1958 1960 1962 1964 1966 0 Average borrowing by member banks from the Federal Reserve Bank of St. Louis was much higher in 1966 than in other recent years. Average credit outstanding to member banks in the Eighth District in 1966 was $32 million, up from $15 million in 1965 and from about a $5 million average in the 1961-64 period. In comparison, loans to member banks aver aged about $19 million during the 1955-60 period. The greater borrowings in 1966 reflected a sharp rise in short-term market interest rates relative to the dis2The rate charged under Sections 13 and 13a of the Federal Reserve Act on advances secured by U. S. Government securities and discounts of and advances secured by eligible paper. The rate charged on advances secured by collateral other than Government securities and “eligible” paper is onehalf of one per cent higher than the normal discount rate. The Board of Governors has recommended elimination of this “penalty” discount rate. count rate and a strong demand for commercial bank credit. The rise in short-term interest rates resulted primarily from a huge demand for funds accompany ing a stimulative Federal budget and a strong demand for goods and services. L o a ns to M e m b e r B a n k s M il lio n s Of D o ll a r s (D a ily A v e r a g e O u t s t a n d in g ] M il lio n S o f D o lla TS C O M PARATIV E STATEMENT OF C O N D IT IO N T ho usa nd s of D ollars D ecem ber 31, 1 966 A sse ts G o ld certificate reserves Decem ber 31, 1965 5 3 4 ,492 52 7 ,575 Federal Reserve notes o f other b anks 29,701 42,029 O th e r cash 31,278 7,128 2,400 1,394 1,490,875 1,546,710 4 7 9 ,4 3 7 4 1 2 ,6 7 6 D iscounts a n d a d va nces U.S. G o ve rn m en t securities Uncollected items O th e r assets Total assets 50,178 40,003 2,618,361 2,577,515 1,471,034 1,450,866 7 2 7 ,0 5 7 690,741 59 9 55,282 L ia b ilit ie s a n d C a p it a l A c c o u n t s Federal Reserve notes (net) D eposits: M e m b e r banks-re se rve accounts U.S. T reasurer-general account O th e r D eferred a v a ila b ility cash items 11,814 14,589 360,611 32 0 ,883 7,748 6,894 39,498 3 8 ,2 6 0 2,618,361 2,577,515 O th er liabilities a n d accrued d iv id e n d s Total capital accounts Statements. Total assets of the Federal Reserve Bank of St. Louis were $2.6 billion at the end of 1966, an increase of 1.6 per cent from a year earlier. The rise in assets was largely matched by increases in notes outstanding (currency) and member bank de posits (reserves). Net earnings, before payments to the United States Treasury, rose to $56 million in 1966, up 19 per cent from 1965. The rise in earnings reflected primarily the higher average interest rates on bank earning assets. Dividends to member banks, set by law at 6 per cent of paid-in capital, were up 5 per cent. Pay ments to the Treasury (interest on Federal Reserve notes) of $55 million were 21 per cent above a year earlier. Total liab ilities a n d capital accounts CO M PARATIVE PROFIT A N D LO SS STATEMENT T h o u sa n d s o f D ollars Total e a rn in g s N et e xpe nses N et e a rn in g s N et a d d itio n s (—(—) or d ed uctions (— ) N et e a rn in g s before paym ents to U.S. T reasury 1966 1965 68,176 58,246 11,809 11,053 5 6 ,3 6 7 47,193 — 44 +39 56,323 47,232 Distribution of net e a rn ing s: D iv id e n d s Interest on Federal Reserve notes Transferred to surplus Total 1,168 1,110 5 4,536 4 4 ,9 3 5 619 1,187 5 6,323 47,232 Page 19 Bank Deposit Growth in the Eighth Federal Reserve District S u b s t a n t i a l v a r i a t i o n e x i s t s in the growth rate of bank deposits among regions as well as among individual banks within a region. This article reviews the growth trends of banks in the Eighth Federal Reserve District since 1950. Deposit growth rates are presented for all insured banks in each metropolitan area, for the nonmetropolitan areas of the district, and for each individual bank with over $25 million in deposits. Possible reasons for the variation in growth trends are examined. Total deposits of member banks in the Eighth Federal Reserve District rose 5.3 per cent during the past year. Member bank deposits in the nation rose 5.4 per cent, while deposits of all commercial banks rose about 6 per cent. Commercial bank deposits both in the Eighth District and in the nation grew some what less than in most other recent years. District bank deposits rose at an average rate of 3.8 per cent per year during the 1950-60 period and at an 8 per cent rate from mid-1960 to mid-1966. Commercial bank deposits in the nation rose at average rates of 3.9 per cent and 8 per cent, respectively, during the two periods. The volume of demand deposits nationally is largely determined by Federal Reserve actions in providing reserves to support these deposits. Using reserves as a base, the banking system creates deposits through the addition of loans and investments to bank assets.1 1Proceeds of loans and investments are credited to customers’ deposit accounts and remain as deposits until the loan is re paid even though they are spent, unless some holder to which the funds have passed converts them to time or sav ings deposits or withdraws them as cash. This process of lend ing and investing and of deposit creation, in the banking system as a whole, can continue as long as bank reserves are sufficient to meet legal reserve requirements. Holders of demand deposits may convert them to time or savings deposits, which have lower legal reserve require ments. In this case, banks will find that they have excess reserves and can create additional deposits. On the other hand, if time and savings deposit holders choose to convert their deposits to demand deposits or transfer them to other Page 20 During the first half of the 1960’s time and savings deposits at commercial banks grew rapidly. Time deposits in the district rose at a 16 per cent rate from mid-1960 to mid-1966 after increasing at a 7 per cent rate in the 1950-60 period. In the nation time deposits increased at a 15 per cent rate during the 1960-66 period compared with an annual growth rate of 6 per cent in the 1950’s. The substantial growth in time and savings accounts in the more recent period is the result of increased aggressiveness by commercial banks in seeking funds to meet a rising demand for credit. Reflecting this increased competition for funds were more liberal interest rates paid on time and savings deposits and the issue of unsecured notes, subordi nated debentures, and an increasing variety of cer tificates of deposit. Demand deposits have grown less rapidly than time and savings deposits. Demand deposits at district banks increased at a 2.8 per cent annual rate during the 1950-60 period and at a 3.6 per cent rate from 1960 to 1966. In the nation demand deposits rose at rates of 2.7 and 3.7 per cent, respectively. D epo sit G roicth A m o n g D istrict S ta tes Differences in the growth rates of deposits in various areas are influenced by numerous economic forces including income, saving, interbank competi tion, and competition between banks and other finan cial institutions. Demand deposits are generally held as a convenient means for settling day-to-day transfinancial institutions, commercial banks will be short of re serves and must reduce their assets in order to bring deposits back to levels consistent with reserves. Legal reserves of Federal Reserve member banks include cash in the vault plus deposits at the Federal Reserve Bank. Reserve requirements were as follows as of December 31, 1966: 16% per cent on net demand deposits at reserve city banks, 12 per cent on net demand deposits at country banks, 4 per cent on savings deposits and on other time deposits up to $5 million, and 6 per cent on time deposits in excess of $5 million. Table actions and as a means of storing wealth. Although changes in these deposits in the nation are largely determined by the Federal Reserve in supplying re serves to the banking system, growth of demand de posits in a local area is likely to be related to the growth of both income and wealth of the community. Time and savings deposits, in addition to their relationship to income and wealth, are perhaps as sociated with the convenience and competitive features of banks relative to other savings mediums. Thus, such deposit growth in an area may be associated with the number of banking offices, rates of interest paid by banks relative to other financial intermediaries, and other alternative opportunities for investing savings. I DEPOSIT G R O W T H AT EIGHTH DISTRICT INSURED BANKS A n n u a l Rates of Increase Total D ep osits 1 9 5 0 -6 0 1 9 6 0 -6 6 Time D e p o sits1 D em and 1 9 5 0 -6 0 D e p osits1 1 9 6 0 -6 6 1 9 5 0 -6 0 1 9 6 0-66 5.7 State portions: A rk a n sa s 4.4 9.9 11.2 17.1 2.9 Illinois 3.7 6.9 5.2 11.9 2.7 3.3 In d ia n a 3.1 8.9 3.9 14.5 2.3 4.9 Kentucky 4.0 7.5 7.7 18.9 3.3 3.2 M is s iss ip p i 5.2 8.4 12.6 17.0 2.9 5.3 M isso u ri 3.4 7.3 5.6 15.8 2.8 2.3 Tennessee 4.3 9.3 9.4 14.7 2.5 5.0 3.8 8.0 6.8 15.5 2.8 3.6 Eighth District 1 D eposits o f individuals, partnerships, and corporations. All areas of the district have had sizable gains in total deposits since 1950. In the portions of states within the Eighth District,2 the rate of increase during the 1950-60 period ranged from 3.1 per cent per year in Indiana to 5.2 per cent in Mississippi (Table I). During the 1960-66 period Arkansas had the most rapid increase, with total deposits rising at a rate of 10 per cent per year, while Illinois, with a rate of 7 per cent, had the lowest rate of gain. In every state of the district growth of time and savings deposits was considerably more rapid than that of demand deposits. Also, variation among states in the rate of growth of time and savings deposits was greater than for demand deposits. As indicated earlier, growth of time and savings de posits is influenced by rates of interest paid. Four states in the district—Arkansas, Indiana, Mississippi, and Tennessee—limit rates paid on such accounts. Maximum rates payable in these states in recent years have generally been below the national Regula tion Q limits.3 Furthermore, many banks pay consider- Apparently, interest rate limitations did not ad versely affect deposit growth during much of the 1950-65 period in those states which have such reg ulations. W hile time and savings deposits in the Indiana portion of the district grew more slowly T able II 2 The Eighth District includes all of Arkansas, all of Missouri except the western tier of counties, the southern third of Illinois, the southern fourth of Indiana, the western half of Kentucky, the western third of Tennessee, and the northern half of Mississippi. 3 At the end of 1966, Regulation Q spec ified that the maximum interest that any member bank could pay was 4 per cent on savings deposits and all multiplematurity time deposits of less than 90 days, 5 per cent on single-maturity time deposits of less than $100,000 and all multiple-maturity deposits of 90 days or more, and 5% per cent on single-matu rity time deposits of $100,000 and over. Maximum rates payable by nonmember insured commercial banks, established by the Federal Deposit Insurance Cor poration, were the same as the above. ably less than the maximum rates permitted. At midyear 1966 one-fourth of all insured commercial banks in the district were paying less than 3 per cent interest on regular savings accounts, and one-eighth of the banks were paying less than that amount on other time de posits (Table II). About one-tenth of the banks paid less than 3 per cent on both savings and time deposits. On the other hand, almost one-third of the banks were paying the maximum of 4 per cent on regular savings accounts. Nearly half of the banks were paying b e tween 4.5 and 4.9 per cent on other time deposits, while one-eighth of the banks paid 5 per cent or more on these accounts. These data indicate that for many banks in the district the opportunity may exist for attracting additional funds by increasing the rates paid on time and savings deposits. INTEREST PAID O N TIME A N D S A V IN G S A C C O U N T S EIGHTH DISTRICT INSURED BANKS June 30, 1 966 Percentage Distribution of Banks Rate of Interest on R eg ula r S a v in g s D ep osits U n d e r 3.0 Rate of Interest on O th e r Time D e p o sits1 U nd e r 3.0 9.62 3.0 - 3.9 — 4.0 - 4.4 4 .5 - 4.9 5.0 - 5.4 Total 9.14 5.78 0.61 25.15 29.99 3 . 0 - 3.4 1.95 4.57 6.66 10.89 5.92 3.5 - 3.9 0.13 — 2.29 10.49 — 12.91 4.0 — 0.27 5.45 19.71 6.52 31.95 11.70 4.84 23.54 4 6 .8 7 13.05 100.00 Total 1 Rates paid are n ot necessarily th e highest, but are the m ost com m on, rates paid. S o u rc e: 1 9 6 6 A gricultural Loan Survey conducted by th e F ed era l Reserve System . Page 21 than in most other areas during the 1950’s, Arkansas, Mississippi, and Tennessee showed the most rapid time deposit gains in the district. Since 1960 the rate of time deposit growth in these states has approximated that of the entire district. The market rate of interest during much of the period ex amined was below the rates banks in these states were permitted to pay. Under such a situation, banks can effectively compete for time and savings deposits. When market rates moved above permitted bank rates, however, a greater share of funds flowed into other intermediaries or into the credit and equity markets. As a result, growth in bank deposits was hampered. Interest rates are not the only factor affecting time deposit growth. Growth in incomes and alter native opportunities for investing savings have also been important determinants of deposit growth. How ever, in much of the period since 1960 bank deposits have increased more rapidly than incomes and sav ings. Stated somewhat differently, banks have been successful, during most of the period examined, in obtaining a greater share of the public’s savings. D eposit G row th in M etro p o lita n a n d N o n m etro p o lita n A reas of such deposits in any of the district metropolitan areas (Table III). While the growth was slower in Indiana and Illinois than in other district states dur ing the 1950’s, it was slightly above the average in crease in all metropolitan areas of the district. The rate of growth of demand deposits at met ropolitan banks during the 1950-60 period was slightly greater than at nonmetropolitan banks, 3.0 per cent annually compared with 2.6 per cent. However, since 1960 this situation has reversed, with demand de posits in smaller centers increasing at a rate of 4.5 per cent annually compared with 2.7 per cent for larger city banks. In d iv id u a l B a n k G row th W hile some areas of the district have shown more rapid deposit growth than others since 1950, an even greater variability appears when individual banks are compared. Deposit growth at banks with deposits of $25 million and over in 1966 was quite rapid at a very few banks in each of the large metropolitan areas. In Little Rock, Louisville, and Memphis a single bank grew two to three times as rapidly as any other bank in the particular area during the 1950-60 period (Table IV). Since 1960 the magnitude of growth variation Since 1950 bank deposits have increased more rapidly at banks located in non T a b le III metropolitan areas than at metro politan banks. Total deposits at DEPOSIT G R O W T H AT METROPOLITAN banks in the smaller cities and rural A N D N O N M ET R O PO LIT AN AREA BA N K S IN EIGHTH DISTRICT areas of the district rose at an annu A n n u a l Rates o f Increase al rate of 9 per cent during the T o ta l D e p o s it s T im e D e p o s it s 1 D e m a n d D e p o s it s 1 1960-66 period compared with a 7 1 9 5 0 -6 0 1 9 6 0 -6 6 1 9 5 0 -6 0 1 9 6 0 -6 6 1 9 5 0 -6 0 1 9 6 0 -6 6 per cent rate at metropolitan banks M e trop olitan areas: (Table III). During the 1950’s total 1.8 St. Louis 3.1 6.8 4.1 14.0 2.7 deposits at nonmetropolitan banks 2.5 4.3 Louisville 4.0 7.3 3.9 20.1 increased at a 4 per cent rate, and 4.9 M e m p h is 4.1 9.3 8.4 14.8 2.8 at metropolitan area banks, at a 3 16.4 4.9 Little Rock 4.9 8.5 4.3 8.8 3.5 Evansville 7.2 13.0 1.7 per cent rate. 1.7 1.1 From 1960 to 1966 time deposits of nonmetropolitan area banks in creased at a 16 per cent rate, and those of metropolitan area banks rose at a 15 per cent rate. During the 1950-60 period time deposits rose at an average rate of 10 per cent at nonmetropolitan banks com pared with an average rate of 5 per cent at metropolitan banks. Except for the Indiana and Illinois portions of the district, nonmetropolitan areas showed an increase in time deposits in excess of the growth Page 22 Sp rin gfie ld 4.2 8.9 6.3 21.0 3.7 4.3 Fort Smith 2.5 9.1 4.8 15.5 2.2 6.0 Pine Bluff 3.4 9.8 5.2 13.4 2.3 4.7 Total 3.4 7.4 4.7 14.9 3.0 2.7 A rk a n sa s 4.5 10.3 13.6 17.6 2.6 5.8 Illinois 3.9 7.5 6.8 12.6 2.3 3.7 In d ia n a 3.7 9.9 5.8 15.2 2.3 5.8 Kentucky 4.1 7.9 13.6 17.4 2.4 4.1 N on m e trop olita n areas in district: M is s iss ip p i 5.2 8.4 12.6 17.0 2.9 5.3 M isso u ri 4.3 8.1 11.1 18.8 3.1 3.3 Tennessee 4.8 9.5 12.9 14.8 2.0 5.7 Total 4.3 8.6 10.1 16.2 2.6 4.5 1 D eposits o f individuals, partnerships, and corporations. among individual banks in these areas has lessened slightly. In the St. Louis area three banks showed extremely rapid growth (over 10 per cent yearly), while six banks grew at quite modest rates of under 2 per cent annually during the 1950-60 period. With few exceptions the most rapidly growing banks during the 1950-60 period have also been the fastest growing in the more recent period. In most cases the rapidly growing banks in each of the met ropolitan areas were relatively small institutions in 1950, generally not more than one-tenth the size of the largest banks in the area. None of these rapidly growing banks had attained the position of largest bank in its particular area in 1966, although the gap T able IV DEPOSIT G R O W T H O F IN D IVIDU AL BA N K S IN EIGHTH DISTRICT1 A n n u a l Rates o f Increase M E T R O P O L IT A N A R E A S 1 9 5 0 -6 0 N O N M E T R O P O L IT A N A R E A S 1 9 5 0 -6 0 1 9 6 0 -6 6 St. Louis, M isso u ri-lllin o is D ep osits $ 1 0 0 m illion an d over 1960-6* Ban k A 8.4 8.2 2.1 7.2 B ank C 3.0 5.9 B ank D 2.9 5.4 B ank E 0.9 5.2 B ank F 1.3 4.4 Ban k G 2.7 0.8 B an k A 12.8 15.1 Ban k B 10.1 12.0 B an k C 3.1 8.3 Ban k D 8.6 7.8 Ban k E 6.0 7.1 3.0 Ban k B 7.9 14.3 Bank C 9.9 11.1 Bank D 8.9 B ank E B ank A 10.6 9.5 Ban k A 5.0 13.3 B an k B 3.7 9.4 Ban k B 4.4 11.6 B ank C 1.1 7.5 Ban k C 3.9 11.4 B ank D 3.8 6.8 B ank D 3.9 9.5 Ban k E 2.0 8.1 B ank F 2.0 7.6 Bank G 1.9 5.2 Louisville Bank A 11.4 16.4 Bank B 3.1 7.9 Bank C 3.4 6.9 Bank D 3.0 6.2 Ban k E 3.6 4.9 Illin ois a n d In d ia n a M e m p h is D ep osits $ 2 5 -5 0 m illion Ban k A A rk a n sa s Little Rock D ep osits $ 5 0 -$ 1 0 0 m illion 14.4 1 9 6 0 -6 6 D ep osits ove r $ 2 5 m illion D ep osits over $ 2 5 m illion B ank B 1 9 5 0 -6 0 Bank A 23.3 15.8 Ban k B 4.4 11.7 B ank C 3.6 7.9 Bank D 5.7 7.7 Ban k E 3.4 6.4 B ank A 2.5 8.5 Ban k B 2.3 7.2 Ban k C 1.1 6.1 B ank D 3.8 5.1 Kentucky B ank A 2.9 8.2 Ban k B 6.4 7.8 8.4 B ank C 7.6 7.5 5.1 8.1 B ank D 6.0 7.3 Ban k F 8.7 7.5 Bank E 2.9 6.3 Bank A 6.9 13.0 Ban k B 7.9 11.2 Bank C 5.8 8.0 Bank D 1.2 7.7 Bank A 1.4 12.6 Bank B 3.2 9.4 Ba n k C 3.3 0.9 Fort Sm ith Bank G 6.8 7.4 B ank A 6.5 14.2 Bank H 2.4 7.3 Ban k B 1.7 8.5 B ank 1 6.3 6.8 B ank C 0.9 6.0 Ban k J 2.9 6.1 Pine Bluff B ank K 2.0 6.0 B ank L 4.5 5.9 Ban k A 6.4 9.5 Bank M 29.5 5.8 Bank B 1.8 9.5 B ank N 1.0 5.8 B ank O 1.2 5.6 B ank P 4.7 4.9 Ban k Q 7.8 4.8 Bank R 4.2 4.4 Bank S 7.2 4.2 Ban k T 2.7 3.9 Bank U 4.0 3.3 M is s iss ip p i M isso u ri Evansville Bank A 0.8 8.5 Bank B 1.5 6.6 Bank C 2.3 6.4 Tennessee S p rin gfie ld Ban k V 0.7 2.2 B ank A B ank W 1.9 2.1 Ban k B 6.9 7.7 Bank A 4.5 9.3 2.8 6.0 Bank B 2.9 7.7 1 Includes all banks in the district with total deposits o f $ 2 5 m illion and over on Ju n e 3 0 , 1 9 6 6 , except three banks o f this size n ot in existence in 1 9 5 0 . F o r banks w hich merged during the 1 9 5 0 -6 0 and 1 9 6 0 -6 6 period the total deposits o f th e separate banks in 1 9 5 0 and 1 9 6 0 were com bined and treated as if the m erger had occurred a t the beginning o f the respective periods. between the rapidly growing banks and their larger competitors closed considerably during the period examined. These data indicate that small, well-managed, ag gressive institutions have been able to attract an in creasing proportion of the banking business of a community. W hile growth does not necessarily in sure competition or profits, these smaller but rapidly growing banks must be providing new or improved services sought by banks’ customers or meeting these demands at lower costs. Through such innovations they may exert a considerable competitive impact on other banks in the metropolitan area. Banks in St. Louis with over $100 million of deposits in 1966 have grown less rapidly than similar banks in other metropolitan areas of the district. Deposits of such banks in the St. Louis area have grown 5 per cent annually since 1960 compared with average rates of 9 per cent in Memphis and 8 per cent in Little Rock and in Louisville. During the 1950-60 period major St. Louis banks grew at an average annual rate of 1.7 per cent, while major banks in these other cities rose at about a 4 per cent rate. One probable explanation for the less rapid growth of large St. Louis banks is their limited opportunity for providing banking services to the rapidly growing suburban communities. Banks in most other metropoli tan areas of the district can provide such services through branches and additional offices, while banks in St. Louis are largely confined to their existing location. W C il l ia m l if t o n E. B. L P e t t ig r e w u ttrell C h a n g in g C red it C o n d itio n s — (Continued from page 4) rate of 12 per cent in September, 8 per cent in Octo ber, 7 per cent in November, and 9 per cent in December. The growth of credit to purchase consumer goods other than automobiles at a 9 per cent annual rate from August to December compares with an increase at an 11 per cent rate from 1961 to 1965, an 8 per cent rate from 1955 to 1961, and a 13 per cent rate Page 24 from 1949 to 1955. OTHER C O N S U M E R G O O D S DEBT A n n u a l Rates of Increase A u g u s t 1 9 6 6 -D e ce m b e r 196 6 ...................................... 8.8 M a rch 1 9 6 5 -A u g u st 19 6 6 ........................................... 14.3 1 9 6 1 -1 9 6 5 ............................................................. 1955-1961 .............................................................. 10.5 7.6 1 9 4 9 -1 9 5 5 .............................................................. 12.8
@FedFRASER