Full text of Review (Federal Reserve Bank of St. Louis) : February 1970

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FEDERAL RESERVE B A N K
O F ST. L O U I S
FEBRUARY 1970


Vol. 52, No.


CONTEN TS
Real Economic Expansion Pauses................. 2
IL L E

Operations of the Federal Reserve Bank
of St. Louis — 1 9 6 9 ............................. 8
Monetary and Fiscal Influences on
Economic Activity — The
Foreign Experience............................... 16
The Administration of Regulation Q ............29

2

Real Economic Expansion Pauses

J jV I D E N C E of the last six months indicates
that a pause has developed in the prolonged economic
expansion that began in early 1961. In the first part
of 1967, another pause developed which, like the
present one, was preceded by a period of marked
monetary restraint.
A few months ago the major question about eco­
nomic policy was when were the effects of the pro­
gressively more restrictive monetary policy going to
appear. Now that the effects of policy are definitely
evident in trends of total spending and real output,
the major questions are how far will the downturn
go, and how long will it last.
Production has weakened considerably since mid1969. Real output of goods and services, which rose at
a 4 per cent annual rate from 1957 to 1969, increased
at only a 2 per cent rate from the second to the third
quarter last year and showed no increase in the fourth


Page 2


quarter. Industrial production declined at a 5 per cent
rate from July to December. Payroll employment rose
at only a 1 per cent rate from June to December, com­
pared with a 3.7 per cent rise in the previous year.
Production has responded to a slower growth in de­
mand. Growth of final sales of goods and services
(total sales less those for inventory purposes) de­
clined from an 8.3 per cent annual rate in the first
half of 1969 to a 6.3 per cent rate in the third quarter
and to a 5.8 per cent rate in the fourth quarter. Retail
sales in the last part of 1969 were rising at about a 1
per cent annual rate, compared with a 4 per cent rate
in late 1968 and early 1969. Sales growth has prob­
ably slowed further in January and early February.
The slower sales growth reflects more restrictive
public policies. In mid-1968, taxes were raised and
growth of Government spending was markedly cur­
tailed. In early 1969 growth of the money supply
slowed from the 7.3 per cent annual rate of the pre­
vious two years to a 4 per cent rate, and then slowed
further to less than a 1 per cent rate from June to
December.
The more restrictive fiscal and monetary actions
were taken with a view to slowing the excessive
spending and inflation and, indirectly and ultimately,
to reducing the inordinately high interest rates. The
general price level, which was nearly stable in the
early Sixties, rose 1.7 per cent during 1965, 3.2 per
cent from the fourth quarter of 1965 to the second
quarter of 1967, 4 per cent in 1968, and 5.1 per cent in
1969.
According to our studies, inflationary pressures may
continue strong as a result of the excesses o f the 196568 period. During 1970, prices are likely to rise at
relatively rapid rates. At the same time, as a result of
the delayed effects of the restrictive actions and the
consequent effect on total spending in 1969, total real
output is not likely to rise in 1970 and may even
decline slightly. The rate of unemployment will prob­
ably show a considerable increase in the last half of
the year.

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

To put recent developments into perspective this
article reviews briefly the changing character of the
eight and one-half year economic expansion from 1961
to mid-1969, and then discusses the evidences of slow­
down that are appearing in the economy.

Economic Expansion 1961-1968:
Changing Characteristics
In many respects, the early years of the economic
expansion were quite different from the more recent
years. In the 1961 to 1964 period, most of the spend­
ing on goods and services was reflected in a rise of
real output, while prices remained relatively stable.
Dining this period of surging real output and gen­
erally stable prices, corporate profits before taxes rose
at a 10 per cent average annual rate, personal income
rose at an average rate of 6 per cent, and wages of
production workers in manufacturing industries in­
creased at an average rate of 3.7 per cent. Since prices
remained fairly stable, most of these gains in profits,
income, and wages represented real gains for the
recipients.
In the two-year period from 1964 to 1966, real out­
put and employment expanded more rapidly than
during the previous three years. However, one very
noticeable feature of the 1964-66 period was the more
rapid rise of prices, compared with the 1961-64 period.
In the 1964-66 period the general price index rose at
a 2.3 per cent annual rate, considerably above the 1.3
per cent rate of increase over the previous three years.
The faster increases in prices offset some of the
nominal gains of the recipients of increased profits,
personal income and wages.
In the following two years, 1966-68, except for a
5-6 month period in early 1967, GNP continued to
expand at a rapid rate. However, the economy was
now placed under increasing strain to meet the con­
tinued rapid rise in the demand for real output.

Accelerating Prices
The most striking feature of the 1966-68 period was
the accelerating price level, with the general level of
prices rising at a 3.6 per cent annual rate, almost three
times faster than during the 1961-64 period. In the
later period approximately 50 per cent of the rise in
total spending reflected rising prices.
Recipients of rising levels of wages and other per­
sonal income were affected by accelerating prices.



FEBRUARY. 1970

For example, though the money wages of production
workers rose at a 4.4 per cent average annual rate
from 1966 to 1968, considerably faster than the 3.7
per cent rate from 1961-64, their real wages rose at
only a 0.9 per cent annual rate from 1966 to 1968.
This rate of real increase in wages was less than half
as rapid as that during the 1964-66 period.

Rapid Rises in Interest Rates
Another noticeable distinction between the first
part of the 1961-69 period and the last half was the
behavior of market interest rates. The 1961-64 period
was characterized by stable or slowly declining long­
term interest rates and slowly rising short-term rates.
The last half of the period was characterized by
progressively more rapid increases in both long- and
short-term interest rates. These rapid rises in the
level of market interest rates reflected mainly the
acceleration of prices, which resulted from an overly
expansionary monetary policy. The “historically high
levels of interest rates” reflect not a “tight monetary
policy,” but the eventual results of the very expan­
sionary monetary policy pursued by the Federal Re­
serve until early 1969.
As the economy moved into 1969 the switch in the
predominant characteristics of the economic expan­
sion became even more evident. Over the first half
of 1969, although GNP spending continued to expand
at a 7.4 per cent rate, real output grew at only a 2.3
per cent rate. Approximately 70 per cent of the expan­
sion in GNP was price inflation.
The accelerating prices and rapidly rising interest
rates of the 1965-69 period followed from: (1) the
economy having reached and gone beyond an efficient
level of resource use; (2) accelerated growth of
public expenditures resulting in government deficits
and, most importantly, (3) an excessive rate of mone­
tary expansion.

1969: Progressively Greater
Monetary Restraint
In the first half of 1969, in contrast with the pre­
vious two years, policy actions by the Federal Reserve
became less expansive. After mid-1969, policy actions
exerted a very restrictive effect on the monetary ag­
gregates. From January 1967 to January 1969 the
money stock increased at a 7.3 per cent rate. During
the first half of 1969 the growth rate of money was
cut to a 4 per cent annual rate. From June to Decem­
ber there was almost no increase in money balances
held by the public.
Page 3

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY. 1970

The progressive slowing in the growth rate of
money has reflected a marked reduction in the growth
of the monetary base and bank reserves. The base
grew at a 3.4 per cent annual rate from January to
June 1969, compared with a 6.4 per cent rate from
December 1966 to January 1969. From June to Jan­
uary 1970, base money increased at only a 2.7 per
cent rate, less than one-half as rapidly as during
„

. ,

,

M o n e y S tock a n d M o n e ta ry B ase

R a t io S c a l e

Monthly A ve ra ge s o f Doily Figure -

Billions of Dollars

S S T

Federal Budget*
Ratio Scale

F iscaiYears

R atio Scale

R a tio S c a l e

Billions o f Dolla

Source: Bureau o f the Budget.
’ U n ifie d B u dg et b a sis; O u tla y s in clu d e n e t le n d in g .
Latest d a to p lo tte d : Fiscal years e n d in g 1970-71 estim o ted by B ureau o f th e Budget

1962

1963

1964

1965

1966

1967

1968

1969

1970

•Uses of the m onetory b ase ore member bonk reserves and currency held by the public and
nonmember banks. Adjustments are mode for reserve requirement changes ond shifts in deposits
am oung classes of bonks. Data are computed by this bonk.
Percentages are annual rates of chonge between periods indicated.They ore presented to aid in
comporing most recent developments with post "trends."
Latest dato plotted: January preliminary

Government Spending as a Per Cent of GNP*
C a le n d a r Years

1968. Member bank reserves declined at a 2.5 per
cent rate from January to December 1969, compared
with a 9 per cent rate of increase over the previous
two years.
The money stock rose sharply in the last half of
December. However, this rapid increase in money
only reflected temporary technical factors. From the
peak in late December, money has declined to an
average at the end of January that is the same as
the average level from June through November 1969.

The Stance of Fiscal Policy
The expansionary monetary actions during the
1967-68 period stemmed from accommodation of large
Federal budget deficits and, after fiscal policy became
restrictive in mid-1968, a desire to cushion an ex­
pected moderation in total spending growth in late
1968. The Federal budget has shown a slight surplus
since 1968, and Government borrowing needs have
been greatly below those of the 1966-68 period. Con­
sequently, the monetary authorities have been spared
4
Digitized for Page
FRASER


•N a tio n a l Incom e Accounts basis.
Source:U.S. D epartm ent o f Commerce
[l_A d juste d to a v o id d o u b le -c o u n tin g o f F e d eral g ra n ts -in -a id to state a n d lo co l
govern m e nt.
Latest d a ta p lo tte d : 1969 p re lim in a ry ; 1970 estim o ted by F ed eral Reserve Bank
o f St. Louis

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

from rising anticipations of inflation. In 1969 the
short-run impact effects of the reduced rate of ex­
pansion of the monetary base reinforced the upward
pressures of price expectations on market interest
rates. Consequently, market interest rates rose very
rapidly in 1969. A sharp short-run impetus to market
interest rates was to be expected to follow from a
much reduced rate of expansion of base money.
However, as the effects of the reduced growth
rate of money continue to result in reduced demand
for real output and consequently a reduction in the
demand for credit and less upward pressure on com­
modity prices, there should be easing in credit market
interest rates.

Total Spending and Components
If economic expansion is evaluated solely by the
rate of increase of GNP spending, the restrictive ef­
fect of policy actions has become apparent only in
recent months. The expansion of GNP slowed to a 6.2
T a b le 1

GROSS NATIONAL PRODUCT
PRODUCTION AND PRICES — 1969
( B illio n s o f d o lla rs )
N o m in a l
Q u a rte r
GNP
1
$
II
III
IV l
(A n n u a l rates o f ch an g e
N o m in a l
Q u a rte r
GNP

the responsibility of financing large Government bor­
rowing and have been free to pursue a restrictive
policy.

1

Real
Product

1 6 .2
$ 4 .6
16.1
3 .6
1 8 .0
3 .9
1 0 .3
-0 .1
fro m th e p re c e d in g q u a rte r)
Real
Product
Prices

7 .5 %

4 .9 %

2 .6 %
As currently estimated by the Bureau of the Budget,
II
7 .3
2 .0
5 .2
2.2
5 .4
III
8 .0
the Government plans to maintain a small budget
— 0.1
IV 1
4 .4
4 .7
surplus through mid-1971. Expenditures are projected
'P relim inary
to increase 1.5 per cent rate from fiscal 1970 to fiscal
1971. The budget surplus is not expected to increase,
per cent rate in the second half of 1969, somewhat
as revenue growth is expected to be slowed by moder­
slower than over the first half of the year. From the
ate advances of income and profits this year; in addi­
second quarter of 1969 to the third quarter of 1969,
GNP rose at an 8 per cent annual rate, then slowed
ction, the surcharge expires in June. The recent Congres­
sional changes in tax structure will also serve to re­
to a 4.4 per cent rate from the third to fourth quarter.
duce the growth of revenue. If cur­
T a b le II
rent budget plans are realized, and
CHANGES IN COMPONENTS OF TOTAL SPENDING, 19691
(A n n u a l rates o f ch an g e in p are n th e s e s )
they are still subject to Congressional
4 th Q u a rte r2
2nd Q u a rte r
3 rd Q u a rte r
1st Q u a rte r
approval, the stance of fiscal policy
9 .4 ( 6 .6 )
C on su m p tion
1 0 .8 (7 .9 )
7 .0 ( 5 .0 )
1 1.3 { 8 .5 )
would allow the monetary authorities
2 .0 ( 6 . 3 )
2 .0 ( 6 .2 )
Fixed In ve stm e n t
1.9 ( 6 .0 )
5 .2 (1 8 .0 )
considerable discretion in formulating
C hanges in
monetary policy.
Business
In ve n to rie s

Interest Rates
From 1965 to 1969 the sharp rise of
interest rates resulted mainly from the
increasing demand for loan funds,
which, in turn derived increasingly



G o ve rn m e n t
S p e n d in g
N e t Exports
T o ta l S p e n d in g 3

0 .3

3.8

3 .3 ( 6 .5 )

2 .9 ( 5 .6 )

4.1 ( 7 .9 )

0 .3

0.1

1.1

-3 .9

1 6 .2 ( 7 .5 )

16.1 ( 7 .3 )

1 8 .0 (8 .0 )

-2 .9
1.9 ( 3 .5 )

—0.1
1 0 .3 (4 .4 )

1In billions o f dollars
P re lim in a ry
3Components m ay not sum to totals because o f rounding.

Page 5

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

Using criteria other than the broad yardstick of
total spending, there is considerable evidence that
the “economic expansion” came to a halt in late
1969. Since mid-1969 the index of industrial pro­
duction has declined, while real output and payroll
employment have both grown at barely a one per
cent rate. Although the dollar value of final sales rose
at a 6 per cent rate in the last half of 1969, the real
volume of final sales showed almost no increase,
compared to a 4.2 per cent annual rate of growth in
real volume during 1966-68.
Personal income rose at about a 5 per cent annual
rate in late 1969, down from a 9 per cent rate in the
preceding year. Taking the rapid rise in prices into
account, increases in personal income during the last
four months of 1969 represented no gain in real com­
mand over goods and services. The slowing in per­
sonal income growth has been reflected in a decline in
the growth of consumption expenditures, which rose
at a 5.8 per cent rate over the last half of 1969 com­
pared to an 8.2 per cent rate over the first half of
the year.
Gross private domestic investment increased at a
7.4 per cent annual rate during the last half of 1969,
compared to a 5.3 per cent rate over the first six
months of 1969. This is the only one of the three
major components of GNP that showed a sharp ac­
celeration during the last half of 1969. However, this
sharp increase in investment during the second half
reflected a large increase in the third quarter. From
the third quarter to the fourth quarter, investment
spending declined at a 2.5 per cent annual rate.
One area of investment spending that has attracted
considerable concern is business expenditure on new
plant and equipment. New capital equipment spend­
ing by business in 1969 is estimated to have increased
11 per cent, compared to about a 4 per cent increase
in 1968. The most recent survey by the Department
of Commerce and Securities Exchange Commission
indicates that the business sector plans to increase
its spending on new plant and equipment by an
additional 9.7 per cent in 1970.
When the rise in prices of machinery and equip­
ment are taken into account, using the wholesale
price index for machinery and equipment, the 11 per
cent increase in 1969 represents about a 7.8 per cent
rise in real terms. This increase in real terms, although
quite large, is well below the average rate of increase
in real terms of 14 per cent over the two years from
1964 to 1966. Assuming no acceleration in prices of
Page
6



FEBRUARY, 1970

machinery and equipment for 1970, the 9.7 per cent
projected rise in spending would represent only a 6.4
per cent real increase.
The projected rise in spending on new plant and
equipment is not evenly spread over all industries.
The projected rise in manufacturing industries is only
6.4 per cent, or about 3.2 per cent after an adjustment
for a continued rise in prices. Of the twenty-one major
industry categories in the Department of Commerce
— SEC Survey, respondents in nine o f the twenty-one
industry categories project no change or a decrease
in capital spending. For example, the motor vehicles
and parts industry projects no increase in capital
spending, and therefore a decline in real terms.
Corporate profits are already beginning to show
noticeable signs of the deceleration of the growth in
total spending. After rising through the first half of
1969, profits declined after midyear. As the slowing in
real personal income continues, as the rate of increase
of payroll employment continues to slow, and if a sharp
increase in government demand for goods and serv­
ices does not arise to offset the slowing in real pri­
vate demand, business will likely revise downward
its expectations of future demand for real output.
Consequently, a significant part of the anticipated
spending by the business sector on new plant and
equipment may not materialize as 1970 progresses.

A Real Interest Rate Guideline
Although market interest rates on long-term capital
borrowing rose very rapidly in 1969, they apparently
had little effect in dampening the business sectors’ de­
mand for credit. If, instead of focusing attention on
market interest rates, real interest rates are con­
sidered, then this anomaly of rising market interest
rates and rising demands for long-term credit largely
disappears. The real costs of long-term borrowing
declined slighdy over the first three quarters of 1969.
Only in the last part of 1969 did the real cost of
borrowing show a significant upward movement.

Ceilings and Channels of Credit Flows
As credit market interest rates rose to high levels
in 1969, the policies of the Federal Reserve, Federal
Home Loan Bank Board, and Federal Deposit Insur­
ance Corporation, which impose ceiling rates on the
interest rates commercial banks, mutual savings banks,
and savings and loan institutions can pay to attract de­
posits, favored borrowing by large corporations. Large
business borrowers with direct access to the money and
capital markets, by issuing bonds and commercial

FEBRUARY. 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

paper, were able to competitively bid funds away
from savings institutions. In 1969 the outstanding
volume of commercial paper averaged $27.3 billion,
up from $19.4 billion in 1968, and double the average
outstanding volume in 1966. In 1967 and 1968 the
household sector reduced its holdings of municipal
and corporate securities. However, in the first half
of 1969, the household sector increased its holdings
of these securities by approximately $9.7 billion.
As funds flowed through channels other than the
savings institutions, the ability of these institutions
to extend credit to specific sectors of the economy,
especially housing, was reduced. Although such a
process of fund diversion probably did not affect
total credit considerably, it had a significant effect
on the locus and form of real investment.
In mid-January, the Federal Reserve Board, the
Federal Deposit Insurance Corporation, and the
Federal Home Loan Bank Board raised the maximum
rates intermediaries are permitted to pay for funds.
Under the amended Regulation Q effective January
21, member banks are permitted to pay 4.5 per cent
on passbook savings deposits, up from the 4 per cent
ceiling in effect since November 1964. Small certifi­
cates maturing in one year are permitted to yield 5.50
per cent, and small certificates maturing in two years
are permitted to yield 5.75 per cent (See the table
on page 29 for all Regulation Q ceilings). Previously,
since September 1966, the ceiling on all single matur­
ity deposits less than $100,000 had been 5 per cent.
However, these new ceiling rates are still below
the market yields available to many savers on com­
petitive financial assets. For example, in mid-January
the yield on commercial paper and Treasury bills,
which are directly competitive with large CD’s, were
8.75 per cent and 7.80 per cent respectively. Seasoned
corporate bonds, which are partial competitors for
savings deposits, were yielding about 7.90 per cent,
compared to the new ceiling rates that savings insti­
tutions could offer of 5 to 5.75 per cent.

Prices
If one looks at prices, evidence of the effect of
restriction imposed by policy since midyear is not
clearly evident. In the second half of 1969 the general
price index rose at the same 5.1 per cent annual rate
as during the first half of the year. In the fourth quar­
ter of 1969 the general price index showed a slower
4.7 per cent rate of increase. However, monthly data
on consumer and wholesale prices cast some doubt on



the degree of reduction of price increases in the last
quarter of 1969. From September to December con­
sumer prices rose at a 6.3 per cent annual rate,
slightly faster than over the first nine months of 1969.
The rate of increase of wholesale prices also rose in
the last three months of 1969, increasing from an
annual rate of 4.6 per cent over the first nine months
to a rate of 5.4 per cent from September to December.
The rate of increase of wholesale prices of industrial
commodities accelerated to a 5 per cent rate, com­
pared to a 3.6 per cent rate from December 1968 to
September 1969.

Conclusions
If, instead of a myopic concentration on the rapid
increase in prices, analysis o f current economic con­
ditions is broadened to take into account lags between
policy actions and their effects on policy goals such
as the growth of real output, production, employment
and real income, then a downward turn in economic
activity has begun. Now that the restrictive effects
of policy actions are definitely evident in the real
sector of the economy, attention should be focused
on the questions of how far and how fast will the
downturn go, and when should the Federal Reserve
move to a moderately easier policy?
Prices have shown very little sign of slowing their
rapid rates of increase, and market interest rates re­
main at very high levels. However, economic theory
and empirical evidence indicate that after a prolonged
period of inflation, a downward adjustment of prices
and interest rates follows only slowly after real out­
put, real income, and employment adjust downward.
Given the difference between the lags of adjustment
of prices and interest rates to a restrictive monetary
policy and real output and employment, a policy of
“waiting to see the whites of the eyes” of the inflation
enemy manifested in prices and interest rates, can
have considerable unnecessary adverse consequences
for real output, income, and employment.
One step that monetary policy should avoid is a
sharp reversal to a very expansionary policy such as oc­
curred dining the 1967 pause in economic activity.
However, if a restrictive policy is pushed too far too
fast, by creating a large rise in unemployment, such
a policy may lay the groundwork for just such a
sharp reversal. If after mid-1970 policymakers
face a 5.5 or 6.0 per cent unemployment rate, then it
may be very difficult to avoid a sharp reversal of
policy. In such a case, the chance of throwing all the
hard-won effects of monetary restraint to the winds
becomes very great.
Page 7

Operations of the Federal Reserve Bank of St. Louis-1969

T HE FEDERAL RESERVE BANK OF ST. LOUIS
is one of twelve banks which, along with the Board
of Governors in Washington, D. C., make up the Fed­
eral Reserve System. The St. Louis Bank’s geographic
responsibility, the Eighth Federal Reserve District,
includes Arkansas and portions of Illinois, Indiana,
Kentucky, Mississippi, Missouri, and Tennessee.
Branches in Little Rock, Louisville, and Memphis aid
the St. Louis bank in its operations.
The operations of each Federal Reserve Bank can
be divided into three major classes. First, it provides
a variety of services for commercial banks (mainly
member banks), the Federal Government, and the
public. Second, it supervises certain banks in the
Eighth District. Third, it aids in the formulation of
national monetary policy. This report of the past
year’s operations discusses these three areas and re­
lated functions.

Service Operations
Each Federal Reserve Bank provides five major
service operations: lending money to member banks;
furnishing currency and coin for circulation; main­
taining facilities for the collection and clearing of
checks; maintaining the legal reserve accounts of


Page 8


member banks; and acting as a fiscal agent of the
U. S . Treasury. The volume of most service opera­
tions at this bank’s four offices increased in 1969,
reflecting growth in economic activity in the Central
Mississippi Valley. The increased volume of opera­
tions is reflected by an increase in employment in
this bank’s four offices from 1,193 on January 1, 1969
to 1,289 on January 1, 1970, an increase of 8 per cent.

Lending
Federal Reserve Banks are “bankers’ banks.”
For example, under certain circumstances, com ­
mercial banks borrow from the Reserve Banks in
much the same way that individuals and corporations
borrow from their banks. This is done through ad­
vances and discounting. Although advances are the
usual means by which credit is extended, a custom
has developed of calling these loans discounts and
the interest charged the discount rate. Lending
through this mechanism is initiated by the borrowing
bank, but the frequency and amount of borrowing by
any one member bank is limited by the Federal
Reserve Banks.
Daily borrowing from the St. Louis Federal Re­
serve Bank averaged $42 million in 1969, compared
with $17 million in 1968, $6 million in 1967, and $32
million in 1966. In 1969, 22 per cent of the member

D is c o u n t R ate

Loans to M e m b e r B anks
M illio n s o f D o lla r s

®<nlyAverag#Ouuiandmg)

M illio n s o f D o lla r s

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

Table

FEBRUARY, 1970

1

VOLUME OF OPERATIONS1
D o lla r A m o u n t
( M illio n s )

Checks C o lle cte d 2
N oncash co lle ctio n

items

C oin co un ted
C urrency co unted
Transfers o f fu n d s
U. S. S avings Bonds h a n d le d 3
O th e r G o ve rn m e n t securities h a n d le d 3
U. S. G o ve rn m e n t coupons p a id

Per C ent
C ha n g e

1969

1 96 8

1 4 0 ,3 4 8 .6

1 3 5 ,7 3 7 .9

1 9 6 8 -6 9

4 5 0 .7

5 5 6 .2

— 1 9 .0
21.1

3 .4 %

7 0 .5

5 8 .2

1 ,7 1 5 .9

1 ,5 7 7 .5

8.8

2 4 4 ,6 4 8 .5

1 6 9 ,1 7 3 .1

4 4 .6

5 9 5 .4

6 0 0 .2

2 1 ,8 3 9 .0

2 0 ,2 5 0 .3

7 .8

1 7 2 .3

1 5 7 .2

9 .6

Num ber
(T h o usa n d s)

-0 .8

Per C ent
C ha n g e

1969

1968

1 9 6 8 -6 9

3 4 4 ,0 6 8

31 1 ,4 1 6

1 0 .5 %

914

882

3 .6

C oin counted

6 3 6 ,3 1 7

5 3 9 ,1 6 2

1 8 .0

C urrency co unted
Transfers o f fu n d s

2 3 6 ,8 4 2
300

2 1 9 ,2 9 7
2 68

1 1 .9

Checks

co lle cte d 2

N oncash co lle ctio n item s

U. S. Savings Bonds* h a n d le d 3

8.0

1 1 ,2 1 9

1 0 ,6 0 8

5 .8

O th e r G o ve rn m e n t securities h a n d le d 3

953

690

38.1

U. S. G o ve rn m e n t coupons p a id

736

724

1.7

In 1969, coin handling contin­
ued the sharp rise of the past
several years, demonstrating fur­
ther recovery from the severe
coin shortage which occurred in
the mid-1960’s. The demand for
coins nationally has been fed in
part by the inflation o f recent
years, and there has probably
been some positive influence from
the increasing use of coin-oper­
ated vending machines. The num­
ber of pieces counted at the Bank
rose from 227 million in 1964 to
636 million in 1969, an average
annual increase of 23 per cent.
Meanwhile, the dollar value in­
creased from $25 million to $71
million.

A total of 237 million pieces of
currency was handled in 1969, 8
per cent above the previous year.
The dollar value of currency han­
dled amounted to $1.7 billion, an increase of 9 per
cent from a year earlier. The increase in currency
probably reflects the increase in personal income and
the related rise in transactions, along with the increase
in the price level.

JTotal fo r the St. Louis office and the Little R ock, Louisville, and M emphis branches.
2ExcIudes Governm ent checks and m oney orders.
3Issued, exchanged, and redeemed.
•

banks in the district borrowed from the Federal Re­
serve, compared with 13 per cent in 1968. While
market interest rates rose rapidly in 1969, the dis­
count rate was raised only once — on April 4, from
5% to 6 per cent.1 Incentive to borrow from the Fed­
eral Reserve was increased with the enlarged spread
between the market rate and the discount rate.

Coin and Currency Operations
Just as businesses and individuals obtain coin and
currency from commercial banks, commercial banks
obtain them at Federal Reserve Banks. Member
banks withdraw directly from the Federal Reserve
Bank, while nonmember banks withdraw from mem­
ber banks or with permission from the accounts of
member banks at the Federal Reserve Bank. When
banks receive an excess of coin and currency from
their customers, it is deposited with the Federal
Reserve Bank. There it is sorted and counted, the
usable money is held for redistribution, and the nonusable money is destroyed.

1Under present law, when a member bank borrows from its
Reserve Bank on collateral that does not meet certain
“ eligibility” requirements, it must pay interest at a rate onehalf of 1 per cent higher than the Reserve Bank’s normal
discount rate. The Board of Governors has recommended leg­
islation that would permit a member bank, in appropriate cir­
cumstances, to borrow on any collateral satisfactory to its
Reserve Bank, without the necessity of paying a “penalty”
rate o f one-half o f 1 per cent.




Page 9

As of February 1, 1970

Chairman of the Board and Federal Reserve Agent
M. P e i r c e , Chairman and Chief Executive Officer,
General American Life Insurance Company, S t. Louis, Missouri
F r e d e r ic

D eputy Chairman of the Board
S m i t h D. B r o a d b e n t , J r .,
Broadbent Hybrid Seed Co., Cadiz, Kentucky
B r a d f o r d B r e t t , President, The First National Bank of
J a m e s P. H i c k o k , Chairman of the Board, First National
Mexico, Mexico, Missouri
Bank in St. Louis, St. Louis, Missouri
S a m C o o p e r , President, HumKo Products, Division of
E d w a r d J . S c h n u c k , President, Schnuck Markets, Inc.,
Kraftco Corporation, Memphis, Tennessee
St. Louis, Missouri
C e c i l W. C u p p , J r ., President, Arkansas Bank and Trust
S h e r w o o d J. S m i t h , Vice President, D /P Computer
Company, Hot Springs, Arkansas
Services, Inc., Evansville, Indiana
M a r k T o w n s e n d , Chairman of the Board, Townsend
Lumber Company, Inc., Stuttgart, Arkansas

L IT T L E ROCK BRANCH
Chairman of the Board
A l P o l l a r d , President,
Brooks-Pollard Company, Little Rock, Arkansas
F r e d I. B r o w n , J r ., President, Arkansas Foundry Com
E d w a r d M . P e n i c k , President and Chief Executive
pany, Little Rock, Arkansas
Officer, Worthen Bank & Trust Company, Little
Rock, Arkansas
J a k e H a r t z , Jr., President, Jacob Hartz Seed Co., Inc.
E l l i s E . S h e l t o n , President, The First National Bank of
Stuttgart, Arkansas
Fayetteville, Fayetteville, Arkansas
L o u i s E. H u r l e y , Chairman and Chief Executive Officer
W a y n e A. S t o n e , Chairman and Chief Executive Officer,
The Exchange Bank & Trust Company, El Dorado
Simmons First National Bank of Pine Bluff, Pine
Arkansas
Bluff, Arkansas

LO U ISV ILLE BRANCH
Chairman of the Board
H a r r y M. Y o u n g , J r .,
Farm er, H erndon, K entucky

G. B e a m , President, Thomas Industries Inc., Louis­
ville, Kentucky
P a u l C h a s e , President, The Bedford National B a n k ,
Bedford, Indiana
J. E. M i l l e r , Executive Vice President, Sellersburg State
Bank, Sellersburg, Indiana

John

E . R e i t m e i e r , President, Catalysts and Chemi­
cals Inc., Louisville, Kentucky
H u g h M . S h w a b , Vice Chairman of the Board, First
National Bank of Louisville, Louisville, Kentucky
J a m e s C. Z i m m e r m a n , Executive Vice President, The
Owensboro National Bank, Owensboro, Kentucky
R onald

MEMPHIS BRANCH
Chairman of the Board
President,
Huffman Brothers Lumber Company, Blytheville, Arkansas
C. W h i t n e y B r o w n , President, S. C . Toof & Company,
W a d e W . H o l l o w e l l , President, The First National
Memphis, Tennessee
Bank of Greenville, Greenville, Mississippi
J a m e s R. F i t z h u g h , Executive Vice President and Cash­
L e w i s K . M c K e e , Chairman of the Board, National Bank
ier, Bank of Ripley, Ripley, Tennessee
of Commerce, Memphis, Tennessee
W i l l i a m L . G i l e s , President, Mississippi State Uni­
J. J. W h i t e , President, Helena National Bank, Helena,
versity, State College, Mississippi
Arkansas

Digitized forPage
FRASER
10


A l v i n H u f f m a n , Jr.,

Member, Federal Advisory
Council
j
M o r g a n , Chairman of the Board,
The First National Bank of Memphis
Memphis, Tennessee

A llen

D a r r y l R . F r a n c is ,
D a l e M . L e w is ,

President

First Vice President

H o w a r d H . W e ig e l ,

Senior Vice President

W o o d r o w W . G il m o r e ,

Vice President

Jo se ph C. W o t a w a ,

Senior Vice President

G e o r g e W . H ir s h m a n ,

General Auditor

H om er Jones,
W il b u r

Jerry

Senior Vice President

Vice President
Vice President

F. G arland

Vice President

W il l is L . J o h n s ,

Assistant Vice President

N orm an N. Bo w sh er,

Vice President

R u s s e l l , Jr., Vice President, General
Counsel, and Secretary of the Board

Vice President

M a r v in L . B e n n e t t ,
G erald T . D u nne,

Jo h n W . M enges,

Vice President

L e o n a ll C. A n d ersen ,

Jo rd an ,

S t e p h e n K o p t is ,

Senior Vice President

H . Isb e ll,

L.

Assistant Vice President
Assistant Vice President

R ic h a r d 0 . K a l e y ,
L . T e r r y B r it t ,

Assistant Vice President

M ic h a e l W . K e r a n ,

M.

K e it h

E a r l H . C h a p in ,
E d g ar H . C r is t ,

W.

G eorge
John

W.

G a r b a r in i,

B. L uttrell,

Assistant Vice President

J . M o r e , Assistant Counsel and
Assistant Secretary of the Board

Assistant Vice President

W il l ia m R . M u e l l e r ,

Assistant Vice President

P aul Salzm an ,

Assistant Vice President

Assistant Vice President

H arold E. U t h o f f ,
W . E. W a lk e r ,

Assistant Vice President

Assistant General Auditor

Assistant Vice President

C h a r l e s E . S il v a ,

Assistant Vice President

J o h n J. H o f e r ,

Assistant Vice President

K athryn

Assistant Chief Examiner

D e n n is o n ,

J. M . G e i g e r ,

C l if t o n

Assistant Chief Examiner

D r u e l in g e r ,

P.

Jo s e p h

Assistant Vice President

Carlson ,

Chief Examiner

Assistant Vice President

L IT T L E ROCK BRANCH
Joh n F. Breen,
M ic h a e l
John

K.

W ard,

T.

M o r ia r t y ,

Vice President and Manager

Assistant Vice President and Assistant Manager

Assistant Vice President

D onald

W . M o r ia r t y ,

Jr., Assistant Vice President

LO U ISV ILLE BRANCH
D onald L. H en ry,
Jam es
R obert

E.

Harlow ,

E.

C onrad,

Senior Vice President and Manager

Assistant Vice President and Assistant Manager

Assistant Vice President

G eorge

E.

R e i t e r , J r .,

Assistant Vice President

MEMPHIS BRANCH
Eugene A . L eonard,
P a u l I . B l a c k , J r .,
R uth

A . Bryant,

Assistant Vice President




Senior Vice President and Manager

Assistant Vice President and Assistant Manager
A nthony

C . C r e m e r iu s ,

Jr., Assistant Vice President

Page 11

FEBRUARY. 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS


Page 12


Check Clearing
Federal Reserve Banks participate in collecting
checks and provide a mechanism through which
commercial banks settle for checks collected. The
four offices of this bank receive checks from district
member banks, other Federal Reserve Banks, and
Government agencies for collection. A Federal Re­
serve Bank also sometimes receives checks directly
from member banks in other Districts to increase the
speed of collections. Checks received are drawn
either on banks in the Eighth District which remit
at par, par remitting banks in other districts, or the
United States Treasury. The dollar volume of checks
collected rose from $136 million in 1968 to $140 mil­
lion in 1969, an increase of 3.4 per cent. The number
of checks collected rose from 311 million in 1968 to
344 million in 1969, an increase of 10.5 per cent. The
number of checks collected in all of the banks in the
Federal Reserve System increased 10 per cent from
1968 to 1969. The fact that the number of checks col­
lected has increased more rapidly than the dollar
amount probably indicates that more people are using
checks for purchasing. Two possible reasons for the

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY. 1970

increased popularity of paying by check are that many
banks have eliminated or lowered service charges on
demand deposits.

M illio n s

Transfers of Funds

700

Wire transfers of funds are largely movements of
member bank balances among Federal Reserve
Banks. Such transfers result primarily from trans­
actions in the Federal Funds market, check collection
settlements, and transfers in connection with U. S.
Treasury obligations. The number and dollar value of
such transfers have risen sharply in recent years. This
Bank was party to 300 thousand transfers in 1969, 12
per cent above the 268 thousand transfers in 1968.
Dollar value was $245 billion, up 45 per cent over
1968.

U.S. S a v in g s B o nd s
Issued, E x c h a n g e d , a n d R ed ee m ed

M illio n s

s

650
600

600
Dollar Volume
550
500

500

450

450

400
0
M ill ons

~

,

~ r

,

~

~

i

~~

,

400
~r 2 o
M i ion s
11.5

11.5
11.0

10.5

10.5

Fiscal Agency Operations

10.0
9.5

Each Federal Reserve Bank acts as a depository
and fiscal agent of the United States Treasury. In this
capacity the Federal Reserve Banks carry the prin­
cipal checking accounts of the Treasury, issue and




9 .0
8.5

8 .5
Number of Pieces

8 .0

8 .0
7 .5
7 .0
=;r
0
19 57
<Dther
B illie ns

__

„

1959

„

1961

7 .0

_

1963

1965

19 69

1967

G o vernm e nt Securities Issued, Servicec
and Retired
Bi

,
ions

2 5.0

2 5.0

22.5

22.5

20.0

20.0
17.5

17.5
Dollar Vol ume
15.0

15.0

12.5

12.5
10.0

10.0
0
Thou sa nd s

~

,

~~

,

~~

1

~

,

~F

s
0
Thous ands

1200

1200

1000

1000

800

/
Number ol Pieces

600

400

800

600

400

-------^

200

200
.
1957

*

1959

1961

1963

1
1965

.

0
1967

19 >9

Page 13

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY. 1970

redeem Government securities, administer the Treas­
ury tax and loan accounts with commercial banks, and
perform various other Government financial duties.
The four offices of this bank in 1969 issued, ex­
changed, and redeemed 11 million U. S. Savings
Bonds valued at $595 million. The number of bonds
handled rose 6 per cent from 1968, while the dollar
value declined 1 per cent. Other government securi­
ties issued, serviced, and retired totaled 953 thousand,
38 per cent above a year earlier, while dollar value
was up 8 per cent to $22 billion.

Supervision and Examination
The Federal Reserve System, along with state
authorities, exercise supervision over state-chartered
banks which are members of the Federal Reserve Sys­
tem, with the objective of fostering and maintaining a
sound banking system. Supervision includes annual
examinations which provide the information for eval­
uation of the assets, operations, policies, and manage­
ment of the banks subject to review. This enables
the supervisory authorities to help prevent or correct
situations that might adversely affect the soundness
of the banks, and the public interest. All state mem­
ber banks in the district were examined in 1969.2
Other supervisory functions of the Federal Reserve
System include admission of state banks to member­
ship in the System, approval for the establishment of
domestic and foreign branches, approval for merger
or absorption of other banks by state member banks,
and permission to establish registered bank holding
companies and for such companies to acquire stock in
banks. Much of the investigation involved in these
supervisory functions is conducted by the Federal
Reserve Banks.

Research
The research staff of the bank performs two major
roles. One is to analyze national and regional financial
situations with a view to formulation of monetary
policy recommendations. These recommendations are
used by the President of the Bank in the delibera­
tions of the Federal Open Market Committee.
The second function of the research staff is to pro­
vide economic information to the public, principally
through the monthly Review and other recurring re­
leases. The research staff also provides data and
analyses which facilitate other operations of the Sys­
tem; for instance, research into the structure of bank­
ing markets aids in determining the advisability of
mergers and holding company applications.

Statements
Total assets of the Federal Reserve Bank of St.
Louis were $3.2 billion on December 13, 1969, an
increase of 9 per cent from a year earlier. Most of
the rise in assets was due to increased holdings of
U. S. Government securities, which resulted from the
operations of the System Open Market Account. These
open market operations, which are the major instru­
ment of monetary policy, are authorized by the Fed­
eral Open Market Committee and are undertaken
at the Federal Reserve Bank of New York by the
T a b le III

COMPARATIVE STATEMENT OF CONDITION
ASSETS
G o ld

c e rtific a te
cash

of

Banks by Type
E ighth
D istrict
1 2 /3 1 /6 9

U n ite d
States
1 2 /3 1 /6 8

E ighth
D istric t
1 2 /3 1 /6 8

N a tio n a l

4 ,6 6 9

348

4 ,7 1 6

350

S ta te M e m b e r

1 ,2 0 3

117

1 ,2 6 7

124

S ta te In su re d
N onm em ber

7 ,5 9 6

891

7 ,5 0 4

1 ,0 1 9

adva n ce s

198

16

197

16

2Four agencies have the authority to supervise private com­
mercial banks. The Comptroller of the Currency’s major
supervisory responsibility is National Banks; the Federal
Reserve, for the most part, examines state member banks;
the Federal Deposit Insurance Corporation mainly supervises
state insured nonmember banks; and the state supervisory
authorities examines all state banks (including both insured
and noninsured).

Digitized for Page
FRASER
14


.

.

.

.

item s

.

.

.

.

.

.
.

O th e r a s s e t s ...............................................
T o ta l

D ecem ber
3 1 , 1968

3 4 5 ,2 8 9

3 5 2 ,9 5 5

2 9 ,3 4 7

3 3 ,0 1 0

9 ,8 2 8

2 4 ,5 8 9

1 5 ,2 0 0

770

2 ,1 0 5 ,5 2 4

1 ,8 6 8 ,8 2 9

6 2 1 ,6 5 8

5 7 3 ,7 6 8

9 3 ,9 6 5

9 5 ,4 3 8

A s s e t s ......................................... 3 ,2 2 0 ,8 1 1

2 ,9 4 9 ,3 5 9

LIABILITIES A N D CAPITAL ACCO UNTS
Federal Reserve notes

S tate
N o n in s u re d

.

U. S. G o v e rn m e n t se curitie s
U nco lle cted

U n ite d
States
1 2 /3 1 /6 9

.

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

D iscounts a n d

Number

reserves

F ederal Reserve notes o f o th e r b an ks
O th e r

T a b le II

(T h o usa n d s o f D o lla rs )
Decem ber
3 1 , 1969

( n e t)

.

1 ,7 9 6 ,5 7 9

1 ,6 7 6 ,6 4 9

M e m b e r b a n k s — reserve accounts

8 2 4 ,0 9 0

7 8 3 ,5 7 0

U. S. Tre a sure r — g e n e ra l account

6 7 ,9 9 8

599

1 5 ,8 6 6

1 6 ,0 8 6

4 4 9 ,5 7 5

4 1 4 ,7 6 2

D ep o sits:

D eferre d a v a ila b ilit y cash item s .
O th e r lia b ilitie s a n d accrued d iv id e n d s

2 1 ,0 2 1

1 3 ,6 9 3

T o ta l c a p ita l a c c o u n t s ...........................

4 5 ,6 8 2

4 4 ,0 0 0

T o ta l L ia b ilitie s a n d
C a p ita l A c c o u n t s ...........................

3 ,2 2 0 ,8 1 1

2 ,9 4 9 ,3 5 9

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY, 1970

Committee’s agent. Although the securities remain at
the New York Bank, each Reserve Bank participates
in the holdings and earnings of the System Account.

T a b le IV

COMPARATIVE PROFIT AND LOSS STATEMENT
(T h o usa n d s o f D o lla rs )

1969

1 96 8

Per C ent
C hange
1 9 6 8 -6 9

T o ta l e a rn in g s ..................................
N e t e x p e n s e s ..................................

. 1 1 7 ,8 7 7
.
1 5 ,5 1 5

9 7 ,6 4 9
1 3 ,9 6 2

2 0 .7
11.1

C u rre n t n e t e a rn in g s
N e t a d d itio n ( + ) o r
d e d u ctio n s
(— )

. 1 0 2 ,3 6 2

8 3 ,6 8 7

2 2 .3

+

—

N e t e a rn in g s b e fo re p a ym e n ts
to U. S. Tre a sury
D is trib u tio n o f N e t E a rn in g s:
D iv id e n d s .........................................
In te re st on Federal Reserve
n o t e s * .........................................
T ra n sfe rred to surplus .

—

2

291

. 1 0 2 ,3 6 0

8 3 ,9 7 8

2 1 .9

1,351

1 ,2 7 3

6.1

. 1 0 0 ,1 6 8
841

8 1 ,0 5 5
1 ,6 5 0

2 3 .6
— 4 9 .0

. 1 0 2 ,3 6 0

8 3 ,9 7 8

2 1 .9

Net earnings before payments to the United States
Treasury increased to $102 million in 1969, up 22 per
cent from a year earlier. This sharp rise in earnings
was due to larger holdings of loans and securities, as
well as higher interest rates on these assets, while
expenses increased only moderately. After dividends
to member banks and increases in surplus, the re­
maining portion of net earnings are transferred to
the U. S. Treasury as interest on Federal Reserve
notes. Such transfers totaled $100 million in 1969, up
24 per cent from a year earlier.

* Incom e transferred to Treasury

Publications of This Bank Include:
Weekly

U. S. FINANCIAL DATA

Monthly

REVIEW
MONETARY TRENDS
NATIONAL ECONOMIC TRENDS
SELECTED ECONOMIC INDICATORS - CENTRAL
MISSISSIPPI VALLEY

Quarterly

FEDERAL BUDGET TRENDS
U. S. BALANCE OF PAYMENTS TRENDS
TRIANGLES OF U. S. ECONOMIC DATA
GROSS NATIONAL PRODUCT

Annually

TRIANGLES OF U. S. ECONOMIC DATA
RATES OF CHANGE IN ECONOMIC DATA
FOR TEN INDUSTRIAL COUNTRIES
(QUARTERLY SUPPLEMENT)

Copies of these publications are available to the public without charge, including
bulk mailings to banks, business organizations, educational institutions, and others.
For information write: Research Department, Federal Reserve Bank of St. Louis,
P. O. Box 442, St. Louis, Missouri 63166.




Page 15

Monetary and Fiscal Influences on Economic Activity:
The Foreign Experience
by MICHAEL W. RERAN

The November 1968 and November 1969 issues of this R e v i e w included articles which developed
and explained in some detail a procedure for testing the relative importance of monetary and fiscal in­
fluences on economic activity in the United States. The conclusions reached in those articles were that
(except for the years covering World War II) monetary influences had a stronger, more predictable,
and faster impact on economic activity than fiscal influences.
This article presents additional empirical evidence on the monetary - fiscal issue on the basis of data
from eight foreign countries. The analysis of this foreign experience tends to confirm the results obtained
for the United States. Because the test procedure is identical with that used and described in some detail
in the previous articles, this article is devoted mainly to presenting and describing the empirical evidence.

O n e OF THE major current debates among econ­
omists and policymakers in the United States and
abroad deals with the relative importance of monetary
and fiscal influences on economic activity. This de­
bate reflects a growing awareness of the importance
of monetary policy in any stabilization program. In
part, this awareness stems from the intellectual re­
surgence of the quantity theory of money as an
explanation of short-run movements in economic
activity. In the main, however, it is probably due to
the surprising number of recent historical experiences
in which monetary actions have seemed to be effec­
tive and fiscal actions have seemed to be ineffective.
The two episodes best known to the American pub­
lic are the tight money-easy fiscal policy combina­
tion of 1966 which preceded the mini-recession in
early 1967, and the easy money-tight fiscal policy
combination of the last half of 1968 which was fol­
lowed by continued economic boom in 1969. Similar
experiences have occurred in other countries. In early
1968, for example, the United Kingdom had an easy
money-tight fiscal policy combination and experienced
a continued economic boom in the second half of
1968 and through early 1969.
This Review has recently published two articles
analyzing the relative impact of monetary and fiscal
influences on economic activity in the United States.1
iLeonall C. Andersen and Jerry L. Jordan, “ Monetary and
Fiscal Actions: A Test of Their Relative Importance in
Economic Stabilization” in the November 1968 issue of this
Review, pp. 11-24; and Michael W . Keran, “ Monetary and
Fiscal Influences on Economic Activity — The Historical Evi­
dence,” in the November 1969 issue of this Review, pp. 5-24.
16
Digitized forPage
FRASER


The conclusions reached in both articles were that
monetary influences have had a larger, more predicta­
ble, and faster effect on economic activity than fiscal
influences. If the relationship observed in the United
States reflects an important and stable underlying
phenomenon, then one would expect that similar re­
lationships would exist in other countries with roughly
similar economic institutions. The intent of this article
is to investigate comparable monetary and fiscal in­
fluences on economic activity for a selected group
of foreign countries.
According to many authorities, the most desirable
quality of any empirically-estimated equation is its
accuracy in forecasting the future. According to
Christ,2 “the ‘future’ should be interpreted to include
anything unknown to the forecaster when he did his
work.” Thus, a significant test of the equation de­
veloped with respect to the United States would be
to subject it to tests using data from other countries.
With this in mind, this article should be viewed as
an attempt not only to increase our understanding
of monetary and fiscal relations in particular foreign
countries, but also to provide an independent test
of the “forecasting ability” of equations developed
for the United States.
2Carl F. Christ, Econometric Models and Methods, (John
W iley and Sons, Inc., 1966). “ Thus, a person might forecast
some aspect of nineteenth century behavior by means of
theory and data derived solely from the twentieth century,”
page 5. “ Is there any truth in the maxim that prediction
provides the acid test? The answer is yes. ( If ) . . . we con­
front the model with an entirely new set of data which we
were not familiar with when the model was chosen,” page 547.

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

This article will deal with these issues in the follow­
ing order: first, a brief consideration of the test pro­
cedures; second, consideration of the data problems
in making empirical tests of foreign countries; third,
presentation of the statistical results; fourth, testing
various propositions; and finally, some general obser­
vations on the role of monetary influences on eco­
nomic activity.

FEBRUARY, 1970

both the Modern Quantity theory and the Keynesian
Income-Expenditure theory would imply are the best
measures of the impact of monetary and fiscal actions.
Because this approach omits direct consideration of
the channels through which the monetary or fiscal
effects operate, it cannot be used to answer questions
about the underlying structure of the economy.

Foreign Data Problems
The Test Procedure
The basic form of the equation used to test the
relative impact of monetary and fiscal influences on
economic activity is the same as that used in the
previous articles in this Review. The general form of
the test equation is:
AY =

ao +

aiA M +

a2A F ,

where: AY is a measure of changes in economic activ­
ity; AM is a measure of changes in monetary influ­
ences; AF is a measure of changes in fiscal influences;
ai and aa are symbols which represent the magnitude
of the impact of monetary and fiscal influences, re­
spectively, on economic activity; and a0 represents
the average impact of all other influences on eco­
nomic activity during the same period.
The earlier articles presented a detailed discussion
of the relative advantages and disadvantages of this
“single equation” approach as opposed to alternative
approaches to measuring monetary and fiscal influ­
ences.3 That discussion will not be repeated here.
The procedure employed in this article is to test
two variables which are usually considered to be
under the control of the monetary and fiscal policy­
makers to see which variable has the dominant impact
on economic activity. These variables are not neces­
sarily those which are consciously controlled by policy
makers. Rather, the variables tested are those which
3One point should be emphasized. The “ single equation”
approach used here does not provide any direct evidence
about whether the Keynesian Income-Expenditure theory or
the Modern Quantity theory is the most appropriate explana­
tion of national income. The reason for this is because the
“ single equation” test used in this article does not discrimin­
ate between the behavioral assumptions of the two theories.
See Keran, pp. 6-8 for further discussion of this and re­
lated issues. It is theoretically possible to have a strong
and prompt monetary influence on economic activity in a
Keynesian model. Such a model was estimated empirically
by J. Ernest Tanner in “ Lags in the Effects of Monetary
Policy,” American Economic Review, December 1969.
A single equation test of behavioral assumptions of The
Quantity Theory and Income-Expenditure Theory, was made
by Milton Friedman and David Meiselman in “ Relative
Stability of Income Velocity and Investment Multiplier in
the United States, 1868-1960,” Stabilization Policies, Prentice
Hall, 1963. The September 1965 issue of the American
Economic Review is devoted to a searching discussion of the
Friedman-Meiselman results.




When American researchers attempt to colleot data
on some facet of the American economy, they are
doubly blessed. First, the United States publishes
more statistics in greater detail and generally of
greater accuracy than other countries. Second, expert
knowledge of the sources and reliability of the data
are readily available.
In general, neither the quantity nor quality of
foreign data are as good as that for the United States.
Furthermore, the American research worker is un­
likely to be as familiar with the sources of foreign
data as with domestic data.
Apparently, only four countries besides the United
States have quarterly GNP data: Canada, Germany,
Japan, and the United Kingdom. For reasons dis­
cussed in the Appendix, GNP results for the United
Kingdom are not used in the main body of this
article. For the United Kingdom and the other coun­
tries in our survey group, for which quarterly GNP
data were not available, namely, Belgium, France,
Italy, and the Netherlands, economic activity was
measured on the basis of a proxy variable. The proxy
variable for economic activity is equal to the scaled
product of the seasonally adjusted industrial produc­
tion index and the consumer price index4 times
GNP in the base years of those indexes. As is shown
in the Appendix, the proxy variable gives substan­
tially the same implications for monetary and fiscal
actions as the GNP measure in those countries in
which both measures are available.
Using GNP data where available, and the proxy
where GNP data was not available, provides quar­
terly measures of economic activity for eight of the
major foreign industrial countries which have reason­
ably decentralized economic systems, and therefore
come closest to paralleling the American economic
system. For purposes of comparison, updated results
from earlier studies on the United States are also
presented.
^The consumer price index is not seasonally adjusted. The
exact formula is presented in the Appendix.
Page 17

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

The measure of monetary influence used for each
country was the money stock as defined by the Inter­
national Monetary Fund (IM F ) in its International
Financial Statistics. This was the only monetary vari­
able which was available quarterly on a consistent
basis for all countries.5 However, it would be desira­
ble in future research to try other monetary variables,
such as the monetary base or total reserves of the
banking system.
The most serious data problems were encountered
in developing an appropriate fiscal variable. Possible
measures of the fiscal influence are total Government
spending ( including transfer payments as well as pur­
chases of goods and services), high-employment tax
receipts, the differences between government spend­
ing and high-employment tax receipts,6 and changes
in the national debt. Data on high-employment tax
receipts and on the national debt were not available
for any of the countries. O f necessity, therefore, the
only measure of fiscal influences used in this paper is
total Government spending culled from Treasury sta­
tistics on cash outlays including transfers to Govern­
ment corporations. The Government component of
the National Income Accounts could not be used for
two reasons: 1) it included only purchases of goods
and services; and 2) it included expenditures at all
levels of government. Even on this basis, fiscal meas­
ures were available for only three countries. By co­
incidence, they were the same countries which had
GNP data: Canada, Germany, and Japan.7
This limited measure of fiscal influence may not be
as serious a liability as it appears. Experience with
United States data indicates that Government spend­
ing is the best measure of fiscal influences.8 However,
it does mean that further research on fiscal influences
could possibly change the results presented in this
article. For Belgium, France, Italy, the Netherlands,
and the United Kingdom, no consistent quarterly fis­
cal variable was available. For these countries only
monetary * influences on economic activity were
measured.
5It could be argued that different definitions of the money
stock would be appropriate for different countries because
of different institutions. This is a reasonable proposition. H ow ­
ever, a consistent IMF definition of money was used for two
reasons: (1 ) the author is not familiar enough with the in­
stitutions in each country to reformulate the money stock
definition; (2 ) the author did not want to be accused of
choosing the data source on the basis of that which best
supported his hypothesis.
“Actual Government spending need not be adjusted for the
high-employment concept because the differences would be
conceputally small. On the other hand, the difference be­
tween actual and high employment tax receipts can be
conceptually large. See Keith Carlson, “ Estimates o f the HighEmployment Budget,” this Review, June 1966.
7Fiscal data were available for the United Kingdom from
1962 but are not included here for reasons given in Ap­
pendix II.
8Andersen and Jordan, pages 17 and 18.


Page
18


FEBRUARY, 1970

The results reported in this article are based on the
data and sources described. However, it is conceiv­
able that some sources of data may have been over­
looked which could have improved, or perhaps modi­
fied, the results presented.”

Statistical Results
The summary results of the regression analysis in
both first and central difference form, using the Almon
distributed lag technique,10 are presented in Tables I
and II. In the case of first differences, the quarter-toquarter change from period ( t-1) to period ( t ) is
labeled as the change at period (<)• In central dif­
ference form, the average change from (t-1 ) to
( t+ 1 ) is labeled as the change at period (t). Al­
though the first difference form is the usual method
of presenting “change” data, the central difference
form more closely approximates the economic con­
cept of “change” at a point in time.11
Table I includes those countries in which economic
activity is measured by GNP and in which the fiscal
influence is measured by total central Government
spending. Table II includes those countries in which
economic activity is measured by the proxy variable
and in which a fiscal variable was not available. In
the Appendix, the validity of the proxy variable is
discussed and it is shown that it gives substantially
the same result as when GNP is used to measure
economic activity. For those who are unfamiliar with
interpreting statistical results as presented in Tables I
and II, a description of the Canadian first difference
9The sources of all data used in this article are listed at the
end of the Appendix.
,uIn each test the form of the equation was estimated with
money alone, fiscal alone, and a combination of the two.
Alternative time lags between (t-1) and (t-6) were tried.
The form of the equation selected and the time lags to
represent each time period were chosen on the basis of
minimum standard error of estimate adjusted for degrees
of freedom.
The Almon lag technique, by constraining the distribution
of coefficients to fit a polynomial curve of (n ) degree, is de­
signed to avoid the bias in estimating distributed-lag co­
efficients which may arise from multicollinearity in the lag
values of the independent variables. The theoretical justi­
fication for this procedure is that the Almon constrained
estimate is superior to the unconstrained estimate because it
will create a distribution of coefficients which more closely
approximates the distribution derived from a sample o f in­
finite size. In order to minimize the seventy o f the Almon
constraint, the maximum degree of the polynomial was used
in each case. The maximum degree is equal to the number
of lags plus one of the independent variables up to five
lags. Following the convention established by Shirley Al­
mon, “ The Distributed Lag Between Capital Appropria­
tions and Expenditures,” Econometrica, (January 1965),
if there are (n ) lags, ( t + 2 ) and ( t-n-1) are both con­
strained to zero. The regressions were also run without
constraining the beginning and ending values to zero, and
the results are virtually identical.
11For a further description and justification of central differ­
ences, see John Kareken and Robert Solow, “ Lags in Mone­
tary Policy,” page 18, in Stabilization Policies, Prentice Hall,
1963.

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

results in Table I is provided.12
Others may proceed to the sec­
tion tided “Presentation of
Results.”
How to Read the Statistical
Results — The time period ( I I /
1953-IV/1968) for Canada indi­
cates the period during which
the dependent variable (AGNP)
is explained by the monetary
and fiscal variables. The lag
(t-6) indicates that it takes the
contemporary and six lagged
quarters for the monetary and
fiscal influences to have their
full effect on the economy.

T a b le I

MONETARY AND FISCAL INFLUENCES ON AGNP
AGNP =

Time
P eriod

C o u n try

ao +

a iA M -j- a2AE

Lags*

C o n s ta n t
Term
ao

M o n e ta ry
Influences
ai
(s u m )

Fiscal
Influences
02
(su m )

R2
D -W

(F irs t D ifferences - B illio n s o f N a tio n a l C u rre n cy)
C anada

1 1 /1 9 5 3 - I V / 1 9 6 8

t- 6

.3 3
( 3 .2 7 )

4 .2 7
( 5 .7 5 )

— 1 .4 5
( 1 .3 8 )

.4 3
2 .2 0

G e rm a n y

111/1961

t-3

-3 .2 6
( .7 6 )

8 .8 8
( 2 .8 5 )

.6 8
( .4 1 )

.3 9
2 .2 7

- 111/1968

Ja p a n

1 /1 9 5 6

- 111/1968

t-2

.0 3
( .2 5 )

2 .7 8
( 5 .2 6 )

.81
(1 7 5 )

.5 6
1 .9 4

U n ite d States

1 /1 9 5 4

- 111/1969

t-4

3 .1 9
( 4 .2 2 )

5 .5 0
( 8 .3 0 )

.01
(02)

.6 7
1.82

— 2 .1 3
( 2 .8 0 )

.6 7
1 .48

(C e n tra l D ifferences - B illio n s o f N a tio n a l C urre n c y )
C anada

1 1 /1 9 5 3 - IV /1 9 6 8

t- 6

G e rm a n y

111/1961

t-3

- 111/1968

.3 2
( 4 .9 1 )
— 4 .2 0

4 .8 2
( 9 .3 2 )
1 0 .4 4

.3 3

.5 4

At the top of Table I is an
( 4 .8 4 )
( .2 3 )
1 .7 0
(1 -3 1 )
equation similar to that de­ Ja p a n
2 .6 8
t-2
-.0 4
1 .4 6
.6 6
1 /1 9 5 6 - 111/1968
.7 4
( 2 .9 6 )
(-3 7 )
( 4 .7 7 )
scribed on page 17. Changes in
3 .1 4
.7 9
U n ite d States
1 /1 9 5 4 - 111/1969
t-4
5 .3 5
.11
Gross National Product ( AGNP)
( 5 .6 4 )
(1 0 .7 9 )
(47)
1 .1 7
is the variable to be explained.
N o te : Regression coefficients are the top figures ; their “ t ” statistics appear below each coefficient,
enclosed by parentheses. R 2 is the percent o f variation in the dependent variable which
Changes in the money stock
is explained by variations in the independent variables. D -W is the D urbin-W atson statistic.
(A M ) and changes in Govern­
♦Lags are selected on the basis o f m inimum standard error, adjusted fo r degrees o f freedom .
ment expenditures ( A E ) are the
variables which are postulated
to explain AGNP.13 aj is the symbol for the measured
ficantly different from zero, and a “t” statistic smaller
influence of AM on AGNP, holding AE unchanged,
than 1.96 is not significantly different from zero at
the 95 per cent confidence level. The convention
and a2 is the symbol for the measured influence of AE
in economics is to make the 95 per cent confidence
on AGNP holding AM unchanged, a0 represents the
interval the boundry between acceptance or rejection
estimated trend value of all other influences on AGNP.
of the coefficient as significantly different from zero.
The columns of numbers in Table I under ai and
Thus, in the case of Canada, the statistical results in­
a2 represent the statistically estimated value of the
dicate
that the monetary influence is positive and
average relation between the monetary or fiscal influ­
highly
significant.
ence and AGNP for various countries. In the case
The estimated coefficient for the fiscal influences
of Canada, 4.27 is the estimated monetary coefficient,
for
Canada is —1.45. The implication is that for every
which implies that on the average, for every $1 in­
$1
increase
in Government expenditures, there will
crease in the money stock, there will be a $4.27 in­
be
a
$1.45
decrease
in GNP after six quarters. This
crease in GNP over the current and six following
negative
relation
is
contrary
to the generally assumed
quarters. The number below, enclosed by a paren­
relation
between
Government
spending and GNP.
theses (5.75), is the “t” statistic, which is a measure
However,
the
“t”
statistic
of
(1.38)
indicates the esti­
of the statistical confidence one may have that the
mated
fiscal
coefficient
is
not
statistically
different
estimated coefficient has the same sign as the “true”
from
zero,
and
consequently
this
result
is
not
persua­
coefficient relating AM to AGNP. The larger the “t”
sive
evidence
that
Government
expenditures
are
per­
statistic, the greater our confidence in the value of
verse
in
their
effect
on
economic
activity.
The
R2
is
the estimated coefficient. In general, an estimated
the coefficient of determination adjusted for degrees
coefficient with a “t” statistic larger than 1.96 is signi­
of freedom.14 It is .43 for Canada. This means that
12It should be kept in mind that this description is highly
simplified. Those who are interested in a more complete and
rigorous explanation of statistical hypothesis-testing should
consult any elementary textbook in statistics.
13AE rather than AF is used here as a symbol of the fiscal
influence because the specific measure used in this case is
changes in Government expenditures. AF was a surrogate
for any measure of fiscal influence.




HThe degrees of freedom of an equation are equal to the
number of observations of the dependent variable minus
the number of independent variables, including the con­
stant term. In the Canadian case, there were 63 observa­
tions of AGNP from 11/1953 to IV /1968 and there were 7
independent money variables ( one contemporary and six
lagged), and 7 independent fiscal variables plus one con­
stant term, so that the degrees of freedom equalled 48.
Page 19

FEBRUARY. 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

43 per cent of the variation in AGNP can be ex­
plained by variation in the monetary and fiscal vari­
ables, AM and AE.
Considering that the statistical estimates were made
on the basis of quarterly first differences, which mag­
nifies the random elements in the data, an R2 = .43
is considered to be reasonably high. D -W ( the DurbinWatson statistic) is a measure of randomness in the
error term of the estimated equation. An acceptable
range for the D -W statistic in these equations would
be roughly between 1.25 and 2.75.15
Presentation of Results — Table I shows the sum­
mary regression results for Canada, Germany, Japan
and the United States, using changes in quarterly
GNP as a measure of economic activity. In each
case the results are presented in both first difference
and central difference form. Central difference data
are, in effect, a two-term moving average of first
difference data. Thus, central differences have con­
sistently higher R2 than first differences because some
of the random movements which are so promi­
nent in first difference data have been averaged out.
This also has the effect of reducing the randomness
of the error term and thus reducing the value of the
Durbin-Watson statistic.10
The regression results in Ta­
ble I give substantially consist­
ent implications with respect to
monetary influences. In every
country the coefficient for the
monetary variable is positive
and statistically significant in
both first and central difference
form. On the other hand, the
fiscal variable does not exert an
influence which exhibits any
systematic pattern for the vari­
ous countries. For Canada the
15This is based on the assumption
of 40 observations and 5 independ­
ent variables. One could reject auto
correlation in the error term (lack
of randomness) if the DurbinWatson statistic is in the range
1.79-2.21. The inconclusive range
goes as low as 1.25 and as high as
2.75. The inconclusive range would
be narrowed with more observa­
tions and widened with more
independent variables.
1(iThere seems to be a systematic
trade-off between first and central
differences, with the latter having
higher R2 s ( which is desirable)
and lower D -W statistics ( which
is sometimes undesirable).

Digitized forPage
FRASER
20


fiscal variable is insignificant in first differences and
negative and significant in central differences. For
Germany and the United States, it is statistically in­
significant in both first and central difference form.
For Japan, the fiscal variable is statistically insignifi­
cant in first differences and positive and statistically
significant in central differences. These results contrast
sharply with those for the monetary variable where,
for each country, and for both first and central dif­
ferences, the monetary coefficient is positive and
statistically significant.
The other countries in this study do not have quar­
terly GNP estimates which can be used as a measure
of economic activity. For those countries economic
activity is measured by the proxy variable defined
above and justified in the Appendix.
In Belgium, France, Italy, the Netherlands, and
the United Kingdom (before 1962), acceptable meas­
ures of fiscal influence are not available. For these
countries, it was only possible to measure monetary
influences on economic activity. This is done in Table
II with quarterly observations from 1953 to 1968,
using both first and central difference form.

T a b le II

MONETARY INFLUENCES ON A PROXY MEASURE
OF ECONOMIC ACTIVITY (A Y )
A

C o u n try

y

Tim e
Period

= a o -(- a j A

Lags*

m

C on sta n t
Term
ao

M o n e ta ry
Influences
a i (Sum )

R2

Dummy
V a ria b le

D -W

(F irs t D ifferences - B illio n s o f N a tio n a l C urre n c y )
B elgium

1 1 /1 9 5 3 - IV /1 9 6 8

t-3

3 .0 0
( 1 .0 2 )

2 .5 7
( 3 .0 8 )

2 3 .6 0
( 3 .1 9 )

.2 8
2 .3 6

France

1 1 /1 95 3 - I V / 1 9 6 8

t-2

3 .1 7
( 1 .3 1 )

2 .0 9
( 2 .5 5 )

9 8 .8 1
(1 5 .5 8 )

.8 2
1 .4 4

Ita ly

1 1 /1 9 5 3 - IV /1 9 6 8

t-3

.1 9
( 1 .9 6 )

1 .8 7
( 5 .6 1 )

.4 2
2 .3 7

N e th e rla n d s

1 1 /1 9 5 3 - I V /1 9 6 8

t-5

.01
.0 4 )

6 .0 2
( 5 .3 1 )

.3 3
1 .6 4

.21
( 3 .1 2 )

1.41
( 2 .6 3 )

.3 5
1 .9 9

(
U n ite d K ing d o m

1 1 /1 9 5 3 - IV /1 9 6 8

Belgium

11 /1 9 5 3 - IV /1 9 6 8

t-3

1 .0 5
( .5 5 )

3 .1 7
( 5 .8 3 )

1 7 .7 7
( 3 .7 6 )

.4 6
1 .3 6

France

1 1 /1 9 5 3 - IV /1 9 6 8

t-2

— .0 2
(01)

3 .2 5
( 3 .4 0 )

3 4 .1 6
( 4 .3 9 )

.3 6
1 .6 5

Ita ly

1 1/1 95 3 - IV /1 9 6 8

t-6

.1 9
( 3 .1 4 )

1 .75
( 7 .9 2 )

.6 6
1 .7 5

N e th e rla n d s

1 1 /1 9 5 3 - IV /1 9 6 8

t-5

— .0 7
( -3 2 )

6 .6 2
( 6 .6 9 )

.4 2
.81

U n ite d K ing d o m

1 1 /1 95 3 - IV /1 9 6 8

t- 6

.2 0
( 4 .3 1 )

1 .4 6
( 3 .8 6 )

.48
.91

(C e n tra l D ifferences

t-6

B illio n s o f N a tio n a l C urre n c y )

N o t e : Regression coefficients are the top figures ; their “ t ” statistics appear below each coefficient,
enclosed by parentheses. R2 is the per cent o f variations in the dependent variable which
i s explained by variations in the independent variable. D -W is the D urbin-W atson statistic.
■“Selected on the basis o f m inimum standard error o f the estim ate adjusted fo r degrees o f freedom .

F E D E R A L R E S E R V E B A N K O F ST L O U IS

FEBRUARY, 1970

In the case of Belgium and France, dummy varia­
bles were added to account for major nation-wide
strikes.17 In Belgium, there was a nation-wide strike
in December 1960 and January 1961 which closed
down most major industries. To account for this non­
monetary influence on economic activity, a dummy
variable was included which assumed the value of
—1 in IV/1960 -1/1961 and a value of + 1 in 11/1961.
For all other periods the dummy variable had a value
of zero. In France, there was a nation-wide strike in
May 1968 which shut down virtually all industry. As
monetary influences would not be expected to explain
this phenomenon, a dummy variable was included
which assumed the value of — 1 in the second quarter
of 1968 and +1 in the third quarter of 1968. The
dummy variable assumed a value of zero for all other
quarters. For France the statistical significance of the
dummy variable was substantial in first differences
and much less so in central differences, because the
impact of the strike was partially averaged out in
central difference data. Consequently, the high R2
for French first difference results (.82) should be
partially discounted.
Although the monetary influence is statistically sig­
nificant for every country in this study, there is a
substantial degree of variation in the estimated value
of the monetary influence between countries. For ex­
ample, in first-difference form the monetary variable
for Germany is 8.88, and for the United Kingdom it
is 1.41. This range of values is largely due to varia­
tions in institutional factors in each country, such as
the level of per capita income, the traditional pay­
ment period for workers, and the number and avail­
ability of money substitutes.
T a b le III
M o n e ta ry
In flu e nce
( a i)

V e lo c ity
( G N P /M )

G e rm a n y
U n ite d States
C anada
Ja p a n

8 .8 8
5 .5 0
4 .2 7
2 .7 8

6 .6 0
4 .5 6
5 .1 4
3 .6 0

N e th e rla n d s
B elgium
France
Ita ly
U n ite d K ing d o m

6 .0 2
2 .5 7
2 .0 9
1 .8 7
1.41

4 .2 2
2 .8 5
2 .9 6
2 .2 3
2 .7 0

These institutional factors can substantially influ­
ence the amount of money stock required to induce
a given change in economic activity. One rough meas­
ure of the institutional differences between countries
is the observed ratio of the money stock to income
17There were undoubtedly random events in other countries
which could have been accounted for with dummy
variables.




(the income velocity of money). As can be seen
in Table III, the estimated value of the monetary in­
fluence for each country ( a i) , is closely associated
with the income velocity of money.
The monetary influence values are derived from
first-difference results in Tables I and II. The values
for velocity (G N P /M ) are calculated on the basis of
annual GNP and money stock data for 1968. These
results indicate that the monetary influence values
are substantially influenced by the institutional fac­
tors which determine velocity in each country. How­
ever, as these institutional factors seem to change
only slowly over time, the monetary influence values
are relatively stable within each country.
The results presented in Table II, where monetary
influences alone are measured, are consistent with the
results in Table I in which both monetary and fiscal
influences are measured. The monetary influence is
positive and statistically significant in all countries
considered in both first and central difference forms
of the equation. The R2’s are sufficiently high to
infer that monetary influences explain a significant
amount of the change in economic activity in these
countries. Every substantial movement in money is
followed by a roughly proportional movement in
economic activity.
The results presented in Tables I and II indicate
that in nine of the major industrial countries of the
world, monetary influences play an important role in
determining the short-run movements in economic
activity.

Testing Propositions
Three propositions with respect to monetary and
fiscal influences were tested in earlier articles on the
basis of United States results. These propositions con­
sidered whether monetary or fiscal actions were (1 )
stronger, (2 ) more predictable, and (3 ) faster-acting.
The conclusion reached with respect to the United
States was that monetary actions dominated fiscal
actions in each proposition.
These same propositions will be tested for foreign
countries in which both monetary and fiscal measures
are available; that is, Canada, Germany, and Japan.
In addition, updated results for the United States
will be presented as a basis for comparison.
Which is stronger? — To measure the relative
strength of monetary and fiscal influences during the
test period we need to know which has had the
largest impact on economic activity. If the monetary
Page 21

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY, 1970

T a b le IV

BETA COEFFICIENTS1
C o u n try

M o n e ta ry
Influences
(S um )

Fiscal
Influences
(S um )

First D ifferences
C anada
G e rm a n y
Japan
U n ite d States

1 .0 8 *
.7 0 *
.6 6 *
.9 4 *

—

.61
.3 0
.3 2
.0 0

C e n tra l D ifferences
C anada
G e rm a n y
Japan
U n ite d States

1 .2 1 *
.8 8 *
.5 4 *
.9 6 *

—

.5 8 *
.0 9
.3 6 *
.0 4

1 Beta coefficients are equal to the estimated coefficient tim es the
ratio o f the standard deviation o f the independent variable over
the dependent variable.
* Statistically significant at the 95 per cent o r higher level o f
confidence.

and fiscal measures had the same dimension and the
same average degree of variation, the test could be
made by directly comparing the size of the estimated
coefficients of the monetary and fiscal variables. As
these conditions are not satisfied, the estimated co­
efficients cannot be used directly for this test. How­
ever, when the estimated coefficients are “normalized”
by being converted into beta coefficients, they can
be compared.18 The “sum” beta coefficients for Can­
ada, Germany, Japan, and the United States are
presented in Table IV for both first and central dif­
ference form.
The results indicate a considerable degree of con­
sistency between countries. In every country for both
first and central differences, the beta coefficients for
the monetary variable are substantially larger than
that for the fiscal variable. In every case the sign of
the monetary variable is positive (a change in money
leads to a change in GNP in the same direction), and
the values are statistically significant. The sign of the
beta coefficient for the fiscal variable varies between
countries and is statistically significant only for Canada
and Japan in central difference form. However, the
values of the fiscal coefficients in these two countries
are opposite in sign, indicating a lack of cross-country
consistency. Clearly, for the time periods and coun­
tries considered, monetary influences have had a
stronger impact on economic activity than have fiscal
influences.
W hich is more predictable? — The best-known
measure of the predictability of the monetary and
fiscal influences on economic activity is the “t” statistic.
18Beta coefficients are equal to the estimated coefficient times
the standard deviation of independent variable over the
standard deviation of the dependent variable. See Arthur
S. Goldberger, Economic Theory, (John W iley and Sons,
1 9 6 4 ), p p . 197-98 .

Digitized forPage
FRASER
22


As indicated above, the “t” statistic is a statistical
indicator of the confidence one may have that the
“true” relationship between the independent and the
dependent variables has the same sign as that of the
statistically estimated relationship between those vari­
ables. The larger the “t” statistic, the more confidence
one may have that the monetary and fiscal variables
are predictably related to economic activity. The sum
“t” statistics of the monetary and fiscal coefficients
included in Table I are reported separately in Table
V for both first and central differences. Again, the
results are remarkably consistent between countries.
In every case the “t” statistic for the monetary co­
efficient is larger than the “t” statistic for the fiscal
coefficient. As a crude indicator of the relative preci­
sion of coefficient estimates, the absolute value of the
average “t” statistic of the monetary variable is 4V2
times larger than that of the fiscal variable. Thus,
for the four countries considered, the monetary varia­
ble is substantially more predictable in its effect on
GNP than the fiscal variable.
T a b le V

“ t " STATISTICS
M o n e ta ry
Influences
(S u m )

C o u n try

Fiscal
In fluences
(S u m )

First D ifferences
C anada

5 .7 5

G e rm a n y

2 .8 5

.41

Japan

5 .2 6

1 .7 5

8 .3 0

.0 2

U n ite d

States

-1 .3 8

C e n tra l D ifferences
C anada

9 .3 2

G e rm a n y

4 .8 4

.2 3

Ja p a n

4 .7 7

2 .9 6

1 0 .7 9

.4 7

U n ite d States

N o te : A “ t” value is a statistical indicator o f
may have that the “ true relationship”
pendent and dependent variable has the
statistically estimated coefficient o f that

— 2 .8 0

the confidence one
between the inde­
same sign as the
relationship.

Which works faster? — The relative speed of mone­
tary or fiscal influences can be measured by observing
which variable has the shorter time lag in influencing
economic activity. For comparability, the quarterly
patterns of the estimated beta coefficients are used.
The beta coefficient results were derived from the
same set of statistical results summarized in Table I.
Only the first difference results are plotted in Chart
I. Almost identical patterns of beta coefficients are
obtained with the central-difference form. Again,
the quarterly pattern of the monetary influence on
economic activity is remarkably stable for different
countries. In contrast, the quarterly pattern of fiscal
influence on economic activity varies substantially be-

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

between countries. For each country, the
effects of the monetary influence substan­
tially outweigh the effects of the fiscal
influence in the contemporary quarter,
except for the case of Japan. In Japan,
where the fiscal influence has had the
largest overall positive association of any
of the countries considered, the monetary
influence outweighed the fiscal influence
in the first and second lagged quarters.
The general impression from observing
the quarterly pattern of the beta coeffi­
cients is that monetary influences tend
to have a faster impact on GNP than fiscal
influences for these four countries.

C h a rt I

Beta Coefficients
of M o n e t a r y a n d Fiscal Influences
F irs t D iffe re n c e s

.6
.5
.4
.3

.2
.1
0

The results of testing these three prop­
ositions about monetary and fiscal influ­
ences on economic activity for Canada,
Germany, and Japan are consistent with
the results obtained from earlier studies
on the United States.

-.1

-.2
-.3

.6
.5

Additional Observations in the
Money-Economic Activity Relation

.4

.3

Two points should be kept in mind in
interpreting these results:

.2

.1
1) Monetary influences have a large
and systematic influence on economic
activity. Because policymakers can con­
trol the money stock, monetary policy
should play a oentral role in any success­
ful stabilization policy.

0
-.1

-.2
-.3
N o te -. B e ta c o e f fic ie n ts a r e f o r c h a n g e s in th e m o n e y s u p p ly (AM ) a n d G o v e r n ­
m e n t e x p e n d it u r e s (A E ). T h e s e b e ta c o e ffic ie n ts a r e c a lc u la t e d a s th e

2) The high degree of statistical as­
p r o d u c ts o f th e re g r e s s io n c o e ffic ie n ts f o r th e r e s p e c t iv e v a r ia b le s a n d
sociation between monetary influences
th e r a tio o f th e s ta n d a r d d e v i a t i o n o f th e in d e p e n d e n t v a r ia b le s to th e
and economic activity should not be
s t a n d a r d d e v ia t io n o f th e d e p e n d e n t v a r ia b le s (A G N P ). L a g s w e r e
taken to imply that there are no other
s e le c te d o n th e b a s is o f th e m in im u m s ta n d a r d e r r o r o f th e e s tim a te
a d ju s te d fo r d e g r e e s o f fr e e d o m .
systematic influences operating on eco­
nomic activity. Economic activity can be
influenced by a wide range of factors which are
stable as measured by the quarter^to-quarter changes
independent of monetary influences. A demonstration
in the money stock. With the exception of a moderate
of this fact is that the degree of variation in economic
deceleration in 1959 and 1960, no cyclical pattern can
be observed in the money stock. Economic activity
activity, explained by monetary influences is less than
perfect.
during the 1954-64 period also exhibited a relatively
stable growth rate. However, there were several mod­
Both of these points can be highlighted with exam­
erate fluctuations with cyclical troughs in 1958, 1960,
ples from three countries.
and 1962. Yet only the trough in 1960 was associated
Germany — Chart II illustrates that from 1954 to
with restrictive monetary influences. Although none
1964, German monetary influences were relatively
of these cyclical movements in economic activity



Page 23

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY, 1970

C h a rt I!

G e rm a ny
C e n tra l D iffe re n ce s
B illio n s o f D eutsche M a rk
B illio n s o f D eutsche M a rk
2 8 1--------------------------------- --------------------------------- ---------------- ----------------- 28

to fears of domestic inflation, although in the main it
was due to concern over deterioration of the German
international trade position.-0 This restrictive mone­
tary policy was followed by a substantial deceleration
in economic activity in late 1966 and 1967. As the
international trade position improved, monetary pol­
icy was eased, and the money stock accelerated in
1967 and 1968. Economic activity responded promptly,
resuming the rapid growth rates of earlier years.
The 1966-67 business cycle trough was widely recog­
nized in Germany as a period of recession, and its
cause can be clearly traced to the actions of the
monetary authorities.
German postwar experience illustrates two things:
first, stable monetary influences do not exclude the
possibility of cyclical instability in the economy; and
second, fluctuating monetary influences seemingly in­
duce fluctuations in economic activity.

1953

1955

1957

1959

1961

1963

1965

1967

1969

Q u a rte rly d a ta a t a n n u a l rates.
E conom ic a c tiv ity is m e asured by the scaled p roduct o f the consum er p rice in d e x (CPI)
a n d the in d u s tria l produ ctio n index (IP!) m u ltip lie d by gross n a tio n a l product (GNP) in
the b ase ye a r 1963: 17CPI • IP lV Deutsche M a rk 37 6 .6 b illio n = Economic A c tiv ity !
[1 10,000/
J
Sources-. GNP a nd M oney Supply: In te rn a tio n a l Financial Statistics, M o n th ly, IMF
Econom ic A c tiv ity : In d u stria l p ro d u c tio n in d e x , M ain Economic Indica to rs,
M o n th ly, OECD; consum er price index. M o n th ly S tatistical S upplem ents,
D eutsche B undesbank

were sufficiently strong to have been generally con­
sidered a recession, they illustrate that cyclical move­
ments in economic activity do occur independently
of monetary influences.19
German developments in the 1965 to 1969 period,
moreover, provide an example of the strength of mon­
etary influences when they are allowed to operate. In
late 1965 and in 1966 the German monetary authori­
ties followed a systematically restrictive policy, as
indicated by the steady deceleration of the money
stock. This monetary action was, in part, a response
19This raises an important point in statistical estimation pro­
cedures. A regression analysis on German data from 1954
to 1964 would not have shown a statistically significant
association between monetary variables and economic activ­
ity. The method of computing statistical association is that
variations in one variable are observed to occur systematic­
ally with variations in another variable. If there is little or
no variation in monetary variable, then the statistical re­
gression procedures will not measure any significant relation
with economic activity.

Digitized forPage
FRASER
24


20See Michael Keran “ Monetary Policy, Balance of Pay­
ments, and Business Cycles: The Foreign Experience,” this
Review, November 1967.

F E D E R A L R E S E R V E B A N K OF ST. L O U IS

Italy — Chart III illustrates that the Italian experi­
ence in the post-war period is similar to that of Ger­
many. From 1953 to 1957, monetary influences in
Italy were stable and economic activity grew at a
relatively stable rate, with some irregular quarter-toquarter movements. From 1958 to 1962 the money
stock accelerated and, correspondingly, economic
activity accelerated. Because of a deterioration in
their international trade position in 1962 and 1963, the
Italian monetary authorities followed a tight money
policy in 1963 and early 1964. Their actions caused
a sharp deceleration in economic activity in late 1963
and into 1964. When the money stock was permitted
to accelerate in the second half of 1964, economic
activity expanded in line with its previous growth
rate. Italy has had stable growth in both money and
economic activity since 1965, despite its widely pub­
licized political turmoil.

FEBR U ARY, 1970

C h a rt IV

Japan
C e n tra l D iffe re n c e s
T rillio n s o f Yen

T rillio n s o f Yen
4.8

4 .4
-

I

1

-

11

The Japanese experience reinforces the points made
above. Although stable monetary influences do not
guarantee stable growth in economic activity, un­
stable monetary influences seem to assure fluctuations
in the growth of economic activity.

Conclusion
The purpose of this article has been to review the
postwar economic experience of a variety of industrial
countries to see whether monetary and fiscal influence
bear any systematic relationship to movements in
economic activity. The results presented indicate that
in spite of admitted differences in economic institu­
tions and differences in the objectives of policymakers
between countries, a substantial degree of consistency
is observed. For each of the eight foreign countries
considered, the monetary influence was important.
The estimated coefficient relating the monetary varia­
ble to economic activity was positive and statistically
significant. Of the countries in which fiscal measures



4.0
3.6
3 .2

-

!'
r 1
1
/v *

Economic Ac ivity (AY) J

-

fl

-

AGNP

2.8

1

j

a

-

2.4

2.0
1.6
1.2
-

A

.8

j

\J

*

Japan —The Japanese experience contrasts with that
of Germany and Italy in its more frequent reversals
of monetary actions, as shown in the lower tier
of Chart IV. This monetary behavior has appar­
ently caused all postwar business cycles in Japan to
be dominated by monetary considerations. Japan has
had four cyclical troughs: in 1954, 1957, 1962, and
1965. Each of these troughs was preceded by a de­
celeration in the money stock and each recovery
with an acceleration in the money stock. All sys­
tematic movements in economic activity in Japan
have been related to monetary considerations. From
1965 to 1968, Japan followed a stable monetary policy
and, as a result, economic activity has also grown at
a relatively stable rate until very recently.

|

-

.4
-

\ J

0

-

-.4
i

,

i

i

1

i

i

-.8
T rillio n s o f fen
.9

ion s o f Yen

.8
.7

.6

Mont y Supply (A 4)

V
/V

1V

n

\

.5
.4
.3

.2

/

.1

\
1953

0
1955

1957

1959

1961

1 963

1965

1967

1969

-.1

Q u a r te r ly d a ta a t a n n u a l rates.
Economic a c tiv ity is m e a s u re d b y the s c a le d p ro d u c t o f the consum er p ric e in d e x (CPI)
an d the in d u s tria l p ro d u c tio n in d e x (IPI) m u ltip lie d b y g ro ss n a tio n a l p ro d u c t (GNP)
in th e b ase y e a r 1965:

T/C PM PIVYen 30.45 tr illio n = E co n o m ic A ctivity."]

L\10,000/

J

S ources: G N P: A n n u a l R eport on N a tio n a l Incom e S ta tis tic s , E conom ic P la n n in g
A g e n c y o f Japan
M o n e y S u p p ly : E conom ic S ta tistics M o n th ly , Bank o f Ja p a n
Econom ic A c tiv ity : Basic D ata fo r Econom ic A n a ly s is , 1969, Bank o f Ja p a n

were available, only in Japan was the positive relation
postulated by economic theory found to hold.
It is important to keep in mind that these results,
especially with respect to fiscal influences, are even
more tentative than is generally the case in statistical
estimations of economic relations, because of the se­
vere data limitations discussed above.
With this caveat the implication of this study is
that our confidence in the results of earlier studies
Page 25

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY, 1970

which were based on United States data, is enhanced.
The single equation approach to measuring monetary
and fiscal influences on economic activity, which
was developed for the United States, has passed the
“forecasting test” mentioned at the beginning of this
article. That is, the recent economic experience of a
number of industrial countries can be better under­
stood by the use of this equation.

Previous research which concluded that monetary
influences are important in determining the shortrun movements in economic activity is confirmed by
the results obtained for other countries.

This article is available as Reprint No. 52.

The Appendix to this article develops the case for using a proxy
measure of economic activity for those countries in which quarterly
GNP data are not available. The Appendix also considers the special
case of the United Kingdom.

APPENDIX

Comparing Nominal GNP and a Proxy
Measure of Economic Activity
Nominal GNP is a measure of the market value of all
goods and services produced in an economy during a
particular time period. It is the most broad-based measure
of economic activity available. But since quarterly GNP
data are not available for many important countries, a
proxy for economic activity was constructed and used in
some cases. This alternative measure is equal to the
scaled product of the consumer price index (CPI) and
industrial production index (IPI) times GNP. The form­
ula for computing the proxy for economic activity (Y) is:

where the value of GNP is that in the base year of
the price and production indexes.

Page 26


The proxy measure of economic activity has a much
narrower base than GNP. The price component of the
proxy was measured only by the consumer price index
(CPI). However, the CPI tends to move quite closely
with movements in the implicit GNP price deflator for
those countries in which we have both data series. The
real component of the alternative measure is based on
the seasonally adjusted industrial production index, which
means that all service industries, levels of government,
and agriculture are not included.
Despite these limitations, this measure of economic
activity is a useful first approximation for the purposes
of business cycles analysis. Its usefulness is indicated in
Table VI, where economic activity is measured by our
proxy variable and by nominal GNP for those countries
in which both series are available. As can be seen, the
indicators of monetary and fiscal influences give con­
sistently the same results with these different measures

F E D E R A L R E S E R V E B A N K O F ST. L O U ’S

FEBR U ARY, 1970

T a b le VI

MONETARY AND FISCAL INFLUENCES ON
ECONOMIC ACTIVITY, MEASURED BY A PROXY
( AY) AND BY NOMINAL GNP ( AGNP)
(F irst D ifferences —
V a ria b le
D e p e n de n t

la g s *

B illio n s o f N a tio n a l C urre n cy)

C o n sta n t
Term
ao

M o n e ta ry
In flu e nce

Fiscal
Influence

a i (S um )

aa (S um )

R2
D -W

The Special Case of the United Kingdom

CANADA
(1 1 /1 9 5 3 ■ I V / 1 9 6 8 )
A

y

t-5

0 .2 9
( 2 .8 8 )

5 .2 5
( 7 .9 5 )

— 1.61
( 1 .7 5 )

.5 8
1.7 3

A

gnp

t- 6

0 .3 3
( 3 .2 7 )

4 .2 7
(5 .7 5 )

— 1 .4 5
(1 .3 8 )

.4 3
2 .2 0

G E R M AN Y
(1 1 /1 96 1 - 111/1968)
A r

t-4

3 .8 6
( 0 .6 0 )

1 0 .6 4
( 2 .2 3 )

- 6 .7 4
( 2 .1 4 )

.31
2 .0 8

A

t-3

— 3 .2 6
( 0 .7 6 )

8 .8 8
( 2 .8 5 )

0 .6 8
( 0 .4 1 )

.3 9
2 .2 7

gnp

explaining changes in G N P ( A G N P ) . F or both Canada
and Japan the R 2 for the proxy variable ( A Y ) is larger
than that for A G N P . In the U nited States and Germ any
the R 2 is higher for A G N P than it is for the proxy variable
( A Y ) . These results im ply that the proxy variable is a
useful measure o f econ om ic activity, perm itting m eaning­
ful estimates o f m onetary and fiscal influences.

JA P A N

T h e results for the U nited K ingdom are consistent with
the results for the other countries, w hen econ om ic activity
is m easured b y the proxy variable (see T ab le II in the
m ain b o d y o f this a rticle). H ow ever, w hen econ om ic
activity is m easured b y G N P or, as the English prefer,
G D P 1, the results are not statistically significant. This can
b e seen in the first difference results presented in T ab le V II.
T able V II presents the estimated relationships betw een
m onetary and fiscal influences and three different m eas­
ures o f econ om ic activity. W h en econ om ic activity is
m easured b y the proxy Variable ( A Y ) , the m onetary in­
fluence is statistically significant and the fiscal influence
is not. T ogeth er the m onetary and fiscal variables explain
21 p er cen t o f the variation in ( A Y ) . W h en econ om ic

(1 /1 9 5 6 - 111/1968)
A

y

t-2

— 0 .1 0
( 0 .7 8 )

3.71
( 6 .0 6 )

1 .4 6
( 2 .7 4 )

.6 6
0 .7 6

A

gnp

t-2

0 .0 3
( 0 .2 5 )

2 .7 8
( 5 .2 6 )

0.81
( 1 .7 5 )

.5 6
1 .9 4

'G D P stands for Gross Domestic Product. The major difference
between this and GNP is the way in which the international
sector is handled. In GDP, net receipts from interest, profits,
and dividends earned abroad are excluded, while in GNP they
are included.

UNITED STATES
(1 1 /1 9 5 4 - 111/1969)

T a b le V II

A

y

*-5

2 .3 4
( 1 .2 4 )

8 .2 7
( 4 .2 7 )

-0 .6 4
( 0 .8 0 )

.5 0
1.6 8

A

gnp

t-4

3 .1 9
( 4 .2 2 )

5 .5 0
( 8 .3 0 )

0 .01
( 0 .0 2 )

.6 7
1.8 2

N o te : Regression coefficien ts are the top figu res; their “ t ” statistics
appear below each coefficien t, enclosed by parentheses. R 2
is the percent o f variation in the independent variable which
is explained by variations in the independent variable. D-W
is the Durbin-W atson statistic.

UNITED KINGDOM
Monetary and Fiscal Influences on Economic Activity
Measured As A Proxy ( A Y ) , Nominal GNP
(A G N P ), and Nominal GDP ( AGDP)
(1 /1 9 6 2 - 111/1968)

D ependent

Lags*

♦Lags are selected on the basis o f m inimum standard error, adjusted
fo r degrees o f freedom .

C o n s ta n t
Term

M o n e ta ry
Influ e nce

Fiscal
influ e n ce

ao

a i (S um )

a a lS u m )

(F irs t D ifferences —

o f econ om ic activity. T h e coefficient for the m onetary
variable is positive and statistically significant for each
country using both measures o f econ om ic activity. The
coefficient for the fiscal variable tends to vary in sign
and significance from country to country.

Another indication o f the reasonableness o f the proxy
variable ( A Y ) is that the quarterly pattern o f the beta
coefficients for each coun try w ith respect to ( A M ) and
( A E ) is almost identical to that presented in Chart I for
( A G N P ) . T h e values o f the m onetary and fiscal variables
with respect to AY and A G N P, can b e com pa red directly
because the proxy variable has been scaled b y the value
o f GNP.

T h e results presented in T ab le V I indicate that in som e
cases the m onetary and fiscal variables d o a better job
o f explaining the proxy, variable ( A Y ) than they d o o f




A

y

t-2

A

gnp

t-2

A

gdp

t-3

R2
D -W

B illio n s o f Pound S te rlin g )
2 .5 0
( 3 .0 6 )

-.3 7
( 1 .0 0 )

.21
1 .98

.4 5
( 2 .2 0 )

.8 0
( .8 1 )

— .6 2
( 1 .4 3 )

.0 5
3 .1 8

.5 4
( 2 .4 3 )

— .5 8
( .5 1 )

— .01
( .0 1 )

.0 2
3 .1 8

.1 2
(-7 3 )

(C e n tra l D ifferences — 1B illio n s o f Pound S te rlin g )
A

y

t-2

.1 5
( 1 .1 3 )

2 .3 4
( 3 .5 8 )

-.3 0
( .9 9 )

.3 5
1.01

A

gnp

t- 6

.3 6
( 2 .9 6 )

1 .9 4
( 2 .0 6 )

- 1 .4 3
( 2 .3 4 )

.3 0
2 .3 6

A

gdp

-.6 5
( 1 .1 0 )

.1 0
2.31

t-5

.3 7
( 2 .6 1 )

1 .2 2
( 1 .1 6 )

N o te : Regression coefficien ts are the top fig u re s; their “ t " statis­
tics appear below each coefficien t, enclosed by parentheses.
R 2 is the percent o f variations in the dependent variable
w hich is explained by variations in the independent variable.
D -W is the D urbin-W atson statistic.
*Lags are selected on the basis o f m inim um standard error, adjusted
fo r degrees o f freedom .

Page 27

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

activity is measured by AGNP or AGDP, neither the
monetary nor the fiscal influences are statistically signifi­
cant, and the amount of variation in economic activity
explained by these variables is only 5 per cent and 2 per
cent, respectively, in first difference form.
Quite clearly, when economic activity is measured in
first difference form, the proxy variable (AY) gives an
entirely different assessment of the influences of monetary
and fiscal variables than does AGNP or AGDP. These
differing results using alternative measures of economic
activity are not observed for the other countries in this
study. For every other country AY and AGNP gave sub­
stantially the same results with respect to the monetary
and fiscal variables.
An investigation of the time series of GNP and the
proxy measure of economic activity provides at least a
partial explanation for this discrepancy. Both series show
the same basic cyclical pattern in first-difference form.
However, the GNP series has a small number of quar­
terly observations which deviate substantially from the
proxy measure series. This is especially true for the third
and fourth quarters of 1963, the first and second quarters
of 1967, and the second and third quarters of 1968.
These deviations tend to be offsetting, that is, a sharp
decline in one quarter is matched by a sharp increase
in the next quarter. With only 27 observations in the
sample period, even six atypical observations can distort
the statistical significance of the estimated coefficients.
These atypical observations could be due to the fact
that both the GNP and GDP data have greater meas­
urement error than the data which underlies the proxy
measure of economic activity. Both the industrial pro­
duction and consumer price indexes are monthly series
which are averaged to compute quarterly proxy meas­
ures. The measurement error possibility is consistent with
the very large Durbin-Watson statistic (3.18) for firstdifference results of both GNP and GDP, which implies
a high degree of negative auto-correlation in the error
term. When central differences are taken of the GNP
and GDP data, the consequences of random-measurement error in the series are reduced. The offsetting
movements in the quarterly values AGNP and AGDP
are considerably lessened.
Measuring monetary and fiscal influences against
central differences (see bottom half of Table VII), one
observes that both the monetary and fiscal variables are
statistically significant with respect to GNP, and the
explained variation of AGNP rises to 30 per cent. The
value of the Durbin-Watson statistic is also in a less
unacceptable range than in the first difference results.
Computing central differences for AGDP does not im­
prove the results significantly from the first difference
results.2
These results suggest that perhaps a proxy variable
may be superior to GNP or GDP as a measure of economic
activity, if there is less measurement error in the proxy
variable than in the other measures of economic activity.
The relatively short period from 1/1962 to III/1968
was used for the regressions in Table VII because total
2M. J. Artis and A. R. Nobay, “ Tw o Aspects of the Monetary
Debate,” in National Institute of Economic Review, August
1969, report similar results with respect to AGDP.


http://fraser.stlouisfed.org/
Page 28
Federal Reserve Bank of St. Louis

government spending data were not available in earlier
years. A longer time span encompassing a wider range
of economic events (1953-68) was used in the main
body of the article to analyze monetary influences in the
United Kingdom.

Data Sources
For each country the seasonally adjusted series for the
industrial production index, Gross National Product,
money stock, and Government expenditures were used.
The consumer price index is not seasonally adjusted.
Belgium — Industrial production index and consumer
price index, 1963=100; Main Economic Indicators,
OECD; Money Stock: International Financial Statistics,
IMF.
Canada — Industrial production index and consumer
price index, 1963=100; Main Economic Indicators,
OECD; Gross National Product: Canadian Statistical Re­
view, Dominion Bureau of Statistics; Money Stock:
International Financial Statistics, IMF; Government Ex­
penditures: Canadian Statistical Review, Dominion
Bureau of Statistics.
France — Industrial production index and consumer price
index, 1963=100; Main Economic Indicators, OECD;
Money Stock: International Financial Statistics, IMF.
Germany — Industrial production index, 1963=100;
Main Economic Indicators, OECD; consumer price index,
1962=100; Monthly Statistical Supplements, Deutsche
Bundesbank; Gross National Product and Money Stock:
International Financial Statistics, IMF; Government Ex­
penditures: Monthly Report of the Deutsche Bundesbank.
Italy —Industrial production index and consumer price
index, 1963=100: Main Economic Indicators, OECD;
Money Stock: International Financial Statistics, IMF.
Japan — Industrial production index and Consumer price
index, 1965=100: Basic Data for Economic Analysis,
1969, Bank of Japan; Gross National Product: Annual
Report on National Income Statistics, Economic Planning
Agency of Japan; Money Stock: Economic Statistics
Monthly, Bank of Japan; Government Expenditures:
Basic Data for Economic Analysis, 1969, Bank of Japan.
Netherlands — Industrial production index and con­
sumer price index, 1963=100: Main Economic Indicators,
OECD; Money Stock: International Financial Statistics,
IMF.
United Kingdom —Industrial production index and
consumer price index, 1963=100: Main Economic Indi­
cators, OECD; Money Stock: International Financial Sta­
tistics, IMF; Government Expenditures: United Kingdom
Financial Statistics.
United States —Industrial production index, 1957-59=
100: Board of Governors of the Federal Beserve System;
consumer price index, 1957-59=100: United States De­
partment of Labor; Gross National Product: United States
Department of Commerce; Money Stock: International
Financial Statistics, IMF; Government Expenditures:
Federal Beserve Bank of St. Louis.

The Administration of Regulation Q*
by CHARLOTTE E. RUEBLING

_^^.T A TIME when market interest rates have soared
to levels never before reached in this country, rates
on deposits at banks and other financial institutions
have been held much lower. The rate commercial
banks charge on prime business loans has been 8Vz
per cent since early last June. Mortgage and many
other market interest rates are currently about as high.
On the other hand, payment of interest is pro­
hibited on demand deposits, and the maximum rates
permitted on time and savings deposits vary between
4.50 and 7.50 per cent.1 The highest rate applies only
to deposits in denominations of $100,000 or more
maturing in a year or longer. Smaller time and sav­
ings deposits are permitted to yield 4.50 to 5.75 per
cent (see table below ).
YIELD DIFFERENTIALS
{ Per Cent Per Annum )

Type o f D ep o sit
S a vings d ep o sits
O th e r tim e d ep o sits
M u ltip le m a tu rity
3 0 - 8 9 days
9 0 d a ys o r more
S in g le m a tu rity
Less th a n $ 1 0 0 ,0 0 0
3 0 d a ys to 1 y e a r
1 year
2 year
$ 1 0 0 ,0 0 0 o r more
3 0 -5 9 days
6 0 - 8 9 days
9 0 - 1 7 9 d a ys
1 8 0 d a ys to 1 y e a r
1 y e a r o r more

R eg u latio n Q
C e ilin g Rate

S p rea d betw e e n
G o ve rn m e n t S ecu rity
Y ie ld a n d C o m p a ra b le
C e ilin g R ate*

4 .5 0

(3 0 d a y s )

2 .6 4

4 .5 0

(3 - m o .)

3 .5 7

5 .0 0

(6 - m o .)

3.11

5 .0 0

(6 - m o .)
( 1 2 - m o.)
(2 yrs .)

3.11
2 .5 3
2 .4 0

(3 - m o .)
(3 - m o .)

1 .5 7

(6 - m o .)
( 1 2 - m o.)
(1 2 - m o.)

1 .3 6
1 .0 3
0 .5 3

5 .5 0
5 .7 5

6 .2 5
6 .5 0
6 .7 5
7 .0 0
7 .5 0

1.8 2

•On January 21, 1970, yields (bond-yield equivalents, see foo t­
note 6) were 7.14 per cent on Treasury bills m aturing in 30
days, 8.07 p er cent on three-m onth bills, 8.11 per cent on sixmonth bills, 8.03 per cent on twelve-m onth bills, and 8.15 per cent
on notes m aturin g in approxim ately tw o years (F ebruary 1972).

* The author acknowledges the work of Elaine Goldstein,
who initiated this study of the history of Regulation Q.
Wime deposits are defined in Regulation Q of the Federal
Reserve to include “ time certificates of deposit” and “time
deposits, open account,” both of which have maturities not
less than 30 days or require 30 days written notice prior to
withdrawal. Savings deposits are not subject to any maturity
or withdrawal notice by the deposit contract, but the bank
may at any time require 30 days notice prior to withdrawal.
In this article, “ time deposits” will be used to refer to de­
posits other than demand and savings; “ time and savings
deposits” will refer to the broad class of bank deposits which
is distinct from demand deposits.




These ceilings were adopted January 21, 1970. Dur­
ing 1969 the ceilings were lower, with yields on small
time deposits limited to 5 per cent or less, a rate which
did not compensate savers for the 6 per cent decline in
the purchasing power of their funds.
Interest rate ceilings on deposits at banks which
are members of the Federal Reserve System are es­
tablished under Federal Reserve Regulation Q. Ceil­
ings at insured nonmember banks, which have been
the same as for member banks, are set by a regula­
tion of the Federal Deposit Insurance Corporation.2
These Regulations stem from Banking Acts of 1933
and 1935, respectively.3 Some states have at times im­
posed ceilings for state-chartered banks which are
lower than those established by the Federal agencies.
There were no explicit nationwide regulations on
interest and dividend rates at mutual savings banks
and savings and loan associations until 1966. Legisla­
tion in September of that year brought rates paid by
Federally insured mutual savings banks under the
control of the Federal Deposit Insurance Corporation,
and rates paid at savings and loan associations which
are members of the Federal Home Loan Bank Board
under its control. That legislation also required the
three regulatory agencies to consult with each other
when considering changes in the ceiling rates.
This article examines changes in the maximum
rates payable on commercial bank time and savings
deposits. The maximum rate permitted on demand
deposits has been zero since 1933.4 Ceiling rates on
time and savings deposits have been changed from
time to time during the past 35 years, particularly
during the 1960’s. Two factors largely responsible for
changes during the Sixties were the rising level of
2Changes in maximum rates permitted at nonmember banks
are given in the Annual Reports of the Federal Deposit
Insurance Corporation. See for example, in The Annual Re­
port of the Federal Deposit Insurance Corporation 1968, pp.
145-147.
3Historical background on interest rate restrictions, including
developments prior to 1933, are summarized in “ Interest
Rate Controls — Perspective, Purpose and Problems” by
Clifton B. Luttrell in the September 1968 issue of this
Review, also available as Reprint No. 32. See also Albert H.
Cox, Jr., Regulation of Interest Rates on Bank Deposits,
Michigan Business Studies, Vol. XVII, No. 4 (Ann Arbor:
University of Michigan, 1966), pp. 1-30.
4The implications of this interest rate ceiling for bank be­
havior nave been analyzed by Donald R. Hodgman in
Commercial Bank Loan and Investment Policy (Champaign:
University o f Illinois, 1963).
Page 29

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBRUARY, 1970

C h a rt I

R a tio S c a le

Selected Interest Rates

Ratio Sca|(

{^ M a r k e t yie ld s c o n v e rte d fro m d is c o u n t to b o n d e q u iv a le n t basis.

market interest rates and the growing importance of
large certificates of deposit as a money market instru­
ment. Use of negotiable certificates of deposit as a
means of attracting large accumulations of money
market funds began in February 1961, when the First
National City Bank of New York announced it would
offer large denomination negotiable CD’s, and the
Discount Corporation, a Government securities dealer,
announced it would make a market for them.5 The
transferability of these C D ’s enhanced their desira­
bility as a financial asset.
Changes in ceiling rates have usually been consid­
ered and made when ceilings were out of line with
market interest rates. However, Chart I, showing
market yields on a bond-yield equivalent basis and
Regulation Q ceilings on two types of deposits, sug­
gests that ceiling rates have sometimes remained
out of touch with market conditions.6 Changes in the
structure of ceilings or in the relationship between
market rates and the ceilings have, at times, been
permitted in order to direct the flow of funds among
5Helen B. O ’Bannon, “ Certificates of Deposit,” in Money and
Finance: Readings in Theory, Policy, and Institutions, ed. by
Deane Carson (N ew York: John W iley & Sons, Inc. 1966),
pp. 118-124.
6In this article interest rates on Treasury bills and commercial
paper are quoted on a bond-yield equivalent (rather than
discount) basis to make them comparable to rates on time
and savings deposits.


Page 30


financial institutions, geographical areas, or sectors of
the economy, or to accomplish stabilization objectives.
This article has three purposes:
(1) to chronicle changes in ceiling rates;
(2) to indicate reasons expressed by policymakers
for making or dissenting from the changes; and
(3) to evaluate the feasibility of achieving intended
goals through deposit rate regulations.
The exhibit on pages 32 and 33 summarizes changes
in the ceiling rates and the reasons behind them.

Emphasis on Prevention of
Destructive Competition
November 1933 — As the Federal Reserve Board
implemented its authority by adopting Regulation Q
on November 1, 1933, the main theme was the pre­
vention of destructive interest rate competition, which
members of the Senate Committee on Banking and
Currency, commercial bankers, and others believed
to have been one cause of bank failures in earlier
years. Possible destructive rate competition was often
cited in later years as a reason for objecting to higher
ceilings or as a justification for a particular structure
of ceiling rates.
The Federal Reserve Board set a 3 per cent maxi­
mum rate on all time and savings deposits, effective

F E D E R A L R E S E R V E B A N K O F ST

L O U IS

November 1, 1933. On average for the year, the
ceiling was above some short-term market rates, but
below the rates apparently being paid on deposits at
commercial banks, savings and loan associations, and
mutual savings banks. Comparing total time and sav­
ings deposits at all commercial banks with interest
expense of banks suggests that they were paying an
“effective” average rate of 3.4 per cent in 1933. Similar
measures for savings and loan associations and mutual
savings banks indicate the same rate.7 Market interest
rates on high-grade short-term securities were far
below 3 per cent. The three-month Treasury bill rate
averaged .53 per cent in 1933, while rates on prime
four- to six-month commercial paper averaged 1.77
per cent. The average rate banks charged on com­
mercial loans in New York City fell from a peak of
4.79 per cent in March 1933 to 2.61 per cent in
December.
February 1935 — In early 1935 the Board lowered
the ceiling rate to 2% per cent, accepting a recom­
mendation of the Federal Advisory Council (com ­
posed of commercial bankers):
. . . in view of the wide divergence in rates of
interest now being paid on thrift and other time
deposits in different sections of the country, and
in view of the increasing difficulty of obtaining
from suitable investments a yield sufficient to
warrant payment of the maximum rate now
fixed under provision of Regulation Q of the
Federal Reserve Board, it is recommended that
the Board give consideration to the advisability
of lowering the present maximum rate.
In the opinion of the Council the present rate
might well be lowered one-half of one per
cent.8
January 1936 — The Federal Reserve set different
rates for time deposits with various maturities as of
January 1, 1936, lowering the ceilings on short-term
deposits. The maximum rate payable was changed to
1 per cent on time deposits maturing in less than 90
days, and to 2 per cent on those maturing in from 3
to 6 months. The Board stated “. . . that banks were
not justified in paying as high rates of interest for time
deposits having shorter maturities in view of their
greater availability for withdrawals and therefore that
'‘ This “effective” rate is calculated by dividing interest ex­
pense of all commercial banks by average balance of time
and savings deposits for the year, and is a crude, but about
the only, measure of rates banks were paying. The deficien­
cies o f this measure are brought out by Albert H. Cox Jr.,
op. cit. p. 37. For one thing, it ignores maturity. For a listing
of annual effective yields from 1930 through 1968, see United
States Savings and Loan League, Savings and Loan Fact
Book, 1969, p. 17.
8Federal Reserve Board, Annual Report, 1934, p. 203.




FEBRUARY, 1970

the rates fixed by the Board should be graduated ac­
cording to maturities.”9 Discussions associated with the
change pointed to the general downward trend of
interest rates and the fact that many banks were find­
ing it necessary to make further reductions in rates
paid depositors because of decreased earnings. This
comment suggests that banks were responding ration­
ally to market forces and that any ceiling rate may
have been superfluous. The lower ceilings, neverthe­
less, vindicated bank actions to their depositors.
Those favoring ceilings in order to limit “destruc­
tive competition” felt that free competition for deposits
would force some banks to offer rates on short­
term funds which were out of line with returns ob­
tainable on assets “suitable” for banks to hold. In order
to earn a return higher than it was paying on deposits,
a bank might accept higher-risk and longer-term as­
sets, thus impairing the liquidity and solvency of that
bank and the banking system.
If the aggregate relation between interest expense
and deposits adequately measures the rates banks
pay, this argument seems to provide some justification
for ceiling rates. In 1933 this measure shows banks
paying rates higher than the rates on high-grade
short-term securities. Banks were paying an average
effective rate of 3.4 per cent, about twice the rate on
prime four- to six-month commercial paper. The rates
banks were paying do not appear significandy dif­
ferent from rates they were charging on short-term
business loans. It could be argued that banks were
offering strongly competitive rates to improve li­
quidity, which had fallen because of strong demands
for currency and liquidity in the rest of the economy.
This might be considered corrective behavior, while
restraint on competition imposed by ceiling rates
simply treated symptoms rather than the cause of the
financial crisis.
Regulation Q ceilings do not appear to have en­
couraged or safeguarded bank liquidity. On the con­
trary, liquidity, in terms of the ratio of loans to de­
posits, has often dropped (the ratio rising) during
periods when Regulation Q constrained competition
for funds. For example, the ratio of loans to total
deposits increased from 61.1 per cent in December
1968 to 67.8 per cent in December 1969, a period
in which Regulation Q was the primary cause
of a $10.7 billion decline in time and savings deposits.
Chart II, a comparison of the spread between the
market yield on prime four- to six-month commercial
9Federal Reserve Board, Annual Report, 1935, p. 211.
Page 31

Page
32

REGULATION Q CEILING RATES
Date
Effective

Ceiling Rates*

Reasons fo r Ceilings

Dissents

N o v . 1, 1 9 3 3

A ll tim e a n d sa vin g s d e p o sits

3 .0 0 %

To p re ve n t in te re s t ra te c o m p e titio n
b a n k fa ilu re s .

Feb. 1, 1 9 3 5

A ll tim e a n d sa vin g s d e p o sits

2.50%

M a rk e t ra te s had been d e c lin in g .
N o investm ents s u ita b le fo r b a n k s o ffe re d c e ilin g ra te .
The in cre a sin g s p re a d in ra te s b e in g p a id in d iffe re n t
areas o f th e c o u n try w as c o n s id e re d u n d e s ira b le .

Jan. 1, 1936

S a vin g s d e p o sits
O th e r tim e d e p o sits
Less th a n 9 0 d a ys
9 0 d a y s - 6 m onths
6 m onths o r lo n g e r

2 .5 0 %

M a rk e t in te re s t rates h ad been d e c lin in g ; rates o ffe re d by
b anks h ad been re duced.
Tim e d ep o sits w ith s h o rte r m a tu ritie s sh o u ld e a rn a lo w e r
ra te o f re tu rn .

J a n . 1, 1 9 5 7

Jan. 1, 1962

J u ly 1 7 , 1 9 6 3

N ov. 2 4 , 1964

S a vin g s d e p o sits
O th e r tim e d e p o sits
Less th a n 9 0 days
9 0 d a ys - 6 m onths
6 m onths o r lo n g e r

S a vin g s d e p o s its
Less th a n 1 2 m onths
1 2 m onths o r m o re
O th e r tim e d e p o sits
Less th a n 9 0 d a ys
9 0 d a ys - 6 m onths
6 m onths - 12 m onths
12 m onths o r m ore

S a vin g s d e p o sits
Less th a n 12 m onths
1 2 m o nth s o r m ore
O th e r tim e d e p o sits
Less th a n 9 0 d a ys
9 0 d a y s o r m ore

S a vin g s d e p o s its
O th e r tim e d e p o sits
Less th a n 9 0 d a ys
9 0 d a y s o r m ore




1 .0 0

2.00

w hich

m ig h t le a d to

2 .5 0

3.00%
1 .0 0
2 .5 0

M a rk e t in te re s t ra te s h a d risen a b o v e c e ilin g s .
Banks sh ou ld have g re a te r fle x ib ility in c o m p e tin g
fu n d s.

fo r

R ob e rtso n : R aising c e ilin g s w o u ld im p a ir b a n k liq u id ity
a n d so lve n cy as th e y s o u g h t h ig h e r y ie ld in g assets in
o rd e r to p a y h ig h e r rates.

3.00

3.50%
4.00
1 .0 0
2 .5 0

To e n a b le banks to a ttra c t lo n g e r-te rm s a vin g s a n d
p e rm it inve stm e n t in lo n g e r-te rm assets nee d e d fo r eco­
nom ic e x p a n s io n .
To enh a n ce fre e d o m o f c o m p e titio n a n d e ffic ie n c y o f
a llo c a tio n .
To e n a b le banks to com pete fo r fo re ig n d e p o sits.

K in g : Rate c o m p e titio n w o u ld have a dve rse effects on
m a n y co m m ercia l b anks w ith o u t m a k in g a s ig n ific a n t
c o n trib u tio n to s o lu tio n o f th e U.S. B alance o f Paym ents
d e fic it, a n d p re s e n t sa vin g s w e re a d e q u a te fo r eco­
nom ic e x p a n s io n .

3.50
4.00

3 .5 0 %
4 .0 0
1 .0 0

4.00
4.00%
4.00
4.50

To a v o id o u tflo w s o f fu n d s to fo re ig n c o m p e titio n .
To p re v e n t a ru n -o ff o f b a n k tim e d e p o s its , w h ic h m ig h t
u n d u ly tig h te n
b a n k c re d it, g iv e n th e d is c o u n t ra te
increase.
To e lim in a te b o o k k e e p in g in e ffic ie n c y cause b y s p lin te re d
c e ilin g rates.

To in su re a s u ffic ie n t flo w o f fu n d s th ro u g h b an ks to
fin an ce dom estic inve stm e n t.
To a v o id o u tflo w s o f fu n d s to fo re ig n c o m p e titio n .
S avings d eposits ra te w as n o t ra is e d h ig h e r because it
m ig h t then d is tu rb th e r e la tio n s h ip w ith ra te s o f o th e r
th r ift in s titu tio n s a n d c o m p lic a te T re a s u ry fin a n c in g .
A h ig h e r ra te o n s h o rt tim e d e p o s its m ig h t co m pe l unw ise
c o m p e titio n .

R obertson — To th e 4 p erce n t c e ilin g o n o th e r tim e
d e p o s its : This increase w o u ld a g g ra v a te v o la tilit y o f
d e p o s its .
S h e pa rd son a n d R obertson — To a 4 p e rc e n t c e ilin g
on s a vin g s d e p o s its : It w as d is c rim in a to ry to sm all
savers in v ie w o f th e 4 .5 p erce n t ra te p e rm itte d on
some o th e r tim e d e p o s its .

Dec. 6 , 1 9 6 5

J u ly 2 0 , 1 9 6 6

S ept. 2 6 , 1 9 6 6

A p r. 1 9 , 1 9 6 8

Jan. 2 1 , 1 970

S a vin g s d e p o s its
O th e r tim e d e p o sits

S a vin g s d e p o s its
O th e r tim e d e p o sits
M u ltip le m a tu rity
3 0 - 8 9 d a ys
9 0 d a y s o r m ore
S in g le m a tu rity

4 .0 0 %

5.50

4 .0 0 %

To e n a b le b a n k s to a ttra c t a n d re ta in tim e d e p o s its a n d
th e re fo re m a ke m ore e ffe c tiv e use o f fu n d s a lr e a d y in the
e conom y to fin a n c e lo a n e x p a n s io n .
M a rk e t in te re s t rates h a d risen since N o v e m b e r 1 9 6 4
u nd e r d e m a n d pressure.

To h e lp fo re s ta ll excessive in te re s t ra te c o m p e titio n a m on g
fin a n c ia l in s titu tio n s a t a tim e w he n m o n e ta ry p o lic y w as
a im e d a t c u rb in g th e ra te o f e x p a n s io n o f b a n k c re d it.

4.00
5.00
5 .5 0

S a vin g s d e p o s its
O th e r tim e d e p o sits
M u ltip le m a tu rity
3 0 - 8 9 d a ys
9 0 d a y s o r m ore
S in g le m a tu rity
Less th a n $ 1 0 0 ,0 0 0
$ 1 0 0 ,0 0 0 o r more

4 .0 0 %

S a vin g s d e p o s its
O th e r tim e d e p o sits
M u ltip le m a tu rity
3 0 - 8 9 d a ys
9 0 d a y s o r m ore
S in g le m a tu rity
Less th a n $ 1 0 0 ,0 0 0
$ 1 0 0 ,0 0 0 o r m ore
3 0 - 5 9 d a ys
6 0 - 8 9 d a ys
9 0 d a ys - 6 m onths
M o re th a n 6 m onths

4 .0 0 %

S a vin g s d e p o sits
O th e r tim e d e p o sits
M u ltip le m a tu rity
3 0 - 8 9 d ays
9 0 d a ys o r m ore
S in g le m a tu rity
Less th a n $ 1 0 0 ,0 0 0
3 0 d a ys to 1 y e a r
1 year
2 ye ars
$ 1 0 0 ,0 0 0 o r m ore
3 0 - 5 9 d a ys
6 0 - 8 9 d a ys
9 0 - 1 7 9 d ays
1 8 0 d a y s to 1 y e a r
1 y e a r o r m ore

4.50%

4 .0 0
5 .0 0

To lim it fu r th e r e s c a la tio n o f in te re s t rates p a id in com ­
p e titio n fo r consum er sa vin g s.
To keep g ro w th o f co m m ercia l b a n k c re d it to a m o d e ra te
pace.

5.00
5 .5 0

4 .0 0
5 .0 0

To su p p le m e n t p o lic y m easures o f m o n e ta ry re s tra in t.
To g iv e b an ks some le e w a y to com pe te fo r in te re s t se nsi­
tive fu n d s .
To resist re d u c tio n in CD's w h ile n o t p ro m o tin g e x p a n s io n
o f b a n k c re d it.

5 .0 0
5 .5 0

5.75
6.00
6.25

4.50
5 .0 0

To b rin g c e ilin g s m ore in lin e w ith m a rk e t rates.
To ra ise ra te on s m a ll s a vin g s.
To e n c o u ra ge lo n g e r-te rm sa vin g s in re in fo rc e m e n t
a n ti- in fla tio n a r y m easures.
To incre a se th e
p o o l o f sa vin g s fo r in v e s tm e n t
m ortg ag e s.

5 .0 0

5.50
5.75
6.25
6.50
6.75
7.00
7.50

*The ceilin g rates w hich w ere changed are shown in boldface type.




of
in

R obertson: It w o u ld c o n flic t w ith c re d it re s tra in t hoped
fro m th e d is c o u n t ra te incre a se .
L arg e r b an ks w o u ld be a b le to a ttra c t fu n d s fro m
s m a lle r b an ks w hich re ly on d e m a n d a n d tim e dep o sits.
I t w o u ld fo rce s m a lle r b an ks in to h ig h e r risk p o s itio n s .

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

FEBR U ARY, 1970

C h a rt II

In te re st Rate D iffe re n tia l a n d B a nk L iq u id ity

l l A l l c o m m e rc ia l b a n k s , la s t W e d n e s d a y o f th e m onth.
12 The s p re a d b e tw e e n m a rk e ty ie ld s on p rim e fo u r- to s ix-m o n th co m m e rcia l p a p e r, conve rte d to b o n d -y ie ld e q u iv a le n t b asis, and the m axim um ra te b a n k s a re p e rm itte d to p a y on
a n y tim e d e p o s it.

paper and the highest Regulation Q ceiling with bank
liquidity ratios, suggests that ceilings, when effective,
have had an adverse effect on bank liquidity by
forcing a run-off of deposits at the very time when
credit demands at banks have been strongest.

Ceiling Rates Raised to Permit
Freedom of Competition
The ceiling rates remained unchanged for twentyone years from 1936 to 1957. Market rates, too, were
relatively stable until the late Forties. Beginning
then, market rates increased somewhat but, in general,
remained below the ceilings. Therefore, during this
twenty-one year period, Regulation Q ceilings were
virtually forgotten by both bankers and public
policymakers.

http://fraser.stlouisfed.org/
Page 34
Federal Reserve Bank of St. Louis

During the late Fifties and early Sixties, market
yields rose and interest rate ceilings were raised in
actions reflecting the view that ceilings should be
generally in line with market rates. In deliberations
on the changes, prevention of undue restriction on
competition was emphasized more than was preven­
tion of destructive competition.
January 1957 — In the mid-1950’s short-term mar­
ket interest rates rose above Regulation Q ceilings.
The average rate on prime four- to six-month commer­
cial paper was 3.41 per cent in 1956; three-month
Treasury bills were trading at an average rate of 2.67
per cent; and savings and loan associations were pay­
ing, on average, an “effective” rate of 3 per cent. In
contrast, commercial banks were paying an “effective”
rate of 1.6 per cent on time and savings deposits,

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

while ceiling rates remained at the 1 to 2.5 per cent
levels established in 1936.
Because banks were not offering competitive yields,
time and savings deposits suffered a relative decline.
From 1955 to 1956 time and savings deposits increased
only 3.3 per cent, compared with a 7.2 per cent aver­
age annual rate in the previous four years. Deposits
at savings and loan associations and at mutual savings
banks rose 15.6 per cent and 6.4 per cent, respectively,
during 1956, compared with rates slightly faster in
the previous four years.
In view of this situation the rate ceilings on bank
time and savings deposits were raised effective
January 1, 1957, in order to give banks greater flexi­
bility in competing for funds. The maximum rate
payable on time deposits of less than 90 days remained
1 per cent, while rates permitted on other time and
savings deposits were raised one-half of one percent­
age point. The specific reasoning behind the decision
was that:
. . . there was insufficient reason to prevent
banks, in the exercise of management discre­
tion, from competing actively for time and sav­
ings balances by offering rates more nearly in
line with other market rates. By increasing the
rate limitations only on savings deposits and
on time deposits with maturities longer than
90 days, the Board continued to recognize the spe­
cial thrift character-of savings accounts and to pre­
serve a differential between longer-term time
deposits and short-term time deposits represent­
ing essentially liquid balances.10
Governor Robertson voted against the change, go­
ing back to arguments presented at the hearings on
the Banking Act of 1933. He held that it would in­
crease bank operating costs, making it more difficult
for banks to raise additional capital, that it would
make banks seek higher yielding assets and impair
the liquidity and solvency of the banking system, and
that short-term funds “should be invested in open
market paper, so that holders would have to bear the
burden and risks of fluctuating rates and not shift
that risk to the banking system.”11
January 1962 — In general the Governors took a
more favorable attitude toward rate competition, and
the ceilings were raised again on January 1, 1962. The
change resulted in some further splintering in the
classification of time and savings deposits, as the
10Federal Reserve Board Annual Report, 1956, pp. 52-53.
n/fotd, pp. 54-55 contain a full statement by Governor
Robertson, giving considerable detail on why there should
be ceiling rates and why they should not be raised at
certain times.




FEBRUARY, 1970

Board distinguished maturities longer than one year
from shorter maturities. Ceilings on savings deposits
and on time deposits with maturities of six to twelve
months were raised from 3 per cent to 3.5 per cent,
and banks were permitted to offer a rate of 4 per cent
on time and savings deposits held for twelve months
or longer.
The Board of Governors felt that the resulting flexi­
bility and freedom of competition would be useful
for three reasons: (1) it would enhance economic
growth; (2) it would contribute to improving the
United States balance-of-payments position; and (3) it
would have a healthy effect on the management of in­
dividual banks. The impact on growth was expected to
come through encouraging the flow of bank funds to
longer-term assets. “By permitting higher rates to be
paid on deposits held for longer periods, the new
limits would make it possible for banks to attract
long-term savings, in contrast to volatile liquid funds,
and thereby give banks greater assurance that they
could invest a larger portion of their time deposits in
longer-term assets.” 12 This possible effect on the se­
lection of bank assets was one reason Governor King
dissented and Governor Mills questioned the action.
Another reason for raising the ceilings in 1962 was
that it would permit competition for foreign deposits
“that might otherwise move abroad in search of
higher returns, thereby intensifying an outflow of
capital or gold to other countries.”13 Balance-of-payments considerations also played a part in subsequent
changes of the ceilings. In October 1962, legislation
was passed which exempted deposits of foreign
governments, and certain international institutions in
which the United States was a participant, from the
deposit rate ceilings for three years. Exempting legis­
lation and exemption under Regulation Q were
renewed in 1965 and 1968.
In discussing competition, most Governors empha­
sized the desirable rather than the possibly destruc­
tive effects. They felt that the higher ceilings would
“enable each member bank to determine the rates of
interest it would pay in light of the conditions pre­
vailing in its area, the type of competition it must
meet and its ability to pay.” 14 Governor Robertson
specifically expressed this thought — urging ceiling
rates even higher than many banks might pay, in
order to place responsibility for determining rates
upon the individual bank. He noted that Regulation
12Federal Reserve Board Annual Report, 1961, p. 103.
13Ibid, p. 102.
uibid, p. 102.
Page 35

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

Q might impart the unintended and unwanted idea
that ceilings indicated what the Federal Reserve
thinks banks ought to be paying.15 This view of com­
petition seems to suggest that the ceilings were not
essential in preventing undue concentration of funds
and that, as a guide to banks, they may be
undesirable.

at least since 1962. It has been argued by many, in­
cluding those associated with savings and loan asso­
ciations and mutual savings banks, that, because these
institutions enhance the availability of credit for
housing, they should be given an advantage in the com­
petition for consumer-type savings.

Reservation: Impact of Higher Ceiling
Rates on Other Savings Institutions
and on Housing

While it is important that there be an optimal flow
of funds into the construction of housing, it should
be considered whether regulation of bank interest
rates accomplishes this goal, and whether this method
involves costs which could be avoided.

One reservation about freer competition for com­
mercial banks was its possible impact on other savings
institutions. Governor Mills voted for the increase in
ceilings in 1962, but questioned going above a 3% per
cent maximum, which would retain the usual spread
between rates on commercial bank deposits and rates
on deposits at other savings institutions.16 The aggre­
gate “effective” rates paid by both banks and savings
and loan associations had continued to rise in the late
Fifties and early Sixties. In 1961 savings and loans
were paying an average “effective” rate of 3.92 per

The examples of 1966 and 1969, when interest rate
ceilings effectively prevented both banks and other
thrift institutions from competing for funds, seem to
suggest that the ceilings alone cannot accomplish an
optimal flow of funds into housing. From May to
November 1966, growth of deposits at savings and
loan associations was only a 2.3 per cent annual rate
compared with an 11 per cent rate in the previous
4% years. In the last half of 1969 the increase was
at a 1.6 per cent rate, compared with 5.4 per cent in
the previous year.

Savings Deposits
R a tio Scale
B illions o f D o lla rs

R atio Scale
B illio n s o f D o lla rs

300

30
1962

1963

1964

1965

1966

1967

1968

1969

S a v in g s a n d lo a n c a p ita l a n d m u tu a l s a v in g s b a n k d e p o s its a r e e n d o f m o n th fig u r e s ;
c o m m e rc ia l b a n k n e t tim e d e p o s its ( to ta l tim e d e p o s its m in us la rg e n e g o tia b le c e r tific a te s
o f d e p o s it) a r e m o n th ly a v e ra g e s o f d a ily fig u r e s . A ll d a ta h a v e b e e n s e a s o n a lly
a d ju s te d b y th e F e d e r a l R ese rve B a nk o f St. Louis.
L a te s t d a ta p lo tte d : D e c e m b e r p r e lim in a ry

cent, compared with 2.71 per cent for commercial
banks. In 1962, after the ceilings were raised, the rate
at banks jumped nearly 50 basis points, compared
with a 15 basis point increase at savings and loan
associations.
Concern over nonbank thrift institutions has been
behind resistance to raising Regulation Q ceilings
liIbid, p. 104.
i«Ibid, p. 103.


Page 36


It has sometimes been argued that because savings
and loan associations invest in longer-term assets than
banks, they cannot adjust so easily as banks to changes
in interest rates. Therefore, without differential ceil­
ing rates, held stable even when market rates vary,
savings and loan associations could not operate prof­
itably. However, longer-term assets only imply that
a savings and loan association requires a relatively
large amount of reserves in order to pay a higher rate
on deposits than the average rate earned on assets
during a period of transition. As savings and loan
associations adjust the rates charged on loans, they
should be able to restore a workable relation between
interest expense and interest earnings.17
Inability to attract and retain deposited funds is
potentially as dangerous to savings and loan associa­
tions as is paying higher rates in the short-run than
they are able to earn. During 1969, Government
agencies tried to supplement savings and loan sources
of funds by selling securities in the capital market at
competitive rates and lending the proceeds to savings
and loan associations. As a result savings and loan
associations pay the higher competitive yield only on
marginal funds, with fewer funds directed away from
the housing market because of the rate ceilings than
in 1966.
17See Norman N. Bowsher and Lionell Kalish, “ Does Slower
Monetary Expansion Discriminate Against Housing?” in
the June 1968 issue of this Review, also available as
Reprint No. 29.

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

It appears that the interest rate ceilings have not
accomplished the goal of encouraging housing. In
fact, they probably have made credit for housing
more difficult to obtain. On the other hand, they have
encouraged the Government to protect a specific set
of institutions and to provide services which regula­
tions hinder private markets from providing.

Changes in Ceiling Rates to Influence
Growth of Bank Credit
Beginning with the change of ceilings in 1963, the
influence of Regulation Q on the growth of bank
credit has gradually become the focus in discussions
of changing ceilings. The flow of deposits into banks
is one factor influencing the ability of banks to expand
loans and investments. The relation of interest rate
ceilings to market rates is, in turn, an important factor
influencing the amount of time and savings deposits
which banks are able to attract. Therefore, through
its influence on bank credit, Regulation Q has come
to be considered a major tool of monetary stabiliza­
tion policy.
July 1963 — The change which took place in July
1963 raised the ceiling rates on all time deposits held
longer than 90 days to 4 per cent, eliminating some
of the previous splintering in the rates. While the
balance-of-payments was cited as the primary reason
for the change, Governor Robertson, who dissented
from the concurrent discount rate increase from 3 to
3% per cent, added that the increase in ceilings was
necessary to offset any restrictive impact of the dis­
count rate increase on bank credit.18
November 1964 — In November 1964 ceiling rates
were raised again, after some further increases in
market interest rates and in conjunction with a dis­
count rate increase to 4 per cent. The action adjusted
the maximum rate on time deposits held less than 90
days from 1 per cent to 4 per cent, while raising that
on longer maturities to 4.5 per cent. The differential
ceiling rates on savings deposits were also eliminated
by permitting a rate of 4 per cent on any savings
deposit held longer than 30 days.
The principal reasons for raising the ceilings were
to insure a sufficient flow of funds through banks to
finance domestic investment and to avoid an outflow
of funds which might worsen the balance-of-payments deficit. Again, Governor Robertson thought that

some change in the maximum interest rates permitted
under Regulation Q was warranted by the need to pre­
vent a run-off of time deposits. He dissented from
raising the ceiling to 4 per cent on time deposits with
maturities less than 90 days, however, because he ex­
pected it to “encourage the replacement of maturing
certificates of deposit with new certificates of shorter
original maturities, thus aggravating bank deposit vola­
tility and pressures upon bank liquidity positions.”19
Both Governor Robertson and Governor Shepardson thought that a 4.5 per cent maximum on savings
deposits would be appropriate in that it would treat
small savers more equitably. The majority of the
Board of Governors, however, felt a 4 per cent rate
would preserve the prevailing relationship between
rates paid on savings deposits by commercial banks
and those paid by savings institutions such as mutual
savings banks and savings and loan associations,
whereas a higher ceiling might encourage unwise
competition and possibly complicate Treasury financ­
ing problems.-"
D ecem ber 1965 — In December 1965 an increase in
ceiling rates was intended to permit some continued
orderly expansion in bank credit while other policy
instruments exercised restraint. The maximum rate
payable on time deposits, regardless of maturity,
was raised to 5.5 per cent, while the ceiling on sav­
ings deposits remained 4 per cent. The discount rate
was again raised — this time to 4.5 per cent. Most of
the discussion reported concerned the discount rate
action and the majority view that monetary policy
should move promptly against inflationary credit
expansion, at a time when market rates had been
rising under demand pressures, resource-use had been
intensifying, and the pace of Government expendi­
tures was accelerating.
The increase in Regulation Q ceiling rates was in­
tended to help stabilize the growth of bank time
deposits and thereby pennit banks to make more ef­
fective use of funds than when they are uncertain
about retaining deposits. The general idea that regu­
lated rates should be in line with market rates is
reflected in the statement: “In addition, a pattern of
interest rates that was accepted by borrowers and
lenders as fully reflecting market forces should, it was
thought, add assurance of a smooth flow of funds to
all sectors of the economy.”21
'^Federal Reserve Board, Annual Report, 1964, p. 48.
20Ibid, p. 48.

18Federal Reserve Board, Annual Report, 1963, pp. 39-40.




21Federal Reserve Board, Annual Report, 1965, pp. 64-65.
Page 37

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

Governor Robertson, however, dissented on the
grounds that the increase in ceilings would conflict
with the credit restraint hoped for from the discount
rate increase. The alternative action he suggested
was to dampen bank issuance of promissory notes by
defining them as deposits, while maintaining the
current discount rate and interest rate ceilings on
deposits. He also felt that higher ceilings would shift
deposits from smaller to larger banks or force smaller
banks into higher-risk assets.22
July 1966 — The ceiling rate structure of 4 per cent
on savings deposits and 5.5 per cent on time deposits
lasted little more than six months. In July 1966 the
Board of Governors took two actions influencing ceil­
ing rates. For one thing they lowered the ceiling rate
on multiple maturity deposits. A multiple maturity
deposit was distinguished from single maturity as
one: (1) payable at the depositor’s option on more
than one date; or (2) payable after written notice;
or (3) subject to automatic renewal at maturity.
Maximum rates on multiple maturity deposits were
lowered to 5 per cent if held more than 90 days and
to 4 per cent if held only 30-89 days. This lowering
of rates was intended to inhibit competition between
banks and thrift institutions “at a time when mone­
tary policy was aimed at curbing the expansion of
bank credit.” 23
The other action was to recommend legislation to
facilitate distinction between consumer-type deposits
and money market C D ’s. The Board considered
the previous action of defining multiple maturity
deposits only a partial attempt at this. They recom­
mended that Congress broaden the authority of the
Federal Reserve by allowing them to distinguish de­
posits by amount in regulating rates, and that it ex­
tend similar authority to the Federal Home Loan
Bank Board to determine maximum rates at savings
and loan associations.
September 1966 — Public Law 89-597, passed Sep­
tember 1966, permitted time deposits under $100,000
to be treated differently from larger ones in regulating
maximum rates and authorized national regulation
of maximum rates paid by savings and loan associa­
tions and mutual savings banks. On the same day the
law was signed, the maximum rate on any time
deposit less than $100,000 (excluding passbook sav­
ings deposits) was set at 5 per cent. Like the previous
reduction, this one was intended to limit rate in­
creases caused by competition for household savings,
22Ibid, p. 70.
23Federal Reserve Board, Annual Report, 1966, pp. 97-98.
24Federal Reserve Board, Annual Report, 1966, pp. 104-106.


Page 38


FEBRUARY, 1970

and to keep the growth of bank credit at a moderate
pace.24
During 1966 market interest rates continued their
upward trend, culminating in the so-called “credit
crunch.” Yields on prime four- to six-month commer­
cial paper reached 6.11 per cent and yields on threemonth Treasury bills reached 5.08 per cent in August
1966. Rates paid at banks and savings and loan as­
sociations were not competitive with these other mar­
ket instruments. As a result, the growth of time and
savings deposits slowed substantially. In early 1967
market interest rates subsided somewhat, financial in­
stitutions could again attract funds, and growth of
deposits quickly moved to the previous rapid trends.
April 1968 — In the spring of 1968, market interest
rates climbed into the range at which ceilings pre­
vented banks from competing for funds as effectively
as before. In April the ceiling rates on large denomi­
nation CD ’s were raised “in order to give banks some
leeway to compete for interest-sensitive funds.” Rates
on single maturity CD ’s in denominations larger than
$100,000 were raised to 5.75 per cent if held 60 to
89 days, to 6 per cent if held 90 days to 6 months,
and to 6.25 per cent if held longer than 6 months.
Ceiling rates on other time deposits were not raised;
the resulting structure was considered sufficient to re­
sist the run-off of CD’s, while not promoting expan­
sion of bank credit.25
1969 — While the relationship between ceiling rates
and market interest rates changed significantly in
1969, no change was made in ceiling rates. For
example, the spread between yields on four- to sixmonth commercial paper and the ceiling rate on
three- to six-month CD’s was over 3 percentage
points at the end of 1969. Prior to the last time ceiling
rates were raised, in 1968, the spread was about onehalf of one percentage point. As a result of the change
in relative yields, by December 1969 banks had lost
over half of the $24 billion in C D ’s held in December
1968. Other time and savings deposits, savings and
loan capital, and mutual savings bank deposits also
stopped increasing or increased at substantially slower
rates than in 1968.
Bank credit increased only 2.5 per cent in 1969,
after rising 11 per cent in 1968. This slowing was due
partly to slower growth of the monetary base and
partly due to the impact of Regulation Q.
January 1970 — The disintermediation in 1969 led
to an upward revision in the ceiling rates effective
January 21. The maximum rate on bank savings de25Federal Reserve Board, Annual Report, 1968, pp. 69-70.

FEBRUARY, 1970

F E D E R A L R E S E R V E B A N K O F ST. L O U IS

C ertificates o f D ep osit a n d C om m ercial Paper
R a tio S c a le

O u ts t a n d in g V o lu m e

R o tio S c a le

Q _large c o m m erc ial b an ks, lo s t W e dn e sd a y of the month fig u re s, s e a so n a lly a d ju s te d by
the Federal Reserve Bank o f St. Louis.
[2 Seaso na lly a d ju s te d by the F ederal Reserve Bank o f N ew York, end o f month figures.
Latest d a ta p lo tte d : Decem ber

posits became 4.5 per cent. Small certificates (less
than $100,000) are now permitted to yield 5.50 per
cent if they mature in one year, and 5.75 per cent if
they mature in two years. The ceiling on each matur­
ity classification of large CD’s was raised % of a per­
centage point, and a new classification, large C D ’s
maturing in a year or more, is permitted to yield
7.50 per cent.
The changes were made to bring the structure of
ceiling rates “. . . somewhat more in line with going
yields on market securities,” to permit a more equi­
table rate on small savings, and
. . to encourage
longer-term savings in reinforcement of anti-inflationary measures.” Along with these reasons was the
belief that higher rates on savings at institutions
would increase the amount of funds available for
mortgages. On the following day the Federal Home
Loan Bank Board raised the maximum rates savings
and loan associations are permitted to pay.
There was no explicit mention of bank credit in
the press release which announced the change. How­
ever, it was pointed out that:
“The revisions in the Board’s Regulation Q ceil­
ing rates were held to moderate size, so as not
to foster sudden and large movements of funds
into the banking system that could cause distor­
tions in traditional financial flows or lead to an
upsurge in bank lending.”
During the Sixties the idea that Regulation Q is a
major instrument for controlling bank credit became



the predominant rationale behind the structure of
the ceilings. Implicit in this view was the importance
of bank credit as a target variable in monetary sta­
bilization policy. It does appear reasonable that the
growth of credit extended by banks is associated with
the growth of spending in the economy, and that ap­
propriate stabilization policy during a period of ex­
cessive spending would be restricting the growth of
bank credit. It should be recognized, however, that
there are alternative channels through which funds
flow from savers to borrowers.
Savers, who are discouraged from putting their
funds in banks or other thrift institutions because of
low yields, have had alternative, higher earning assets
available. Therefore, any slowing in the growth of
bank deposits and hence bank credit, which is caused
by restricting competition, is probably offset by a rise
in the flow of funds through unregulated markets,
leaving the growth of total credit unaffected. In 1969,
for example, at the same time that the outstanding
volume of large negotiable CD ’s declined $13 billion,
the outstanding volume of commercial paper in­
creased by $11.5 billion. A stronger demand by indi­
viduals for small denomination ($1,000 and $5,000)
Treasury bills also developed, as savers sought higher
returns than banks were permitted to pay.
The impact of Regulation Q has encouraged banks
to find nondeposit sources of funds. During the past
two years, they found supplemental sources of funds
in the sale of commercial paper by bank subsidiaries
and holding companies and in Euro-dollar transac­
tions. The channelling of dollars through Europe to
avoid interest rate restrictions increased the cost and
distance of flows of funds and led to new regulations
imposing reserve requirements on such borrowing.
Regulations concerning the sale of commercial paper
are pending, while commercial banks continue to seek
ways to avoid the discriminatory impact of Regula­
tion Q.

Summary and Conclusions
The Banking Act of 1933 authorized the Federal
Reserve Board to establish maximum rates which
banks may pay for funds. In November of that year,
the Federal Reserve Board adopted Regulation Q,
which imposed a ceiling rate of 3 per cent on mem­
ber bank time and savings deposits. The action was
taken to help avoid unwise competition among banks
and its detrimental effects on the soundness of banks.
This reason has gradually received less attention.
Page 39

F E D E R A L. R E S E R V E B A N K O F ST. L O U IS

While the ceilings have been raised on occasion
in order to permit some competition for funds,
changes in the spreads between the ceiling rates and
market rates sometimes have been allowed to occur
with the intention of increasing the flow of funds
toward nonbank thrift institutions or influencing
the growth of bank credit. The primary justifica­
tion for the current structure of Regulation Q
ceilings has been its presumed control on bank credit
for purposes of economic stabilization. Given this
goal, the adverse impact of Regulation Q ceilings on
bank liquidity at certain times has probably been
intended. However, Regulation Q cannot control total
credit in the economy, since funds leaving bank time
deposits are channelled through unregulated markets
or return to banks through nondeposit sources of
funds.
Though the growth of total credit probably is un­
affected by Regulation Q, the allocation of credit is
affected. At times when ceilings restrict the amount
of funds available to financial intermediaries, borrow­
ers in the unregulated markets are able to obtain
funds more cheaply than if all markets were freely
competitive, while borrowers who rely on banks or

FEBRUARY, 1970

other thrift institutions are forced to pay a higher
price or may find funds simply unavailable. The sit­
uation is analogous for savers. Holders of large
amounts of liquid funds with knowledge of capital
markets can receive the highest return available,
while those who must rely on regulated institutions
to hold and accumulate savings receive a lower re­
turn than if banks were free to compete.
It appears that interest rate restrictions on financial
intermediaries impose inequities on our economy, dis­
criminating against housing, small savers, and the
regulated financial institutions. They encourage in­
efficiencies as banks try to reroute funds, inter­
mediaries try to compete through premiums, and
Government agencies have to find both new regu­
lations and ways to ease the burden on those most
severely hurt. It further appears that interest rate
restrictions are of little consequence in the control of
total credit or total spending in the economy. At the
same time, there is no evidence that the absence of
Regulation Q would be detrimental to the equity of
the economy, the solvency of the banking system, or
the control of total spending.

This article is available as Reprint No. 53.

O v e r THE YEARS certain articles appearing in the R e v i e w have proved to be helpful to
banks, educational institutions, business organizations, and others. To satisfy the demand for
these articles, a reprint series was made available, and has been expanded frequently by
the addition of new articles. A complete listing of the series, as well as individual reprints,
are available on request from: Research Department, Federal Reserve Bank of St. Louis,
P.O. Box 442, St. Louis, Mo. 63166


Page 40