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FEDERAL RESERVE B A NK
O F ST. L O U IS
FEBRUARY 1972

The Economy in 1972 ............................

2

Operations of the Federal Reserve
Bank of St. Louis— 1971 ................... 13
Projecting With the St. Louis Model:
A Progress Report ............................. 20

Vol. 5 4 , No. 2




The Economy in 1972
by ROGER W. SPENCER

7^_LTHOUGH most projections of the pace of
economic activity this year are quite optimistic, un­
certainty continues to cloud the 1972 economic hori­
zon. With unemployment still high by historical
standards, many people remain concerned about their
ability either to obtain a job to their liking or to retain
their present one. Inflation and potential inflationary
pressures are not yet subdued. The effectiveness of
the price and wage control program is still debated by
those who regard it as a necessary, long-term supple­
ment to orthodox monetary-fiscal policies, and by those
who see the program as a disturbing encroachment on
individual freedom. Nineteen seventy-two could also
be a year marking the most sweeping changes in the
international monetary payments mechanism since the
1944 Bretton Woods Conference. Finally, all these
economic developments take on added significance in
light of the coming presidential election.
Many of these issues evolved over a long period
and will be difficult to resolve in a single year. To
assess the course of economic activity over the next
several months, this article discusses first the principal
influences on the course of economic activity and
secondly, the economic outlook.

Factors Influencing The Economic Outlook
The chief factors to be considered in projecting the
economic outlook for 1972 are given in Figure I. The
three major categories are cyclical forces, structural
changes and policy actions.
At any time, the economy has a certain “momentum”
of its own. The direction and magnitude of the mo­
mentum reflect the particular stage of the business
Page 2



cycle. The momentum of cyclical forces can be offset
or augmented by structural changes or stabilization
policy actions.
Structural changes include developments in the
world trade picture which influence the U.S. balanceof-payments position, random events such as wars,
strikes and weather shifts, as well as “other” factors.
These other factors include: (1) changes in prefer­
ence, such as an increased preference for saving rela­
tive to consumption, or liquidity relative to goods and
services; (2 ) changes in the nature or rate of in­
crease of technological advance; (3 ) changes in the
quantity and quality of available resources, such as a
shift toward more availability of inexperienced labor
resources relative to experienced labor resources; and
(4 ) changes in the institutional and legal framework,
such as the initiation of legally authorized price and
wage controls in a peace-time economy.
Policy actions are the orthodox measures employed
by stabilization authorities to guide the course of eco­
nomic activity. Monetary and fiscal actions taken prior
to and during 1972 will have a substantial bearing on
economic developments during the current year.

Cyclical Influences
Nineteen seventy-two begins the second year of re­
covery from the moderate recession which ended in
November 1970. Much has been made of the fact that
the first year of the current recovery period was not
as strong as the first year of previous recoveries, but
insufficient attention has been given to the relation
between the moderate recession and the moderate
recovery. To the extent that forces are set in motion

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

which influence the scope of business cycles independ­
ent of policy actions or other outside forces, a strong
recovery in 1971 should not have been anticipated.1
Indeed, many observers accurately predicted a mod­
erate recovery in 1971 based, in some degree, on such
reasoning.
iW esley C. Mitchell, a pioneer in business cycle analysis,
wrote on the automatic forces influencing the up and down
phases of the cycle;
The various processes just described combine reduc­
tions in both prime costs and fixed charges with an ex­
pansion in the physical volume of business. In this fashion
depression ultimately brings about revival. For of course
these changes increase prospective profits, and in the
money economy prospective profits are the great incentive
to activity. . . .

F E B R U A R Y 1972

Nevertheless, the weakness of the recovery last year
has contributed to the view that there has been a
change in the way the economy works, that the
economic principles which held in times past no longer
apply. There is no question that the economy is con­
stantly changing and the policies used to influence
the course of its movement must be reasonably flexi­
ble. However, a simple comparison of the moderate
recovery in 1971 with vigorous first year recoveries in
the past may overstate the degree of structural
change, especially with regard to production and
employment.

In fine, this business situation is that described in the
first section of Chapter 1 — the situation out of which a
revival of activity presently develops. Having thus come
round again to its point of departure, after tracing the
processes of cumulative change by which prosperity breeds
crisis, crisis evolves into depression, and depression paves
the way for a return of prosperity, the present theory of
business cycles has reached its appointed end. [Wesley
Clair Mitchell, Business C ycles an d T heir Causes (B erke­
ley and Los Angeles: University of California Press,
1 9 5 0 ), pp. 146-47.] This volume is a reprint of Part III
of M itchell’s Business C ycles, originally published in 1913
by the University of California Press.

Table I presents changes in several important eco­
nomic variables for each business downswing, for each
recovery and for each entire recession-early recovery
period of the past two decades (see also the ac­
companying chart). The “Total Period” data reflect
both the depth of the recession and the strength of
the early portion of the ensuing recovery. On this
basis, the recent economic experience docs not appear
as strikingly different from other periods as a com­
parison of recessions alone or early recovery periods
alone would suggest.2

There is some likelihood that, other things equal, the
more severe is the downturn due to such factors as described
by Mitchell, the stronger will be the upturn. For example, if
the downturn is of sufficient scope that even very efficient
resources become unemployed, the efficient resources can be
utilized to produce a strong upturn after the crisis point is
passed. Outside forces, however, such as strikes and policy
actions, can effectively alter this relation.

2Most recessions are often termed “inventory” recessions since
much of the adjustment in total spending is reflected in the
rate of inventory accumulation. The 1969-70 recession differed
in the respect that inventories did not fall as they did in
previous recessions. Accordingly, it should not have been
expected that inventories would have increased significantly
in the early recovery, and they did not. The change in real
( price-deflated) inventories averaged $2.3 billion in the




Page 3

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

F E B R U A R Y 1972

T a b le I

Recent Recession and Early Recovery Periods
( A n n u a l Rates o f C h a n g e )
In d u stria l
Production

Real
Product

Com parison of Four Economic Indicators
Recession— Recovery

T rough s = 100

P a yro ll
Em p lo ym e nt

GNP
Deflator

R h | pr0(jl|C,

110

105

R E C E S S IO N
111/53-111/54
111/57-11/58

— 7 .6 %
— 1 4 .5

T ro u gh s = 100

— 1 .6 %

— 3 .2 %

1 .4 %

-4 .6

— 5 .0

110

3RD C TR'54
2 N D )TR 58
1ST Q TR '67
4TH C TR.70

.

2.3

li/ 6 0 -1 / 6 1

— 7 .3

— 1.9

— 2 .4

1.6

IV / 6 9 - IV / 7 0

— 6 .3

— 1.3

— 1.0

5 .7

105

1969-71

100

100

RECO VERY
111/54-111/55

1 4 .7

8.6

4 .7

1.6

11/ 5 8 -1 / 5 9

2 0 .2

8 .9

4 .5

1.9

1/61 - IV / 61

15.1

8.1

2.8

1.0

3 .4

5 .0

1.3

3.3

0 .7

A v e r a g e of 1 95 3 -5 5 , 1957 -59,
a n d 1 960-62

1.5

IV / 7 0 - IV / 7 1

1

95

1

.

Industrial

120

95

>
roduction

120

3 T A L P E R IO D
111/53-111/55

2.9

3 .4

111/5 7 -1 / 5 9

1.4

2 .0

-0 .4

2.1

II/ 6 0 - IV / 6 1

3 .3

3 .0

0.1

1.3

IV / 6 9 - IV / 7 1

— 1.6

1.8

0.1

4 .5

115
✓
/

Notes: The early recovery period is arbitrarily dated the same
length as its accompanying recession ; thus, the first and last
recovery periods (1954-55 and 1970-71) are one year in
duration and the other two are three quarters. The periods
of recession used in the article have been defined by the
National Bureau of Economic Research. Because of the
automobile workers strike in late 1970, the depth of the most
recent recession and strength of the recovery are somewhat
overstated. A 1967=100 base was used for the industrial pro­
duction calculations, except for the first recession-recovery
period, in which a 1957— 59 = 100 base was used.

1969-70 recession, compared with an average decline for the
three previous recessions of $2.9 billion. The change in real
inventories averaged $2 billion in the 1970-71 recovery, com­
pared with a $3.8 billion average for the three previous
recoveries.
Some analysts have suggested the current “low” inven­
tory/sales ratio indicates large increases in inventories in the
near future. The inventory/sales ratio is currently “low” only
in relation to the past four years. It is not far from the
average in relation to past early recovery periods. The
average of the inventory/sales ratio in the early recovery
period (through November 1971) following the 1969-70
recession was 1.56 compared with 1.54, 1.56 and 1.50 for
the recoveries immediately following the recessions of 1960-61,
1957-58 and 1953-54, respectively.

Page 4


115

✓

/

✓

110

*

A v e r a g e of 195*3-55, 1 95 7 -5 9 , /
a n d 19< 0-6 2

^
\

105

110

✓

X

\
\

/

\
N

X

\
V

1

95

\

/

\

/

1

1

/

105

/

\
*** ^ j

100

Production and Em ploym ent - Industrial production
rose about 20 percent in the first year following the
1957-58 recession, compared with a 3.4 percent in­
crease in the year following the 1969-70 recession.
H o w ev er, in d u stria l production fell at a 14.5 percent
annual rate during the 1957-58 recession, compared
with a 6.3 percent decline in the 1969-70 recession.
Table I indicates that there has been a strong relation
between the severity of a recession and the strength
of the immediate recovery. In general, the most severe
recession of the four compared was that which oc­
curred in 1957-58, and the strongest immediate re­
covery followed the 1957-58 recession. The mildest
recession was the most recent one (1969-70), and the
mildest recovery was in the 1970-71 period.

✓

1969-71

100

1

1

1

95

P a yro ll Employm ent

105
^

100

105

1 95 3-55, 195 7 -5 9 ,
an d 1 9 6 0 -6 2 *4
^ ^ ^
___________

^

^

___

100

1969-71

.

l

95

95

GNP P rice Deflator

105

105

100

100
A v e r a g e of 1 95 3-55, 1 95 7 -5 9 ,
a n d 1 960-62

95

95

90
-

----------------------------4

-

3

-

2

-

1

0

1

2

3

90
4

QUARTERS TO A N D FR O M TROUG H
Note: A 1967=100 b a s e w a s u se d for the in d u stria l production
calcu latio ns, except for the first re c e ssio n -re c o v e ry period ,
in w hich a 1 9 5 7 -5 9 = 1 0 0 b a s e w a s use d .
Sources: U.S. D e p a rtm e n t of Labor, B o a rd of G o v e r n o r s of the
F e d e ra l R e se rv e System , a n d U.S. D e p a rtm e nt of C o m m erce
Latest d a ta plotted: 4th qu a rte r 1971

F E B R U A R Y 1972

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

Growth in real product or industrial production has
not been as strong in the 1969-71 recession-recovery
period as in earlier comparable periods, but differ­
ences (particularly with the 1957-59 period) are not
as great as one might expect. Although industrial pro­
duction has not yet reached its 1969 peak, real product
gains over the latest recession-recovery period are only
slightly less than in the earlier comparable periods.
Payroll employment changes over the several pe­
riods are quite comparable. Payroll employment rose
at a 0.1 percent annual rate in the 1969-71 period,
compared with a 0.1 percent rate rise in the 1960-61
period, a 0.7 percent rate rise in the 1953-55 period,
and a 0.4 percent rate decline in the 1957-59 period.
Prices —One of the most substantial differences
among the indicators and periods given in Table I
is the movement of prices in the most recent period.
The implicit GNP deflator rose in the 1969-71 period
at a 4.5 percent annual rate, more than twice as
rapid as in any earlier comparable recession-recovery
period. On its face, such a difference would appear
to reflect substantial structural changes in the economy.
An alternative, or supplementary, explanation for
the difficulty in restraining price advances in the most
recent recession-recovery period is framed in terms of
price anticipations. The longer that prices are per­
mitted to rise unchecked, the more expectations of
rising prices are incorporated into current prices
through higher wages, rents, and other contractural
obligations. Anticipations of higher prices built up
over a period of years can effectively impede the
efforts of stabilization authorities to halt inflation with­
out any significant changes in economic structure (for
example, more monopoly power on the part of unions
or businesses) having occurred.
Prices rose for 35 quarters from the trough of the
1961 recession to the peak of the recovery ending in
1969. The next longest period from trough to peak
(in the past two decades) in which prices were per­
mitted to rise was the 15 quarter period preceding
the 1953-54 recession. Given the length of the period
over which prices rose and the fact that price in­
creases accelerated in each succeeding year after 1962
(especially in the latter half of the 1960s), it should
not have been surprising that the moderate stabiliza­
tion measures adopted in 1969 to stem inflation were
not immediately successful in reversing the trend.3
:!The model of the Federal Reserve Bank of St. Louis, pub­
lished in the April 1970 issue of this R eview , indicated at
that time that following a course of 6 percent money growth
( and high-employment expenditures as estimated by this
B an k) from the fourth quarter of 1969 to the fourth quarter




Structural Influences
There are sufficient differences in the economic
indicators over the recession-recovery periods to sug­
gest that cyclical influences alone cannot explain the
variations. The structural changes which have oc­
curred over the years have affected, in particular, the
short-run unemployment-prices relation.
The unemployment rate rise from 3.6 percent at the
beginning of the recession to 6 percent at the end of
the early recovery over the latest recession-recovery
period is the most severe of the past four such periods,
despite the fact that payroll employment increased
more rapidly in the most recent period than in 1957-59,
as rapidly as in 1960-61, and only slightly less rapidly
than in 1953-55.4 Part of the explanation for this ap­
parent paradox is that (1) the labor force has been
increasing more rapidly in the past recession-recovery
period than in most earlier ones, and (2) the compo­
sition of the labor force has been shifting such that
proportionately more of the labor force is composed
of individuals with a historically high average rate of
unemployment. Women and teen-agers, for example,
comprise relatively more of the labor force than in
earlier recession-recovery periods.
The change in the composition of the labor force
over the past decade represents a structural shift in
the economy. It is a shift which has worsened the
tenuous, short-term relation between unemployment
and prices through the aggravation of unemployment.
of 1971 would find prices still rising at a rapid rate at the
end of 1971.
By late 1971, total spending would be increasing
at an eight percent rate with such monetary actions
[6 percent annual rate of increase of money]. The
rate of price increase would fall somewhat, however,
because of past restrictive monetary actions. But the
gain in price performance would be small, because
by late 1971 prices would still be increasing at a four
percent rate [Leonall C. Andersen and Keith M. Carl­
son, “A Monetarist Model for Economic Stabilization,”
this R ev iew (April 1 9 7 0 ), p. 20],
A simulation of the model over the IV /1969-II/1971 period
( before price and wage controls) with actual money and
high-employment expenditures and coefficients estimated
through IV / 1969, projected a 4.9 percent six-quarter average
price increase, compared with an actual average of 5.4 per­
cent. See Keith M. Carlson, “Projecting W ith the St. Louis
Model: A Progress Report,” this issue of the R eview , pp.
20-27, for other comments on the model’s predictive
performance.
4T he rise in the unemployment rate from 3.6 percent in
IV /1969 to 6 percent in IV /1971 reflects the persistence of
relatively high levels of unemployment during the recent re­
covery. LTnemployment rose from 2.7 percent of the labor
force in III/ 1953 to 4.1 percent in III/ 1955, an increase of
1.4 percentage points. Unemployment increased 1.6 percent­
age points from 4.2 percent to 5.8 percent in the 1957-59
period and one percentage point from 5.2 to 6.2 percent in
the 1960-61 recession-recovery period.

Page 5

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

Unem ploym ent Rate

Percent
8

1950

F E B R U A R Y 1972

Percent

8

1951

1952

1953 1954 1955

1956

1957 1958

1959 1960

1961

1962

1963 1964

Sh o o e d a re a s reoresent p e rio d s of business recessions a s d efine d b y the N a t io n a l Bureau of Economic Research.
* D a ta re vise d from J a n u a ry 1970
Latest d a ta plotted: J a n u a ry

Another structural change which may have affected
unemployment is the fact that U.S. exports relative
to imports have been slowing in recent years. Net
U.S. exports slowed each year (except 1970) from
$8.5 billion in 1964 to $0.7 billion in 1971. Employ­
ment and output in a number of U.S. industries are
probably less than they would be otherwise if it were
not for the deterioration of the U.S. competitive posi­
tion over the past several years. Over a long period,
U.S. resources may shift from industries with declining
export demand to other industries, but during the
period of adjustment/ employment is probably af­
fected adversely.
Quite likely, structural changes have also hampered
efforts to slow price increases. The shifting composition
of final output from the production of goods to the
production of services has probably tended to rein­
force price pressures. Because of the nature of many
services rendered, such as those of barbers, lawyers,
and government workers, productivity gains are dif­
ficult to achieve (or measure). The production of
goods such as automobiles or appliances can be more
easily enhanced by technological advances and/or
mass assemblage techniques. Lower productivity, other
things equal, results in lower potential output, a more
severe total supply constraint relative to total de­
mand, and consequently, higher prices.5
The minimum wage, which puts a floor under wage
rates, and also tends to increase unemployment by
making inexperienced workers ineligible for many
jobs, has been extended to cover more workers in re­
cent years than in the 1950s. Although the minimum
wage was designed to benefit the worker, it is possible
5See Roger W. Spencer, “Population, T he Labor Force, and
Potential Output: Implications for the St. Louis Model,” this
R ev iew (February 1 9 7 1 ), pp. 15-23.


Page 6


1965

1966

1967 1968

1969

1970

1971

1972

1973 1974

1975

Source: U.S. D e partm ent of L a o o r

that it has affected adversely both unemployment and
prices. This structural shift is one endorsed by law.
Because structural changes probably have accounted
for some worsening of the prices-unemployment rela­
tion, structural measures could play a strong role in
improving the relation. Job training, information and
relocation subsidies, and the elimination of legal and
institutional barriers to jobs (such as the minimum
wage) could bolster orthodox monetary and fiscal
stabilization techniques to achieve the goals of a low
rate of unemployment and price stability.

Stabilization Policy Actions
The impact of monetary and fiscal policy actions
economic activity is, like cyclical and structural
influences, not easy to identify or measure. A rough
approximation of aggregate monetary and fiscal policy
actions prior to and during recent recession-recovery
periods is given in Table II. Such actions normally
influence economic activity with some lag, and a
period of three quarters before each peak was arbi­
trarily selected as the point from which actions affect­
ing activity over the course of the recession-early
recovery periods should be dated.8 Money, defined to
include demand deposits and currency in the hands
of the public, is used to represent monetary policy
actions and high-employment expenditures is selected
as the fiscal policy variable. Both are deflated by the
implicit price deflator to account for varying price
trends over the past twenty years.7
on

°See Andersen and Carlson, “A Monetarist Model,” for some
evidence on the relevant length of policy action lags.
'Another method of adjusting stabilization policy actions for
changes in trend over a long period is given in Leonall C.
Andersen, “A Monetarist View of Demand M anagement: The
United States Experience,” this R ev iew (Septem ber 1 9 7 1 ),
p. 9. Andersen adjusts the money supply by comparing its
growth relative to various trends over the 1952-71 period.

F E B R U A R Y 1972

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

T able II

Monetary and Fiscal Trends Prior to
and During Recent Recession-Recovery Periods
(A n n u a l Rates o f C h a n g e )
M oney/
Prices

Period
I V / 1 9 5 2 -111/1955

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

1 .0 8 %

E x p e n d itu re s/
Prices
— 3 .7 %

IV / 1 9 5 6 - 1 / 1 9 5 9

......................... — 0 .8 1

6 .4

III/ 1 9 5 9 - IV / 1 9 6 1

......................... — 0 .9 5

4 .3

1/19 6 9 - IV / 1 971

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

2.3

0.21

Rapid growth of the money stock, relative to prices,
is presumed to have a short-run stimulative effect on
the economy, as is rapid growth of high-employment
expenditures relative to prices. For example, there
would probably be general agreement that monetary
actions were stimulative in the IV/1967-1V/1968 pe­
riod when money/prices rose 3.2 percent and restrictive
in the IV/1968-1V/1969 period when money/prices
declined 1.3 percent.8
Table II suggests that monetary actions were rela­
tively stimulative in the 1952-55 period, but fiscal ac­
tions were not (unwinding of the Korean War). Fiscal
actions were relatively stimulative in the 1956-59 and
1959-61 periods (compared to the 1952-55 and 196971 periods), but monetary actions were not. Neither
monetary nor fiscal actions were overly expansive in
the 1969-71 period.
By these crude indexes, the slightly stimulative
monetary actions in 1969-71 relative to 1956-59 or
1959-61, would tend to exert more inflationary pres­
sure than in the two earlier periods, and also tend to
maintain the unemployment rate at a relatively lower
level than in the two earlier periods. This most recent
monetary trend may represent a partial explanation
for the lack of success in slowing price rises in recent
years relative to the two earlier periods, and for the
success attained in holding the aggregate unemploy­
ment rate lower than in the two earlier periods (the
unemployment rate reached a peak of 6 percent in
the latest recession-recovery period, compared with
7.4 percent and 7 percent for the 1957-59 and 1960-61
periods, respectively).
Two other factors — the shifts in composition of the
labor force mentioned above and the sizable defense
cutbacks in recent years (reflected in the 2.3 percent
figure for expenditures/prices in the table) —have
contributed to the high unemployment rates for in­
8It should be noted that monetary and fiscal authorities can­
not control money/prices and expenditures/prices over any
brief period; they may, however, control money and
expenditures.




experienced workers across the country and defenseoriented workers in particular geographic areas of the
United States.9

The Economic Outlook
The current economic outlook is based on recent
and projected cyclical, structural and policy influ­
ences. These factors affect economic activity in 1972
and beyond.

Current Cyclical and Structural
Considerations
The U.S. economy begins the year 1972 at a
position on the business cycle not substantially dif­
ferent from that a year ago in terms of actual “mo­
mentum” relative to potential. Although real product
rose at a 6.1 percent rate from the third to the fourth
quarter of 1971, after increasing at a 3 percent rate
from the first to the third quarter, output advances
have not been sufficient to reduce unemployment.
The rate of utilization of both labor and capital re­
sources has changed little in the past year. Actual
output is approximately 93 percent of potential out­
put, about the same as a year ago. Thus the “mo­
mentum” of the economy moving into 1972 gives little
reason by itself to alter economic projections from the
actual developments of 1971.
°“The total employment attributable to military expenditures,
including military forces and government civilian personnel,
dropped from a peak of 7.8 million in 1968 to about 6.1
million in 1971, a loss of 1.7 million jobs over the three-year
period, with more than 900,000 of these lost during 1970-71.”
Richard P. Oliver, “Employment Effects of Reduced Defensed Spending,” M onthly L a b o r R ev iew (D ecem ber 1 9 7 1 ),
p. 4.

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

F E B R U A R Y 1972

Most structural changes occur slowly over time, but
there are some important developments changing the
1972 outlook from that of 1971. Little is currently
known as to whether preferences for liquidity and
saving relative to the purchase of goods and services
have changed much from last year, but it is unlikely
that the long-term trend of preference toward services
from goods will be much altered. Moreover, there is
little basis on which to project changes in economic
activity in 1972 over 1971 because of differing re­
source trends, weather changes, war developments,
technological advancements, or strike patterns.
There are at least two structural changes which
will likely exert some influence on the economy in
1972. First, the anticipated improvement in demand
for U.S. exports relative to imports should have an
expansionary effect on total spending, output, and
employment.10 Second, price and wage controls should
contribute to a slowing in the rate of increase of
prices in 1972, given moderate stabilization actions.
Price increases leveled off in 1970 and 1971, and
may have been decelerating slightly when the Presi­
dent called for a wage-price freeze last August 15.
Since the imposition of the freeze and the second
phase of the Administration’s program, measured
prices have slowed. Wholesale prices of industrial
commodities increased at a 0.5 percent rate from
August to December, after rising at a 4.6 percent rate
in the preceding eight months. Consumer price in­
creases slowed to a 2.5 percent rate from August to
D ecem b er, co m p ared w ith a 3 .8 p e rce n t ra te from
D ece m b er 1970 to A ugust.

Problems of administration and equity will likely
intensify the longer the program remains in existence,
but in the latter months of 1971, at least, wage and
price controls seemed to have had the desired effect.
The potential for eventual success of the program is
enhanced by: (1) the fact that the controls have not
been accompanied by excessive monetary stimulus;
(2) the fact that there is currently substantial eco­
nomic slack; (3 ) the possibility that controls may
have helped stem anticipations of higher prices; and
10“The expected employment gains for the United States will
probably be spread over about two years, too, according to
Peter G. Peterson, the W hite House International Economic
Policy Chief. E ach $1 billion of payments turnabout will
create 60,000 to 80,000 jobs, he estimates. Thus, attaining
the Connally goal of a $9 billion swing for the better could
mean more than 700,000 additional jobs by late 1973; that
in itself would be enough to lower the unemployment rate
to about 5.2 percent from November’s 6 percent,” Richard
F. Janssen, “The New Dollar: Devaluation of 8.57 Percent
Likely to Create Jobs, Help Nixon Summitry,” T h e W all
Street Journ al, Decem ber 20, 1971, p. 25. These exportrelated employment gains anticipated by the administration
seem overly optimistic.


Page 8


(4) the fact that the wage negotiation calendar for
1972 is relatively light.

Recent Monetary and Fiscal Policy Actions
The course of economic activity in 1972 depends,
in part, on both monetary and fiscal policy actions.
There is a carry-over effect from actions taken last
year, and there will be some effect from actions taken
during 1972.
Monetary Actions —The rate of growth of the
money stock fluctuated more widely in 1971 than
usual. After rising 5.4 percent from December 1969
to December 1970, the money stock accelerated to a
10.3 percent annual rate of growth in the first seven
months of 1971, and then slowed markedly to very
little growth during the last five months of the year
and into January 1972.
These violent swings in money movements were
accompanied by roughly similar changes in interest
rates. The three-month Treasury bill rate, for exam­
ple, rose from a low of 3.3 percent in March 1971 to a
peak of 5.5 percent in July, and then fell to a little
over 3 percent in January 1972. Falling interest rates
in the latter half of 1971 have been viewed by many
analysts as a spur to economic activity in 1972, and
indeed a lower cost of capital is often one of the ways
by which monetary changes influence spending.

F E D E R A L R E S E R V E B A N K OF ST. LO U I S

F E B R U A R Y 1972

Fiscal M easures

M o n e y Stock

(+)Surplus; (-)Deficit
Q u arterly Totals at A n n u a l Rates
Se ason ally Adjusted

Billions of Dollo

ions of Dollar!

H ig h - E m p lo y m e n t

P erc e nta ge s o re a n n u a l rates of chan ge for p e rio d s indicated.
Latest d a ta plotted: January estimated

However, because there are channels other than
interest rates through which monetary growth affects
economic activity, the recent slower growth in the
money stock may have a restrictive effect on spending
(assuming a relatively stable demand for money).
When the money stock expands rapidly relative to de­
mand, its value falls, and people exchange money for
goods and services at a rapid rate. Conversely, when
growth of the money stock slows, relative to demand,
its higher value makes people more reluctant to ex­
change their cash for goods and services. Persistent
and pronounced swings in monetary growth rates
have consistently led similar swings in spending.
Thus, the slower monetary expansion during late
1971 may retard economic activity during the first
part of 1972 from what it would otherwise have been.
Activity later in the year will be influenced by mone­
tary expansion during the early part of 1972.
F iscal Actions — Federal expenditures affect eco­
nomic activity in two ways. First, Federal Govern­
ment outlays, whether financed by taxes or borrowed
from the public, have an important short-run stimula­
tive effect on total spending. Over longer periods of
time, such expenditures tend to displace private pur­
chases of goods and services. Second, increased Fed­
eral Government expenditures, financed in part by
borrowing, often induce expansion in the money stock,
as the Federal Reserve “monetizes” a part of the debt
increase. Tax reductions also tend to expand the size
of the deficit. The larger the deficit, the more likely
is the Federal Reserve to increase its purchases of
Treasury securities, which in turn, increases the
money stock.



1964

1965

1966

1967

1968

1969

1970

1971

1972

Sources: U.S. Department of Commerce, Council of Economic Advisers, and Federal Reserve Bank of St. Louis
Note: 1972 figures estimated by Federal Reserve Bonk of St. Louis
and based on Federal budget for fiscal 1973.
Latest d ata plotted: HEB-ith quarter preliminary;
NIAB-4th quarter estimated

The Federal budget deficit in fiscal year 1971 (on a
unified budget basis) was $23 billion, the second
largest deficit recorded since World War II. The
budget deficit for fiscal year 1972, estimated at $11.6
billion in early 1971, has been revised upward to
$38.8 billion. Reasons for the revision include an over­
estimate of the strength of the economy in calendar
year 1971, and the Administration’s new fiscal pro­
posals of last August and this January. Congress has
already acted favorably on a number of the Adminis­
tration’s proposals of August 1971.
The high-employment budget, which assumes
budget expenditures and tax revenues at a constant
4 percent level of unemployment, is expected to shift
markedly from a $4.2 billion surplus (as estimated by
this Bank) in fiscal 1971 to a $10.5 billion deficit in
fiscal 1972. The fiscal 1973 high-employment budget
is expected to run a $10.9 billion deficit. Thus the
budget, by such actions as the 7 percent tax invest­
ment credit, the increased personal income tax exemp­
tions and accelerated expenditures, should have a
stimulative effect on economic activity this calendar
year.

1972 Projections
Stimulative fiscal actions provide much of the basis
for the very optimistic 1972 forecasts which have ap­
peared regularly in the media the past few months.
Page 9

F E B R U A R Y 1972

F E D E R A L R E S E R V E B A N K OF ST. LO U I S

A large majority of economic forecasters have pre­
dicted a strong surge in spending this year. Such
unanimity is difficult to understand in view of the
additional uncertainties with which the analysts are
faced in 1972. The chief unknown influences on spend­
ing are usually monetary and fiscal actions, but this
year the analysts must also project the expected im­
pact of the possible removal of some trade barriers,
the dollar devaluation, and foreign exchange rate ad­
justments, as well as the effects of price-wage controls,
their duration, and the successive phases, if any, of
controls. Uncertainty often breeds divergence, but this
year the product of uncertainty is conformity.
The standard projections of economic activity in
1972 include: (1 ) approximately a $100 billion rise
in total spending compared to a $73 billion increase
in 1971; (2 ) an increase in real product growth from
2.7 percent in 1971 to about 6 percent; (3 ) a decline
in the rate of price increase from 4.7 percent in 1971
to a little over 3 percent; and (4 ) a steady fall in
the unemployment rate from 6 percent to a little over
5 percent by year end.
Most forecasters believe these ebullient figures will
be achieved by way of the following standard route:
the consumer, bolstered by the progress of the wageprice control program and higher tax exemptions,
starts spending more (and saving less); the increased
expenditures reduce sellers’ inventories, which must
then be replenished; a greater sales volume leads to
higher profits which, together with the tax investment
credit, induce capital expenditures; exports accelerate
in response to increased demand from abroad, thereby
creating many more jobs; residential construction and
state and local spending pick up moderately, while
Federal Government purchases of goods and services
accelerate.
MIT-PENN-SSRC M odel — Typical of the models
which generate such projections for 1972 is the MITPENN-SSRC (MPS) econometric model. It is a large
model of the economy with many behavioral relation­
ships and most of the latest features in model build­
ing, such as a well-developed financial sector. In
addition, the model can give detailed projections of
each economic sector in response to any of a large
number of simulated policy actions. It, like most large
models, incorporates cyclical forces, some structural
changes, and possible policy alternatives.
Unlike the small St. Louis Bank model, the larger,
more detailed MPS model: (1) contains both money
demand and supply functions; (2) can account to
some extent for the expected improvement in U.S.
net exports; (3) can simulate changes in activity

Page 10


T a b le III

M odel Projections of Economic Activity in 1972
Under Specific Assumptions*
MPS
Model
1971
A ctu a l

St. Louis
Model

1972
Projected

1972
Projected

Rates of c h a n g e in:
N o m in a l G N P ....................

7 .5 %

9 .4 %

7 .5 %

Real G N P .........................

2 .7

5 .8

3.5

Price D e f l a t o r ....................
U n e m p lo ym e n t Rate .

.

.

.

4 .7

3.3

3.9

5 9

5. 9

6. 2

* Among the many assumptions in the MPS model are a 6 percent
rate of growth in the money stock, price and wage controls effec­
tive through III/1972 and rising prices of U .S. imports relative to
exports. The St. Louis model assumes a 6 percent rate of growth
in the money stock and high-employment expenditures as estimated
by this Bank through IV/1972. Coefficients are estimated through
11/1971 for the MPS model and through III/1971 for the St. Louis
model.

under varying assumptions of both price and wage
constraints; (4) has relatively long lags in the
effect of changes in the money supply on economic
activity and short lags in the effect of fiscal actions
on economic activity; (5) projects estimates of total
spending indirectly by the addition of GNP compon­
ents rather than directly.
Table III indicates that the MPS model, under
the assumptions that the money stock will grow at a
6 percent rate, that price and wage controls will be
effective through III/1972, and that import prices will
rise relative to the prices of U.S. exports, projects
changes in total spending, real output, and prices in
1972 similar to those of the “standard” forecast.11 The
unemployment rate projection is high relative to the
standard.
St. Louis M odel — Table III gives the projections
of the St. Louis model for total spending, real output,
prices, and the unemployment rate using the 6 percent
money growth assumption employed with the MPS
model. In this model, monetary and fiscal actions
affect prices and real output (and, in turn, employ­
ment) by influencing the course of total spending.
Monetary actions are the dominant source of changes
in total spending. Whether the spending is channeled
into real output changes or price changes depends on
the degree of slack (actual output relative to poten­
tial) in the economy and the intensity of price antici­
pations. The model can account for cyclical forces,
but offers a more limited selection of policy alterna­
tives than the large models. Some provision for struc­
tural change is found in the potential output variable.
11Six percent money supply growth was arbitrarily selected
as the monetary assumption. Other assumptions are similarly
arbitrary.

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

The St. Louis model projects considerably smaller
economic advances in 1972 over the year 1971 than
either the standard or the MPS forecast (based on a
6 percent money growth assumption). Total spending,
according to the St. Louis model, will rise 7.5 percent,
the same as in 1971, real output will increase 3.5
percent, somewhat more than in 1971, prices will rise
3.9 percent, somewhat less than in 1971, and the
unemployment rate will be little changed from this
past year.
There are three basic reasons why this set of St.
Louis projections differs so much from the standard.
First, the model has incorporated the sharply lower
growth of the money stock in late 1971, the effect of
which does not appear in the MPS or most other
models for a long period. Second, no provision is
made for the actions of the Price Commission and
Pay Board. Third, the model does not account for the
expected increase in foreign demand for U.S. goods.
Because price and wage controls will likely keep
price advances in 1972 below what they otherwise
would be, and because increased demand for exports
will probably stimulate spending, output and employ­
ment, the St. Louis projections for prices and un­
employment should be adjusted downward, and the
projections for total spending and real output up­
ward, given a 6 percent rate of increase in the money
stock. These projections should not be adjusted to the
optimistic levels of the standard forecast, however,
since the standard forecast is not appropriately “ad­
justed” for the influence of the recent slowdown in
the growth rate of money.

Looking Past 1972
To this point, only a limited set of figures for a
few economic variables for a single year, 1972, have
been discussed. To focus on such a narrow field is
to miss much of the importance of current and future
domestic economic developments. At least one issue —
price and wage controls —merits further consideration.
The adoption of price and wage controls by the U.S.
Government in a period of peace time is a move
which has strong long-term implications for our basi­
cally free market economy. Although there have been
some brief periods of success with controls in this
country as well as in a number of foreign countries,
instances in which inflation was effectively curbed
over sustained periods are rare indeed. Price and
wage freezes have typically been followed by controls
inequitably applied and ineffectively administered.
The initial euphoria over the fact that someone is
doing something to stop inflation has often given way



F E B R U A R Y 1972

to dissatisfaction on the part of those whose incomes
do not rise as fast as others and to cheating by those
who cannot buy or sell goods at the administered
prices. Once the controls are removed, past experience
indicates prices may rise back to about where they
would have been in the absence of controls.12
The MPS model, using the assumed 6 percent rate
of monetary growth, indicates that prices would rise
about as rapidly in 1973 as in 1972 if controls were
removed toward the end of this year. This model also
indicates that without any controls, but with moderate
monetary growth, there would be less inflation in 1973
than in 1972, a result also given by the St. Louis
model.

Summary
Nineteen seventy-one was a year of moderate re­
covery following the moderate recession in 1970. Com­
parisons with previous recession-early recovery years
indicate that economic expansion in the 1970-71 pe­
riod was slightly weaker than in earlier comparable
periods. A major difference is that prices rose at a
much faster rate during the recent period than in the
earlier ones. Some structural changes in the economy
have undoubtedly occurred over the years, but they
have probably played a minor role in influencing
recent activity relative to normal cyclical adjustments
and policy changes. Excessively stimulative monetary
and fiscal policies over the extended 1965-68 period,
for example, undoubtedly made the recent inflationary
situation much more difficult to control than earlier
ones.
Most projections of economic activity in 1972 are
quite optimistic relative to the actual experience of
1971. What makes 1972 that much different from
1971? The differences may be explored by examining
cyclical influences, structural changes, and policy
actions.
The economy begins 1972 at only a slightly different
position on the business cycle than a year ago in
terms of actual “momentum” relative to potential. The
'-L loyd Ulman and Robert Flanagan recently completed a
study of incomes policies in other countries. “However, as
indicated at the outset, periods of apparent effectiveness
[of price-wage controls] were typically short-lived; they
were frequently followed by wage or price explosions which
sometimes blew up the policies themselves. Thus the policy
at best seems to have been gaited for a short sprint rather
than a long race, which suggests that it was better suited
to deal with short-run emergencies like balance-of-payments
disequilibria than with persistent inflationary forces.” See
Lloyd Ulman and Robert J. Flanagan, W a g e R estraint: A
Study o f In co m e P olicies in W estern E u ro p e (Berkeley and
Los Angeles: University of California Press, 1971) p. 223.

Page 11

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

rate of utilization of both labor and capital resources
is little changed from this time last year. Actual output
relative to potential output is approximately the same
as a year ago. Some structural aspects of the economy
such as the composition of the labor force and the
ratio of goods to services will be little different than
in 1971. Productivity may rise at a more rapid rate
in 1972 than 1971, but short-run changes in productiv­
ity are more a result of cyclical changes than a cause.
There are at least two institutional changes which
will likely exert a strong influence on the economy in
1972. First, the anticipated improvement in demand
for U.S. exports relative to imports due to exchange
rate and tariff changes should have an expansionary
effect on total spending, output and employment.
Second, price and wage controls should contribute to
a slowing in the rate of increase of prices in 1972. If
the controls are effective over the short period of a
year, many analysts believe this will have a positive
influence on consumer confidence and lead to spend­
ing gains. The effect of controls on profits, work stop­
pages and price-wage escalator contracts is unclear.


http://fraser.stlouisfed.org/
Page 12
Federal Reserve Bank of St. Louis

F E B R U A R Y 1972

A major difference between 1971 and 1972 is that
fiscal policy actions will likely be much more stimula­
tive. To the extent that the large, projected 1972
deficit is “monetized” by the Federal Reserve System,
monetary policy may also be quite stimulative. Most
economic analysts and models have not, however, ac­
counted for the recent slowing in the rate of growth
of the money stock. Correction for this factor suggests
somewhat lower projections than the norm for spend­
ing, output, and employment in 1972.
Focusing on economic developments in 1972 runs
the risk of overlooking the important long-range im­
plications of recent policy actions. The record of pricewage controls and sharp fluctuations in the money
stock over a number of years gives little reason for
continuation of such actions over an extended period.
In developing stabilization policies, it should be recog­
nized that an economy the magnitude of ours cannot
be steered in any direction instantaneously, and that
effective policies should look to the long-run effects,
rather than to the short cures which often lead to
long-run instability.

Operations of the Federal Reserve Bank
of St. Louis — 1971

X HE ST. LOUIS Federal Reserve
Bank and its branches provide numer­
ous services to member banks, the
United States Government, and the
public. These service operations include
collecting checks, maintaining member
bank reserve accounts, transferring
funds, distributing coin and currency,
and acting as fiscal agent for the Fed­
eral Government. The Bank also extends
credit to its member banks, exercises
supervision over certain commercial
banks, engages in research directed to­
ward the formulation of monetary policy,
and performs educational functions in
regard to both monetary actions and
Federal Reserve operations. In addition,
it participates in Federal Open Market
Committee deliberations, which are dis­
cussed in other issues of the R eview .1

T ab le 1

V O L U M E O F O P E R A T IO N S 1
D o lla r A m o u n t
( m illio n s)
1971

1970

Percent
Change

.

.

$ 1 5 5 , 8 0 3 .1

$ 1 3 8 ,9 4 5 .2

.

.

2 6 8 .9

4 3 4 .3

C o in c o u n t e d ...................................

.

.

8 6 .0

7 9 .6

C urren cy

c o u n t e d ..............................

.

.

1 ,8 6 6 .8

1 ,8 1 6 .2

2.8

T ran sfers of f u n d s ..............................

.

.

3 4 9 ,2 4 9 .4

2 8 7 ,4 6 7 .7

2 1 .5

B o n d s 3 .........................

.

.

5 8 5 .0

5 7 9 .4

1.0

.

.

2 3 ,6 2 9 .2

2 1 ,7 0 6 .2

8.9

22 9 .4

2 0 2.1

1 3 .5

C he cks

collected2

N on cash

collection

U.S. S a v in g s
O th e r

G o ve rn m e n t

..............................
items

.

securities3

.

.

.

.

U.S. G o ve rn m e n t c o u p o n s p a id .

Num ber
(th o u s a n d s )
1971

1970

1 2 .1 %
-3 8 .1
8 .0

Percent
Change

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

.

.

4 8 0 ,9 4 6

3 9 7 ,5 0 4

N o n c a s h collection i t e m s ....................

.

.

804

855

c o u n t e d ...................................

.

.

7 2 5 ,8 8 5

7 1 5 ,5 0 5

1.5

c o u n t e d ..............................

.

.

2 4 8 ,8 0 6

2 4 0 ,4 5 2

3.5

T ran sfers of f u n d s ..............................

.

.

356

317

1 2 .3

C he cks
C o in

collected2

C urren cy

2 1 .0 %
-

6 .0

This report on the operations of the
— 2.0
. .
1 0 ,7 2 4
1 0 ,9 4 3
U.S. S a v in g s B o n d s 3 .........................
— 4 0 .6
O th e r G o ve rn m e n t securities3 .
. .
581
978
Federal Reserve Bank of St. Louis in­
1.2
804
814
U.S. G o ve rn m e n t c o u p o n s p a id .
cludes the operations of its head office
in St. Louis and its branches in Little
1Total for St. Louis office and the Little Rock, Louisville, and Memphis branches
2Excludes Government checks and money orders
Rock, Louisville, and Memphis. The
3Issued, exchanged, and redeemed
Federal Reserve Bank of St. Louis is
one of twelve Federal Reserve Banks which, with
Checks drawn on commercial banks are the means
of settling the major portion of all nonbank financial
their branches and the Board of Governors, form the
Federal Reserve System. The St. Louis Bank operates
transactions. Payment by check offers many advan­
tages over payment by cash, including less risk from
in the Eighth Federal Reserve District, which includes
theft, fire, and other disasters; greater convenience
all of Arkansas and portions of Illinois, Indiana, Ken­
in making large transactions; greater opportunity to
tucky, Mississippi, Missouri, and Tennessee.
make large unscheduled transactions; and provision
of a record of disbursements. The use of checks by
Check Collection and Clearance
individuals and businesses is facilitated by the collec­
The operation of the Federal Reserve Bank of St.
tion and clearing operations of the Federal Reserve
Louis utilizing the largest number of employees is
Banks, which provide a mechanism for settlement of
collecting and clearing checks. At the close of last
checks collected by commercial banks. Settlement is
year, 299 persons or 21 percent of the employees
accomplished by entries to the member banks’ re­
at this Bank and its branches were engaged in the
serve accounts at the Reserve Banks.
check collection operation.
The dollar volume of checks collected by the St.
'See Reprints 13, 17, 22, 28, 39, 57, and 68 for annual reviews
Louis Federal Reserve Bank and its branches rose
of monetary actions by the FOMC for the years 1964 through
from $139 billion in 1970 to $156 billion in 1971, an
1970, available on request from this Bank.



Page 13

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

increase of 12 percent. The number of checks col­
lected increased 21 percent from 398 to 481 million.
These sharp rises in number and dollar volume of
checks collected last year reflect improved economic
activity (including inflation) in the district and a
trend increase in the use of checks as a means of
payment. The greater rise in the number of checks
collected than in the dollar volume reflects the Bank’s
new program of sorting many checks received from
St. Louis area banks drawn on each other. Before
mid-1970, these checks were sorted by the Suburban
Check Exchange clearing banks and were cleared in
bundles through the Collection Department. The dol­
lar value of checks cleared was not affected by this
change, but the number increased because a pre­
sorted bundle is counted as one item, whereas checks
sorted and cleared at this Bank are counted
individually.
Technological innovations, such as the conversion
to electronic equipment, have increased the efficiency
of collecting checks over the years. In 1960, prior to
the installation of high-speed collection equipment,
the St. Louis office and its three branches collected
checks at the rate of 372 per man hour. By 1970 the
rate of such collections had increased almost three­
fold to 1,026 checks per man hour. In 1971 approxi­
mately 97 percent of all checks received at this
Bank were processed through computers.
The Federal Reserve System in June 1971 outlined
a program to streamline the structure of the U.S.
payments system by expanding zones of overnight
check clearance around Federal Reserve Banks and
branches and by opening new regional zones for
check clearance. The establishment of regional facili­
ties would accelerate check collections and increase
availability of funds. The St. Louis Bank expanded
its zones of immediate payment several decades ago
to include most suburban banks in the St. Louis area.
The zones of immediate clearing around St. Louis
and its branch cities will be further expanded as
transportation and equipment problems are resolved.2
In addition to collecting checks, the Federal Re­
serve Banks handle numerous other settlement items
such as postal money orders, food stamp coupons,
2During the first half of 1972, the Little Rock immediate
check clearing zone will be expanded to include Pulaski and
Saline Counties in Arkansas; the Louisville zone will include
Clark and Floyd Counties in Indiana and Jefferson County in
Kentucky; and the Memphis zone will include Shelby County
in Tennessee, Crittenden County in Arkansas, and DeSoto
County in Mississippi. During the first half of 1973, the St.
Louis zone will be expanded to include the City of St. Louis
and St. Louis, Franklin, Jefferson, St. Charles and Warren
Counties in Missouri, and Madison, St. Clair and Monroe
Counties in Illinois.
Digitized forPage 14
FRASER


F E B R U A R Y 1972

and noncash collections. Among the latter are collec­
tions for drafts, promissory notes, bonds, and bond
coupons.

Transfer of Funds
Wire transfer of funds is a service that the Federal
Reserve provides to member banks to promptly and
efficiently transmit funds around the country. These
transfers primarily result from transactions involving
interbank loans, check collections, and U.S. Treasury
obligations. In implementing the new program for
more rapid check clearance, the Federal Reserve in
1971 removed charges on wire transfers of $1,000 or
more made through member banks by third parties —
nonmember banks, businessmen and individuals — to
encourage immediate payment of large amounts by
wire. In addition, plans are being made to extend the
hours of the wire transfer operations when warranted
by a sufficient volume.
The St. Louis Reserve Bank processed 356 thousand
wire transfers amounting to $349 billion in 1971, an
increase of 12 percent in number and 22 percent in
dollar volume from 1970. These rapid increases in the
number and dollar volume probably reflect in part
the elimination of the above mentioned fees.

Coin and Currency Operations
The Federal Reserve Banks maintain a readily
available supply of coin and currency to provide the
amounts, kinds, and denominations demanded by the
public. The public holds about a fifth of its money in
currency, which is more universally acceptable than
checks and is more desirable in settling some trans­
actions.3 The use of currency, especially for small
transactions, is more timesaving and often a less ex­
pensive means of settlement than the use of checking
accounts. To meet the public demand for currency,
member banks order funds from their Reserve Bank,
which charges the order to their reserve accounts.
Nonmember banks generally receive their currency
supplies from member banks. Those member banks
with excess currency may deposit it in their reserve
account at the Reserve Bank. The usable coin and
currency is then redistributed, and the unfit is re­
moved from circulation to be melted down or
destroyed.
Coin and paper currency handled at the St. Louis
Bank increased in 1971 as the demand for a hand-tohand medium of exchange rose with increased eco­
nomic activity. Pieces of coin counted and sorted
3Money is defined as demand deposits of the nonbank public
plus currency outside banks.

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

totaled 726 million, up 2 percent from 1970, and their
value amounted to $86 million, up 8 percent. Pieces
of paper currency counted and sorted increased 4
percent in 1971 to 249 million, and the value rose
3 percent to $1.9 billion.

Fiscal Agency Operations
As fiscal agents for the U.S. Treasury, the Federal
Reserve Banks service the Treasury’s checking ac­
count, perform much of the work involved in the
issuance and redemption of Government securities,
and execute numerous other fiscal duties.
The Federal Reserve Banks add to the Treasury’s
checking account by periodically collecting Treasury
funds from commercial banks. These funds were
previously deposited in commercial banks by the pay­
ment of taxes and sales of Government securities.
When the Government disburses its funds, the checks
issued in payment are drawn against its account at
the Federal Reserve Banks.
When a new Government security is issued, the
Federal Reserve Banks circulate subscription forms
and receive applications for its purchase. The securi­
ties are allotted according to the Treasury’s instruc­
tions and are delivered to the purchasers. In addition,
the Reserve Banks redeem Government securities
upon maturity, make exchanges, and pay interest by
redeeming coupons.
In 1971 the four offices of this Bank issued, re­
issued, exchanged, and redeemed 11 million U.S. Sav­
ings Bonds valued at $585 million. The number de­
clined 2 percent from a year earlier, but the value rose
one percent. The number of other Government securi­
ties issued, serviced, and redeemed decreased 41
percent in 1971 to 581 thousand while the dollar
value rose 9 percent to $23.6 billion. The rapid de­
cline in the number of such Government issues
processed, particularly with respect to securities is­
sued, resulted from several factors. After interest
rates on short-term Government securities continued
to decline in early 1971, funds of small investors were
attracted to other investments, such as certificates of
deposit, with higher rates of return. In addition, the
Government no longer issued Treasury bills under
$10,000 after March 1969. Therefore, no bills of a
smaller denomination were handled after the matu­
rity dates in 1970.

Lending Activity
Member banks may borrow from Reserve Banks
over short-term periods to meet their required re­



F E B R U A R Y 1972

serves. The volume of these borrowings tends to rise
when the Federal Reserve lending rate is below
other short-term rates, such as those on Treasury
bills and prime commercial paper. Conversely, these
loans decline when the discount rate, the interest rate
charged to member banks on funds borrowed from
Reserve Banks, is above these market rates.
After being well below market rates during 1969
and most of 1970, the discount rate exceeded
market interest rates during most of the past year.
Reflecting these interest rate differentials, loans to
member banks by the Federal Reserve Bank of St.
Louis have declined sharply since 1969. Daily bor­
rowings averaged only $1.5 million in 1971, compared
with $12.7 million in 1970 and $41.8 million in 1969.
The percent of member banks borrowing from this
Bank sometime during the year decreased from 17 in
1970 to 7 in 1971.
The St. Louis Reserve Bank altered the discount
rate six times during 1971 to realign it with fluctua­
tions in market rates. The effective rate on discounts
under Sections 13 and 13a of the Federal Reserve Act
was reduced from 5.5 percent to 5.25 percent on
January 8, to 5 percent on January 29, and then to
4.75 percent on February 13. It was increased to 5
percent on July 16 and was reduced again on Novem­
ber 11 to 4.75 percent and on December 13 to 4.5
percent, the lowest rate since March 1968.
In early 1971 the Board of Governors introduced
several major changes in lending procedures to facili­
tate Federal Reserve credit services to member banks.
The new procedures were designed to simplify dis­
count window accommodation by:
1 ) using a co n tin u in g len d in g agreem en t instead of
an ap p licatio n and n ote fo r m ost borrow ings;
2 ) c o lle ctin g in te re st at th e tim e o f repaym ent
ra th e r than b y d ed u ction in ad v an ce; and
3 ) m aking chang es in th e d iscou nt rate ap p licab le
to outstand in g loans.

Supervision
Federal Reserve Banks perform a variety of super­
visory activities to foster effective operation of the
commercial banking system. A major supervisory func­
tion is the annual examination of state chartered
member banks to evaluate their assets, liabilities,
capital, liquidity, operations, and management. This
examination information is used by banking authori­
ties to correct unsatisfactory practices and conditions.
Examiners from the Federal Reserve Bank of St.
Page 15

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

Louis along with the state supervisory authorities
examine the 111 state member banks in the Eighth
Federal Reserve District.4 The staff of the Comptroller
of the Currency examines the 347 national banks
in the district, which are required by law to be mem­
bers of the Federal Reserve System. Other insured
banks are examined by the Federal Deposit Insur­
ance Corporation and state supervisory authorities
while the few noninsured banks are examined by
state examiners only. Although fewer in number than
the 1,064 nonmember banks, member banks hold about
60 percent of the total district bank deposits.
Other supervisory functions of the Federal Reserve
System include the admission of state banks to mem­
bership in the System and the approval of acquisitions
by registered bank holding companies, bank mergers,
and new branches of state member banks. During
1971, this Bank processed 6 applications to form onebank or multiple bank holding companies and 14
applications by holding companies to acquire addi­
tional subsidiaries. The passage of the “Bank Holding
Company Act Amendments of 1970” placed onebank holding companies under Federal Reserve reg­
ulation similar to that of multiple bank holding com­
panies. These amendments will continue to increase
supervisory activities. Approximately 75 of the esti­
mated 1,500 one-bank holding companies in the na­
tion have registered through this Bank.

Research
The research operations at the Federal Reserve
Bank of St. Louis are directed toward the collection
and analysis of regional, national, and international
data. These data are instrumental in the formulation
of monetary policy recommendations used by the
President of this Bank in meetings of the Federal
Open Market Committee. Information and data re­
lated to economic developments are available to the
public in the monthly R eview and other periodicals.
The Research Department’s role in reviewing pro­
posed bank holding company acquisitions and bank
mergers has gready expanded in recent years. The
passage of the “Bank Holding Company Act Amend­
ments of 1970” further increased research operations,
especially with respect to one-bank holding companies.

Bank Relations and Public Information
This activity of the St. Louis Federal Reserve Bank
is designed to maintain personal contact with all
^Number of banks as of December 31, 1971.

Page 16


F E B R U A R Y 1972

banks in the Eighth District and to assist member
banks with their operations relative to those of the
Federal Reserve. Each year this department makes
available to all district member banks the Federal
Reserve Functional Cost Accounting Program, which
provides a cost-income profile of each participating
bank’s major functions. These data enable an in­
dividual bank to make comparisons with its previous
operating statistics and with an average of banks of
similar size.
This department also distributes educational films
on banking and makes arrangements for the display
of currency exhibitions, speeches by the Bank’s staff,
and tours of the Bank.

Transfer of Counties from Eighth District
Operations of the St. Louis Federal Reserve Bank
in 1972 will be affected by the transfer of 26 member
and 92 nonmember banks, located in 24 counties in
western Missouri, from the St. Louis to the Kansas
City Federal Reserve District. The twelve Federal
Reserve Districts were originally constructed in 1914
by the Reserve Bank Organization Committee,5
which was authorized by the Federal Reserve Act
to apportion the districts “with due regard to con­
venience and customary course of business.”6 In line
with the efforts of the Federal Reserve to accelerate
check clearances, the transfer of these counties, which
are economically aligned with metropolitan Kansas
City, will shorten the distances of check and cash
delivery routes. This change, effective January 24,
1972, is the first in Federal Reserve district bounda­
ries since 1926 when two counties were transferred
from the Dallas to the Kansas City District.

Financial Statements
Although the Federal Reserve Banks generate earn­
ings, their operations are directed primarily toward
influencing monetary conditions. In 1971 the portion
5In making its districting decisions, the Organization Com­
mittee stated that it had been guided by the following six
considerations: “mercantile, industrial, and financial connec­
tions existing in each district; ability of reserve bank in each
district to meet legitimate demands on it; fair division of
capital among the districts; general geographical and trans­
portation situation of the districts; population, area, and
prevalent business activities of the district; and ability of
member banks of each district to provide the minimum
necessary capital.” See H. Parker Willis, The Federal Reserve
System: Legislation, Organization and Operation (New York:
The Ronald Press Company, 1923), p. 586.
6U.S., Congress, Senate, U.S. Reserve Bank Organization
Committee, Location of Reserve Districts in the United States,
63rd Cong., 2nd Sess., 1914, document no. 485, p. 361.

F E B R U A R Y 1972

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

of the System’s earnings allocated to the St. Louis Bank
and its branches totaled $136.9 million, a decrease of
one percent from a year earlier. This decline reflects
the lower rates received on earning assets, which
more than offset the increased holdings of such assets.
After operating costs, net additions, statutory divi­
dends to member banks, and additions to surplus, the
remaining earnings of $115.9 million were paid to
the U.S. Treasury as interest on Federal Beserve notes.
Dividends and transfers to surplus totaled $1.5 mil­
lion and $1.1 million, respectively.
Total assets of the Federal Beserve Bank of St.
Louis and its branches at the end of 1971 were $4
billion, an increase of 13 percent from a year earlier.
Most of this rise resulted from increased holdings of
Government securities, which are the principal means
of creating Beserve Bank credit. Two-thirds of the
assets were Government securities, primarily short­
term Treasury bills and notes. The remaining assets,
including the gold certificate account, the special
drawing rights certificate account, notes on other Be­
serve Banks, Federal agency obligations, cash items
in process of collection, and bank premises, totaled
$1.3 billion.
Liabilities of the St. Louis Bank and its branches
rose to $3.9 billion at the close of 1971. Federal Be­
serve notes, the principal type of currency in circula­
tion, amounted to $2.1 billion or more than half of
this Bank’s liabilities. Deposits, consisting primarily
of the reserve accounts of member banks, amounted
to $1.2 billion, and other liabilities including deferred
availability cash items and accrued dividends totaled
$0.6 billion.

T a b le III

C O M P A R A T IV E STATEMENT OF C O N D IT IO N
(D o lla r A m o u n ts in T h o u s a n d s )

A SSET S
D ecem ber
31, 1971
G o ld Certificate A c c o u n t ....................

1 971

1970

Total e a r n i n g s .........................

$ 1 3 6 ,8 5 6

$ 1 3 8 ,7 3 8

N e t e x p e n s e s .........................

2 1 ,9 1 2

1 5 ,0 0 0

1 5 ,0 0 0

4 0 ,1 4 0

3 2 ,1 0 2

O th e r C a s h .........................................

1 7 ,4 7 5

1 2 ,2 7 9

Discou nts a n d

A dvances

.

.

.

.

A c c e p t a n c e s .........................................
Federal A g e n c y O b lig a t io n s .

.

.

1 1 4 ,9 4 4

1 2 0 ,4 9 0

3 ,5 5 1

—

.

1 8 ,6 2 1

1 ,1 5 7 , 7 8 8

B i l l s ..............................................

T ra n sferred

to

1 ,4 7 4

1 ,2 1 8 ,8 1 0

1 2 6 ,1 7 5

1 0 7 ,8 2 5

T O T A L U.S. G O V E R N M E N T
S E C U R I T I E S .......................... $ 2 , 6 4 9 , 0 1 9

$ 2 ,2 7 8 ,7 9 2

TOTAL L O A N S A N D
S E C U R I T I E S .......................... $ 2 , 6 6 7 , 6 4 0

$ 2 ,2 7 9 ,1 7 2

C a sh Item s in Process o f C ollection .
B a n k Prem ises

8 5 4 ,5 3 0

( N e t ) .........................

1 2 ,1 2 5

2 6 ,6 4 4

2 8 ,4 6 8

$ 3 ,9 8 2 ,3 1 9

$ 3 ,5 1 9 ,1 3 3

O th e r A s s e t s ....................................
T O T A L A S S E T S .........................

L IA B IL IT IE S A N D

6 7 1 ,1 21

1 4 ,6 8 2

C A P IT A L A C C O U N T S

L IA B IL IT IE S
Decem ber
3 1 , 197 1
Federal Reserve N o te s

$2,1 1 8 , 9 2 6

(N e t )

D ecem ber
31, 1 9 7 0
$ 1 , 9 5 1 ,2 2 1

D ep osits:
.

1 ,0 1 5 ,1 7 8

8 8 4 ,7 6 1

G e n e ra l A ccou nt .

1 5 3 ,4 1 9

7 3 ,8 8 7

F o r e i g n .........................................

9 ,5 2 0

4 ,2 5 0

2 7 ,8 5 1

1 0 ,9 0 6

TOTAL

D E P O S I T S ....................

$ 1 ,2 0 5 ,9 6 8

$ 1 2 0 ,9 0 6

$

9 7 3 ,8 0 4

Deferred A v a ila b ilit y C a sh Items
O th e r L iab ilities a n d A ccrued D iv id e n d s

2 2 ,1 1 2

2 0 ,9 7 2

T O T A L L I A B I L I T I E S ....................

$ 3 ,9 3 1 ,9 6 7

$ 3 ,4 7 1 ,0 4 7

1 .4 %
20.1

-

5 8 4 ,9 6 1

7 5 3 .6
-

C A P IT A L A C C O U N T S
2 5 ,1 7 6

.

2 4 ,0 4 3

2 5 ,1 7 6

2.0

2 4 ,0 4 3

—
. $

5 0 ,3 5 2

4.8

1 ,4 0 6

5 2 5 ,0 5 0

4 .6

C a p ita l P a id I n ....................................

$

—

1 ,3 6 5 ,0 5 6

T O T A L C A P IT A L A C C O U N T S
$

9 5 2 ,1 5 7

—

C e r t i f i c a t e s ....................................

O th e r C a p ita l A c c o u n t s ....................

Interest on Federal
Reserve notes .

—

U.S. G o ve rn m e n t Securities:

D istrib ution o f N e t E a rn in g s:
D i v i d e n d s .........................

—

—

416

N e t e a r n in g s before p aym en ts
$1 1 8 ,4 9 5
to U.S. T re a su ry . .

380

—

Percent
Change

1 8 ,2 4 8

+

4 6 8 ,8 6 6

O lh e r D e p o s i t s ...............................

LOSS STATEMENT

( D o lla r A m o u n ts in T h o u s a n d s )

N e t a d d itio n s ( + ) or
d ed u ction s ( — ) .

$

Federal Reserve N o te s o f O th e r B a n k s

U.S. T re asu rer —

C urrent net e a rn in g s .

3 4 6 ,2 0 8

S p e cia l D ra w in g Rights
Certificate A c c o u n t .........................

M e m b e r B a n k ----Reserve A ccou nts
T ob le II

C O M P A R A T IV E PROFIT A N D

$

Decem ber
31, 1970

—
$

4 8 ,0 8 6

T O T A L L IA B IL IT IE S A N D
.

.

.

surp lu s

T o t a l ....................




1 1 5 ,8 8 7

11 8 ,2 9 8

-

2.0

1 ,1 3 4

1 ,2 0 2

-

5 .7

$ 1 1 8 ,4 9 5

$ 1 2 0 ,9 0 6

-

2 .0 %

C A P IT A L A C C O U N T S .

.

.

.

$ 3 ,9 8 2 ,3 1 9

$ 3 ,5 1 9 ,1 3 3

MEMORANDA: Contingent liabilities on acceptances purchased for
foreign correspondents increased from $8,503,000 on December 31,
1970 to $8,667,000 on December 31, 1971.

Page 17

As of February 1, 1972

Directors

Chairm an o f the Board and F ed era l R eserve Agent
F r e d e r ic M. P e i r c e , Chairman and Chief Executive Officer,
General American Life Insurance Company, St. Louis, Missouri
D eputy Chairm an of the Board
S a m C o o p e r , President,
HumKo Products, Division of Kraftco Corporation,
Memphis, Tennessee
B r a d f o r d B r e t t , President, The First National Bank of
E d w in S. J o n e s , Chairman and Chief Executive Officer,
Mexico, Mexico, Missouri
First National B a n k in St. Louis, St. Louis, Missouri
I. B r o w n , J r ., President, Arkansas Foundry Company, Little Rock, Arkansas

E dw ard

President, Arkansas Bank and Trust
Company, Hot Springs, Arkansas

F red

J. S c h n u c k , Chairman of the Board, Schnuck
Markets, Inc., Bridgeton, Missouri

J am es

M. T u h o l s ic i , President, Mead Johnson & Company, Evansville, Indiana
H a r r y M . Y o u n g , J r ., Farmer,
Herndon, Kentucky

C e c i l W . C u p p , J r .,

LITTLE ROCK BRANCH
Chairm an o f the Board
m e l , Chairman of the Board,
Southland Building Products Co., Little Rock, Arkansas
J a k e H a r t z , J r ., President, Jacob Hartz Seed Co., Inc.,
A l P o l l a r d , President, A1 Pollard & Associates, Little
Stuttgart, Arkansas
Rock, Arkansas
W. H K e l l e y President and Chief Executive Officer.
£ llis £ ShelT0N5 President, The First National Bank of
The State First National Bank of Texarkana, TexFayetteville. Fayetteville. Arkansas
R oland R . R e m

a r k a n a , A rk a n s a s
E d w a r d M. P e n i c k ,

3

President and Chief Executive
Officer, Worthen Bank & Trust Company, Little
Rock, Arkansas

W

A. S t o n e , Chairman and Chief Executive Officer,
Simmons First National Bank of Pine Bluff, Pine
Bluff, Arkansas

ayne

LOUISVILLE BRANCH

Chairm an o f the Board
President, Thomas Industries Inc.,
Louisville, Kentucky
P a u l C h a s e , President, The Bedford National Bank,
H e r b e r t J . S m i t h , President, The American National
Bedford, Indiana
Bank and Trust Company of Bowling Green, BowlH a r o l d E. J a c k s o n , President, The Scott County State
ing Green, Kentucky
Bank, Scottsburg, Indiana
W i l l i a m H. S t r o u b e , Associate Dean, College of Science
H u g h M. S h w a b , Chairman of the Boards, First Naand Technology, Western Kentucky University, Bowltional Bank of Louisville and The Kentucky Trust
ing Green, Kentucky
Company, Louisville, Kentucky
( vacan cy)
J ohn

G.

B ea m ,

MEMPHIS BRANCH
W

il l ia m

L.

Chairm an o f the Board
President, Mississippi State University,
State College, Mississippi

Gil e s ,

W ade C. B a r to n , President, First Citizens National Bank,
Tupelo, Mississippi
C. W h it n e y B rown , President, S. C. Toof & Company,
Memphis, Tennessee
J am es R. F itzh u g h , Executive Vice President, Bank of
Ripley, Ripley, Tennessee


Page 18


A l v in H uffm an, J r ., President, Huffman Brothers,

Member, Federal Advisory Council
Chairman of the Board
and Chief Executive Officer,
The Boatmen’s National Bank of St. Louis,
St. Louis, Missouri
D a vid H . M o r e y ,

In-

corporated, Blytheville, Arkansas
W ayne W . P ye a t t , President, National Bank of Commerce, Memphis, Tennessee
J . J . W h it e , President, Helena National Bank, Helena,
Arkansas

Officers
Darryl

A.

E ugene
L eo n a ll

C.

W

oodrow

C.

L.

J o rd a n ,

E arl

M.
H.

E dgar

H.

C r is t ,

R . Q u in n F o x ,
J . M . G e ig e r ,

W.

Assistant Vice President

Assistant Counsel and
Assistant Secretary of the Board

K a th r yn J . M o re,

W

il l ia m

R. M u eller,

A lexan d er P . Orr,

Assistant Vice President

Assistant Vice President

Assistant Vice President

P a u l Salzm an ,

R o b e r t W . T h o m a s,
K arl

Assistant Vice President

E.

Assistant General Auditor

Assistant Vice President

J o h n F . O t t in g , J r .,

Assistant Vice President

Assistant Vice President

V iv ia n ,

Assistant Vice President

Assistant Vice President
Assistant Chief Examiner

Assistant Vice President

K er a n ,

Assistant Vice President

C l if t o n B . L u t t r e l l ,

Chief Examiner

R ic h a r d 0 . K a l e y ,
M ic h a e l

Vice President

Assistant Vice President

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

Senior Vice President

Senior Vice President

Chief Examiner

J o h n W . D r u e l in g e r ,

e ig e l ,

Vice President
Vice President
F . G a r l a n d R u s s e l l , J r ., Vice President,
General Counsel, and Secretary of the Board
C h a r l e s E. S i l v a , Vice President
H a r o l d E. U t h o f f , Vice President

Assistant Vice President

G e o r g e W . D e n n is o n ,

W

D o n a ld W . M o r i a r t y , J r .,

Vice President*

Ca r lso n ,

C h a p in ,

H.

J o h n W . M en g es,

General Auditor

N orm an N. B o w s h er ,
K e it h

otaw a,

Vice President

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

W

Vice President

W . Gil m o r e ,

President

First Vice President
H ow ard

J o seph

J o s e p h P . G a r b a r in i ,

F r a n c is ,

Senior Vice President

A nd ersen ,

Ger a ld T . D u n n e,

R.

L eo n a r d ,

D elm er D. W

Assistant Vice President**

C h arles D. Z et t le r ,

e is z ,

Assistant Chief Examiner

LITTLE ROCK BRANCH
Jo h n

F.

B reen ,

Vice President and Manager

M i c h a e l T . M o r i a r t y , Assistant Vice President and Assistant Manager
Thom as

R.

C a lla w a y ,

Assistant Vice President

Jo h n

K.

W a rd ,

Assistant Vice President

LOUISVILLE BRANCH
D on ald L . H e n r y ,
J am es
R o bert E . Harlo w ,

E.

C on rad,

Senior Vice President and Manager

Assistant Vice President and Assistant Manager

Assistant Vice President

G e o r g e E . R e i t e r , J r .,

Assistant Vice President

MEMPHIS BRANCH
L.
P aul
R u th A . B ryant,

I.

B la ck ,

T e r r y B r it t ,

Vice President and Manager

Jr., Assistant Vice President and Assistant Manager

Assistant Vice President

A n t h o n y C. C r e m e r iu s ,

Jr., Assistant Vice President

* 0 n leave to Bundesbank, Germany.
* * 0 n leave to the U.S. Treasury Department, Washington, D.C.




Page 19

Projecting With the St. Louis Model:
A Progress Report
by KEITH M. CARLSON

T h e ST. LOUIS model was designed to project
the general time path of response of certain key
economic variables to monetary and fiscal actions.1
What can be said, in retrospect, about the success of
the model in achieving its stated objectives?
The period from fourth quarter 1969 to second
quarter 1971 is taken as the focus of discussion. Late
1969 is chosen as the starting point for the analysis
because the current version of the St. Louis model
was developed at that time. Mid-1971 is selected as
the terminal point of reference because of the adop­
tion of an incomes policy in mid-August. The model,
as designed, is not able to capture the short-run
effects of price-wage controls, nor does it allow in­
corporation of the effects of restructured international
monetary arrangements. The model is purposely kept
small to aid in the identification of the fundamental
determinants of economic trends over periods as long
as a year or more.
The St. Louis model is small in size and is not
designed for quarter-to-quarter forecasting because
many factors are known to influence short-run move­
ments in economic activity. For this reason, the
model’s performance is examined for the six-quarter
period as a whole, rather than quarter by quarter.
There are three exogenous variables in the St. Louis
model — changes in the money stock and high em­
ployment Federal expenditures, considered sum­
mary measures of monetary and fiscal actions,
and potential output, which reflects growth of the
labor force and productivity.2 In using the model for
purposes of monetary policy recommendation, alter1Leonall C. Andersen and Jerry L. Jordan, “Monetary and
Fiscal Actions: A Test of Their Relative Importance in
Economic Stabilization,” this Review (November 1968), pp.
11-24, and Leonall C. Andersen and Keith M. Carlson,
“A Monetarist Model for Economic Stabilization,” this Review
(April 1970), pp. 7-25.
2For a discussion of the role of potential output in the St.
Louis model, see Roger W. Spencer, “Population, Labor
Force, and Potential Output: Implications for the St. Louis
Model,” this Review (February 1971), pp. 15-23.

Page 20


native steady growth rates of the money stock are
assumed. This procedure does not entail forecasting
movements in the money stock over short periods.
Instead, it presents a set of simulations using alterna­
tive steady growth rates which can aid in assessing
the economic impact over several quarters of different
trend growth rates of money.

Background
The economy was in the early stage of a recession
in late 1969.3 GNP had risen 7.5 percent in 1969,
compared with 8.9 percent the previous year, and
the rate of increase from third to fourth quarter of
1969 had slowed to 3.4 percent. Real product had
declined from third to fourth quarter 1969. Despite a
slowdown of growth in nominal and real terms, prices
had continued to accelerate through 1969.
St. Louis model projections in early 1970 indicated
there was little prospect of strong economic recovery
in 1970 because of the lagged effect of monetary
restraint in 1969.4 For example, assuming 6 percent
growth in money, real output was projected to de­
cline in the first two quarters of 1970, pick up slightly
in the second half, then advance at a 3.5 to 4 percent
rate in 1971.
The outlook for prices with a 6 percent rate of
monetary growth was for a very slow decline in the
rate of inflation throughout the projection period —
from a 4.7 percent rate of increase in fourth quarter
1969, to a 4.3 percent rate in fourth quarter 1970,
and a 3.8 percent rate in late 1971. Unemployment
was projected to rise quite rapidly in 1970, then level
off in 1971 at about 5.7 percent.
The model presented a mixed picture for interest
rates. Long-term rates were projected to change
3See “Real Economic Expansion Pauses,” this Review (Febru­
ary 1970), pp. 2-7.
4See Andersen and Carlson, “A Monetarist Model,” p. 19.

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

C h a rt I

Data Used in Calculations
of Policy Assumption Error
. _
P o lic y V a r i a b l e s *
. _
A n n u a l R ates
A n n u a l R ates
of C h an g e
Money Stock
of Change
------------------------ ------------------------ ------------------------ 15

15

H i g h - E m p lo y m e n t Budc

'ixpenditures

F E B R U A R Y 1972

prepared. One simulation was based on coefficients
estimated with data for the variables of the model
through second quarter 1971, and used observed
values for money and Federal expenditures to drive
the model in the simulation period. This simulation is
referred to as the “ex post” simulation. Another simu­
lation, called “ex ante A,” used coefficients estimated
from data through fourth quarter 1969, and like the
“ex post” simulation, actual data on money and Federal
expenditures were used to drive the model. Finally,
a simulation referred to as “ex ante B ” was run which
again had coefficients based on data through late
1969, but steady growth rates of money and Federal
expenditures (at their average rates over the simula­
tion period from late 1969 to mid-1971) were used.
These three simulations were designed to identify
the sources of error underlying model projections
based on constant growth rates of money and Federal
expenditures during the six-quarter period.5 Total er­
ror is defined as the difference between the observed
value (either its level or rate of change) of a variable
and the value projected in the ex ante B simulation.
These values for the variables in the ex ante . B
simulation can be compared with those published
in the April 1970 issue of this Review.
For purposes of evaluation, total projection error
is divided into explained and unexplained error.
Unexplained error is the difference between actual
values and those yielded by the ex post simulation.
Explained error is attributed to two factors —chang­
ing economic structure, which is reflected in changes
in the coefficients, and deviations of monetary and
fiscal variables from the assumed steady rates.
The method used here to identify the sources of
error is summarized as follows:
Error

Defined as:

Actual minus Ex Post
Ex Post minus Ex Ante A
1969

1970

Due to changing eco­
nomic structure

Ex Ante A minus Ex Ante B

Due to steady rate
assumption

Actual minus Ex Ante B

Total error

1971

* S h a d e d a r e a s r e p r e s e n t s im u la t io n p e r io d s .

little for the period through 1971, while short­
term rates were projected to decline sharply in 1970,
to about 6.3 percent, then drop further to 5.5 per­
cent by late 1971.

Procedure
To provide a basis for a systematic evaluation of
the St. Louis model, three sets of simulations were



Unexplained

5The sources of error relate to the use and interpretation of
the St. Louis model, and are not to be confused with
studies of sources of forecasting error published by other
investigators. See, for example, Jared J. Enzler and H. O.
Stekler, “An Analysis of the 1968-69 Economic Forecasts,”
The Journal of Business (July 1971), pp. 271-81, for a dis­
cussion of forecast error attributable to inaccurate predictions
of public policy.
Page 21

F E B R U A R Y 1972

F E D E R A L R E S E R V E B A N K OF ST. LO U I S

Unexplained error provides
an indication of the overall reli­
ability of the specification of the
model. Error attributable to
changing economic structure
provides a measure of the sta­
bility of the coefficients over
time, although with the addi­
tion of only six quarters of data,
this is a very weak test of para­
meter stability. Finally, error
attributable to the steady rate
assumption regarding the mone­
tary and fiscal variables sheds
light on the usefulness of the
model as a guide to the formu­
lation of policy.

Results
The results of the three types
of simulations with the St. Louis
model for first quarter 1970
through second quarter 1971 are
summarized in Table II and
Chart II. The sources of error as
defined above are shown in
Table I. The focus of discussion
is the average error for each
variable, i.e., the last co lu m n of
Table I. Rates of change in total
spending, real product and prices
are emphasized because the part
of the model relating to these
variables is estimated in first dif­
ference form, reflecting greater
confidence in the statistical reli­
ability of first difference esti­
mates in the GNP accounts than
of levels.

T a b le I

SO U R C ES OF ERROR IN ST. LOUIS M O D E L*
(Percent)
1970
1
—

II

1971
III

IV

1

II

Q u a rte r
A ve rage

Total S p e n d in g
-2 .7

-1 .7

-2 .0

— 6 .8

5 .5

-0 .5

-1 .3 7

U n e x p la in e d error

-1 .6

-2 .0

-0 .5

— 4 .0

7 .7

-1 .5

-0 .3 2

Error d u e to c h a n g in g
econom ic structure

— 0 .2

-0 .3

-0 .5

-0 .3

0.5

0 .5

— 0 .0 5

Error d u e to ste a d y
rate assu m p tio n

-0 .9

0 .6

-1 .0

-2 .5

-2 .7

0 .5

-1 .0 0

-3 .8

-1 .2

-1 .9

-7 .7

4 .7

0 .2

-1 .6 2

— 2 .4

— 1.1

-0 .1

-4 .7

7.1

-0 .5

-0 .2 8

Error d u e to c h a n g in g
econom ic structure

-0 .6

-0 .7

-0 .9

-0 .6

0 .0

0 .0

-0 .4 7

Error d u e to ste a d y
rate a ssu m p tio n

-0 .8

0 .6

-0 .9

-2 .4

-2 .4

0 .7

— 0 .8 7

Total error

Real Product
Total error
U n e x p la in e d

error

Prices
Total error

1.5

-0 .5

0.1

1.3

0 .4

-0 .7

0 .3 5

1.1

-0 .9

-0 .3

1.0

0 .2

-0 .9

0 .0 3

Error d u e to c h a n g in g
econom ic structure

0.4

0 .5

0 .4

0 .4

0 .5

0 .4

0 .4 3

Error d u e to ste a d y
rate assu m p tio n

0 .0

0 .0

— 0.1

-0 .3

-0 .2

-0 .1 2

U n e x p la in e d

error

-0 .1

U n e m p lo ym e n t Rate
-0 .3

0 .0

0 .3

0 .9

0 .8

0 .9

0 .4 3

-0 .3

— 0.1

0.1

0 .6

0 .3

0 .2

0 .1 3

Error d u e to c h a n g in g
econ om ic structure

0 .0

0.1

0.1

0.2

0 .3

0 .2

0 .1 5

Error d u e to ste a d y
rate a ssu m p tio n

0 .0

0 .0

0.1

0.1

0.2

0 .5

0 .1 5

0 .7

0 .8

0.8

0 .3

-0 .4

-0 .2

0 .3 3

0 .3

0 .5

0 .5

0 .0

-0 .5

0 .0

0 .1 3

Error d u e to c h a n g in g
econom ic structure

0 .3

0 .3

0 .2

0 .3

0 .2

0 .2

0 .2 5

Error d u e to ste a d y
rate a ssu m p tio n

0.1

0 .0

0.1

0 .0

-0 .4

-0 .0 5

Total error
U n e x p la in e d error

C o rp o ra te A a a

Rate

Total error
U n e x p la in e d

error

-0 .1

C om m ercial P a p e r Rate
1.5

Total error
U n e x p la in e d

error

Error d u e to c h a n g in g
econ om ic structure
Error d u e to ste a d y
rate a ssu m p tio n

1.1

0 .6

— 0 .9

-2 .5

— 1.9

-0 .3 5

1.1

1.1

0 .6

-0 .8

-1 .7

-0 .5

-0 .0 3

0.1

0 .0

-0 .2

-0 .2

-0 .1

-0 .0 8

-0 .1

Total spending — Assuming
-0 .2 3
0 .0
0.1
0.1
-0 .6
-1 .3
0 .3
steady growth of money and ex­
*Total error = actual — ex ante B
penditures at the average rate
Unexplained error = actual — ex post
E rro r due to changing economic structure = ex post — ex ante A
that actually occurred (ex ante
E rro r due to steady rate assumption = ex ante A — ex ante B
B simulation), the average an­
specification of the St. Louis model, average projection
nual rate of change of total spending would have been
error was 0.32 percentage points for this period.
overpredicted by 1.37 percentage points. Of this over­
prediction, 0.32 is unexplained. In other words, using
The average error associated with changing eco­
all available information, including observations in
nomic structure is .05 percentage points. Updating
the simulation period, but retaining the fundamental

Page 22


F E B R U A R Y 1972

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

Errors in
U n ex p la in e d

the St. Louis Model: 1/1970
D ue to Changing Structure

-----A C TU A l n

-

Due to Steady G row th Assumption

----- EX

POST U.
------- EX ANTE *

------- EX POST

------- EX ANTE *
------- EX ANTE B

A n n u a l R ates
of C h a n g e

u
1969
A n n u a l Rates
of C h an ge

1 969
A n n u a l R ate s
of C h a n g e

11

A n n u a l Rates
of C h a n g e

1 969
A n n u a l R ates
of C h a n g e

A n n u a l Rates
of C h a n g e

11/1971

1969
A n n u a l R a te s
of C h a n g e

♦ E ffects o f m a jo r s trik e '

1969
n u a l Rates
Change

♦E ffects o f m a jo r strike

1970

1970

UMwptotmmt Rift

P erce nt

Unemployment Rile

P e rtsn l

Corporate Ah Rile

1970

1970

Cwpwite Am Rite

Uweiployiiieiit Kite

P erce nt

Corporile Am Rale

P ercent

rcent

P e rce n t

Commercial Piper Rale

1970

1970

1970

1969

197 0

IX A ll p a n e ls show a c tu a l d a ta fo r 1969.




Page 23

F E B R U A R Y 1972

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

the coefficients with six addi­
tional quarters of data improves
the accuracy of the total spend­
ing projection by .05 percentage
points, on average.

T a b le II

ST. LO U IS M O D E L S IM U L A T IO N S V S. A C T U A L
(Percent)
1970

1971

1

The average error for total
spending attributable to the as­
sumption of steady growth of
the policy variables is the larg­
est, amounting to one percent­
age point. This result follows
from the pattern of variability
of quarter-to-quarter rates of
change of both money and ex­
penditures during this six-quarter period (see Chart I). The
annual rate of change of money
varied from 4.2 to 11.3 percent
to yield the 6.5 percent average
rate of change for the period,
whereas Federal expenditures
varied between — and 24 per­
3.4
cent, averaging 8.6.

II

III

IV

1

II

S ix Q u a rte r
A ve rage

6 .4 2

ACTUAL
A n n u a l Rates o f C h a n g e in:
3 .4

5 .3

6 .3

2 .0

13.8

7 .7

— 2.9

0 .7

1.2

- 4 .0

7 .9

3 .4

1 .0 5

6 .6

4 .6

5.1

6 .3

5 .4

4 .2

5 .3 7

U n e m p loym e n t Rate

4 .2

4.8

5 .2

5 .9

5 .9

6 .0

5 .3 3

C o rp o ra te A a a Rate

7.9

8.1

8.2

7 .9

7.2

7 .5

7 .8 0

C om m ercial P a p e r Rate

8.6

8.2

7.8

6 .3

4.6

5 .0

6 .7 5

6 .7 3

Total S p e n d in g
Real Product
Prices

EX P O S T S IM U L A T I O N 1
A n n u a l Rates of C h a n g e in:
5 .0

7 .3

6.8

6 .0

6.1

9.2

-0 .5

1.8

1.3

0 .7

0 .8

3 .9

1 .3 3

5 .5

5 .5

5 .4

5 .3

5 .2

5.1

5 .3 3

U n e m p loym e n t Rate

4 .5

4 .9

5.1

5 .3

5 .6

5 .8

5 .2 0

C o rp o ra te A a a Rate

7 .6

7 .6

7 .7

7 .9

7 .7

7.5

7 .6 7

C om m e rcial P a p e r Rate

7 .5

7.1

7 .2

7.1

6.3

5 .5

6 .7 8

Total S p e n d in g

Error attributable to the steady
rate assumption would not nor­
mally be expected to be this
large, but it is a factor to con­
sider when using this equation
for a horizon as short as six
quarters. It is not only the vari­
ability but also the pattern of
the variability that leads to this
type of error. For example, con­
sider the accompanying figure
on the following page, where
two patterns of money growth
are shown, both of which yield
the same average for the period.

Total S p e n d in g

5 .2

7 .6

7 .3

6 .3

5 .6

8 .7

6 .7 8

Real Product

0.1

2.5

2.2

1.3

0 .8

3 .9

1 .8 0

Prices

5.1

5 .0

5 .0

4 .9

4 .7

4 .7

4 .9 0

U n e m p lo ym e n t Rate

4.5

4.8

5 .0

5.1

5 .3

5 .6

5 .0 5

C o rp o ra te A a a Rate

7 .3

7 .3

7 .5

7 .6

7.5

7 .3

7 .4 2

C om m ercial P a p e r Rate

7 .4

7.1

7 .3

7 .3

6 .5

5 .6

6 .8 7

Total S p e n d in g

6.1

7 .0

8.3

8.8

8.3

8.2

7 .7 8

Real Product

0 .9

1.9

3.1

3 .7

3 .2

3.2

2 .6 7

Prices

5.1

5.1

5 .0

5 .0

5 .0

4 .9

5 .0 2

Real Product
Prices

EX A N T E A

S IM U L A T I O N 2

A n n u a l Rates o f C h a n g e iin:

EX A N T E B S IM U L A T I O N 3
A n n u a l Rates o f C h a n g e i n:

U n e m p lo ym e n t Rate

4 .5

4.8

4 .9

5 .0

5.1

5.1

4 .9 0

C o rp o ra te A a a Rate

7 .2

7.3

7 .4

7 .6

7 .6

7 .7

7 .4 7

C om m ercial P a p e r Rate

7.1

7.1

7 .2

7.2

7.1

6 .9

7 .1 0

'Coefficients
Coefficients
Coefficients
simulation

estimated through 11/1971 ; actual money and expenditures used in simulation.
estimated through IV/1969 ; actual money and expenditures used in simulation.
estimated through IV /1969; money at 6.5 percent and expenditures a t 8.6 percent in
period. (Averages of actual quarter-to-quarter rates from 1/1970 to 11/1971.)

Because of the lags in the impact of monetary actions,
the money growth pattern in Case B will be associated
with a larger growth of total spending for the period
than in Case A.6 If total spending growth were con­
sidered for a longer period of time, the pattern would
be irrelevant. Furthermore, the error in total spending
attributable to the steady rate assumption can be
traced primarily to the pattern of variation in monetary
growth, rather than Federal expenditures, because of
the nature of the coefficients in the total spending
equation.

Page 24


6Money growth in 1971 is a case in point. Assuming lags in
the impact of monetary actions, as used in the St. Louis
model, the steady rate equivalent is calculated as follows:
Weighted
Annual Rate
Annual Rate of
of Change
Change of Money
Weight
2.74
7.3
.375
1/71
3.62
.320
11/71
11.3
.214
1.65
111/71
7.7
.090
.04
.4
IV/71
8.05
An unweighted average of the monetary tgrowth rates would
be 6.7 percent. The economic impact of monetary actions
in 1971, though averaging a 6.7 percent growth, is the equi­
valent of an 8 percent steady rate in the St. Louis model.

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

A lte r n a tiv e P atterns o f M o n e y G r o w th
C a se B

C a se A
P e rc e n t

P e rce n t

F E B R U A R Y 1972

product projections bear the brunt of two types of
errors — that due to the steady rate assumption in
the total spending projections and that due to chang­
ing economic structure in the price projections.
Unemployment rate — Projections of the unemploy­
ment rate can be expected to reflect the projection
errors for real product. The total error associated
with the unemployment rate averaged 0.43 percentage
points. The total was equally divided among the
three categories of error.

Tim e

Prices — The total error for price projections was
0.35 percentage points during the six-quarter sim­
ulation period. However, unexplained error was
negligible.
The major source of error in the price projections
was associated with changing economic structure. Up­
dating the price equation with observations from the
six-quarter simulation period alters the coefficients
significantly —in particular, increasing the coefficient
on the weighted sum of past prices. The implications
of this result are unclear, since our knowledge of the
determinants of price level movements and price ex­
pectations and their interaction is so limited.
Error attributable to the steady rate assumption
was in a direction opposite that due to changing eco­
nomic structure. In other words, the steady growth
case (ex ante B ) tended to predict faster inflation
than when the actual course of the policy variables
(ex ante A) was included in the ex ante simulations.
Like total spending, the error for prices attributable
to the steady rate assumption can be traced to the
pattern of variation in monetary growth.
R eal product —The projections of real product are
dependent on those for total spending and prices
because real product is calculated by subtracting from
the change in total spending that portion which is
associated with estimated price change. Overpredic­
tion of total spending along with underprediction of
prices leads to an average overprediction of real
product of 1.62 percentage points. Unexplained error
is about the same as for total spending because such
error is negligible for prices.
Changing economic structure accounts for a sub­
stantial portion of total error for real product, re­
flecting the underprediction of prices. Error due to
the steady rate assumption is also significant and of
the same order of magnitude as for the total spending
projections, though it does receive some correction
from such error in the price projections. The real



It should be noted that the sources of error are
difficult to identify for the unemployment rate be­
cause the errors are derived from full model simula­
tions rather than the unemployment equation alone.
All types of error come into play, operating through
total spending and prices, as well as the unemploy­
ment rate equation itself.
C orporate Aaa rate — Examination of the corporate
Aaa rate projections indicate total error averaged 33
basis points. Unexplained error averaged 13 basis
points, but changing economic structure is the key
factor in the Aaa projections. This result is to be
expected because price movements play an important
role in the corporate Aaa equation. Because prices
tended to be underpredicted in the ex ante A simula­
tion, the Aaa rate is underpredicted also. There is a
partial offset from the overprediction of real product
growth, but clearly the price effect dominates.
Com m ercial paper rate — Commercial paper rate
projections exhibit an average total error of about the
same absolute magnitude as the corporate Aaa pro­
jection, but, in contrast, it is overpredicted. Surpris­
ingly, both unexplained error and that due to chang­
ing economic structure are small during the simulation
period. The reason is that the overprediction of real
product and the underprediction of prices tended to
offset each other. The price effect does not dominate
the short-rate projections like it does the long-term
rate.
Error attributable to the steady rate assumption
accounts for most of the total error in the commercial
paper rate projections. One of the reasons is that the
direct effect of money tends to be larger in the
short-rate equation than for the long rate. In addition,
over-predictions of both real product and prices, as
associated with the steady rate assumption effect,
reinforce each other in the commercial paper rate
projections.

Conclusions
The St. Louis model was not designed for quarterto-quarter forecasting. When interpreted in light of
Page 25

F E D E R A L R E S E R V E B A N K OF ST. LO UIS

F E B R U A R Y 1972

its objectives, the model succeeded in roughing out
the average time paths of total spending, real prod­
uct, prices, unemployment, and interest rates during
the period from late 1969 to mid-1971. However, the
degree of success can be gauged only by comparing
the results with those of other models.7
7Some general comparisons with the Wharton model and the
FRB-MIT-Penn model are given in Lawrence R. Klein,
“Empirical Evidence on Fiscal and Monetary Models,” in
James J. Diamond, ed., Issues in Fiscal and Monetary Policy:

Policymakers and private forecasters may find that
the St. Louis model is inadequate for many of their
purposes—for example, quarter by quarter forecasts or
detailed forecasts of the components of GNP. Never­
theless, it is hoped that this identification of strengths
and weaknesses of the model will provide further
understanding on its use and interpretation.
The Eclectric Economist Views the Controversy (DePaul
University, 1971), pp. 35-50.

APPENDIX

Estimated Equations of the St. Louis Model'
I.

A.

Total Spending Equation
A.

Sample period:

Sample period:

.66
3 .8 4
1.80

Sample period:

Sample period:

.92
.30
.65

1 /1 9 5 5 — 11/1971

.58
4 .5 3
2.12

A.

1 /1 9 5 5 — IV /1 9 6 9

Sample period:

1 /1 9 5 5 — IV /1 9 6 9

R1 = 1.23 ,'
.06 M , + 1.44 Z , + .21 X t_,
(4 .9 0 ) ( - 3 . 5 2 )
(1 1 .3 6 )
(2 .9 6 )
.87
1.11
1.39

+ .99 P / ( U / 4 ) , _ ,
(1 8 .5 1 )
R2
=
S.E. =
D -W =

1 /1 9 5 5 — 11/1971

APt = 2 .0 5 + .08 D t_ , + 1.01 A Pt
A
(6 .3 2 ) (8 .3 8 )
(1 5 .7 0 )
R2
.90
S.E. = 1.23
D -W = 1.67
“Constraints and lag structures correspond to those set forth in
the original article discussing the St. Louis model. See Ander­
sen and Carlson, “A Monetarist Model.” Coefficient values on
lagged variables (subscripted “t-i” ) are sums of the coeffi­
cients for current and lagged quarters. Figures enclosed by
parentheses under the coefficients are “t” statistics.
Page 26



Sample period:

IV. Long-Term Interest Rate Equation

APt = 2 .4 6 + .09 D t_ , + .93 AP,A
(6 .2 0 ) (8 .6 4 )
(9 .0 4 )
R2
=
S.E. =
D -W =
B.

R2
=
S.E. =
D -W =

B.

.92
.31
.59

U , = 3 .8 8 + .03 G, + .29 G ,- ,
(7 2 .4 1 ) ( .8 3 )
(7 .6 6 )

II. Price Equation
A.

1 /1 9 5 5 — IV /1 9 6 9

R2
=
S.E. =
D -W =

1 /1 9 5 3 — 11/1971

AY, = 2 .7 0 + 5.11 AM t_ , + .09 A E ,_ ,
(3 .0 4 ) (7 .3 7 )
(.2 5 )
R2
=
S.E. =
D-W =

Sample period:

U , = 3 .8 9 + .04 G, + .29 G t_ ,
(7 0 .5 9 ) (.8 7 )
(6 .9 4 )

1 /1 9 5 3 — I V / 1969

AYt = 2.78 + 5 .1 0 A M ,., + .10 A E ,_ ,
(.3 0 )
(3 .6 1 ) (7 .9 9 )
R2
=
S.E. =
D-W =
B.

III. Unemployment R ate Equation

B.

Sample period:

.92
.28
.67

1 /1 9 5 5 — 1 1 /1971

R , = 1.29 .06 M t + 1.58 Z , + .15 X , - ,
(4 .7 7 ) ( - 3 . 5 6 )
(1 3 .0 0 )
(2 .1 2 )
+ 1.03 P / ( U / 4 ) , _ ,
(1 9 .9 6 )
R2
=
S.E. =
D -W =

.95
.31
.79

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

V.

F E B R U A R Y 1972

S h o rt-T erm In terest R a te E q u a tio n
A.

Sample period:

AP

= AY -

XF

= potential output

X

+ 1.30 P / ( U / 4 ) t_,
(1 5 .1 7 )
R=
S.E. =
D -W =
Sample period:

D

= output (G N P in 1958 prices)

1 /1 9 5 5 — IV /1 9 6 9

Rf = - 1 .0 7 .17 M t + 1.01 Z t + .66 X t_ ,
( —2 . 7 2 ) ( —5 .6 7 )
( 5 .1 7 )
(7 .3 3 )

B.

= dollar change in total spending (G N P in current
prices) due to price change

.88
.51
.54

(X F- X )

A PA = anticipated price change (scaled in dollar units)

Rf = - 1 . 0 0 .18 M t + 1.05 Z t + .64 X t_,
( —2 .1 9 ) ( —5 .2 1 )
(4 .7 3 )
(6 .0 1 )

= unemployment as a percent of labor force

G

1 /1 9 5 5 — 11/1971

U

=

R

((X F - X )/X F)

• 100

Moody’s seasoned corporate Aaa bond rate

M

= annual rate of change in money stock

Z

= dummy variable ( 0 for 1 /1 9 5 5 — IV /1 9 6 0 and 1
for 1 /1 9 6 1 — end of regression period)

X

= annual rate of change in output (G N P in 1958
prices)

AY = dollar change in total spending (G N P in current
prices)

P

= annual rate of change in GNP price deflator
(1 9 5 8 = 1 0 0 )

AM = dollar change in money stock

U / 4 — index of unemployment as a percent of labor force
(base = 4 .0 )

+ 1.30 P / ( U / 4 ) t_i
(1 4 .3 3 )
R=
S.E. =
D -W =

.87
.60
.61

Symbols are defined as:

AE

= dollar change in high-employment Federal
expenditures




Rs

= four- to six-month prime commercial paper rate

Page 27

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