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FEDERAL RESERVE B A N K
O F S T . L O U IS
FEBRUARY 1974
Real M oney Balances: A M isleading
Indicator of M onetary Actions ..............
Operations of the Federal Reserve
Bank of St. Louis — 1973 ........
M onetary Developments and System
Policy Actions in 1 9 7 3 ..................
Vol. 56, No. 2
2
11
Real Money Balances: A Misleading Indicator
of Monetary Actions
D EN IS S. KARNOSKY
I H R O U G H O U T most o f 1973, many analysts were
concerned about the prospects for what they called a
“growth recession” — a prolonged period where total
output continues to rise, but only at a fairly slow rate.
Indeed, the rate o f growth o f total product in the
econom y has slow ed substantially since early last year.
N ow these fears have been com pounded b y reports of
widespread difficulty in securing production materials
and, more recently, sudden public awareness o f the
nation’s energy problem . The situation has shifted to
one of fear of an imminent decline in econom ic ac
tivity. W hile a great deal o f attention is directed
toward the prospects for production and employment,
much concern is also being expressed about the ac
celerated rise in prices in 1973. There is some fear
that actions to stimulate production might further ag
gravate the inflation problem.
Recently, however, some analysts have claim ed that
monetary actions threaten to restrict the expansion of
aggregate demand to an extent which w ould aggra
vate any im pending production and employment
problems. In part, this point of view is based on the
observation that the accelerated pace o f inflation last
year exceeded the growth in the money stock, result
ing in a decline in “real money balances” — money
divided by an index o f prices.1
The argument is apparently based on the conten
tion that the effect of changes in the money stock on
econom ic activity is transmitted through the public’s
1An ironic development is that this argument is being ad
vanced by economists who hold vastly different views on the
role of monetary actions in economic activity. For example,
First National City Bank of New York, which has usually
been identified with the monetarist position that monetary ac
tions are a dominant force in the economy, has taken this
position. See “ Energy: looking past the panic at the prob
lem,” Monthly Economic Letter, First National City Bank of
New York (December 1973), pp. 6-7. At the same time,
Professor Walter Heller, who has little sympathy for mone
tarist precepts, has offered a similar analysis. See, for exam
ple, his column, “Oil and the 1974 Economic Outlook,” Wall
Street Journal, 8 January 1974.
On January 31, 1974, the Board of Governors of the Fed
eral Reserve System released a revised series for the money
stock. The revision was based on a benchmark adjustment
for nonmember banks and revised seasonal adjustment factors.
The revised data show a faster rate of money growth in the
first half of 1973 than did the original data. As a consequence,
the level of real money balances did not decline as much as
had been thought earlier.
Page 2
demand for these “real m oney balances” . The con clu
sion is reached that, since the accelerated rate of
inflation last year has contributed to a reduction in
these real m oney balances, individuals have been re
stricting their spending, and will continue to d o so in
an attempt to rebuild the amount o f “real” money
they hold. Some have suggested that this view implies
that monetary policy should b e directed toward in
creasing the rate o f growth o f the money stock above
that of the rate of inflation, thus restoring real money
balances to their form er level.
In this context, the ratio o f the money stock to some
current price index is alleged to be an indicator o f the
thrust o f monetary policy. As an indicator, the decline
in this ratio in 1973 has been offered by some o b
servers as evidence that monetary actions in 1973 were
restrictive and, unless real balances are restored b y ac
celerated money growth, will lead to a reduction in
output and employment. This article shows that such
an interpretation o f this ratio is misleading, at best, in
that a decline in real balances can be indicative of
either monetary restraint or stimulus. It is also shown
that attempts to control the stock o f real balances are
extremely dangerous. The effort has been made in
other countries on other occasions, and in many in
stances, has led to an ever accelerating rate o f infla
tion and eventual econom ic collapse.
REVIEW OF ECONOMIC SITUATION
Aggregate dem and has increased steadily over the
past three years. Total spending in the econom y rose
11.2 percent over the year ended in the fourth quar
ter o f 1973, com pared to a 10 percent annual rate of
increase experienced in the previous tw o years. Over
most o f the period since 1970, rapid expansion o f ag
gregate demand served to induce growth in production
from the depressed level o f the 1969-70 recession. It
now appears, however, that the econom y is close to its
short-term potential rate o f production, with rapid ex
pansion of demand eliciting smaller gains in output.2
2One element in the growth of aggregate demand last year
was a shift in the composition of demand. For example,
consumer preference has shifted toward smaller automobiles,
reflecting public doubt about future gasoline prices and
availability. The decline in spending for autos reflects, in part,
FEDERAL RESERVE BANK OF ST. LOUIS
D e m a n d a n d P ro d u c tio n
R a tio Se al*
T r illio n s of D o lla rs
1.7
Quarterly Totals at Annual Rates
Se a son a lly Adjusted
FEBRUARY
1974
The T re nd o f O u t p u t
R a tio Scalo
T r illio n s of D o lla rs
1.7
1.6
1.5
1.4
1.3
1.2
Total Spending 1
Real Producta
1971
1966
1967
1961
L LG N P in current dollars.
2 G N P in 1958 dollars
Percentages are annual rates of chan ge for periods indicated
Latest d a ta plotted: 4th quarter prelim inary
1972
1973
1974
U.S. D epartm ent of Commerc
The rate of increase in production over the 1971-72
period exceeded the estimated rate o f growth of the
econom y’s productive capacity — the com bination of
such factors as increases in productivity, technology,
labor force, and productive facilities. Thus the rapid
expansion of demand served to induce more intensive
use o f productive resources, encouraging new em ploy
ment while allowing resources idled during the 196970 recession to be re-employed. One aspect o f this
expansion was reflected in the reported rate o f unem
ploym ent, which declined from 6 percent of the civil
ian labor force in 1971 to an average o f 4.7 percent in
the fourth quarter o f last year.3
Total production in the econom y increased at a 1.3
percent annual rate in the fourth quarter o f last year,
according to preliminary estimates. The rate o f out
put growth began to slow early last year and p rodu c
tion increased at only a 2.4 percent rate from the first
to the fourth quarters in 1973. This is markedly slower
a decrease in demand for new cars. An additional factor has
been the inability of auto manufacturers to shift production
quickly from standard size cars to smaller cars. Inventory
stocks of large cars have increased substantially, while stocks
of smaller cars have been drawn down. The result has been
a sharp decline in production of automobiles and increased
unemployment in the industry. In this type of situation it is
difficult to determine how much of the decline in production
is due to an absolute decline in consumer demand for cars
and how much is due to the inability to shift production to
meet a shift in consumer demand.
3The rate of unemployment rose to 5.2 percent of the labor
force in January 1974, reflecting cutbacks in employment in
automobile production, transportation, and service industries
which rely heavily on travel volume. It is too early to attribute
such a rise in unemployment to a general weakening of eco
nomic activity, however, since much of the rise reflects the
shift in consumer preference away from energy-using
activities.
30 0
1952
1954
1956
1958
I9 6 0
1 96!
1964
1966
1961
1910
1972
1974
Shaded areas represent periods of business recessions os defined by (he National Bureau of Economic Research
i The trend of output was determined from the regression lnQ=57385* 0092t. which was estimated from
quorterly dota for the 1/1947 - 11/1971 period. The coefficient (.0092) is the estimate of the trend rote of increase
than the rate achieved over the prior tw o years, when
the average rate o f increase o f total production was in
excess o f 6 percent.
As output growth slow ed last year in the face of
steadily rising aggregate demand, the result was a
renewed acceleration in the rate o f inflation.4 The
average level of prices in the econom y, as measured
by the deflator for gross national product, rose at a
7.9 percent annual rate in the fourth quarter and was
7.1 percent higher than a year earlier. The rate of in
crease in prices during 1973 was more than double
the average 3.5 percent rate o f increase reported over
the previous tw o years.
The general situation at the end of 1973 was that
output growth had slowed considerably and inflation
had accelerated anew. These are not tw o separate
problems, however. They are the joint result o f the
rapid expansion o f aggregate demand since 1970.
Sharp increases in aggregate demand throughout the
1971-73 period strained the ability o f the productive
sector to keep pace. The imposition o f price-wage con
trols and the numerous shifts in control policy served
to further constrain the ability o f the econom y to
expand production to meet growing demands. The
recent em bargo on oil shipments from the M iddle-
4While rapid expansion of aggregate demand served as the
catalyst for increases in the average level of prices last year,
several developments worked to intensify pressure on specific
prices in the economy. These developments, including in
creased foreign demand for U.S. farm products, worked to
intensify changes in relative prices in the economy. There is
no doubt, for example, that the huge purchase of grain by the
Soviet Union last year contributed to the rise in food prices;
but such a transaction, unless accommodated by monetary
expansion, does not necessarily raise the average level of
prices in the economy.
Page 3
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY
1974
M o n e y Stock
Percentages are annual rates of change lor periods indicated.
Latest data plotted: 4th quarter
East was but one m ore element limiting the short-term
productive capacity o f the economy.
THE ROLE OF MONEY AND REAL
BALANCES
The amount o f m oney that individuals and busi
nesses want to hold is a result of a decision about the
form in w hich wealth is held. Various types o f assets
— m oney, bonds, equities, savings deposits, real assets,
and so forth — serve as a store o f value, a means o f
holding purchasing pow er.5 Th ey do not perform this
service equally well, however. In some situations real
assets serve better as a store o f value than d o m on
etary assets, such as bonds and money. In other situa
tions, it is relatively more advantageous to hold m one
tary assets.6 The proportion of wealth held in these
various assets reflects the attempt b y individuals to
com mand maximum purchasing power, weighing
such factors as relative risk of default, expected
changes in relative prices, and expectations about the
average level o f prices.
5For a concise, but fairly complete, presentation of the ele
ments which enter into the demand for money, see Milton
Friedman, “The Quantity Theory of Money — a Restate
ment,” Studies in the Quantity Theory of Money, ed. Milton
Friedman (Chicago: University of Chicago Press, 1956),
pp. 4-15.
8Monetary assets are more reliable as a store of value than
real assets during periods of unexpected changes in the rela
tive prices of real assets. Consider, for example, the case in
late 1973 when the price of many equities fell and the price of
petroleum rose. Wealth held in the form of equities declined
while wealth held in the form of crude oil stocks rose.
Ignoring all other forms in which they each held their wealth,
equity holders suffered a wealth loss and oil holders enjoyed
a wealth gain. Holders of money balances did not enjoy the
wealth increase which accrued to oil holders, but neither did
they suffer the loss absorbed by holders of equities. Thus
Digitized for Page
FRASER
4
Besides serving as a store o f value, money holdings
provide a convenience in that they are readily ac
cepted in exchange for goods and services. Even in
periods when other assets serve better than m oney in
protecting purchasing power, m oney balances are still
desired as a means for reducing the cost o f trans
actions.
Individual and Aggregate Demand for Money
The demand for m oney, as both a store of value
and a means for facilitating transactions, is tempered
by the advantages which accrue to holders o f other
forms o f assets.7 By holding money balances, an in
dividual sacrifices the services of other assets. Other
financial assets, for example, yield an explicit interest
incom e, which money balances do not. The higher the
rate o f interest, the greater is the interest incom e
sacrificed by holding money. In addition, if prices of
goods and services are expected to rise in the future,
this interest incom e helps to offset some o f the decline
in the purchasing pow er of monetary assets. Rising
money served as a hedge against such relative price move
ments. If the choice was between holding money or oil, oil
was obviously a better store of value, and if the increase
in the price of oil had been foreseen by an individual, the
result would have been an increase in his demand for a real
asset ( oil) relative to his demand for a monetary asset
(money). For a review of the effects of commodity inflation
9n various forms of wealth see Albert E. Burger, “The Ef
fects of Inflation (1960-68),” this Review (November 1969),
p p . 2 5 -3 6 .
7The demand for money to hold must not be confused with
the desire to borrow funds to spend. The former refers to
the average level of money balances that individuals and
businesses want to hold over some period of time. The de
mand to borrow is the demand for credit, where the price of
borrowed funds is reflected in the rate of interest.
FEDERAL RESERVE BANK OF ST. LOUIS
interest rates w ould tend to decrease the quantity of
money balances an individual desires to hold relative
to other financial assets.
One individual in the econom y has very little influ
ence on average prices and interest rates. Being only
one among many in most markets, an individual essen
tially buys and sells at quoted prices. An individual’s
desire to hold various assets, including money, reflects
attempts to adjust asset holdings to the prices currendy prevailing as well as those expected in the
future.
W hat is true for an individual, however, is generally
not true for the econom y as a whole. W hile an indi
vidual is able to dispose o f what he considers to be
excess money balances, such decisions do not substan
tially change total money in the econom y. The amount
o f money in the econom y is effectively determined by
the actions o f the monetary authorities, and one indi
vidual’s reduction in money balances creates excess
balances in someone else’s portfolio.8 The second per
son, in turn, attempts to exchange these balances for
other assets, and so on through the economy.
W hile each individual is adjusting money balances
to prices and interest rates, the cumulative effect of
many persons attempting the same adjustment is pres
sures on prices and interest rates. The pressure for
price change will continue until individuals find that
the cost of exchanging money for other assets exceeds
the expected return at the new set of prices and in
terest rates. Thus individuals adjust money holdings
to prices, but for the econom y, prices adjust to the
amount of money.
The ultimate effect of increases in the stock of
money is a higher level of prices in the econom y.9
The relationship between the money stock and the
price level is quite close over extended periods; that
is, the trend rate of inflation is determined primarily
by the trend rate of money growth in the economy.
This effect is transmitted via the public’s demand for
m oney balances, resulting in changes in aggregate de
mand for goods and services. The price which adjusts
8This is not to say that the monetary authorities can neces
sarily control the stock of money exactly on a daily, weekly,
or even monthly basis. Over the course of a quarter, however,
changes in the stock of money are closely related to mone
tary policy actions.
9This proposition has a long tradition in economic litera
ture. An informative comparison of money and price move
ments over the past twenty years can be found in James M.
O’Brien, “ Inflation and a Role for Monetary Policy,” Business
Review, Federal Reserve Bank of Philadelphia (December
1973), pp. 3-11.
FEBRUARY
1974
is the average level o f prices. N ot all prices are af
fected equally and some change more than others.10
Real Balances as an Indicator
The role o f “indicators” in the formulation o f sta
bilization p olicy stems from the lack o f com plete in
formation about the econom y. Policymakers do not
know with certainty the effect that their actions will
have on production, employment, and prices. They
require some readily available and reliable inform a
tion about the effect o f their p olicy actions.11
For an individual, a rise in the ratio of m oney to
prices can occur in two ways. First, his money bal
ances may suddenly rise faster than prices. For ex
ample, he might receive a w age increase, resulting in
a larger paycheck. Secondly, the rate o f change of
prices may unexpectedly rise slower than the rate at
which his money balances are growing. In either case,
his ratio o f money to the price of other assets rises and
he attempts to adjust his portfolio.
W e cannot generalize from individual behavior,
however, and say that when the ratio o f money to
some price index in the econom y rises, monetary
policy is stimulating econom ic activity, or when this
measure of real balances is falling, monetary policy
is restrictive. The problem with using the ratio of
money to an index of com m odity prices, or financial
asset prices for that matter, is that this ratio is deter10Due to the diversity of tastes and preferences among eco
nomic units, an increase in aggregate demand is not mani
fested equally across all markets. In addition, differences in
technology, expectations, and resource endowments in the
various markets result in different supply responses. The
combination of these factors results in larger increases in
demand in some markets than in others and also larger in
creases in some prices than in others. In a smoothly func
tioning market economy resources move between markets in
response to information about these changes in relative prices.
The movement of resources in response to the stimulus of
price change is constrained by several non-economic factors,
among which are legal institutions. The wage and price con
trol program instituted in 1971, and pursued with varying
intensity since, is one such legal constraint. The effect of
these controls has been to distort the functioning of the
price system as an allocative device. Markets where prices
are controlled are unable to attract new resources to meet
demand increases, and persistent “shortages” develop. In
non-controlled markets, prices are bid higher in the short
run than they otherwise would be, as demand, unsatisfied
in controlled markets, shifts to markets where prices are not
controlled by government edict. The controls result in
changes in relative prices, but the average level of prices
rises just the same. The speed of adjustment of average
prices, however, might be altered.
n An indicator serves a purpose much like that of a ther
mometer which provides signals as to when more output is
needed from a furnace in order to maintain some desired
room temperature. For a discussion of the indicator problem
in monetary policy, see Albert E. Burger, “ The Implementa
tion Problem of Monetary Policy,” this Review ( March
1971), pp. 20-30.
Page 5
FEDERAL RESERVE BANK OF ST. LOUIS
mined b y the public and is ultimately beyond the
control of the monetary authorities. In the long run
the ratio is essentially w hatever the public wants it
to b e; monetary actions have only a tem porary effect
on real balances.
The ambiguity o f real m oney balances as an indi
cator can be seen most readily b y considering a case
where there are no adjustment costs in the econom y.
If econom ic units could fully and instantaneously ad
just their portfolios to excess m oney holdings, prices
and interest rates w ould change immediately to
equate the aggregate amount of money dem anded to
the larger amount supplied. C om m odity prices w ould
rise instantly to the point where it is no longer advan
tageous to exchange m oney for goods and services. In
such a world, measures o f real money balances, money
divided b y an index of com m odity prices, w ould al
ways be equal to the amount o f real money balances
demanded in the econom y. A fall in real balances
w ould mean that the amount of m oney demanded
relative to the com m odity price level had declined
and that aggregate demand for goods and services
had been stimulated.
However, prices do not adjust instantaneously, and
observed movements in the ratio o f money to com
m odity prices can also reflect the temporary effect of
the adjustment process. Individuals hold a w ide va
riety o f expectations, and are bound by a variety of
contractual agreements. It takes time for the adjust
ment of prices to take place, and the observed ratio of
money to prices cannot, by itself, reveal anything
about the state o f that adjustment. Since prices d o not
fully adjust immediately (n or do people’s expecta
tions about future p rices), an increase in the stock of
money, above that demanded by the public, results
in a temporary increase in the ratio of m oney holdings
to com m odity prices.
Empirical evidence suggests that, on average, out
put is much more responsive in the short run to un
expected changes in aggregate demand than is the
average level o f prices. The initial effect o f a change
in aggregate demand stemming from the excess sup
p ly of money balances will tend to be manifested in
attempts to increase output to meet the new demand.
Thus the rise in “real balances” will tend to b e asso
ciated with a temporary rise in output. As the rate of
resource utilization rises, however, these increases in
output becom e increasingly more costly to maintain.
W hen businesses begin to suspect the increase in d e
mand to be longlasting, they will cease attempts to
meet it solely b y increased utilization o f labor and
capital and begin to increase price, in line with their
Page 6
FEBRUARY
1974
HOW REAL BALANCES
The level of “real money balances” depends on
three factors. The ultimate determinant is the amount
of real balances that the public wants to hold, as
determined by the public’s comparison of the relative
subjective value of the services of money and non
money assets and their respective prices. If economic
activity adjusted instantaneously to all shocks, the
public’s demand would be the sole determinant and
“real balances” would always be as desired by the
public. Since adjustments in economic activity typ
ically take time, there are two additional factors which
do affect the level of real money balances. These are
changes in the amount of money resulting from
actions of monetary authorities, and the mechanism by
which the public adjusts to discrepancies between the
amount of money they actually hold and the amount
they want to hold at current prices. The example below
is intended to illustrate the interaction of these three
factors in determining the level of “real money
balances.” 1
The model used to generate these results assumes
that the public is willing to hold a one percent
larger stock of money only if prices rise by one per
cent. In other words, the quantity of money demanded
is proportionate to the price level.2 It is also assumed
that there are costs of adjustment in the economy
which prevent instantaneous adjustment to changes in
the amount of money outstanding. Specifically, when
individuals decide that at current prices their money
balances are larger than they desire and thus
attempt to exchange money for other assets, the price
level does not begin to adjust to this increased spend
ing until the next period. In addition, the price adjust
ment in that period is only half of what is required
to induce the public to hold the larger stock of money.
In the example the money stock is increased by 10
units in the first period, from 100 to 110. This change
follows an extended period where prices were con
stant (at an index of 100) and the amount of money
demanded at those prices was also 100 units. Thus
in the first period the amount of money in the economy
(110) exceeds the amount demanded (100) by ten
units, and the demand for other assets is stimulated.
Prices are unaffected in the first period, however, re
sulting in a rise in real money balances from 1.00 to
1.10. If the money stock then remained at 110 units,
prices would have to rise from 100 to 110 before the
'The example is not intended as a model of actual
behavior in the economy. It is an expository device
which can be helpful in understanding the issue —
in particular, the misleading information which can be
obtained from using real money balances as an in
dicator of the effect of monetary actions.
2For the sake of simplicity only the current prices
of goods and services are considered in the demand
for money. Interest rates, other prices, and price
expectations are ignored. This omission does not affect
the analysis.
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY
1974
CAN GIVE UNRELIABLE INFORMATION
to fall while monetary actions are still stimulating de
mand for goods and services.
When the monetary authorities cease to provide ad
ditional stimulus after the eighth period and hold the
money stock constant at 180, the stimulative effect of
their previous actions continues. Prices continue to rise
since the amount of money in the economy in the eighth
period (180 units) exceeds the amount demanded
(160.1 units). Due to the adjustment procedure as
sumed in the model, it takes another eight periods
before prices rise sufficiently to induce an increase in
the amount of money demanded from 160.1 units to
180 units.3 With the money stock constant, the rise
in prices further decreases “real balances,” which
ultimately return to 1.0, the ratio desired by the public.
public would be willing to hold the larger money stock.
Due to the adjustment process, prices rise to 105 in the
second period in response to the increased demand
for goods and services. At this price level the amount
of money that the public wants to hold increases to
105 units. In the second period the money stock is
increased another 10 units to 120. The amount supplied
now exceeds the amount demanded by 15 units, and
the demand for goods and services is further stim
ulated. Real money balances also rise again to 1.143,
(120 h- 105).
The money stock continues to be increased by 10
units in each period until the ninth period when it
ceases to rise and is held constant at 180 units. Real
balances begin to fall in the fourth period, however,
while the money stock is still increasing. The fall
reflects the accelerated rate of price increase resulting
from prior increases in the money stock. In the third
period the money stock is 130 units and the price
level is 112.5. Thus the amount of money supplied
exceeds the amount demanded by 17.5 units, and the
pressure on prices is to increase by 8.75 units in the
next (fourth) period. This represents an increase of 7.78
percent over the price level in the third period, but
the money stock increases by an additional 10 units
in the fourth period, a 7.69 percent increase. Since the
rate of price increase exceeds the rate of increase in
the money stock, the level of real money balances
declines. Although the money stock continues to in
crease by 10 units in each of the next four periods,
the rate of price rise exceeds the rate of money growth
in each period. As a result, the level of real balances
falls. The accelerated rate of price increase reflects
prior monetary stimulus, and real money balances begin
Looking just at the pattern of real balances above,
they are seen to rise sharply for three periods after
being constant for some time. Real balances begin to
fall in the fourth period and then decrease at a faster
pace from the ninth period onward, returning to their
original level in about the sixteenth period. It would
be incorrect to conclude, however, that on the basis
of the movement of real balances, aggregate demand
was stimulated in the first three periods, restricted
somewhat over the next five periods, and then re
stricted even further. This pattern of “real money
balances” was generated by monetary actions which
stimulated aggregate demand over the entire interval
from the first to the sixteenth periods. The decline in
real money balances from the fourth period onward
reflects only the adjustment in prices to excessive
money holdings and does not necessarily indicate a
fall of real balances below the desired level.
An attempt by the monetary authorities to maintain
the ratio at any level above 1.0 by increasing the
money stock results in a perpetual increase in the
level of prices. For example, if the monetary author
ities attempt to keep the ratio at 1.10, the level
reached in the first period of the example, prices would
rise 5 percent in every period thereafter. The inflation
which results from attempts to maintain real money
balances above the level desired by the public would
be even greater if the monetary authorities tried’ to
maintain an even higher ratio. Prices would rise 10
percent per period if the monetary authorities sought
to hold the ratio at 1.20.4
3Since prices adjust in each period by half of what
is required to restore equilibrium, the price level
will only approach a level of 180. After the sixteenth
period, however, the price level is very close to 180
and the difference becomes insignificant thereafter.
4The rate of inflation is also dependent on the speed
of adjustment of prices; the faster the adjustment,
the more rapid the inflation. For example, if the rate
of price adjustment was 75 percent instead of 50 per
cent, attempts to hold the ratio at 1.10 would result
in a 7.5 percent rate of inflation. Attempts to hold
the ratio at 1.20 would result in a 14 percent rate
of price rise.
Page 7
FEDERAL RESERVE BANK OF ST. LOUIS
longer-term profit plans.12 As prices rise, “real bal
ances” fall toward their form er level. This fall, instead
of being indicative o f monetary restriction, is actually
the result o f prior monetary stimulus. Prices will con
tinue to rise, and real m oney balances fall, until the
advantages gained b y exchanging money for other
assets becom e too expensive, and people are willing
to hold the increased stock o f m oney.13
FEBRUARY
1974
A n n u a l Rates of C h a n g e of M o n ey
Percent
Percent
Real Money Balances in the Current Economy
The rate o f money growth averaged a little over 6
percent from the fourth quarter o f 1972 to the fourth
quarter o f 1973, not much different from the average
rate o f increase experienced over the previous five
years. As stated earlier, empirical evidence suggests
that the rate o f average price change in the econom y is
determined b y the trend rate of money growth over
the prior 4 to 6 years.14 On the basis of this evidence,
the rate o f monetary expansion w ould have to fall
significantly below this trend rate before a “shortage”
o f money developed at current prices and interest
rates, and aggregate demand was restricted suffi
ciently to contribute to a decline in output and
employment.
The chart entitled “Annual Rates of Change of
M oney” shows the quarter-to-quarter annual rate of
change o f the m oney stock and the trend rate of
money growth, measured by a twenty-quarter moving
average of the rate o f money growth. Tw enty quarters
is selected as the period over which prices adjust to
equate the supply and demand for money balances.15
The chart “ Real M oney Balances” shows that there
are five periods from 1955 to 1973 when the ratio of
money to com m odity prices declined for tw o quarters
12Denis S. Karnosky, “The Effect of Market Expectations on
Employment, Wages, and Prices,” Federal Reserve Bank
of St. Louis, Working Paper No. 17 (August 1973),
pp. 22-33.
13As prices rise the amount of money demanded increases
until the public is willing to hold the larger stock of money.
This is a movement along a demand curve to restore an
equilibrium. This is not to be confused with an increase in
the demand for money, a shift to the right of the demand
schedule. In the latter case the public decides it wants to
hold more money balances at all prices. Such a shift would
result in the public decreasing its demand for other assets
in an attempt to increase its money balances. The effect is a
restriction of aggregate demand. In the former case, aggre
gate demand is stimulated.
14See Leonall C. Andersen and Denis S. Karnosky, “The
Appropriate Time Frame for Controlling Monetary Aggre
gates: The St. Louis Evidence,” Controlling Monetary Ag
gregates 11: The Implementation, Conference Series No. 9,
Federal Reserve Bank of Boston, 1972, pp. 147-77.
13Ibid., pp. 147-77. This selection is not completely arbitrary,
but is the mid-point of the range suggested by empirical
investigations.
Page 8
LL A n n o a l ra te s o f c h a n g e o v e r th e p re v io u s tw e n ty q u a rte rs .
or more: 1955-57, 1959-60, 1966, 1969, and 1973. Prior
to 1973, each period in which “real balances” declined
for two quarters or more was follow ed by a significant
slowdown in econom ic activity, ranging from the
1966-67 mini-recession to full-scale recessions in the
other periods.
It can be seen from the “ Rates of Change of
M oney” chart that in 1955-57, 1959-60, 1966, and 1969
a large portion of the decline in real balances reflected
a sharp drop in the rate o f growth o f the money stock
below its trend. The deceleration in money growth in
1973 was not as abrupt. Instead, the indicated decline
in “real balances” in 1973 reflected, in large part, the
reported acceleration o f inflation.
Since the adjustment of prices to a change in the
trend rate of money growth is estimated to take from
four to six years to com plete, it is probable that the
econom y is still adjusting to the accelerated rate of
money growth over the period from 1971 to mid1973.18 Supporting evidence for this contention can be
found in the movement o f interest rates in 1973.
An important element in the adjustment o f prices
to an increased trend rate o f money growth is the
adjustment o f price expectations — a com ponent of
long-term interest rates. The rate o f interest on Aaarated corporate bonds averaged 7.82 percent in Janu
ary of this year, com pared to 7.15 percent a year
earlier. If people currently expected inflation to aver
age 7 percent over the next 10 to 20 years ( the actual
rate o f increase in 1973) then the current real rate of
interest on high grade bonds w ould be substantially
less than one percent, and w ould have declined sub
stantially since 1972, when the expected rate of infla16It can be seen from the “Annual Rates of Change of Money”
chart that the trend rate of money growth has increased, on
balance, since the mid-1960s. The trend rate reached 6
percent in late 1971 and has changed little since. The
money stock would have to grow at an average of 6 percent
for another couple of years to firmly establish a new trend
and allow prices to adjust completely.
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY
public to dispose o f excess m oney balances. On the
basis o f past experience, if the money stock continued
to grow at about the 6 percent annual rate observed
in 1973, this adjustment w ould continue for another
year or two.
R e a l M o n e y B a la n c e s *
U5I
1154
m t
I1 S I
mo
114!
19*4
lit*
IH I
1*70
1*71
1*74
Shoded oreas represent periods of business recessions os defined by the Notional Bureau of Economic Research
‘Money stock divided by the implicit price deflator for the private sector.
tion was presumably much less than 7 percent. This
seems highly improbable.
It is more likely that, while the sharp acceleration
in the rate o f com m odity inflation in 1973 was not
expected b y most people, average expectations of
the long-term rate of inflation were not revised u p
ward to the full extent o f the 1973 inflation.17 The
longer the rate o f inflation remains at 7 percent,
however, the more the expectations of inflation would
b e revised upward. An increase in the expected rate
o f inflation w ould tend to decrease the amount of
m oney demanded, in any event, as real assets and
non-money assets becom e more attractive relative to
money as stores o f purchasing power. The change in
expectations w ould then put further upward pressure
on prices.
The inflation o f last year, instead of threatening to
restrict aggregate demand b y eroding real m oney bal
ances below desired levels, reflects the efforts of the
17There is some evidence that short-term price expectations
are not of the magnitude of 1973 rate of inflation. In one
survey taken in November of last year, the consensus was
that the implicit price deflator for GNP would rise at a 5.1
percent annual rate from the fourth quarter of 1973 to the
fourth quarter of 1974. See J.A. Livingston, “Prospects for
1974? The Economists Can’t Agree,” The Philadelphia In
quirer, 30 December 1973.
There is also a strong possibility that current price indices
overstated the acceleration of inflation in 1973. While there
can be no doubt that many prices rose dramatically last
year, food prices for example, the aggregate indices are not
sufficiently flexible to capture the effects of shifts in de
mand. Given the perverse effect of price controls, the actual
rate of increase of commodity prices, on average, was prob
ably somewhat higher than reported in 1971-72 and some
what lower in 1973. As measured by the GNP deflator,
prices rose at an average annual rate of 4.7 percent over
the three years ended in the fourth quarter of 1973. The
actual rate of inflation was probably a bit below this in 1971
and somewhat above in 1973. This is difficult to document,
but it is consistent with the types of price forecasts being
made by various observers.
1974
The arguments which contend that monetary policy
is restrictive, on the basis o f the recent decline in
“real m oney balances,” im ply a recommendation to
increase the rate of money growth above the rate of
inflation in order to restore the growth of real bal
ances. Both theoretical analysis and the experience
o f other countries indicate that there are few more
dangerous courses o f action that any monetary au
thority could undertake.
The stock of money is determined b y the monetary
authorities, but the stock of “real balances” is essen
tially determined by the behavior of the public. In or
der to achieve some level of “real balances” the m one
tary authorities w ould have to b e able to control the
price level, independently of the stock of money out
standing. Monetary authorities do not have that
power. The stock of money and the rate of price
change are intimately related, in that any attempt to
force the public to hold larger m oney balances than
they desire ultimately results in accelerating inflation.
A further increase in the rate of money growth,
above its recent average rate of 6 percent per annum,
w ould only generate pressure for further inflation. It
is not possible to avoid the adjustment of real money
balances to the level desired by the public by increas
ing the rate of money growth.18
SUMMARY
The slowdown in the growth o f output in the econ
om y since early last year reflects, in large part, the
constraints on production stemming from a generally
high level of resource utilization and the perverse
effects o f price control programs. Severe limitation of
growth in energy supplies w ould work to further this
constriction o f output potential for at least a short
time. Aggregate demand continues to grow rapidly,
however, and inflationary pressure is strong.
18As an extreme example of the futility of such a policy, dur
ing the German hyper-inflation of 1920-23, the monetary
authorities interpreted the long lines of persons waiting for
bank notes as indicative of a currency shortage. In order to
meet the cash requirements at the existing prices they sought
to increase the supply of money faster than prices were
rising. The approach was to print ever larger denominations
of currency and speed the output rate of their printing
presses. See Frank D. Graham, Exchange, Prices, and Pro
duction in Hyper-Inflation: Germany 1920-23 (New York:
Russell & Russell, 1930), pp. 104-7.
Page 9
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY
1974
REAL BALANCES DURING GERMANY’S HYPER INFLATION
The inflationary experiences of Germany, Hungary,
Austria, and other countries after World War I pro
vide extreme examples of how misleading “real bal
ances” can be as an indicator of monetary policy. Take
the example of Germany in the early 1920s. The ac
companying chart shows movements in “real money
balances” for Germany in the early 1920s. The U.S.
experience provides a perspective for the enormity of
the German problem. From the chart it is obvious
that the recent decline in real balances in the United
States is almost imperceptible when compared to the
decline experienced in Germany from 1921 to late
1923.
The German hyper-inflation began with a wartime
deficit financed largely by the printing press. The
money stock kept rising after the war ended, as the
German government attempted to meet the heavy
reparations demanded by the allies. From June 1922
to November 1923, the German money stock rose by
almost 2 trillion (2,000,000,000,000) percent.1 No one
could possibly call this a restrictive monetary policy.
Nevertheless, over the same period “real money bal
ances” fell each month at an average annual rate of
over 50 percent. The reason these real balances fell
is that as expectations of inflation rose to catch up with
1See Frank D. Graham, Exchange, Prices and Pro
duction in Hyper-Inflation: Germany 1920-23 (New
York, Russell & Russell, 1930), pp. 104-7.
The danger in using “real m oney balances” as an
indicator of the thrust o f monetary actions in the cur
rent situation is that these balances can give very
misleading information. Movements in real balances
reflect the adjustment o f public behavior to discrep
ancies between desired and actual money balances.
The monetary authorities, although able to control
the growth o f money in the econom y, are not able to
secure lasting changes in real balances which are in
consistent with public demand. Ultimately, prices will
adjust to frustrate any such efforts. As prices adjust
upward the stock o f “real money balances” will tend
to decline. This fall, instead o f being indicative of
monetary restraint, reflects prior monetary stimulus.
Page 10
R e a l M o n e y B a la n c e s
200
200
United States ii-
100
100
1970
1971
200
1972
1973
200
Gem tany 12
100
100
1920
1921
1922
1923
U. In d e x o f U .S. m o n e y sto c k (19 6 7 = 1 0 0 ) d iv i d e d b y the in d e x of
w h o le s a le p r ic e s (19 67= 10 0).
[2 In d e x o f G e r m a n m o n e y sto c k (19 13= 10 0) d iv id e d b y the i n d e x
o f w h o le s a le p r ic e s in G e r m a n y (1913=100).
the phenomenal increase in prices, over 10 trillion per
cent from June 1922 to November 1923, the cost of
holding wealth in the form of currency and demand
deposits became prohibitive; the demand to hold
money balances essentially fell to zero.
Tem porary changes in real balances, above levels
desired b y the public, can be achieved, since the
public does not immediately adjust their expectations
or their behavior, and price increases will tend to lag
behind. The historical record of Germany, Austria,
Hungary, the American Confederacy, and many other
econom ies is frightening evidence of the futility of
trying to increase m oney faster than prices are rising.
All o f these economies experienced declining “real
balances” while their respective money stocks were
increasing explosively.
This article is available as Reprint No. 84.
Operations of the Federal Reserve Bank
of St. Louis — 1973
W IL L IA M L E P L E Y
I HE Federal Reserve Bank o f St. Louis is one of
twelve such banks which, with the Board o f Governors,
make up the Federal Reserve System. The St. Louis
Bank operates in the Eighth Federal Reserve District,
which encompasses all o f Arkansas and parts of
Illinois, Indiana, Kentucky, Mississippi, Missouri, and
Tennessee. In addition to the head office in St. Louis,
the Bank has branches in Little Rock, Louisville, and
Memphis.
The functions o f the Federal Reserve System in
clude the formulation and implementation of m one
tary policy, the regulation o f banks, and the provision
o f services to banks, the U.S. Government, and the
general public. The day-to-day operations of the F ed
eral Reserve Banks consist primarily o f the regulatory
and service functions. This report reviews these op
erations for the Federal Reserve Bank o f St. Louis
during 1973.
Bank Supervision and Regulation
The Federal Reserve System has responsibility for
the supervision and regulation of state-chartered
banks which are members o f the Federal Reserve
System. Nonm ember state banks which are insured
b y the Federal Deposit Insurance Corporation
(F D I C ) are supervised b y that agency as well as
state officials. National banks, although required to
be members o f the Federal Reserve System, are under
the jurisdiction of the Comptroller of the Currency.
One o f the regulatory actions o f the Federal Re
serve Banks is the processing o f applications from
state-chartered banks for membership in the Federal
Reserve System. N ew branches o f state member banks
also must b e approved b y the Reserve Banks. An
important part o f the Federal Reserve System’s con
tinuing supervision o f banks is the annual examina
tion of state member banks which the twelve Reserve
Banks conduct in their districts. The purpose o f the
examinations is to evaluate each bank’s assets, liabili
ties, capital, liquidity, operations, and management,
and to determine com pliance with applicable laws
and regulations. The Bank Supervision and Regulation
Department of the Federal Reserve Bank o f St. Louis
examined 91 banks during 1973.
The Federal Reserve System also has responsibility
for administering the Bank H olding Com pany Act.
T he responsibility o f the Reserve Banks includes the
analysis o f applications both for establishing bank
holding companies and for acquiring additional banks
and bank-related firms. In addition, supervision o f the
bank holding companies is perform ed by the Reserve
Banks. At the end of 1973, the Federal Reserve Bank
o f St. Louis had jurisdiction over 17 multi-bank h old
ing companies and 67 one-bank holding companies.
The Bank Supervision and Regulation, Legal, and
Research Departments o f the Federal Reserve Bank
o f St. Louis are involved in processing the bank hold
ing com pany applications. Factors analyzed in con
nection with these applications include the financial
conditions and managerial capabilities o f the relevant
companies, the effects on com petition expected to
result from the proposal, and likely effects on the
convenience and needs o f the areas involved. Under
certain circumstances the Federal Reserve Bank pos
sesses delegated authority to approve applications. In
most cases the recommendations o f the Federal Re
serve Bank are forw arded to the Board o f Governors
o f the Federal Reserve System for the final decision.
Page 11
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY
During 1973, 41 bank holding com pany applications
were received and accepted for processing b y the
Federal Reserve Bank o f St. Louis.
Bank holding companies are required to file annual
reports with the Reserve Banks. Also, discretionary
on-site inspections o f bank holding companies are con
ducted. This information, in addition to the examina
tion reports of subsidiary banks, is analyzed to ascer
tain the financial condition o f the holding com pany
and its subsidiaries and to determine com pliance with
applicable laws and regulations.
Applications for bank mergers are processed by the
Federal Reserve Banks when the resulting bank is to
be a state-chartered member o f the System. Factors
considered in the review o f these cases are similar to
those in bank holding com pany cases.
In addition to regulating the state-chartered mem
ber banks, the Federal Reserve System contributes to
the regulation of banks w hich are under the jurisdic
tion of the F D IC and the Comptroller o f the Cur
rency. Advisory opinions are provided by the Federal
Reserve System for proposed bank mergers which are
subject to the approval o f these agencies. The advisory
opinions are limited to a discussion of the com petitive
effects o f the proposed mergers. The Federal Reserve
Bank o f St. Louis provided advisory opinions on four
of these bank mergers during 1973.
Check Collection and Funds Transfer
The Federal Reserve System provides check collec
tion and clearing service for both member and non
member banks. Entries are made to the reserve ac
counts o f member banks to effect payment for checks.
For nonmember banks entries are made to the ac
counts o f member banks which are correspondents of
the nonmembers.
1974
As the econom y has expanded, the volum e of
checks which must be collected and cleared has in
creased. The St. Louis Bank and its branches cleared
586 million checks with a dollar value of $191 billion
in 1973. This amounted to a 14.2 percent increase in
number and an 11.9 percent increase in dollar value
over 1972 levels.
The increasing volum e o f checks has meant a
greater burden on the check clearing operation, and
automation is one o f the means being used to improve
this operation. Electronic com puting facilities are used
extensively b y the St. Louis Bank; preparations were
undertaken during 1973 for the implementation o f
more pow erful com puting facilities to im prove further
the check clearing process.
An increasing amount o f funds are transferred elec
tronically b y means o f the Federal Reserve Communi
cations System (F R C S ). This System consists o f the
Reserve Banks and their branches; the offices are
equipped with data communications terminals which
can be connected through a central switching station.
W hen immediate payment is desired, member banks
may transfer funds through the FRCS. Nonm em ber
banks, firms, and individuals can make use o f this
service through the member banks. These wire trans
fers o f funds are especially attractive for large trans
actions. During 1973, 494,000 wire transfers amount
ing to $491 billion were made b y the St. Louis Bank
and its branches, an increase o f 20.3 percent in num
ber and 23.7 percent in dollar value over 1972 levels.
In order to speed the collection and clearing of
checks, Regional Check Processing Centers (R C P C s)
have been established b y the Federal Reserve Sys
tem. The goal o f the RC PC project is to increase the
number of banks receiving overnight check clearing
service. Zones are designated for each RCPC and the
T a b le I
VO LU M E OF O PER A T IO N S 1
Num ber
(t h o u s a n d s )
1973
C he cks collected2
.........................................
.
.
5 8 5 ,7 1 3
1972
Percent
Change
5 1 2 ,9 6 6
1 4 .2 %
65 2 ,0 5 6
9 8 .0
D o lla r A m o u n t
(m illio n s)
1973
1972
$ 1 9 1 ,4 6 0 .3
$ 1 7 1 ,0 9 2 .6
7 7 .2
1 3 1 .3
Percent
Change
1 1 .9 %
70.1
C u rre n cy received a n d c o u n t e d ....................
.
.
2 7 3 ,3 0 4
2 6 6 ,3 2 3
2.6
2 ,1 4 7 .0
1 ,9 6 9 .9
9 .0
T ran sfe r o f f u n d s .........................................
U.S. S a v in g s B o n d s a n d S a v in g s N o te s3
.
.
.
.
494
1 1 ,0 2 1
410
1 0 ,3 1 1
2 0 .3
6 .9
4 9 1 ,2 4 4 .9
6 4 2 .6
3 9 7 ,2 0 4 .6
6 0 5 .6
2 3 .7
6.1
O th e r G o ve rn m e n t Securities3
....................
.
.
493
415
1 8 .8
2 3 ,8 1 2 .0
2 0 ,7 1 0 .9
1 5 .0
U.S. G o ve rn m e n t c o u p o n s p a i d ....................
.
.
683
1 4 2 ,6 3 5
706
1 2 9 ,6 1 0
— 3.3
2 4 2 .6
3 1 5 .6
2 1 9 .4
1 0 .7
2 7 3 .8
1 5 .3
F oo d c o u p o n s received a n d counted .
.
.
.
, Totai fo r the St. Louis, Little R ock, Louisville, and M emphis offices.
2Excludes Governm ent checks and m oney orders.
3Issued, exchanged, and redeemed.
Page 12
1 0 .0
FEBRUARY 1974
FEDERAL RESERVE BANK OF ST. LOUIS
banks within these zones may use this faster check
clearing service. Previously, only some banks located
close to their check clearing facilities w ere served in
this manner.
The Federal Reserve Bank o f St. Louis and its three
branch offices have been operating RCPCs since
mid-1972. These offices have always provided check
clearing facilities, but they now provide overnight
check clearing to much larger areas. Implementation
o f the Eighth District RCPC plan has involved a
gradual expansion o f the RCPC zones. In January
1973, the second phase of the RCPC plan was im ple
mented in St. Louis with the addition of 97 banks to
the St. Louis RCPC zone. The RCPC zones o f Louis
ville and Memphis have already been expanded to
the geographic boundaries of these branches. The ex
pansion o f Little Rock’s RC PC zone is approximately
90 percent complete.
Coin and Currency Operations
Coin and currency, making up approximately 23
percent of the nation’s m oney supply, are used for a
variety o f transactions.1 Currency is more w idely ac
cepted than personal checks and its use is more con
venient and less costly for smaller transactions. M em
ber banks receive or deposit coin and currency at the
Federal Reserve Banks; the necessary bookkeeping
entries are made to their reserve accounts. This service
is also available to nonmember banks, the entries
being made to the reserve accounts o f correspondent
banks which are members o f the System. Currency is
sorted at the Federal Reserve Banks, and that which
is no longer usable is rem oved from circulation and
destroyed.
During 1973, 273 million pieces of paper currency
with a value o f $2.1 billion were received and counted
by the St. Louis Reserve Bank. Pieces of coin received
and counted totalled 1.3 billion, amounting to $131
million.
Lending Activity
M em ber banks may borrow from their Federal R e
serve Banks for short periods o f time in order to meet
reserve requirements. The interest rate at which the
banks may borrow is referred to as the discount rate.
The volum e o f Federal Reserve loans to banks typi
cally rises as short-term market interest rates rise
relative to the discount rate; conversely, loan volum e
'The money supply is defined as demand deposits of the
nonbank public plus coin and currency outside banks.
declines as short-term market interest rates decline
relative to the discount rate.
The discount rate at the beginning o f 1973 was 4.5
percent; it was raised seven times during the year and
reached 7.5 percent at yearend. Short-term market
interest rates remained above the discount rate
throughout 1973. M em ber bank borrowings were quite
high, with the daily average outstanding loans rising
from $6.6 million in 1972 to $55.0 million in 1973.
During 1973, 1,759 advances were made, amounting
to $11.1 billion; this is a substantial increase from the
198 advances totalling $1.3 billion which were made
in 1972.
U.S. Fiscal Agency Operations
The Federal Government maintains checking ac
counts at the Federal Reserve Banks w hich provide
the means for making Government disbursements.
W hen the Government receives funds from taxes or
the sale o f securities, they are initially deposited in the
Treasury’s “tax and loan accounts” at designated com
mercial banks. The Treasury periodically transfers
funds from these commercial banks to its checking
accounts at the Federal Reserve Banks.
Securities subscriptions o f the Federal Government
are also handled b y the Federal Reserve Banks. The
Reserve Banks circulate the subscription forms for
new Government securities and accept applications for
their purchase. The securities are issued b y the Re
serve Banks and the funds received as paym ent are
deposited in the Treasury’s accounts. After the securi
ties have been issued and delivered, the Reserve
Banks pay the interest on the securities and redeem
them at maturity.
In 1973, 11 million savings bonds and notes and
493,000 other Government securities with a com bined
total dollar value of more than $24 billion were issued,
exchanged, or redeem ed by the Federal Reserve
Bank o f St. Louis. Also, 693,000 Government bond
coupons with a dollar value o f $242.6 million were
paid b y this Bank.
Another fiscal agency activity is the redemption of
U.S. Government fo o d coupons (com m on ly known as
“fo o d stamps” ). During 1973, 143 million fo o d cou
pons with a total value o f $315.6 million were received
and counted b y the St. Louis Bank.
Research
The Research Department o f the Federal Reserve
Bank of St. Louis contributes to the formulation of
Page 13
As o f February 1, 1974
Directors
Chairman o f the Board and Federal R eserve A gen t
F r e d e r i c M. P e i r c e , Chairman of the Board,
General American Life Insurance Company, St. Louis, Missouri
D ep u ty Chairman o f the Board
S a m C o o p e r , President,
HumKo Products, Division of Kraftco Corporation,
Memphis, Tennessee
F r e d I. B r o w n , J r ., President, Arkansas Foundry ComE d w a r d J . S c h n u c k , Chairman of the Board, Schnuck
pany, Little Rock, Arkansas
Markets, Inc., Bridgeton, Missouri
R a y m o n d C. B u r r o u g h s , President. The City National
J a m e s M. T u h o l s k i , President, Mead Johnson & ComBank of Murphysboro, Murphysboro, Illinois
pany, Evansville, Indiana
E d w i n S. J o n e s , Chairman and Chief Executive Officer,
W m . E . W e i g e l , Executive Vice President, First National
First National Bank in St. Louis, St. Louis, Missouri
Bank and Trust Company, Centralia, Illinois
H a r r y M. Y o u n g , J r ., Farmer,
Herndon, Kentucky
LITTLE ROCK BRANCH
Chairman o f the Board
President, Arkansas Business Development
Corporation, Little Rock, Arkansas
T h o m a s E. H a y s , J r ., President and Chief Executive
R o l a n d R . R e m m e l , Chairman of the Board, Southland
Officer, The First National Bank of Hope, Hope,
Building Products Co., Little Rock, Arkansas
Arkansas
H e r b e r t H . M c A d a m s , II, Chairman of the Board and
T. G. V i n s o n , President, First National Bank, Batesville,
Chief Executive Officer, Union National Bank of
Arkansas
Little Rock, Little Rock, Arkansas
A l P o l l a r d , President, A1 Pollard & Associates, Little
F i e l d W a s s o n , President, First National Bank, Siloam
Rock, Arkansas
Springs, Arkansas
W. M.
P ie r c e ,
LOUISVILLE BRANCH
Chairman o f the Board
President, Reliance Universal, Inc.,
Louisville, Kentucky
Ja m e s C . H e n d e r s h o t ,
H . D a v i s , Chairman and Chief Executive Officer,
Porter Paint Co., Louisville, Kentucky
Ja m e s
E J a c k s o n , President, The Scott County State
Bank, Scottsburg, Indiana
H arold
M. S h w a b , Chairman of the Boards, First National Bank of Louisville and First Kentucky Trust
Company, Louisville, Kentucky
J . S m i t h , President, The American National
Bank and Trust Company o f Bowling Green, Bowl-
^H e r b e r t
W il l u m ^
and
H ugh
T om
S
t
^ ube!
Technology>
Associate Dean, College of Science
Western Kentucky University,
Bowling Green, Kentucky
G. V o s s , President, The Seymour National Bank,
Seymour, Indiana
MEMPHIS BRANCH
Chairman o f the Board
President, S. C. Toof & Company,
Memphis, Tennessee
R i d l e y A l e x a n d e r , Chairman, The Second National Bank
C. B e n n e t t H a r r i s o n , Chairman of the Board, Union
of Jackson, Jackson, Tennessee
Planters National Bank of Memphis, Memphis,
W. M. C a m p b e l l , Chairman of the Board and Chief
Tennessee
Executive Officer, First National Bank of Eastern
G. L. H i c k m a n , Chairman and President, The First
Arkansas, Forrest City, Arkansas
National Bank of Oxford, Oxford, Mississippi
J e a n n e L . H o l l e y , Assistant Professor of Business
Education and Office Administration, University
of Mississippi, University, Mississippi
Page 14
C.
W h it n e y B r o w n ,
Member, Federal Advisory Council
D onald
E.
Chairman of the Board and Chief Executive Officer,
Mercantile Trust Company National Association,
St. Louis, Missouri
L asater,
Officers
D arryl
A.
E ugene
P.
G a r b a r in i,
Barry H . A lpe r ,
Jo h n
Vice President
F.
Vice President
Ja m e s R . K e n n e d y ,
Vice President
F.
Vice President,
General Counsel, and Secretary of the Board
G a r l a n d R u s s e l l , J r .,
B.
Assistant Vice President
E ugene
L.
F.
Assistant Vice President
O ertel,
Orf,
Assistant Vice President
Assistant Vice President
Assistant Vice President
A lexander P. O r r ,
K e it h
Carol
M.
P.
Claypool,
E d g a r H . C r is t ,
Jo h n
W.
Assistant Vice President
Carlson ,
R . Q u in n F o x ,
J. M . G e i g e r ,
P au l Sa l z m a n ,
Assistant Vice President
Edw ard R. S c h o tt,
Assistant Vice President
K a r l E . V iv ia n ,
Assistant Vice President
Assistant Vice President
Assistant Vice President
D e l m e r D . W e is z ,
Assistant Vice President
Assistant General Auditor
Assistant Vice President
R obert W . T hom as,
Assistant Vice President
R ic h a r d 0 . K a l e y ,
Assistant Vice President
B e r n h a r d t J. S a r t o r iu s ,
Assistant Vice President
D r u e l in g e r ,
Assistant Vice President
Lu ttrell,
J . M o r e , Assistant Counsel and
Assistant Secretary of the Board
Regulations Officer
A lbe rt E. B urger,
Vice President
K ath ryn
A rth ur
E d w a r d J. B u r d a ,
Vice President
Vice President
O t t in g ,
C l if t o n
Assistant Vice President
N orm an N. Bo w sh er,
Senior Vice President
H arold E. U t h o f f ,
Assistant General Auditor
A n ato l B. Ba lb a c h ,
First Vice President
D o n a l d W . M o r i a r t y , J r .,
Vice President
W o o d r o w W . G il m o r e ,
J erry L. Jordan,
President
C h a r l e s E. S il v a ,
Vice President
R uth A . Bryant,
F r a n c is ,
L eonard,
Senior Vice President
L eo n a ll C. A n d ersen ,
Jo se ph
R.
Assistant Vice President
C harles D. Z ettler,
Chief Examiner
LITTLE ROCK BRANCH
J o h n F. B re e n ,
M ic h a e l T . M o r ia r t y ,
T h o m as R. Ca lla w a y ,
Vice President and Manager
Assistant Vice President and Assistant Manager
Assistant Vice President
D a v id T . R e n n ie ,
Assistant Vice President
LOUISVILLE BRANCH
D onald
L.
H enry,
Jam es E. C o n rad ,
R obert
E.
Harlow ,
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.
Paul
A nthony
C . C r e m e r i u s , J r .,
I.
T e r r y B r it t ,
B l a c k , J r .,
Vice President and Manager
Assistant Vice President and Assistant Manager
Assistant Vice President
C h a r l ie
L.
E pperson ,
Jr., Assistant Vice President
Page 15
FEDERAL RESERVE BANK OF ST. LOUIS
national monetary p olicy and to the Bank’s regulatory
function. In addition, it provides econom ic data and
analyses to the public.
FEBRUARY 1974
T a b le II
C O M PARATIV 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 variety o f regional, national, and international
econom ic data is collected and analyzed b y this de
partment. The information is used b y the President
of the Bank in his participation in monetary p olicy
discussions during meetings of the Federal Open Mar
ket Committee.
Members o f the Research Department contribute to
bank regulation b y analyzing the com petitive and
p u blic interest aspects o f bank mergers and holding
com pany acquisitions. Recommendations on each
case are submitted to the Board o f Governors.
Data collected b y the Department are available to
the public in its ten regular publications. The R eview ,
with a monthly circulation in 1973 o f more than 42,000,
provides a forum for the presentation o f econom ic
research.
T he Research staff is also encouraged to publish
articles in outside econom ic journals. Several such
articles appeared during 1973.
Bank Relations and Public Information
The St. Louis Bank and its branches maintain per
sonal contact with the banks and assist member banks
with their operations related to the Federal Reserve
System. The Federal Reserve “Functional Cost Analy
sis Program” is one of the services provided to member
banks. This program provides a cost-incom e profile of
each participating bank’s major functions. The indi
vidual bank can com pare its current operating statis
tics with its past data as well as with average data for
banks of similar size.
T he Bank also maintains contact with the public
through several other activities. During 1973, officers
and staff members o f the Federal Reserve Bank of
St. Louis and its branches delivered 217 addresses
before groups o f bankers, businessmen, and educators.
The Bank was represented at 226 banker, 62 profes
sional, and 187 miscellaneous meetings. Under the
bank visitation program, 1,452 banks were visited.
During 1973, 286 groups requested films, and 3,894
visitors toured the four offices.
ASSETS
D ecem ber
31, 1973
U.S. G o ve rn m e n t Securities:
B i l l s .............................................. $ 1 , 3 8 0 , 3 1 9
C e r t i f i c a t e s ....................................
1 ,4 3 7 ,0 0 2
1 1 7 ,8 0 1
_
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 ,9 3 5 ,1 2 2
D iscou nts a n d A d v a n c e s .................... $
A c c e p t a n c e s .........................................
Fed eral A g e n c y O b lig a t io n s . . . .
T O T A L L O A N S A N D S E C U R IT IE S
2 0 ,8 8 0
—
7 2 ,4 8 2
. $ 3 ,0 2 8 ,4 8 4
G o ld Certificate A c c o u n t .................... $
S p e cia l D ra w in g R igh ts Certificate
A ccou nt
.........................................
Federal Reserve N o te s of O th e r B a n k s .
O th e r C a s h .........................................
C a sh Item s in Process of C ollection .
B a n k Prem ises ( N e t ) .........................
O th e r A s s e t s ....................................
3 5 9 ,1 5 9
$ 1 ,0 6 5 ,8 5 2
_
1 ,3 1 7 ,9 6 4
1 2 4 ,4 0 3
$ 2 ,5 0 8 ,2 1 9
$
5 1 ,8 0 0
___
4 7 ,1 1 7
$ 2 ,6 0 7 ,1 3 6
$
1 5 ,0 0 0
4 8 ,8 8 0
1 8 ,6 1 0
4 6 3 ,2 0 5
1 3 ,8 2 2
3 1 ,7 1 1
T O T A L A S S E T S .........................
L IA B IL IT IE S A N D
D ecem ber
31, 1972
5 3 4 ,2 0 6
1 5 ,0 0 0
3 5 ,1 2 4
2 1 ,1 2 0
4 4 4 ,5 8 4
1 4 ,6 0 9
3 4 ,1 4 3
$ 3 ,7 0 5 ,9 2 2
C A P IT A L A C C O U N T S
L IA B IL IT IE S
Dep osits:
M em ber Bank —
U.S. T re asu rer —
O th e r
Reserve A ccou nts
G e n e ra l A ccou nt
$
7 7 1 ,2 6 4
1 7 8 ,1 9 6
8 ,8 4 0
15 ,3 4 4
$
9 7 3 ,6 4 4
D e p o s i t s ..............................
T O T A L D E P O S I T S .........................
Federal Reserve N o te s (N e t )
$ 2 ,6 0 2 ,4 9 3
Deferred A v a ila b ilit y C a sh Item s
3 1 0 ,9 9 6
O th e r L iab ilities a n d A ccrued D iv id e n d s
3 4 ,7 6 8
T O T A L L I A B I L I T I E S ....................
$ 3 , 9 2 1 ,9 0 1
C A P IT A L A C C O U N T S
C a p ita l P a id I n .................................... $
O th e r C a p ita l A c c o u n t .........................
T O T A L C A P IT A L A C C O U N T S
T O T A L L IA B IL IT IE S A N D
C A P IT A L A C C O U N T S .
.
.
.
. $
.
$
8 1 4 ,1 6 6
1 4 2 ,4 1 8
9 ,8 6 0
1 1 ,1 7 8
$
9 7 7 ,6 2 2
$ 2 ,3 1 9 ,5 6 9
3 3 5 ,4 1 5
1 9 ,4 0 6
$ 3 ,6 5 2 ,0 1 2
2 8 ,4 8 5
2 8 ,4 8 5
—
$
2 6 ,9 5 5
26 ,9 5 5
—
5 6 ,9 7 0
$
5 3 ,9 1 0
$ 3 , 9 7 8 ,8 7 1
$ 3 ,7 0 5 ,9 2 2
M E M O R A N D A : C ontingent liabilities on acceptances purchased fo r
toreign correspondents increased from $6,086,000 on
1972 to $19,757,000 on Decem ber 31, 1973.
Financial Statements
Government securities was the primary source o f the
increase in total assets. This increase was somewhat
offset by a $175 million decrease in the G old Certifi
cate account. Approximately three-fourths of the
Bank’s assets were held in U.S. Government securities.
The remaining assets, including the gold certificate
account, the special drawing rights certificate account,
notes on other Reserve Banks, cash items in process
o f collection, and bank premises, totalled $1.04 billion.
Total assets o f the Federal Reserve Bank o f St. Louis
and its branches at the end of 1973 were $3.98 billion,
an increase o f 7 percent from the previous year (see
Table I I ). A $427 million increase in holdings o f U.S.
Liabilities o f the St. Louis Bank increased to $3.92
billion, a 7 percent increase from the end o f 1972. This
increase resulted largely from a 12 percent increase in
Federal Reserve Notes, the principal type o f currency
Page 16
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY 1974
T a b le III
CO M PARATIV E PROFIT A N D LO SS STATEMENT
{ In t h o u s a n d s o f d o lla rs)
Total e a r n i n g s ....................
N et e x p e n s e s .........................
C urrent net e a rn in g s .
N e t a d d itio n s ( + ) or
d ed u ction s (— ) . .
.
1973
1972
Percent
C hange
$ 1 8 0 ,6 7 3
2 7 ,7 9 1
$ 1 4 1 ,5 4 3
2 3 ,7 5 7
2 7 .6 %
1 7 .0
1 5 2 ,8 8 2
1 1 7 ,7 8 6
2 9 .8 %
2 ,8 6 2
— 1 ,5 9 0
1 5 0 ,0 2 0
1 1 6 ,1 9 6
29.1 %
1 ,5 4 4
8 .0 %
. —
N et e a r n in g s b efore p a y
m ents to U.S. T re asu ry
D istrib u tio n o f net e a rn in g s:
D i v i d e n d s .........................
Interest on Federal Reserve
N o t e s .........................
Tra n sferred to surp lu s
T O T A L ....................
$
1 ,6 6 7
$
1 4 6 ,8 2 3
1 ,5 3 0
1 1 2 ,8 7 3
1 ,7 7 9
$ 1 5 0 ,0 2 0
$ 1 1 6 ,1 9 6
--
30.1
1 4 .0
2 9 .1 %
in circulation. These notes
approximately two-thirds o f
Deposits, consisting mainly
accounts, amounted to $974
amounted to $2.6 billion,
the Bank’s total liabilities.
o f member bank reserve
million.
Federal Reserve Banks’ earnings result from interest
on Government securities, interest on loans to member
banks, and reimbursements for certain fiscal agency
functions. In 1973, the portion o f the Federal Reserve
System’s earnings allocated to the St. Louis Bank
totalled $180.7 million, an increase of 27.6 percent
from the previous year (see Table I I I ). After statu
tory dividends of $1.7 million were paid to member
banks and operating expenses o f $27.8 million were
covered, $1.5 million was transferred to surplus and
$147 million was paid to the Treasury as interest on
Federal Reserve Notes.
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY 1974
MONETARY DEVELOPMENTS ANI
Factors Influencing the M onetary Base in 19731
Averages of Daily Figures
Millions o f Dollars
D ecem ber
1972
Change m
D ecem ber
1973
Change
Attributable T o:
Federal Reserve Credit
U.S. Government Securities2 ________ ___ ..$71,185
Loans ______________________________
1,049
F lo a t ___________________ _________
___ ... 3,479
Other F.R. Assets _____________ _____ ___ ... 1,138
$ 79,851
1,298
3,326
1,079
$+ 8,666
+ 249
153
59
+
+
-
96.1%
2.8
1.7
0.7
T o t a l __________ __ __________________ ... 76,851
85,554
+ 8 ,7 0 3
+
96.5
Other Factors
G old Stock ______________________________ . 10,410
Special Drawing Rights Certificate Acct.
400
Treasury Currency Outstanding .............. .. 8,293
Treasury Cash Holdings3 ________ __ ____
350
Treasury Deposits with F.R. Banks3 ........
1,449
Foreign Deposits with F.R. Banks3 _____
272
Other Deposits with F.R. Banks3 ________
631
Other F.R. Liabilities and Capital3 .... .. .. 2,362
11,567
400
8,668
323
1,892
406
717
2,942
+ 1 ,1 5 7
0
+ 375
+
27
— 443
— 134
86
580
+
+
+
-
12.8
0
4.2
0.3
4.9
1.5
1.0
6.4
T o t a l________________________________ . 14,039
14,355
+
+
3.5
Total Source Base
____ $90,890
316
$ 99,910
$ + 9,0 20
7,245
5,489
-1 ,7 5 6
M onetary Base® ______________________________ .$98,135
$105,399
$ + 7,264
M onetary Base, Seasonally Adjusted5 ________..$97,006
$104,275
Reserve Adjustment4 5 _________ __ ___________ ..
100.0%
1T he monetary base is defined as the net monetary liabilities o f the U.S. Treasury and Federal Reserve System held b y com m ercial banks
and the nonbank public. For a brief description o f each o f the factors influencing the monetary base see Glossary: W eekly Federal Reserve
Statements, Federal Reserve Bank o f N ew York. Copies o f this publication are available on request from the Federal Reserve Bank o f N ew York,
Public Inform ation Department, 33 Liberty Street, N ew York, New York 10045.
“Includes Federal agency obligations and bankers’ acceptances.
3These items absorb funds and therefore a reduction in them releases reserves and increases the base (sign is reversed on dollar changes and
percent distribution).
A djustm en t for reserve requirement changes and changes in average requirements due to shifts in deposits where different reserve requirements
apply.
“C om puted b y this Bank.
Totals m ay not add due to rounding.
M argin Requirements on Listed Stocks
In effect January 1, 1973 _____________________ ____________ __ _____________
In effect D ecem ber 31, 1973 _______________________________________________
65%
65%
Discount Rate
In effect January 1, 1973 _________________________________________________
4%%
January 15, 1973 ________ ________________________________________ _5
February 26, 1973 _______________________________________________ 5%
M ay 4, 1973 _____________________________________________________ 5%
M ay 11, 1973 ____________________________________________________ 6
June 11, 1973 _ _ __ _______________________________________________6%
July 2, 1973 _____________________________________________________ _7
August 14, 1973 _________________________________________________ _IVi
In effect D ecem ber 31, 1973 ______________________________________________ 7%%
Page 18
FEDERAL RESERVE BANK OF ST. LOUIS
FEBRUARY 1974
SYSTEM POLICY ACTIONS IN 1973
M axim um Interest Rates Payable on Time & Savings Deposits1
In Effect
Jan. 1, 1973
In Effect
D ec. 31, 1973
4%%
5%
4%
5
5
5%
Savings D e p o s its __________________________________________________________________
Other Tim e Deposits
Multiple maturity:
30-89 days _____________________ _________________________________________
90 days to 1 y e a r _______________________________________________________
1 year to
2 yea rs______________________________________________________________
2% y e a rs ____________________________________________________________
2 years and o v e r _________________________________________________________
2% years and o v e r ________ __ ___________________________________________
4 years and over (minimum denomination o f $1,000) __________________
Single maturity:
Less than $100,000
30-89 days
90 days to 1 y e a r ___________________________________________________
1 year to
2 years
2% years
2 years and over
2% years and o v e r ____________________________________
4 years and over (minimum denomination o f $1,000)
$100,000 and over
30-59 days ___________________________________________
60-89 days
90-179 days _________________________________________________________
180 days to 1 y e a r __________________________________________________
1 year or more _____________________________________________________
5%
6
5%
6%
7y42/
5
5%
5
5%
6
5%
6V2
7y42/
1/
i/
s1
6%
7
7%
8/
*J
AJ
1A member bank may not pay a rate in excess o f the maximum rate payable by state banks or trust companies on like deposits under the laws of
the state in which the m ember bank is located.
2Between July 1 and O ctober 31, 1973, there was no ceiling on 4-year certificates with minimum denom ination o f $1,000. The amount o f such
certificates that a bank could issue was limited to 5 percent o f its total time and savings deposits. Sales in excess o f that amount were subject
to the 6 Vfc percent ceiling that applies to time deposits maturing in 2% years or more.
E ffe ctiv e N o v e m b e r 1, 1 9 7 3 , a ce ilin g rate o f 7 % p ercen t w as im p o se d o n certificates m atu rin g in 4 years an d o v e r w ith m in im u m den om in a tion s
o f $1,000. There is no limitation on the amount o f these certificates that banks may issue.
Suspen ded as o f June 2 4, 1970.
S usp en d ed as o f M ay 16, 1973.
Percent Reserve Requirements
Net Dem and Deposits
Over
$2 M illion Over $2 Million Over $10 M illion $100 Million
or Less
to $10 Million
to $100 M illion to $400 Million
Tim e
Deposits up
Tim e
Over $400
to $5
Deposits in
Million
M illion &
Excess o f
(Reserve City) Savings Deps. $5 M illion1
In effect Jan. 1, 1973 _____ 8
July 19, 1973 ____ 8
10
10%
12
12%
13
13%
17%
18
3
3
5
5
In effect Dec. 31, 1973 ...... 8
10Vs
12%
13%
18
3
5
E ffe ctiv e dates quoted below are deposit dates. On June 2 1, 1973 a marginal requirement o f 8 percent (the regular 5 percent plus a supple
mental 3 percent) was imposed on increases in the total amount outstanding o f $ 100,000 and over single maturity time deposits and bank-related
com m ercial paper above the level existing during the week ending May 16, 1973, or above $10 m illion, whichever is larger.
June 21, 1973 reserve requirements were reduced on Eurodollar borrowings, above the reserve-free base, from 2 0 percent to 8 percent.
July 12, 1973 finance bills were included in the total volum e subject to the supplemental reserve requirement.
August 30, 1973 m ultiple tim e deposits o f $ 100,000 or m ore becam e subject to the supplemental reserve requirement.
October 4, 1973 the supplemental reserve requirement was raised to 6 percent.
D ecem ber 13, 1973 the supplemental reserve requirement was reduced to 3 percent.
Page 19
@FedFRASER