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FEDERAL RESERVE BANK
OF ST. LOUIS
JULY 1977

The Nature and Origins of the
U.S. Energy C risis...............................

2

Revision of the Monetary B a s e ................. 13
LITTLE

Vol. 59, No. 7




The Nature and Origins of the U.S. Energy Crisis
JAI-HOON YANG

G GREG ATIVE economic policy is designed to
stabilize the general price level and the growth in
output and employment. Monetary policy, as a gen­
eral tool of aggregate demand management, seeks to
achieve these goals by affecting the volume of total
spending in the economy. Whether ultimate goals of
this policy are achieved depends to a large extent
upon the external shocks to which the economy is
subjected. Regardless of the sources of these shocks
— weather, foreign actions, or changes in institutional
conditions — they must be taken into consideration in
the process of monetary policy planning and execu­
tion. One of the recent shocks has been the sudden
and dramatic increase in the relative price of energy,
which has significantly affected U.S. productive capac­
ity.1 This article traces and analyzes the underlying
factors which were instrumental in rendering the U.S.
economy vulnerable to the energy shock.
In the wake of the Arab oil embargo in 1973-74 and
the weather-induced natural gas crisis in the winter
just passed, concern about an energy crisis has spread
across the U.S. The crisis often has been identified as
an energy gap manifested as shortages of gasoline in
1974, and of heating oil and natural gas last winter.
The emergence and the prospective persistence of
such an energy gap often have been diagnosed as
being the result of rising demand for energy and
dwindling supplies of oil and natural gas. However,
such a perception of the nature and the roots of the
energy crisis is based on an uncritical acceptance of
the “lump-of-energy” conception and on a denial of
the laws of demand.
An alternate view of the energy crisis rejects the
identification of the energy problem as a growing
imbalance between the absolute quantity of energy
demanded and supplied. Rather, the energy problem
is diagnosed as the apparent “failure” of the energy
market to accommodate the amount of energy de­
manded at policy-mandated prices, and the seemingly
1Robert H. Rasche and John A. Tatom, “The Effects of the
New Energy Regime on Economic Capacity, Production, and
Prices,” this Review (May 1977), pp. 2-12 and “Energy
Resources and Potential GNP,” this Review (June 1977),
pp. 10-24.
2
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FRASER


progressive deterioration in the capacity of the energy
market to adjust to man-made and weather-induced
shocks.
The history of U.S. energy markets reveals that
the roots of the current crisis have been nurtured
by past public policy measures. These policies were
adopted in response to demands by segments of
the energy industry for protection from the rigors of
market competition. The crisis is rooted in the sup­
planting of the market mode of competition by the
political mode. From this perspective, it is difficult to
avoid the conclusion that past public policies (pu r­
sued to shelter some segments of the energy industry)
have been, in large measure, responsible for the
energy crisis.

THE NATURE AND ROOTS OF THE
U.S. ENERGY CRISIS: TWO VIEWS
A Prevalent View
A widely accepted diagnosis of the nature of the
U.S. energy crisis is one of growing imbalance in the
nation’s energy budget. Such a diagnosis is based on
the premise that the amount of energy demanded
will continue to increase, while the amount of oil and
natural gas supplied will diminish.2 The “crisis” the
U.S. faces is often said to be a grave threat to the
nation’s economic security and the American way of
life.
This conception of the energy crisis is, thus, that of
an inexorable emergence and worsening of an energy
gap, unless dependence on nonrenewable fossil fuel in
general, and on oil and natural gas in particular, is not
reduced. In estimating the length of the “grace period”
during which plans for an oilless future must be made,
the projections of energy “demands” are based upon
alternative assumptions of the rate of growth in energy
usage in the form of oil consumption. Such projections
are typically made by extrapolating the historical
-S. David Freeman, Director, A Time to Choose, Final Report
by the Energy Policy Project of the Ford Foundation (Cam­
bridge: Rallinger Publishing Co., 1974).

FEDERAL RESERVE BANK OF ST. LOUIS

rates of growth in energy usage and by assuming
different (lower) rates of growth under alternative
conservation plans.3 Then, given geological estimates
of potentially recoverable oil reserves, the computa­
tion of the grace period becomes routine.
For example, some estimates of the grace period
use as a benchmark the estimate of about 2 trillion
barrels of total world recoverable oil. Even using a
“conservative” projection of a 3 percent rate of growth
in oil demand, as contrasted to the 8 percent rate of
growth in the 1960s, the world’s presently estimated
recoverable oil resources would be exhausted before
2020. The arithmetic is unassailable and, hence, the
spectre of freezing in the dark arises if the U.S. is not
weaned away from its dependency on oil in time.4
The policy prescriptions that often follow from such
a view of the energy problem are mandated conserva­
tion and the pursuit of technical energy efficiency
during the transition into a new energy regime.5 Such
a transition is deemed to be facilitated by a mix of
standby and regular excise and consumption taxes on
energy, subsidies, tax credits, “reform” of the utility
rate-making procedures, a system of incentive pricing
for new oil and natural gas, and by a set of mandatory
allocations and conversions to coal — the more plenti­
ful “interim” fuel.

An Alternate Market-Based View
The essence of the energy problem from the alter­
nate view is that the problem is one of apparent (or
potential) “malfunction” in the market for energy.
This view focuses squarely on the capacity of the
energy market to respond to unforeseen shocks, such
as the recent oil embargo and severe weather, and to
accommodate foreseeable changes in the quantity of
energy demanded. When the energy problem is
framed in this manner,6 the accumulated stock of
knowledge regarding the functioning of markets can
be used to diagnose the nature and the origins of the
energy problem.
•‘Ibid., pp. 19-25.
4For a graphic illustration of the apocalytic vision of the dismal
energy future evoked by the recent discussions of the energy
crisis, see Isaac Asimov, “Essay,” Time (April 25, 1977), p. 33.
"'Such a regime is characterized by renewable and essentially
inexhaustible energy sources, such as solar and wind energy,
and viable nuclear fusion technology.
(iFor a statement of this approach, see Armen A. Alchian, “An
Introduction to Confusion,” in No Time to Confuse (San
Francisco: Institute for Contemporary Studies, 1975). Also
see Edward J. Mitchell, U.S. Energy Policy: A Primer



JULY

1977

Despite its importance, energy must be viewed as a
commodity not unlike any other commodity that com­
petes for a share of limited budgets. Hence, the
amounts of energy demanded and supplied are both
determined by laws that govern consumer and pro­
ducer behavior.
According to the first law of demand, the lower the
price ( that is, the lower the sacrifice incurred in terms
of other goods that have to be given up to purchase
energy), the higher is the quantity demanded, other
things being equal.7 And, according to the second law
of demand, the longer the elapsed time after a price
fall, the greater will be the extent of substitution
toward the commodity which has become cheaper.
As prices fall, increases in the quantity demanded
occur, first, because more is demanded by the present
users and, second, because new users enter the
market.
Such an adaptive behavior on the part of consumers
is mirrored in a similar behavior on the part of pro­
ducers in an exchange system organized within a
general private property framework. Thus, a greater
quantity of energy will be supplied as prices rise be­
cause more energy will be supplied by the present
producers and new (higher-cost) producers will be
enticed to enter the market.
The nature of the energy problem from the market
view is the “inadequate capacity” of the energy mar­
ket to adjust to unexpected shocks, such as the manmade oil embargo and nature-induced severe weather
conditions. Such a conception of the nature of the
energy problem leads one to heed Santayana’s dictum
that, “those who do not learn from history are con­
demned to repeat it,” and to study the history of
energy markets in the U.S. for a clue to the roots of
the current energy crisis.
Such a study of the history of energy markets,
especially the markets for oil and natural gas, reveals
some general characteristics of the energy market
which have circumscribed its adjustment capacity,
such as the exceptionally long (three-to five-year) lead
(Washington, D.C.: American Enterprise Institute (A E I),
1974); Hendrick S. Houthakker, The World Price of Oil
(Washington, D.C.: AEI, 1976), Washington, D.C.; and
Douglas R. Bohi, Milton Russel, and Nancy McCarthy Snyder,
U.S. Congress, House of Representatives, Committee on Bank­
ing, Currency, and Housing, The Economics of Energy and
Natural Resource Pricing, A Compilation of Reports and
Hearings, 94th Congress, 1st Session, Parts 1 and 2, March
1975, pp. 1-2.30.
"Armen A. Alchian and William R. Allen, University Eco­
nomics, 3rd. ed. (Belmont, California: Wadsworth Publish­
ing Company, 1972), pp. 60-66.
Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

JULY

1977

times for end-use delivery and the common pool
problem.8 More importantly, a historical inquiry,
which will be discussed in greater detail in later sec­
tions, also reveals that deep government involve­
ment in the past has greatly attenuated the adjust­
ment capacities of the energy market.

of advocacy politics. The more successful were those
who sought relief from the rigors of competition
through political means, the less robust became the
adjustment capacity of the energy markets to unfore­
seen shocks.

For example, the legacy of the demand prorationing
system,9 which arose in the 1920s, and the subsequent
voluntary and mandatory import quotas on oil prod­
ucts (on national security grounds) in the 1950s, is
evident in the current problem. Indeed, the formation
of the oil producers’ cartel (O P E C ) in 1960 was
proximately caused by the imposition of mandatory
import quotas in the U.S. in 1959.10 The Supreme
Court’s ruling on the Phillip’s case in 1954 also was
one of the roots of the current energy problem.11 The
more recent price controls on energy imposed in
mid-1971 also have had adverse effects.

Comparison of the Two Views

The unifying thread in the apparently disparate set
of causes of the energy problem, is the replacement of
the market mode of competition by the political mode
8The common pool problem is similar to the fishery problem
in that both arise due to the ill-defined property rights over
the common resource at issue. Typically, the applicable law
with regard to property rights is the rule of capture. That is,
the exclusive property rights are created at the instant of
capturing fish or drawing oil from the pool. There exist,
therefore, incentives for co-owners of the pool to extract as
much of the oil as they singly can. Such an unrestrained
behavior on their part, however, tends to reduce the ultimate
amount of oil recoverable by drilling, relative to the more
paced rate of drilling known as the “maximum efficient rate
of production (M E R ).” Hence, the logic of joint maximiza­
tion would call for a rate of production not to exceed MER.
The problem involved in striking an agreement to promote
joint maximization is similar to the one in forming a cartel of
producers to coordinate production decisions. See U.S. Con­
gress, Senate, Committee on the Judiciary, Governmental In­
tervention in the Market Mechanism: The Petroleum Industry,
Hearings before the Subcommittee on Antitrust and Monop­
oly, 91st Congress, 1st Session, Part 2, 1969, pp. 1070-71.
nMarket demand prorationing refers to the system of allocat­
ing production quotas to individual oil producers. It arose in
response to the common pool problem in the production of
crude oil. Since the transaction costs (inclusive of negotiation
and enforcement costs of agreed upon output shares) in­
volved in determining the oil to be drawn from a common
pool by co-owners are substantial, such determination was
done through the mediation of various state regulatory
commissions. Rationing of the quota was specified in terms of
the allowable percentage of MER ( maximum efficient rate
of production), with a view to controlling total production
such that the targeted market price of oil could be sustained.
Ibid., pp. 1069-73.
10See Kenneth W. Dam, “ Implementation of Import Quotas:
The Case of Oil,” The Journal of Law and Economics
(April 1971), pp. 1-60.
n The Supreme Court ruled that the Federal Power Commis­
sion must regulate the wellhead price of natural gas flowing
in interstate commerce. Phillips Petroleum Company V.
Wisconsin, 347 U.S. 622, 1954. See Edmund W. Kitch,
“Regulation of the Field Market for Natural Gas by the
Federal Power Commission,” The Journal of Law and
Economics (October 1968), pp. 243-80.
4
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FRASER


The market-based view of the energy crisis denies
the usefulness of the prevalent conception of the
energy crisis as that of an ever accelerating shortfall
in the amount of BTUs (British Thermal Units) em­
bodied in finite and nonrenewable oil and natural gas.
The fatal flaw in the prevalent view is the failure to
perceive the fundamental distinction between (1 ) ris­
ing prices in response to changes in underlying sched­
ules of demand and supply, and (2 ) the phenomenon
of rising shortages in quantity supplied relative to
quantity demanded, because prices do not or are not
allowed to adjust fast enough to equate the quantity
demanded to quantity supplied.
According to the market view, the adherents of the
prevalent view, in advancing their various scenarios
of impending disaster, ignore adaptive human be­
havior under perceived changes in scarcity and op­
portunities. They base their scenarios instead on the
arbitrary projections of quantity demanded relative
to estimates of fixed “recoverable” reserves of oil and
gas.1- Such a mechanistic conception of the problem
neglects the roles which changes in price and tech­
nology play in inducing revisions in the estimates
of recoverable reserves, as well as in altering the
quantity demanded of oil and gas and the quantity
supplied of alternate sources of energy. Such neglect
reflects two underlying false premises.
The first premise is that energy is an “essential
resource.” According to this premise, the demand for
energy is insensitive to changes in its price. The
premise, in essence, denies the fundamental laws of
demand. This premise is falsified by the available
evidence which indicates that the quantity demanded
of energy is sensitive to both its price and consumer
income.13 More importantly, the price sensitivity of
demand for energy is greater in the long run than in
the short run.
12For a discussion of various concepts of (mineral) reserves
and the problems in estimating them, see U.S. Congress,
House of Representatives and Senate, Joint Economic
Committee, Adequacy of U.S. Oil and Gas Reserves, 94th
Congress, 1st Session, 1975, pp. 14-27.
13Dale W. Jorgenson, ed., Econometric Studies of U.S.
Energy Policy (Amsterdam: North-Holland, 1976); Also
Houthakker, The World Price of Oil, p. 8.

FEDERAL RESERVE BANK OF ST. LOUIS

The second premise is that the reserves of oil and
gas in particular, and other nonrenewable energy
resources in general, are a predetermined, fixed
“lump” which is independent of both price and tech­
nology. This premise ignores the fact that reserves are
essentially adjustable inventories which the energy
producers hold in order to safeguard their market
positions. The amount of reserves (inventories) pro­
ducers want to hold, then, is dependent upon the
perceived cost of holding them relative to the ex­
pected returns from such holdings.
The prevalent view of the nature and origins of the
energy crisis is, thus, based on twin fallacies: the lump
of energy fallacy and the denial of the fundamental
laws of demand. Such a view tends to ignore the
following facts: (1 ) that the demand for energy is a
derived demand,14 (2 ) that energy produces valued
output in conjunction with other scarce factors of
production (such as labor and capital), (3 ) that other
factors are substitutable for energy in the production
process (hence other factors are valuable, as is
energy), and (4 ) that the substitution of one form of
energy for another depends on the relative cost of
alternative forms of energy.15
Underlying the prevalent view is a concept that
could be characterized as the “BTU theory of value.”
A strict BTU theory of value would hold that energy
is the only scarce resource and, as such, is as fallacious
as the Marxian labor theory of value, which holds that
labor is the sole source of value. If the issue is pre­
sented so starkly, one would be hard put to find an
advocate of such a BTU theory of value. However,
the theory, at least in its applied forms, appears to
have substantial adherents.
A variant of the BTU theory of value imputes an
inherent, independent value to a specific source of
BTUs, such as oil or natural gas. This variant denies
the proposition that a dollar’s worth of energy (in
whatever form ) is equal in value to a dollar’s worth of
14Demand for energy is a derived demand in the sense that
an energy resource is not wanted for its own sake but for
the output of the objects of more immediate consumption,
such as comfortable temperatures and transportation services,
which energy helps to produce.
15For recent articles which document the “abundant” avail­
ability of energy at higher market prices (from such sources
as untapped natural gas reservoirs, Devonian shale and
geopressured methane), see The Wall Street Journal edi­
torial pages, 27 April 1977 and 14 June 1977. For an
account of a series of substitutions of alternate fuels used
for illuminants as the price of whale oil (the dominant light­
ing fuel in the U.S. in the early 1800s) rose drastically, see
Murray L. Weidenbaum and Reno Harnish, Government
Credit Subsidies for Energy Development (Washington,
D.C.: American Enterprise Institute, 1976), pp. 4-5.



JULY

1977

labor or capital. Therefore, a question regarding the
cost of conserving energy in terms of non-energy fac­
tors of production is seldom raised explicitly in asses­
sing the comparative merits of various energy
programs.
For example, some proposals to conserve the BTUs
embodied in natural gas would use taxation and other
measures to induce conversion to coal of electric
power and industrial plants, designed to operate on
natural gas. The question of cost-effectiveness in
terms of the total resource use, relative to the desired
output forthcoming from the production process, is
seldom fully addressed. Implicit in this view is either
a belief in the inherent value of the BTUs embodied
in natural gas and the denial of the scarcity value of
other cooperating factors, or a lingering belief that the
price of natural gas does not, or will not be permitted
to, reflect its true scarcity value.16
The market-based interpretation of the energy
problem implies that the urgent task of public policy
is to make the energy market more responsive to
unexpected shocks and expected changes in market
demand and supply conditions. Such a goal is likely
to be achieved only if tinkering in the energy market
by self-serving domestic power groups, acting through
the government, is effectively curtailed.17 Public pol16Should the price indeed reflect the true scarcity value of
natural gas, and, even given that, should some industrial
users decide to use natural gas in conjunction with the
natural gas powered capital goods already put in place (pre­
sumably because the total resource cost is lower than the
alternative of enforced capital replacement), the only basis
for questioning such a decision appears to be a BTU theory
of value.
i'In case of a discrepancy between direct private costs and
total social cost of using energy resources in the presence of
pollution externalities, an intervention through excise taxes
could be appropriate. It may also be appropriate to attempt
to induce changes in the discount rate that market partici­
pants use to optimize the time distribution of extraction and
consumption of energy resources, if a demonstrable basis
exists for a bias in the market interest rate. For a classic
discussion of the problem of social cost, see Ronald H.
Coase, “The Problem of Social Cost,” The Journal of Law
and Economics (October 1960), pp. 1-44. For a voluminous
literature inspired by the Coase work, see William J.
Baumol, “On Taxation and the Control of Externalities,”
The American Economic Review 62 no. 3 (June 1972),
pp. 307-322 and various comments on the article together
with “Reply,” The American Economic Review 64 no. 3
(June 1974), pp. 462-92. For a discussion of the “proper”
social discount rate for capital deepening decisions, see
Kenneth J. Arrow, “ Discounting and Public Investment Cri­
teria,” in Water Research, A. V. Kneese and S. C. Smith, eds.
(Baltimore: Johns Hopkins Press, 1966), pp. 28-30; Jack
Hirshleifer, James C. DeHaven, and Jerome W. Milliman,
Water Supply (Chicago, The University of Chicago Press,
1960), pp. 139-41; Stephen A. Marglin, “The Social Rate of
Discount and the Optimal Rate of Investment,” The Quar­
terly Journal of Economics 77 no. 1 (February 1963), pp.
95-111; Gordon Tullock, “The Social Rate of Discount and
the Optimal Rate of Investment: Comment,” The Quarterly
Journal of Economics, 78 no. 2 (May 1964), pp. 336-45.
Page 5

FEDERAL RESERVE BANK OF ST. LOUIS

icy becomes questionable if it is based exclusively on
conserving particular forms of energy, such as oil and
natural gas, without an explicit regard to the total cost
of that policy, including the capital cost, relative to
the demonstrable total benefits.

PAST PUBLIC POLICIES AS THE
ROOTS OF THE ENERGY CRISIS
The Natural Gas Market
The controls on the wellhead price of natural gas,
which were imposed in the 1960s, were below the
market clearing level in the 1960s. According to the
first law of demand, mentioned above, the expected
result was an increase in the quantity of natural gas
demanded by existing users of natural gas. According
to the second law of demand, as the lower price per­
sisted, there entered a new class of users, such as
electric utilities. At first glance, it would appear that
there should have been a “shortage” of natural gas, as
the quantity demanded outstripped the quantity sup­
plied when prices are held down artificially. This was
not the case, however.
It appears paradoxical that an “artificially” low price
of natural gas led to an actual increase in consump­
tion, rather than to a mere increase in attempted
consumption. Why did producers supply enough gas
to accommodate the increase in quantity demanded
at the artificially low price? The resolution of this
puzzle holds a key to unravelling the nature of the
fa lla c y im b e d d e d in th e p re v a le n t v iew of th e en ergy
problem.
The technological nature of the natural gas ( and
oil) industry is such that the industry maintains a
relatively high inventory-to sales ratio.18 The inven­
tories are held in the form of proved reserves. The
existence of inventories helps to dampen fluctuations
in the current price and facilitates quantity adjust­
ments to fluctuations in demand. The amount of re­
serves (inventories) sellers want to hold is systemat­
ically related (1 ) to the expected future market price
relative to the current price, and (2 ) to the cost of
holding inventories.
To understand what we observed in the 1960s —
(1 ) the simultaneous lowering of the regulated price
of natural gas below the market clearing level and
18This is because of the long lead time between exploration
and production. See Paul W. MacAvoy and Robert S.
Pindyck, Price Controls and the Natural Gas Shortage
(Washington, D.C.: American Enterprise Institute, 1975),
pp. 16-19.
6
Digitized for Page
FRASER


JULY

1977

increased consumption and production of natural gas,
and (2 ) the conversion to natural gas by utilities and
industrial users — it is necessary to review the history
of regulatory control on the wellhead price of natural
gas since the Phillips case of 1954.
The Federal Power Commission (F P C ) approached
its Supreme Court mandated task of regulating the
wellhead price of natural gas on a case by case basis
until the early 1960s. The case by case approach, how­
ever, put such a strain on the F P C ’s resources that the
commission itself estimated that its 1960 case load
would not be completed until the year 2043.19 Faced
with such a backlog of case load, the FPC introduced
in 1961, the Permian Basin method of area-wide
rate-making.20
Under the Permian Basin methodology, the FPC
would establish a “just and reasonable” ceiling price
for all natural gas produced within a broadly defined
producing area such as the Permian Basin in Texas or
Southern Louisiana. This method of price control re­
sulted in the practice of basing the permitted price on
the historical cost of a low cost producer in a given
area. Therefore, the new method was instrumental in
inducing a downward revision in the expected future
price of natural gas.
Chart I indicates that the hypothesized downward
revision in the expected price was in fact borne out by
the actual price behavior. The relative price of natural
gas declined on balance in the post-Permian 1960s, in
sh arp c o n trast to its risin g tren d b e tw e e n the late
1940s and the early 1960s. Chart I also shows that the
actual thrust of regulation after the Phillips case of
1954 and prior to the Permian Basin proceedings, was
such that the price of natural gas was permitted to
continue its rise relative to both the price of oil and
other prices in general.
In terms of the interpretation offered above of re­
serves as business inventories, one would expect that
the downward revision in the expected future price
of natural gas would have induced an accelerated
10Ibid., p. 12.
-°The area-wide rate making procedure, based on an adapta­
tion of the public utility rate-making approach, tended to
impart a downward bias to the regulated wellhead price.
The FPC attempted to arrive at an area-wide composite
average cost estimate based on a survey of cost data. Con­
fronted with the logically impossible problem of joint cost
allocation between oil and gas, the FPC systematically
chose the figures at the lower end of the choice set. The
Supreme Court once again ruled, in 1968, that it was within
the discretion of the FPC to adopt the area-wide ratemaking procedure, however arbitrary the rate may be.
Permian Area Rate Cases, 390 U.S. 747 (1968).

JULY

FEDERAL. RESERVE BANK OF ST. LOUIS

C h a ri I

The Relative W ellhead Prices

1977

C h a r t II

Ra tio o f N a t u r a l G a s R e se rv e s to Production 11

1947 48 49 SO 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 751976
*D a t a are incficies of constant (1967) prices.

1947 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 1974
S o u rc e : A m e r i c a n G a s A s s o c i a t i o n

downward revision in the desired reserve-to-production ratios. Such an expectation is borne out by the
behavior of the reserve-to-production ratios shown in
Chart II. The chart shows that the reserve-toproduction ratio was falling even before the Permian
Basin proceedings in the early 1960s, indicating that
the actual ratio was above the desired ratio. However,
the downward adjustment proceeded at a slower rate
of 1.8 percent per year after the Phillips case of 1954
but prior to the Permian proceedings in 1961, com­
pared to the 3.7 percent per year rate in the earlier
1947-54 period. Such behavior is consistent with the
earlier finding that regulation permitted a relative
increase in the price of natural gas prior to the
early 1960s.
The decline in the reserve-to-production ratio ac­
celerated after the Permian proceedings began early
in the 1960s. The ratio fell at the rate of 6 percent per
year from 1963 to 1970. Such an acceleration in the
decline of the ratio reflects the downward adjustment
in the desired reserve-to-production ratio induced by
the adoption of the Permian methodology.
Chart III indicates that the accelerated downward
adjustment in the reserve-to-production ratio in the
1960s took the form, first, of decelerating growth of
reserves, and then of outright reduction in reserves
since 1968. Chart IV indicates that this slowing in



L l M e a s u r e d a s the r a t io of: the b e g i n n in g a n d e n d o f y e a r f ig u r e s f o r p r o v e n r e s e r v e s o f
n a t u r a l g a s to the p r o d u c t io n o f n a t u r a l g a s d u r i n g t h a t y e a r .
[2. In c lu d e s 2 6 t rillio n c u b ic fee t a t 1 4 .7 2 p s i a a n d 6 0 ° F in P r u d h o e B a y , A l a s k a .

reserve accumulation and the eventual reduction in
reserves, can be attributed squarely to the slowing in
the search for reserves as a direct consequence of
policy-induced souring in the prospective returns on
exploration and development activities. The Chart
shows that there has been a secular improvement in
the success ratios in exploratory and development
efforts, possibly due to technological progress.1’1
Therefore, the marked reduction in the number of
successful gas well drillings since 1962, as shown in
Chart IV, is primarily due to the reduction in the
search activities. Production of natural gas, however,
did not start decreasing absolutely until 1973.
The drawing down of reserves (inventories) by
producers reconciles the apparent puzzle of an “arti­
ficially” low, controlled price and the observed in­
creases in the quantity supplied. It is ironic that the
peculiarities of the market for natural gas masked the
policy-induced disequilibrium in the market, so that
many new industrial and electric utility users switched
over to natural gas from coal. They were attracted to
natural gas because of its apparent “bargain” price
-'The conclusion regarding the success ratios also holds indi­
vidually for new-field wildcats, total exploratory wells and
development wells.
Page 7

FEDERAL RESERVE BANK OF ST. LOUIS

C h a rt III

C h a n g e s in Natural G a s Reserves*

JULY

1977

In view of the eventual emergence at the controlled
price of a shortage in the market for natural gas,
which led to supply curtailments, the decisions of new
users to convert to natural gas must be judged with
hindsight to have been ill-advised. It is doubly ironic
that these victims of the unintended side-effects of
public policy could now become targets of elaborate
tax and administrative measures.

The Oil Market

S o u rc e : A m e ric a n G a s A s s o c ia t io n
*T h is s e rie s is g e n e ra t e d b y su b tra c tin g e stim a te d p ro d u c tio n o f n a tu ra l g a s d u r in g the y e a r
from th e re se rve re v isio n s, e xte n tio n s, a n d d is c o v e r ie s d u r in g the sa m e ye a r.

and the higher cost of using coal occasioned by the
passage of various environmental legislations.
C h a rt IV

Natural G a s Drilling and Production

The preceding analysis of the nature and origins of
the natural gas crisis is applicable to the market for
oil, the other endangered specie of energy. The ad­
justment capacity of the market for oil also has been
attenuated as a consequence of past public policy. In
contrast to the unintended shortage policy followed
in the market for natural gas, a deliberate surplus
policy was followed in the market for oil. As noted
earlier, various state regulatory agencies followed a
demand pro-rationing policy to cope with the common
pool problem in the industry, which arose from the
rule of capture doctrine in existence. This, in turn,
arose from incompletely defined property rights over
oil in the ground.22
In the absence of a demand pro-rationing system
and of consolidation of an oil field under one or joint
control, violent fluctuations arose in the price of crude
oil that producers received as developed fields were
intensively mined and new discoveries made.23 The de­
mand pro-rationing system evolved to protect the joint
interests of the producers.24 Under the demand pro­
rationing system the state regulatory agencies, such as
the Texas Railroad Commission, sought to alleviate
this condition by setting total production targets for
the particular state, and by distributing the produc­
tion quotas according to a formula which favored
small and usually higher-cost producers. The ever­
present stripper wells — producing less than 20 bar­
rels per day — were usually exempted from quota
regulation altogether. The economic consequence of
this form of allocation was higher than necessary
22Since oil is mobile in underground reservoirs, it is difficult to
define and enforce property rights when the field is owned
jointly.
23Morris A. Adelman, “Efficiency of Resource Use in Crude
Petroleum,” Southern Economic Journal 31 (October 1964),
pp. 101-22.

Sources: A m eric a n A s s o c ia t io n o f Petroleum G e o lo gists, A m erica n Petroleum Institute, a n d the
Am erica n G a s A sso cia tio n .
L i B a s e d on 13.638 q u a d rillio n cubic feet of g a s p ro d u c e d in 1962.
[2 B a se d on 5 ,8 4 8 new g a s w ells in 1962. This fig u re in clu d e s e x p lo ra to ry a n d d evelopm ent wells.
[3 M e a s u re d a s the ratio of new g a s w e lls to total w ells drilled.

8
Digitized forPage
FRASER


-4This system is a classic case of “acquired regulation.” In
such a situation, regulation is supplied by the state in
response to the demand by the incumbents (mainly to
restrain entry). For the original statement of the hypothesis
of acquired regulation, see George Stigler, “The Theory of
Economic Regulation,” The Bell Journal of Economics and
Management Science (Spring 1971), pp. 3-21.

FEDERAL RESERVE BANK OF ST. LOUIS

resource costs of domestic oil, as higher-cost producers
were rewarded.
Prior to 1948, the U.S. was a net exporter of oil,
holding 31 percent of the then proven world reserves.
Thus, the U.S. occupied a position of dominance, even
greater than the position of Saudi Arabia today. But
an accelerated pace of discovery and development by
the major international oil companies of low-cost re­
serves in the Persian Gulf states began to make in­
roads into the U.S. position. Threatened by the com­
petition from low-cost foreign oil imported mainly by
the U.S. based major integrated international oil com­
panies, other domestic oil producers and refiners, who
had not developed foreign sources of oil, succeeded
in persuading the government to institute a voluntary
oil import program in 1957.25
The voluntary program failed, mostly due to the
attempts of non-major U.S. producers to import from
their recently developed wells in the Persian Gulf
area. Unlike the international majors, which had al­
ready developed extensive networks of markets out­
side the U.S., these late-comers from the U.S. seized
the opening under the voluntary import program to
increase their market share at home. As a conse­
quence, total imports as a percent of domestic pro­
duction jumped from 19.7 percent in 1957 to 22.4 per­
cent by 1959. Yielding to the intense pressure by a
coalition of domestic producers and refiners, who de­
manded protection from cheap foreign oil on “security
of supply” and other grounds, the voluntary import
program became a mandatory import quota system in
1959.26 As a result, a segment of the domestic oil in­
dustry was insulated from the rigors of competition in
the market place. The mandatory program was to last
until April 1973.
Under the Mandatory Oil Import Program, the
overall import quota was set so as to freeze the share
of imports at the level achieved in 1959. The distribu­
tion of import licenses among refiners was skewed in
favor of smaller refiners. Such refiners received a dis­
proportionately larger share of import licenses (in
effect, subsidies), which had a market value per bar­
rel equal to the difference between the higher-priced,
regulated domestic oil and the cheaper, market-priced
foreign oil.
2BSee Dam, Implementation, pp. 5-8. Also see Morris A. Adelman, The World Petroleum Market (Resources for the Fu­
ture, Inc.; Baltimore: The Johns Hopkins University Press,
1972), pp. 150-55.
26Dam, Implementation, pp. 9-14 and pp. 58-60.



JULY

1977

The conventional method of arriving at the cost of
the mandatory quota system is to add the estimated
additional consumer costs of oil products to the cost
of domestic resources unnecessarily used up to pro­
duce oil that could have been imported more cheaply.
The real cost of the Program, however, would far
exceed the conventionally estimated sum. The Pro­
gram had sown the seed of the current energy crisis
by sharply reducing the capacity of the oil market to
respond to external shocks such as the effective car­
telization of the Organization of Petroleum Exporting
Countries (O P E C ), and the Oil Em bargo of 1973.
The Program set in motion a chain of events that
culminated in the birth of OPEC in September 1960.
The imposition of the U.S. import quota, based on a
fixed share of the U.S. oil market, meant that imports
could grow only at the rate of growth of U.S. produc­
tion. This meant that the increased production that
was just coming on stream from foreign wells de­
veloped by non-major U.S. producers had to be
diverted away from the U.§. market. Precipitous price
declines ensued in the world oil market and price
competition forced the major international oil com­
panies (majors hereafter) to match the decline.
It so happened, however, that the profit-sharing
arrangement which the majors had with the oil pro­
ducing countries was on the basis of the posted price
rather than on the market price.2'7 Therefore, in order
to lighten the squeeze on their profits, the majors uni­
laterally cut posted prices in 1959 and once again in
August 1960, despite strenuous protests and explicit
warnings from the exporting countries.28 The quotainduced cut in posted prices by the majors provided
the spark for the exporting countries to form an
organization to safeguard their common interest.
It is a moot point whether such an organization
would have formed in the absence of the Mandatory
Oil Import Quota Program. The point is that the quota
system adopted in 1959 had a direct causal effect on
the formation of OPEC, and such an untoward effect
should be considered as a significant component of the
cost of import programs.
The surplus policy on domestic oil, pursued by both
state and Federal authorities at the instigation of some
segments of the industry, reduced the incentives of
the oil industry to improve efficiency and to add to
27Yoon S. Park, Oil Money and *he World Economy (Boulder:
Westview Press, 1976), pp. 27-35.
28Bohi, Russel, and Snyder, Economics of Energy, p. 47, ( p. 57
of the Compilation).
Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

its stock of oil reserves. Public policy then delivered
another blow to the oil market in the form of a series
of price freeze and control programs instituted in 1971
to fight inflation. The domestic oil price control pro­
gram had the unintended effect of killing off the
mandatory import quota system. While the domestic
price was being held down, the foreign price of oil
increased and surpassed the U.S. level, thus wiping
out the value of import licenses.
The familiar scenario of one control begetting
another, in order to deal with the unintended distor­
tions produced by the previous control, was repeated
many times.29 For example, under Phase IV of the
price control program, the Cost of Living Council
(C L C ) adopted the technique of “vintaging” to the
pricing of crude oil. A two-tier price system, with a
ceiling price on “old” crude and a market-determined
price on “new” and “released” domestic crude oil, was
designed to encourage new exploration and produc­
tion.30 The program, while encouraging domestic
exploration and development, created predictable
problems of its own, due to the fact that not every
refiner had equal access to old and new domestic
crude oil, nor to domestic and imported crude oil.
Complaints of discrimination and charges of evad­
ing the two-tier pricing system through tie-in-sales,
were often raised.31 As a consequence of the two-tier
pricing, substantial price differentials appeared in re­
fined products reflecting different access to lower and
higher-priced crude oil. The crude oil program was
instrumental in creating artificial, policy-induced com­
petitive advantages and disadvantages where none
existed. A coalition of refiners, who had not developed
their own domestic sources of old crude oil, lobbied
actively for a crude oil allocation program under
which they would receive their “equitable share” of
lower-priced old crude oil.32
When the OAPEC ( Organization of Arab Petroleum
Exporting Countries)33 embargo unexpectedly hit the
2!)For an authoritative and revealing account of the utter
frustration experienced by a former Federal Energy Office
(F E O ) administrator, see William A. Johnson, “The Impact
of Energy Controls on the Oil Industry: How to Worsen an
Energy Crisis,” in Energy: The Policy Issues, edited by
Gary D. Eppen (Chicago: University of Chicago Press,
1975), pp. 99-121.
:i0Ibid., pp. 109-110.
3'Ibid., pp. 110-111.
•‘-U.S. Congress, House of Representatives and Senate Sub­
committee on Consumer Economics of the Joint Economic
Committee, The F.E.A. and Competition in the Oil Industry,
93rd Congress, 2nd. Session, 1974, p. 17 and pp. 52-53.
33OAPEC was founded in 1967 by the Arab members of the
OPEC.

Page 10


JULY

1977

U.S. in October 1973, the energy markets, particularly
those of oil and natural gas, were tied up in knots due
to the effects of the past policies, such as demand
pro-rationing, the mandatory import quotas, and price
controls on oil and natural gas. The U.S. dependence
on foreign oil was to become larger than that which
would have resulted in a world of open markets for
natural gas and oil.34
The public policy response to the embargo exacer­
bated the adjustment problem. The Federal Energy
Office — instead of focusing on the level of stocks of
crude oil and refined products (which was the
technique used to allocate production quotas by the
Texas Railroad Commission) — focused on an antici­
pated reduction in U.S. oil imports, which was re­
peatedly overestimated. The amount of oil allocated
for consumption consistently fell below the sum of
domestic production and imports. As a consequence,
the U.S. ended the embargo period with a higher
stock of petroleum products than it started.35
In the wake of the embargo and the quadrupling of
the crude oil price, a coalition of refiners without
access to cheaper domestic old oil finally succeeded
in having the newly organized Federal Energy Ad­
ministration adopt the crude oil cost equalization
program in December 1974.36 The program was de­
signed to allocate lower-priced domestic crude oil
subject to price controls proportionately among re­
finers, and was adopted in response to the pressures
to allow all refiners to have the equal access to
cheaper domestic oil.
The principal part of the program was designed to
distribute low-cost “old” domestic crude oil propor­
tionately to all U.S. refiners through the issuance of
tickets or entitlements. The entitlements represented
rights to purchase lower-priced “old” domestic crude
just as the import licenses during the mandatory oil
import quota period represented rights to purchase
the then cheaper foreign oil. Although the situation is
reversed, the principle of resorting to political com:i4The price control on natural gas was having a delayed
impact on the quantities supplied relative to the quantities
demanded by then. Hence, the excess demand for natural
gas spilled over into the market for oil. Bohi, Russel, and
Snyder, Economics of Energy, pp. 81-7.
:ir,Richard B. Mancke, Performance of the Federal Energy
Office (Washington, D.C.: American Enterprise Institute,
1975), pp. 4-7.
:l,!See “Allocations: F.E.A. Adopts Regulations Designed to
Equalize Crude, Fuel Oil Costs,” Energy Users Report no. 69
(Washington, D.C.: The Bureau of National Affairs, Inc.,
5 December 1974), p. A-7. Hereinafter, Energy Users
Report.

FEDERAL RESERVE BANK OF ST. LOUIS

petition to alter economic outcomes remained invari­
ant. Once again, as in the import licensing and the
demand pro-rationing systems, smaller refiners (with
less than a 175,000 barrel per day capacity) were to
receive proportionately more entitlements than larger
refiners.37

JULY

1977

F igu re I

The Effects of Price C o n tro ls and Entitlements

The system of entitlements, in conjunction with the
multi-tier pricing of crude oil that was introduced
earlier, had the unintended effect of increasing U.S.
dependency on foreign oil.38 The increase in foreign
dependency was due to the joint effects of the “un­
controlled” price of “new” domestic oil being set be­
low the world (the O PEC cartel) price, and the
entitlement program. The former reduced the
domestic production below the level that would other­
wise have been attained under free (open) market
pricing, while the entitlement program had the per­
verse effect of encouraging imports by, in effect,
taxing domestic production and subsidizing imports.30
Figure I illustrates how a public policy, designed to
deal with one set of problems through intervention in
the market place, created another problem. The rise
in the world (cartel) price of oil and the domestic
price control on crude oil led to a demand by some
refiners for crude oil allocation and cost equalization
programs. Such a demand was eventually answered
by the Emergency Petroleum Allocation Act of 1973
and Crude Oil Equalization Program of 1974. In
Figure I, one can contrast the amount of imports that
would have prevailed under free market pricing and
the entitlement programs as evolved. Pw denotes the
“world” price set by O PEC.40 OPEC is assumed ready
to supply all the “residual” oil demanded by the U.S.
at Pw. In the absence of any domestic price control,
the domestic production would be OB and the im­
ports BC. However, under the price controls on both
the “old” and the “new” domestic oil at PI and P2
respectively, the U.S. producers would supply OE of
“old” oil and EA of “new” oil. The total domestic
production would now be OA and the amount of
37Energy Users Report, p. A-8.
:i8See Hans H. Helbling and James E. Turley, “Oil Price Con­
trols,” this Review (November 1975); Also Robert E. Hall
& Robert S. Pindyck, “The Conflicting Goals of National
Energy Policy,” The Public Interest no. 47 (Spring 1977),
p. 3.
MSee Milton Friedman, “Subsidizing OPEC Oil,” Newsweek
June 23, 1975, p. 75, and Hall and Pindyck, “The Conflicting
Goals,” p. 3 and p. 5.
,0The analysis abstracts from the question of how the Pw has
been chosen. Presumably, if the objective is to maximize the
joint profits (or wealth) of the OPEC members, a dominantfirm price leadership model would be relevant.



IVvI W o rld Price (set by O P EC )
P i: U.S. ’ O l d " O il Prices
P 2 : U.S. "N e w ’’ O il Price

P d : W e ig h te d A v e ra g e of D om estic a n d F oreign O il *
* Assume Controls on End-Product Prices U sin g Pass-T hrough Provisions

imports would be AC, which are purchased at price
Pw. The dependence on foreign oil increases by AB.
The introduction of the entitlement system worsens
the situation further, especially when one assumes the
existence of controls on end-product prices through
pass-through provisions, for example, on utility rates.
If we assume that the pricing of oil products is based
on the weighted average price, denoted by Pd, of
domestic and foreign oil, imported oil now increases
to AD whereas the domestic production is still at OA.
In view of the avowed objective at that time to
achieve energy self-sufficiency by 1985 (Project In­
dependence), it is indeed ironic that the policies
chosen militated against the professed goal.
Aside from the adverse effect on foreign depend­
ency, the crude oil cost equalization program raises a
fundamental question regarding the role of public
policy in the market place. Those who first asked for
allocation and, then, for cost equalization of crude oil
were those refiners who had not integrated backward
Page 11

FEDERAL RESERVE BANK OF ST. LOUIS

to production of crude oil.41 Their argument was that
it was unfair for them to be deprived of the supply of
crude oil by the integrated producers in times of
crude oil “shortage.” They argued that the price to
society of impending failures, due to their inability to
secure crude oil in times of “tight” supply, would be a
reduction of competition in the market. They sought,
through political actions, access to crude on the same
terms as the integrated producers.
However, the reasoning advanced above for politi­
cal intercessions runs counter to the concept of com­
petition in the market place. The cardinal rule of
competition is that individual participants in the
market place bear the full consequences of their own
market decisions, inclusive of those decisions regard­
ing the future supply of raw materials. One possible
strategy for an oil refiner, regarding the future source
of raw materials, is to depend on the spot market for
a supply of crude oil. This tends to be a higher risk
strategy than the alternative one of integrating back­
ward to the production of crude oil. A higher risk
strategy is associated in the long run with a higher
expected return than the alternative lower risk
strategy.
In terms of this “new view” of industrial organiza­
tion, then, the demands of some refiners for equal
access on competitive ground is difficult to defend.42
Furthermore, expected accommodations of their pleas
tend to have effects beyond the mere redistribution of
wealth from the integrated companies to those who
were not integrated. It would tend to reduce the
integrated oil companies’ incentives to explore and
develop new reserves of crude oil.
4,See Eppen, Energy, pp. 106-107.
4-For a systematic statement of the “new view” of industrial
organization, see Oliver E. Williamson, Markets and Hier­
archies (New York: The Free Press, 1975). For an applica­
tion of the new view to the U.S. oil industry, see David J.
Teece, “Vertical Integration in the U.S. Oil Industry,” in
Vertical Integration in the Oil Industry, edited by Edward
I. Mitchell (Washington, D.C.: American Enterprise Insti­
tute, 1976).

Page
12



JULY

1977

An exploration into the history of two major energy
markets in the U.S. reveals that the overriding uncer­
tainty regarding the thrust and direction of public
policy on energy has shrouded the energy markets.
Under these circumstances, decision-makers in the
energy industry were distracted from the business of
securing, processing and marketing energy products
in response to the perceived “energy consumption
policies” of individual consumers and “energy supply
policies” of fellow competitors. Instead, they have had
to play the socially unproductive game of trying to
anticipate and influence shifts in public policy.

CONCLUSIONS
The growing concern about an energy crisis has
resulted in a repeated call for a national energy
policy. Unfortunately, there are widespread miscon­
ceptions about the nature and origins of the U.S.
energy problem. Past attempts by various segments
of the energy industry to avoid the rigors of competi­
tion have resulted in public policies which have emas­
culated the energy market’s ability to adjust to manmade and nature-induced shocks. It is ironic that
those who now call for deregulation of the energy
market are the ones that had successfully sought
most of the existing regulations.
We are now faced with a “crisis,” which calls for
policy-mandated conservation measures that may be
costly in terms of economic utilization of existing
capital resources. And we seem to forget that an
unfettered energy market could, and still can, bring
forth ever expanding supplies of energy from highercost conventional sources and more exotic, alternate
sources. Also, an unencumbered energy market could,
and still can, induce effective conservation on the part
of consumers, through the working of the first and
second laws of demand. The question that remains,
however, is whether the various elements of the
energy industry will accept competitive market out­
comes in totality or demand protection from the rigors
of competition when the sledding gets tough.

Revision of the Monetary Base
ALBERT E. BURGER and ROBERT H. RASCHE
Due to space constraints, a detailed mathematical formulation of the deriva­
tion of the reserve adjustment magnitude was omitted from the presentation
here. As an Appendix to this article, such material will be made available upon
request.

TX L
H E monetary base, as published by the Federal
Reserve Bank of St. Louis, consists of member bank
deposits at Federal Reserve Banks, vault cash held by
member and nonmember banks, and currency held by
the public plus an adjustment referred to as the re­
serve adjustment magnitude ( R A M ). On the basis of
an analysis of the purpose for which RAM is to be
used and its historical behavior, it was decided to
change the method by which RAM is computed. Con­
sequently, monetary base has been revised to reflect
this new method of computing RAM.
This article explains the purpose of a reserve ad­
justment magnitude and illustrates its computation
under the method used in the past (R A M I), an
alternative method (R A M 2), and the new method
(R A M 3), which is an approximation to RAM2. After
the method of computing the new RAM is explained,
the old and revised monetary base series are com­
pared. Revised monetary base data are presented in
Appendix I.

Purpose of a Reserve Adjustment Magnitude
In the “monetary base - money multiplier” frame­
work the relationship between the base and the
money stock can be expressed as
M = mB

where the multiplier (m ), is equal to
1+ k

r (1 + t + g) + k

In this formulation of the multiplier, r represents the
reserve ratio,1 t is the ratio of time deposits to private
demand deposits (dem and deposits included in M x),
g is the ratio of U.S. Government demand deposits at
1The reserve ratio consists of legal reserve requirement ratios
plus an excess reserve ratio and a nonmember bank vault cash
ratio.



commercial banks to private demand deposits, and k
is the ratio of currency held by the nonbank public to
private demand deposits.
In a “monetary base - multiplier” framework there
are two ways to capture the effects of changes in
reserve requirement ratios on the money stock. One
way is to allow all the effect of changes in reserve
requirement ratios to appear in the r-ratio and, hence,
as fluctuations in the money multiplier. In this method
the amount of base remains unchanged and the money
multiplier rises when reserve requirement ratios are
lowered, indicating that a given amount of base held
by banks can now support a larger amount of demand
deposits. When reserve requirement ratios are raised,
the money multiplier falls, indicating that a given
amount of base held by banks can now support a
smaller amount of demand deposits.
An alternative method of isolating the effect of
changes in the reserve requirement ratio is to make
an adjustment to the base and to the money multi­
plier. This adjustment is called the reserve adjustment
magnitude (R A M ). The effect of this adjustment is to
locate the primary impact of reserve requirement
ratio changes in fluctuations of the base.
Since changes in the base are dominated by actions
of the Federal Reserve System, such as open market
operations and lending to member banks, the base is a
useful summary measure of the net effect of Federal
Reserve actions on the growth of the money stock.
The rationale for making a RAM adjustment to the
base is that legal reserve requirement ratio changes
are also under the complete control of the Federal
Reserve. Therefore, if one is interested in a variable
that summarizes the effect of Federal Reserve actions
on the monetary aggregates, it is appropriate to in­
clude these effects in movements of the monetary
base.
Page 13

FEDERAL RESERVE BANK OF ST. LOUIS

Alternative Methods of Computing RAM
This section presents three ways in which the base
could be adjusted to include the effect of changes in
reserve requirement ratios on the money stock. The
examples are kept very simple to illustrate the basics
of the process. It is assumed that required reserves
are based on current week deposits. Introduction of
lagged reserve accounting makes the example more
involved, without changing the basic results. The
computation of RAM under a system of lagged reserve
accounting is discussed at the end of this paper. The
actual procedure by which RAM is computed is some­
what more complicated than in the first example be­
cause reserve requirement ratios differ by size of de­
posit. Some of these complications are discussed after
the basic examples.
A very simplified representation of the banking
system is used to illustrate the alternative computa­
tions of the reserve adjustment magnitude. The follow­
ing assumptions are used:
(1) The only type of deposits that banks hold are
demand deposits (D ).
(2) There is no currency, hence, the money stock
(M) is equal to demand deposits (D ).
(3) Since there is no currency, the source base (B)
in this example is equal to bank reserves.
(4) The only type of bank reserves (R) are re­
quired reserves. Banks always adjust so that
excess reserves are zero.
(5) There is only one reserve requirement ratio that
applies to all demand deposits at all banks re­
gardless of the amount of deposits held by the
bank.
The following notation is used:
RAM = reserve adjustment magnitude
MB = monetary base = B + RAM
RAM
L
= ------D
R
r
= — = reserve ratio
D
R RAM
r + L = — H-------- -- adjusted reserve ratio
D
D
E
= bank earning assets

In the above simplified example, the money stock
(D ) can be expressed as:
1
— R= D
r

The process of making a reserve adjustment to the
source base involves adding RAM to the base and
adjusting the reserve ratio by a factor L. Hence:
Page
14



JULY

1977

l

—-----(R + RAM) = D
r+ L
RAM
L = ------D

The current procedure for computing RAM (d e ­
noted as R A M I) consists of accumulating the amount
of reserves liberated or absorbed by changes in re­
serve requirement ratios from some initial starting
point (under the current procedure, 1929). This
method was originally developed by Karl Brunner
and Allan Meltzer.-’ Starting from an initial time
period t, RAM I is computed as follows:
RAMI, = (rt_ j - r() D( 1
RAM1,+1 = RAMI, + (r, —r,+1) D,
RAM l (+2 = RAM 1, + RAMlt+1 + (rt+1 - r l + 2) D,+1

Under this procedure RAM I changes only when
there is a current change in the reserve requirement
ratio. For example, if the reserve requirement ratio in
t-)-l (r t+i) equals the reserve requirement ratio in the
previous period ( r t ), then R A M lt = R A M lt+1.
In the case of RAMI, the adjustment ( L ) to the
multiplier depends upon the growth of deposits. For
example, suppose that reserve requirement ratios are
lowered and then are unchanged thereafter. If de­
posits continue to grow, say as a result of open market
operations expanding bank reserves, then, since RAMI
is constant and D rises, L falls. The multiplier — -—=~
r + L
drifts upward.
An alternative method (RA M 2) is based on the
objective of holding the multiplier invariant with re­
spect to reserve requirement ratios. Under this proce­
dure, using the simplified example above, RAM would
be computed as follows:
RAM2t = (ro- r t) D,
R A M 2 t+ l = ( ro - r t+ l) D t+ l

In this method the current reserve requirement
ratio is compared to the reserve requirement ratio
( rc) in some fixed initial period. The deposits used to
compute RAM2 are current period deposits, instead
of lagged deposits as in RAMI. Also, unlike RAMI,
the reserve adjustments are not accumulated. The
-’A discussion of the procedure developed by Brunner and
Meltzer and the objective of this procedure is presented in
the Appendix which is available upon request. For another
discussion of the RAM adjustment see: Peter A. Frost, “ShortRun Fluctuations in the Money Multiplier and Monetary
Control,” Journal of Money, Credit and Banking, Part 2
(February 1977), p. 167.

FEDERAL RESERVE BANK OF ST. LOUIS

only factor that determines whether RAM is equal to
zero in any period is whether in that period, the re­
serve requirement ratio is equal to the reserve re­
quirement ratio (r0) in the initial period.
This method of computing RAM makes the multi­
plier invariant with respect to reserve requirement
ratios.3 The computation of RAM2, however, has one
serious practical defect. Its computation requires
knowledge of current period deposits. If the monetary
base is to be used as a control variable, this is a
serious deficiency. For example, the Trading Desk
would not be able to measure this week’s monetary
base until it had this week’s deposits. Consequently,
a third method of computing RAM was developed.
The objective of RAM3 is to “approximate” as closely
as possible a constant multiplier with respect to re­
serve requirement ratios, while permitting RAM in
the current week to be calculated using data available
at the start of the week.
In this example we will assume that at the start of
the current week the Federal Reserve knows what
deposits were in the previous week. Using the above
simplified banking system, RAM3 is defined in the
following manner:

JULY

To the extent that D t and D, , are about the same
size, then:
— i— under RAM3 is approximately the same as —
rt + L

ro

Examples of Use of Alternative RAM
Adjustments
Let us now turn to a simple numerical example to
further illustrate the behavior of the three methods of
adjusting the base. This example is based on the
simplified model of the banking system outlined in
the previous section. We begin by assuming that the
legal reserve requirement ratio (r) equals 12.5 per­
cent, and banks hold 200 of source base ( reserves ( R )
in our exam ple). Hence, the multiplier ( m ) is ^ = 8.
Each dollar of base held by banks supports 8 dollars
of deposits. In the first period it will be assumed that
RAM = 0. Therefore, in period I the balance sheet of
our simplified banking system would appear as
follows:

RAM3t = (ro- r t)D t_,

The reader will notice that RAM3 is very similar to
RAM2; it is based on a comparison of the current
period reserve requirement ratio and some initial
reserve requirement ratio (r0), and it is not cumula­
tive. The basic difference between RAM2 and RAM3
is that RAM3 is computed using lagged and, hence,
known deposits, instead of current period deposits.
RAM3 is an “approximation” to an invariant multi­
plier because lagged deposits are used in its computa­
tion. In any period t, under RAM3, the adjustment to
the multiplier is:
3

1

If — is the multiplier in the initial period, then at any time

ro

period t the reserve ratio (r() is equal to:

1977

P eriod I
B a n k in g System
R =

200

E =

1400

D =

1600

Where: r = .125 = ratio of reserves to deposits4
m = ^ = — = 8 = money multiplier
B
r
RAM = 0
B = R = 200

In period I the banking system is in equilibrium in
the sense that banks hold the amount of reserves they
desire to hold given their legal reserve requirement
ratio of .125 and the amount of their deposit liabilities.
If banks held more than 200 of reserves, then they
would expand their holdings of earning assets and
consequently, through the multiple expansion process,
demand deposits would rise.

r t = r o + ( r t - r o)

Since the adjustment factor L is defined as:
RAM
L = ------D
under RAM2,

L = (r0- r,)
Consequently, the adjusted multiplier at any time t is equal to:
1

1




1

Let us now assume that the Federal Reserve lowers
the required reserve ratio from .125 to .10. With
deposit liabilities of 1600 and a new, lower reserve
requirement ratio of .10, required reserves fall from
200 to 160. Therefore, in period II the banks find
themselves with excess reserves. Consequently, under
4In this simple example, required reserves are always assumed
to equal total reserves. In actual practice total reserves (R )
consist of required reserves and excess reserves.
Page 15

FEDERAL RESERVE BANK OF ST. LOUIS

JULY

1977

T a b le 1

Effects o f Policy Actions on the M o n e y Multiplier
P E R IO D S

Policy action

1

II

None

Lower
re ie rve
requirem ents

r

.1 25

RAMI

III

IV

None

Increa se
bank
reserves

.1 0

0

.1 0
40

40

V

VI

V II

None

R aise
reserve
requirem ents

Reduce
bank
reserves

.1 0

.1 0

40

40

.1 2 5
-2 2 .5

.1 2 5
-2 2 .5

RAM2

0

50

50

6 2 .5

6 2 .5

0

0

RAM3

0

40

50

50

6 2 .5

0

0
200

B

200

200

200

250

250

250

MBl

200

240

240

290

290

2 2 7 .5

1 7 7 .5

MB2

200

250

250

3 1 2 .5

3 1 2 .5

250

200

MB3
D

200

240

250

300

1600

2000

2000

2500

3 1 2 .5
2500

250

200

2000

1600

m

8

1 0 .0 0 0

1 0 .0 0 0

1 0 .0 0 0

1 0 .0 0 0

8 .0 0 0

8 .0 0 0

ml

8

8 .3 3 3

8 .3 3 3

8 .621

8 .6 2 1

8.7 9 1

9 .0 1 4

m2

8

8 .0 0 0

8 .0 0 0

8 .0 0 0

8 .0 0 0

8 .0 0 0

8 .0 0 0

m3

8

8 .3 3 3

8 .0 0 0

8 .3 3 3

8 .0 0 0

8 .0 0 0

8 .0 0 0

MB = m o n e ta ry base
B = source b ase — re q u ire d reserv es in th is exam ple
M Bl = B + KAM I
MB2 = B + RAM2
MBS = B + RAM3

D
~

1X1C

B

-

m3 =

m l = M Bl

D
MB2
D
MBS

the stated assumptions, banks expand their holdings
of loans and securities, and deposits expand, until at
the end of period II the banking system’s balance
sheet appears as follows:
Period II
B a n k in g System
R -

200

E =

1 800

D =

2000

We notice that even though the amount of base
held by banks (reserves) has not changed (R = 200
in period I and period I I ) the money stock has risen.
Essentially, lowering the reserve requirement ratio
has “liberated” 40 of reserves to support more deposits.
Deposits expand to 2000 at which point the 40 of
reserves have again been absorbed in the sense that
they are being used to support deposits.
The reserve adjustment magnitude would be com­
puted, using the three alternative methods, in the
following manner:
RAMI = (.125 - .10) 1600 = 40
RAM2 = (.125 - .10) 2000 = 50
RAM3 = ( .125 - .10) 1600 = 40
where:

r0 = .125

16
Digitized forPage
FRASER


rt = .10
Dt-i = 1600
Dt = 2000
RAMt-i = 0

The monetary base ( M B ) in period II is then com­
puted by adding the selected RAM adjustment to the
source base (reserves in our example) in period II:
M Bl = 200 + 40 = 240
MB2 = 200 + 50 = 250
MB3 = 200 + 40 = 240

In all three cases, the monetary base is increased
by the RAM adjustment. Most of the effect of lower­
ing the reserve requirement ratio is now reflected in
a movement of the monetary base. However, as shown
in Table I, only in RAM2 is all the effect located in
the base; this is the only case where the multiplier
remains constant. Using either RAM I or RAM3 the
multiplier rises, although much less than in the case
where all the effect appears in the multiplier (m ).
This result occurs because lowering reserve require­
ment ratios has two effects: (1 ) an initial effect result­
ing from reserves being liberated to support a larger
volume of deposits, and (2 ) a continuing effect that
lasts as long as the lower reserve requirement ratio
prevails, because each dollar of reserves supports a

FEDERAL RESERVE BANK OF ST. LOUIS

JULY

lowered and the banking system is allowed to adjust
to this change. Then, bank reserves are increased, for
example through open market operations, and the
banks are allowed to adjust to this change. Then,
through a series of steps, the reserve requirement
ratio is raised to its initial level and bank reserves are
reduced to their initial level. Although the range of
variation of the money multiplier (m l) associated
with a RAM I adjusted monetary base (M B 1) is much
less than with no adjustment (m ), there is still a
noticeable drift in m l over time.

Table II

Expla natio n o f Com putation o f R A M
in Table I
P e r io d III
RAMI =

(.1 0 —

RAM2 =

(.1 25 —

.1 0 ) 2 0 0 0 +
.1 0 ) 2 0 0 0 =

40 =
50

RAM3 =

(.1 2 5 —

.1 0 ) 2 0 0 0 =

50

40

P e r io d IV
RAMI =

(.1 0 —

RAM2 =

(.1 2 5 —

.1 0 ) 2 0 0 0 +
.1 0 )

RAM3 ~

(.1 2 5 —

.1 0 ) 2 0 0 0 =

0 +

2500 =

40 =

40

6 2 .5
50

P e r io d V
RAMI =

(.1 0 —

.1 0 ) 2 5 0 0 +

0 +

0 +

RAM2 =

(.1 2 5 —

.1 0 ) 2 5 0 0 =

6 2 .5

RAM3 =

(.1 2 5 —

.1 0 ) 2 5 0 0 =

6 2 .5

RAMI =

(.1 0 —

.1 2 5 ) 2 5 0 0 +

0 +

RAM2 =

(.1 2 5 —

.1 2 5 ) 2 0 0 0 =

0

RAM3 =

(.1 2 5 —

.1 2 5 ) 2 5 0 0 =

0

RAMI =

(.1 2 5 —

.1 2 5 ) 2 0 0 0 — 6 2 .5 +
4 0 = -2 2 .5

RAM2 =

(.1 2 5 —

.1 2 5 )

1600 =

0

RAM3 =

(.1 2 5 —

.1 2 5 ) 2 0 0 0 =

0

40 =

40

P e r io d VI
0 +

0 +

40 = - 2 2 . 5

P e r io d VII
0 +

0 +

0 +

larger volume of deposits than previously. Only RAM2
captures both of these effects in period II. It should
be noted that the difference between RAM3 and
RAM2 in this example is somewhat exaggerated be­
cause of the large change in deposits in the example.
In actual practice the week-to-week or month-tomonth change in deposits would be much smaller
and, hence, RAM3 would be a closer approximation
of RAM2.
In period III, RAMI and RAM2 would be un­
changed. However, RAM3 would change, rising to
50. This would result because RAM3 is computed
using lagged deposits. In period III, RAM3 would be
computed using the new, higher level of deposits
(2000). Consequently, after the initial period, the
multiplier associated with the monetary base, MB3,
would again return to the value that existed prior to
the policy change. These results are shown in Tables
I and II.
The main difficulty with computing the reserve
adjustment as RAM I (the current procedure) is that
(1 ) it does not capture the full effect of changing
legal reserve requirement ratios and (2 ) it imparts a
drift to the money multiplier as other policy actions,
such as open market operations, take place. These
results are illustrated in Table I, where the results of
a series of policy actions are outlined. In this set of
examples, the legal reserve requirement ratio is first



1977

The multiplier (m 2) associated with the monetary
base (M B2) with the reserve adjustment RAM2 is
unaffected by policy actions, remaining at 8 through­
out the whole process of adjustment to the policy
changes. The multiplier (m 3) also shows some varia­
tion. However, the variation in m3 is only of a short­
term nature associated with the fact that m3 is com­
puted using lagged deposits. Aside from this short-term
variation, m3 remains invariant with respect to the
legal reserve requirement ratio. Consequently, RAM3
has essentially the same properties as the adjustment
factor RAM2, plus the additional advantage that it is
computed using lagged and, hence, known deposits.

RAM With A Fully Specified Multiplier
Let us now examine the properties of the RAM
adjustment in the context of a complete money
multiplier specified as follows:
1+ k

m = ---------------

r (1 + t + g) + k

The objective of the reserve adjustment magnitude
(RAM3) is to hold the multiplier invariant with re­
spect to changes in legal reserve requirement ratios to
the nearest approximation possible while allowing
RAM to be computed using lagged and, hence, known
data.
Therefore, with this goal in mind, RAM3 is specified
as:
RAM3 = (r“ - r “ ) ( D ^ + D ^ + ^ - r J ) T,_2 = [(r °- r °) ( l+ g,_2)
+ f r l - ^ ) t , _ 2] D,P_2

It should be noted that RAM3 is now defined using
deposits two weeks earlier, rather than only the one
week lag that appeared in the earlier, simplified
examples. A two week lag on deposits is used because
this is the most recent deposit data available to the
Federal Reserve. On Thursday each week the Fed­
eral Reserve has deposit data for the statement week
ended one week ago. For example, on Thursday June
Page 17

FEDERAL RESERVE BANK OF ST. LOUIS

16, 1977 the Federal Reserve had preliminary deposit
data for the statement week ended Wednesday June
8, 1977. This would be the deposit data used to
compute the RAM adjustment for the week ended
June 22, 1977.
In the complete form of the money multiplier the
reserve ratio r is defined:
r=r

D D +D
'r T
(------— ) + r (——) + e + v
D

D

where: rD = legal reserve requirement ratio on demand
deposits
rT = legal reserve requirement ratio on time deposits
Dp = private demand deposits
DG = U.S. Government demand deposits at commer­
cial banks
T = time deposits
e = excess reserve ratio
v = nonmember bank vault cash ratio

The purpose of the RAM adjustment is to make the
multiplier invariant to changes in legal reserve re­
quirement ratios. Let us ignore the lag on deposits to
simplify the notation. This objective can then be
stated in mathematical notation as follows:
. D / P r+ P f ' .
°

D?

t

/ T , \

d , d |V d ?

r° \ D tP / " r , (

D

D

/ T x

DP

T\D P
J

P t

T

T

Consequently: L = (r - r ) (----- -— ) + (r - r ) ——
D,
DP

This expression can be rewritten in the following
manner:
, D

D, „

,

. T

T.

L = <r „ - r , ) ( ' + g ) + ( r 0 “ r t ) ‘

It can be seen from this formulation of the adjusted
reserve ratio that the reserve ratio (r) is not held
invariant with respect to all factors influencing it. For
example, changes in the member bank excess reserve
ratio (e ), and the nonmember bank vault cash ratio
(v ) will change the total reserve ratio (r ). Because
legal reserve requirement ratios on demand deposits
are set at different levels from those on time deposits,
a shift of deposits between demand and time de­
posits will also affect the reserve ratio. Further, to the
extent that there are different legal reserve require­
ment ratios on the same type of deposits, as is the
current case where reserve requirement ratios are
applied in a graduated manner by size of bank de­
posits, shifts in deposits between different reserve
categories will change the r-ratio. The RAM adjust­
ment is not intended to hold the reserve ratio invariant
in the face of these types of changes. Also, it is
apparent that an adjustment factor designed to hold
the multiplier invariant with respect to reserve re­
Page 18




JULY

1977

quirement ratios will depend upon the g- and t-ratios
that appear in the multiplier.

Computation of RAM
The new reserve adjustment magnitude is com­
puted taking the reserve requirement ratios that
existed in 1929 as the initial values for the reserve
requirement ratios. In 1929 these ratios were set as
follows:
N et D e m a n d
D ep osits

Time
D ep osits

Central Reserve C ity B a n k s

13%

3%

Reserve C ity B a n ks

10

3

7

3

C o u n try B a n ks

These ratios correspond to the r0 used in the sim­
plified example presented in the previous section.
They are the ratios that are used each period, along
with the current ones, to compute RAM. If current
period reserve requirement ratios are equal to the
1929 ratios, RAM is equal to zero.5 If current period
ratios are larger (sm aller) than 1929 ratios, then RAM
is negative (positive).
Changes in the structure of legal reserve require­
ment ratios were relatively minor until 1972. The
major time deposit change was in mid-1966 when
deposits were split into savings deposits, other time
deposits of $0-5 million and over $5 million.
On net demand deposits the legal reserve require­
ments were originally established for three classes of
banks — central reserve city, other reserve city and
country banks. The central reserve city classification
was eliminated in 1962, and in January 1968 the re­
quirement on net demand deposits by class of bank
was split into $0-5 million and over $5 million. The
major change came in late 1972 when member banks’
required reserves were computed on net demand de­
posits of $0-2, $2-10, $10-100, $100-400, and over
$400 million.
As an example of how RAM was computed for the
structure of legal reserve requirement ratios in mid1972, we begin with the following distribution of de­
mand deposits:
O v e r $ 5 m illion

$ 0 -5
Reserve C ity B a n k s in
N .Y. a n d C h ica go *5
O th e r

Reserve C ity B a n ks

C o u n try

B a n ks

(

110

m illion

$ 3 2 ,0 1 5

779

5 1 ,9 6 8

2 1 ,0 0 6

4 4 ,0 7 5

m illion

"'Since reserve ratios were fixed by law until 1935, RAM is
zero up to this date. The first change in legal reserve re­
quirement ratios took place in August 1936.
“Formerly central reserve city banks.

FEDERAL. RESERVE BANK OF ST. LOUIS

JULY

The reserve adjustment magnitude associated with
demand deposits is then computed by multiplying the
deposits in each category by the appropriate differ­
ence between current reserve requirement ratios and
those that existed in 1929. The structure of legal re­
serve requirement ratios on demand deposits in mid1972 was as follows:

ginning in November 1972 graduated reserve require­
ment ratios were applied against the volume of de­
posits held by a bank. For example, at the end of
November 1972 the following set of legal reserve
requirement ratios on net demand deposits was in
effect:
$ 0 -2

$ 0 - 5 m illion O v e r $ 5 m illion
Reserve

C ity

C o u n try

Banks

Banks

RAMD =
+
+
=

13

.1 2 5

.1 3 0

O ver $ 4 0 0

1 7 '/ ,

$ 9 2 , 6 8 6 m illion

O th e r Time
O v e r $ 5 m illion

2 1 ,1 7 7
1 1 7 ,7 7 6

the reserve adjustment magnitude on time deposits
was computed in the following manner:
RAMT = (.03 - .03) 92,686 + (.03 - .03) 21,177
+ (.03 - .05) 117,776 = -$2,356 million

As can be seen in this example, the only difference
between required reserve ratios on time deposits in
mid-1972 from those that existed in 1929 is that re­
serve requirements on the volume of other time de­
posits in excess of $5 million are 5 percent in 1972,
compared to 3 percent in 1929. Hence, the RAM
adjustment on savings and other time deposits up to
$5 million is zero, and since the reserve requirement
ratio on other time deposits in excess of $5 million is
greater in 1972 than 1929, this adjustment is negative.
In November 1972 there was a major change in the
method by which legal reserves on demand deposits
were calculated. The previous division of banks into
reserve city and country banks was eliminated. Be­



12

$ 1 0 0 -4 0 0

The next step in computing the reserve adjustment
magnitude is to compute the part associated with
time deposits (R A M T ). This procedure is essentially
the same as that used for RAMD. In 1972, this is
somewhat easier than RAMD, because there are
fewer deposit categories to consider. All banks faced
a reserve requirement ratio of 3 percent on savings
deposits and 3 percent on the total amount of other
time deposits up to $5 million, and 5 percent on the
amount of other time deposits in excess of $5 million.
Given the following distribution of time deposits in
mid-1972:

$ 0 - 5 m illion

8%

10

.1 7 5

(.13 - .17) 110 + (.13 - .175) 32,015
(.10 - .17) 779 + (.10 - .175) 51,968
(.07 - .125) 21,006 + (.07 - .13) 44,075
- $9,197 million

S a v in g s

m illion

$ 2 -10
$ 10-100

.1 7 0

Consequently, the reserve adjustment magnitude
for demand deposits (R A M D ) equals:

1977

Since no such reserve requirement categories existed
in 1929, this change made it necessary to construct a
set of reserve requirement ratios that would have
been comparable to the 1929 set. What reserve re­
quirement ratios in 1972, based on the net demand
deposit categories, would have been equivalent to the
1929 ratios? The distribution of deposits in November
1972 was used to construct these base period ratios.
The proportion of deposits in each category held by:
(1 ) New York and Chicago banks (the former central
reserve city banks), (2 ) other reserve city banks, and
(3 ) country banks was determined. This distribution
is given in the table below.
Prop ortion of D e p osits b y
D e p o sit C a te g o ry

B a n k Location

$ 0 -2

$ 2 -1 0

$ 1 0 -1 0 0

O ver
$400
M illio n

$100400

N .Y . & C h ic a g o

.0 0 0 2 8

.001 1 2

.01 251

.0 3 3 5 2

.1 6 2 1 2

O th e r Reserve City

.0 0 1 9 8

.0 0 7 8 7

.0 8 1 3 6

.1 3 7 0 8

.1 2 4 9 5

C ou ntry

.0 6 6 0 6

.1 3 4 6 8

.1 8 5 5 8

.0 4 9 0 8

.0 0 1 8 0

Sum

.0 6 8 3 2

.1 4 3 6 7

.2 7 9 4 5

.2 1 9 6 8

.2 8887

The numbers in each of the cells were computed by
dividing total deposits in that category held by that
class of banks by total deposits. For example, country
banks holdings of demand deposits in the $0-2 million
category were 6.6 percent of total demand deposits
subject to reserve requirements. The number at the
bottom of each column gives the proportion of total
deposits in that categoiy. For example, 27.9 percent
of total demand deposits subject to reserve require­
ments fell in the $10-100 million category.
To compute the appropriate base period (1929
equivalent) reserve requirement ratio for each deposit
category, the proportion of deposits in each cell is
multiplied by the 1929 ratio applicable to that cate­
gory of banks. Then this total is divided by the num­
ber at the bottom of the column. For example, the
1929 equivalent reserve requirement ratio applicable
to deposits in the $0-2 million category is computed
in the following manner:
(.00028) (.13) + (.00198) (.10) + (.06606) (.07) _
.06832
Page 19

JULY

FEDERAL RESERVE BANK OF ST. LOUIS

The new set of 1929 equivalent reserve requirement
ratios is as follows:
$ 0 -2

m illion

.0 711

$ 2 -1 0

.0 7 2 1

$ 1 0 -1 0 0

.0 8 1 4

$ 1 0 0 -4 0 0

.0 9 7 9

O ver $ 4 0 0

.1 1 6 7

As an example of the computation of RAMD under
the new reserve requirement categories, in early 1973
the distribution of demand deposits subject to reserve
requirements was approximately as follows:
$ 0 -2

m illion

$ 1 0 ,7 7 3

$ 2 -1 0

2 2 ,7 4 9

$ 10 - 1 0 0

4 5 ,5 3 3

$ 1 0 0 -4 0 0

3 6 ,4 0 0

O ver $ 4 0 0

5 1 ,0 1 0

m illion

Hence, RAM D was computed as follows:
RAMD = (.0711 - .08) 10,773 + (.0721 - .10) 22,749
+ (.0814 - .12) 45,533 + (.0979 - .13) 36,400
+ (.1167 - .175) 51,010 = -$6,630 million

Additional Factors in the Computation of RAM
To complete the computation of the reserve adjust­
ment magnitude requires consideration of some addi­
tional factors: (1 ) vault cash, (2 ) special reserve re­
quirements imposed on selected bank liabilities, (3 )
special waivers of penalties for reserve deficiencies,
(4 ) the reserve carryover privilege, and (5 ) the lag
on deposit data and vault cash.
Vault cash — Between mid-1917 and November
1959 member banks could use only their deposits at
Federal Reserve Banks to meet their legal reserve
requirements. In a series of stages beginning Decem­
ber 1, 1959 member banks were allowed to count
part of their vault cash as legal reserves, and after
November 23, 1960 they were allowed to count all
their vault cash toward meeting legal reserve require­
ments. This action by the Federal Reserve is viewed
in the computation of RAM as a reduction in reserve
requirement ratios.7 Consequently, after November
23, 1960, all current vault cash holdings of member
banks are treated as part of RAM.
This method of treating vault cash has an important
effect on the level of RAM and some effect on the
variability of RAM. Under the old method of com­
puting RAM, the early 1960 release of vault cash to
meet required reserves was treated as a one time
7See the technical Appendix to this article which is available
upon request.

Page 20


1977

permanent event. RAM was increased by $2,492 bil­
lion, the amount of vault cash released by the end of
1960, and, thereafter, this was unchanged. Under the
new procedure, as banks’ holdings of vault cash varies,
RAM varies. For example, the vault cash adjustment
to RAM rose from about $2.5 billion in December
1960 to about $6.5 billion in January 1973, and then
increased an additional $2.5 billion by January 1977.
Special reserve requirements — Beginning in Octo­
ber 1969 the Federal Reserve introduced reserve re­
quirements against special classes of bank liabilities.
Since Oct. 16, 1969, member banks have been
required under Regulation M to maintain reserves
against foreign branch deposits computed on the basis
of net balances due from domestic offices to their for­
eign branches and against foreign branch loans to
U. S. residents. Since June 21, 1973, loans aggregat­
ing $100,000 or less to any U. S. resident have been
excluded from computations, as have total loans of a
bank to U. S. residents if such loans do not exceed
$1 million. Regulation D imposes a similar reserve
requirement on borrowings from foreign banks by
domestic offices of a member bank. The reserve per­
centage applicable to each of these classifications is
4 per cent. The requirement was 10 per cent orig­
inally, was increased to 20 per cent on Jan. 7, 1971,
was reduced to 8 per cent effective June 21, 1973,
and was reduced to 4 per cent effective May 22,
1975. Initially certain base amounts were exempted
in the computation of the requirements, but effective
Mar. 14, 1974, the last of these reserve-free bases
were eliminated. . . .
A marginal reserve requirement was in effect be­
tween June 21, 1973, and Dec. 11, 1974, against in­
creases in the aggregate of the following types of obli­
gations: (a) outstanding time deposits of $100,000
or more, (b) outstanding funds obtained by the bank
through issuance by a bank’s affiliate of obligations
subject to existing reserve requirements on time de­
posits, and (c) beginning July 12, 1973, funds from
sales of finance bills. The requirement applied to
balances above a specified base, but was not appli­
cable to banks having obligations of these types aggre­
gating less than $10 million.8
There were no reserve requirement ratios in 1929
that corresponded to these special reserve require­
ments. However, these special requirements absorbed
bank reserves in the same manner as an increase in
regular reserve requirement ratios. Consequently,
these actions are included in RAM by entering, as a
negative item, the volume of required reserves gener­
ated by these special reserve requirement ratios. This
8Board of Governors of the Federal Reserve System, Annual
Statistical Digest 1971-1975 (Washington, D. C.: Board of
Governors of the Federal Reserve System, 1976), p. 328.

FEDERAL RESERVE BANK OF ST. LOUIS

negative adjustment to RAM amounted to about $400
million from late October 1969 through March 1970.
This adjustment reflected required reserves on bank
Eurodollar borrowings. Over the next six months the
amount of this adjustment declined, reaching about
$100 million in mid-September 1970. Then, for about
three months there was a rise in required reserves
resulting from the introduction of graduated reserve
requirements against funds obtained by member
banks through issuance of commercial paper by their
afliliates.
Initially this raised the adjustment factor to about
$300 million. However, after a few months, the
amount of required reserves associated with these
special reserve categories had fallen below $100
million, at which level they remained until about
mid-1973. With the introduction of the “over the base
period” reserve requirements on time deposits and a
reserve requirement on the funds from sales of finance
bills along with the increased use of Eurodollars by
banks, the amount of this adjustment rose sharply,
reaching about $1.5 billion in August 1974. In D e­
cember 1974, with the removal of the “over the base
period” requirement on time deposits, the size of this
adjustment began to decrease sharply, falling to
around $300 million in January 1975. By mid-1975 it
amounted to only about $100 million where it has
remained.

JULY

1977

June 1976, and since then have fluctuated between
about $150-$160 million.
These actions by the Federal Reserve were essen­
tially the same as an increase in member bank re­
serves. Instead of directly increasing member bank
deposits at Federal Reserve Banks, the Federal Re­
serve gave the banks an “overdraft privilege.” The
banks appear to have treated this “overdraft privilege”
exactly the same as an increase in deposits at Federal
Reserve Banks. For example, the level of excess re­
serves of member banks, computed to include the
allowable deficiencies, remained at about the same
level during the period from late 1972 to mid-1974 as
in the previous 4 year period. Consequently, the total
of these allowable deficiencies are included in RAM
for each month in which they were in effect.
The Board of Governors includes these allowable
reserve deficiencies in total member bank reserves.
Hence, the amount of this item can be computed by
subtracting from total member bank reserves the sum
of member bank reserves with the Federal Reserve
Banks and member bank currency and coin. For his­
torical data these items are available in the Federal
Reserve Bulletin table entitled “Member Bank Re­
serves, Federal Reserve Bank Credit, and Related
Items,” and for current data Table 1.12 “Reserves and
Borrowings Member Banks.”

Reserve Carryover Privilege

Waiver of penalties for reserve deficiencies — In
November 1972, and again in November 1975, the
Federal Reserve instituted a practice of allowing, un­
der certain conditions, Federal Reserve Banks to
waive penalties for member bank reserve deficiencies.
Beginning with the week ended November 15, 1972,
Federal Reserve Banks were allowed to waiver penal­
ties for a transition period in connection with bank
adaption to Regulation J, as amended November 9,
1972.9 These allowable deficiencies averaged $330
million in November, $428 million in December 1972
and then declined through June 1974 after which they
were eliminated. Starting with the reserve settlement
week of November 19, 1975 a policy of allowable re­
serve deficiencies was reinstituted in accord with
Board policy of permitting transitional relief when a
nonmember bank merges with an existing member
bank, or when a nonmember bank joins the Federal
Reserve System. These waivers averaged $135 million
in January 1976, rose to a peak of $160 million in

Lag on Deposit and Vault Cash Data

9Effective November 9, 1972 banks were required to pay cash
items presented by a Federal Reserve Bank on the day of
presentation in funds available to the Federal Reserve Bank
on that day.

In any week the most recent deposit and vault cash
data are those on deposits and vault cash held by
member banks two weeks earlier. Consequently, the
RAM adjustment for any class of deposits is com-




In the September 1968 revision of Regulation D the
Federal Reserve also instituted a reserve carryover
privilege under which either an excess or deficiency of
reserves of up to 2 percent of average required re­
serves could be carried forward to the next week. In
one sense it could be argued that this carryover privi­
lege should be treated as a regulatory change supply­
ing reserves and, hence, should be part of RAM.
However, the size of the carryover is determined,
within limits, by the banks. Hence, we have chosen
not to include this factor in RAM. Instead, its influ­
ence remains in the money multiplier where it ap­
pears as a factor influencing the variance of the
excess reserve ratio. On balance, the influence of the
reserve carryover has been very small, remaining at
about $100 million with little variation since late 1968.

Page 21

FEDERAL RESERVE BANK OF ST. LOUIS

M il lio n s o f D o ll a r s

JULY

C h a rt I

C h a r t II

M onetary B ase

M ultiplier
M il li o n s of D o ll a r s

N o t S e a s o n a lly A d ju ste d

135

135

1977

3.2

3.2

3.1

3.1

3.0

3.0

^ 132.12

130

130

V

/
j

125
Av . /

120

125

s/

/

23.06
/■

120

P re v io u sly Report id M onetary Base/—
115

A
/

110

/

115

W

/

105
/•--t /

105

/

/

100
f ' v/

/

/

95

v \ A

2.9

f\

v v /

100

2.9

M ultipli er A sso cia te w ith
M o n e ta ry B ase
\VA \ .NeW
—^

110
2.8

2.8

2.7

2.7

R evis ed M onetary B a se

\
95

r~ J

90

90

2.6 v iVr - i

VvA K

V V --*

/

^ V v V

\
V'-\

\'2 .5 6

'A
85

85

80

80

2.5

h lu ltip lle r A s soc iate d w it
Previc u sly Reportf d M o n e ta ry B a se

2.5

\
O

A '

\

A

W I

2.4
75

2.6

s ­\

'2 .3 9

2.4

75
70

70
197 2

1973

1974

1975

1976

2.3

2.3
197 2

1977

L a t e s t d a t a p lo t te d : M a y

puted by taking the difference between the currently
effective reserve requirement ratio on the class of
deposits and the base period reserve requirement
ratio applicable to that class of deposits and multi­
plying this result by deposits of two weeks earlier.
The RAM associated with the ith class of deposits in
period t is:

197 3

1974

1975

1976

1977

L a t e s t d a t a p lo t te d : M a y

(3 ) Follow steps (1 ) and (2 ) for demand deposits
and time deposits.
(4 ) Subtract from RAM the amount of required
reserves on all deposits subject to special reserve
requirements.
(5 ) Add to RAM the amount of waiver privileges.

RAM i,t = (r
—ri,.)
D i,t. — 02
v i, o
t'

Likewise, the vault cash added to RAM in the current
week is vault cash held two weeks earlier.

Summary of the Computation of RAM
The new RAM adjustment is, therefore, computed
in the following steps:
(1 ) Determine the distribution of member bank
deposits subject to reserve requirements according to
reserve requirement categories two weeks earlier.
(2 ) Compare the current reserve requirement ratio
for each reserve requirement category with the cor­
responding 1929 equivalent reserve requirement ratio
for the category. Multiply the difference between the
1929 equivalent ratio and the current ratio by the
amount of deposits in that category two weeks earlier.
If the current reserve requirement ratio exceeds the
1929 ratio, this reduces RAM. If the current ratio is
less than the 1929 ratio, this amount is a positive
entry to RAM.
22
Digitized for Page
FRASER


(6 ) Add to RAM the amount of vault cash held by
member banks two weeks earlier.

Comparison of the Old and New Monetary
Rase Series
Table III and Charts I and II present a comparison
of the old and new RAM, old and new monetary
Table

C o m pa riso n of O L D an d
Base D a ta: J anu ary

NEW

M onetary

1972-M ay

1977

( N o n s e a s o n a ll y Adjusted M o n t h ly D a t a )
M ean
O ld M o n e ta r y B ase

$1 1 0 . 4 1 5

N e w M o n e ta r y B ase

$ 1 0 0 ,5 9 2

O ld

$

RAM

New R A M

7 .0 3 9

$ -2 .7 8 4

O ld M u ltip lie r

2 .5 3 5

N e w M u ltip lie r

2 .7 8 8

FEDERAL RESERVE BANK OF ST. LOUIS

JULY

1977

Table IV

Janu ary

1972 - M a y

1977

N o t S e a s o n a lly Adjusted Da ta
Const.

Time

m

D2

D3

D4

D5

D6

D7

D8

D9

-.0 0 1 6 8 8
(-1 3 .3 5 )

-. 0 0 1 8 0 5
( - .89)

-.0 1 8 7 0 4
(-7 .2 7 )

-. 0 1 8 1 1 4
(-6 .2 1 )

-. 0 0 7 1 3 8
(-2 .2 8 )

-.0 2 8 5 2 5
(-8 .7 4 )

-.0 1 5 9 7 9
(-4 .7 3 )

-.017531
(-5 .1 8 )

-.0 2 2 7 4 6
(-6 .9 3 )

-.0 1 5 8 6 4
(-5 .1 8 )

-. 0 1 3 9 3 9 ^ -.011 306
(-5 .1 9 ) ' ' (-5 .5 5 )

1.001846
(176.79)

.001678
(-1 4 .2 9 )

-.0 0 1 6 7 0
( - .83)

-.0 1 8 6 0 5
(-7 .3 6 )

-.0 1 7 9 4 4
(-6 .2 7 )

-. 0 1 5 1 0 9
(-5 .0 3 )

-. 0 1 3 1 0 4
(-4 .9 6 )

-.0 1 1 1 4 3
(-5 .5 5 )

1.000114

.013315
(-4 .5 1 )

-.0 0 9 5 5 5
(- 3 . 7 1 )

-.00 8 5 81
(-4 .4 2 )

1.117275

R2 =

R2 =
-.0 0 2 3 9 2
(-1 6 .7 0 )

-.0 0 3 4 3 0
(-1 .7 6 )

-.015481
(-6 .2 7 )

-.01 3 5 01
(-4 .8 0 )

.98

SE =

-.0 0 6 7 5 7
(-2 .2 0 )
.98

SE =

-. 0 0 1 8 5 8
( - .61)

R* — .99

.0043

-.0 2 8 1 2 5
(-8 .8 1 )
.0042

-.0 2 4 4 0 7
(-7 .7 1 )

SE =

.0042

DW =

2.39

-. 0 1 5 5 2 6
(-4 .6 9 )
DW =

2.37

-. 0 1 3 0 0 0
(-3 .9 7 )
DW =

2.42

J =

-.01 4 9 51
(-4 .5 6 )
p =

D ll

.768

-. 0 1 6 8 2 3
(-5 .0 8 )
p =

D IP

-.0 2 2 0 1 3
(-6 .8 5 )

(189.31)

.755
-.0 1 9 8 0 5
(-6 .2 5 )

(175.15)

.802

N O T E S : N u m b ers in p a re n th e se s a re t-s ta tis tic s
m ^ = M l -r P reviously re p o rte d m o n e ta ry base
m | = M l -£• (P re v io u sly re p o rte d m o n e ta ry base + reserves released by w aiv er p riv ileg e )
m j* = M l -7- N ew m o n e ta ry base series based on revision o f m ethod o f c o m p u tin g R A M
D l, . .

D l l a re dum m y v ariab les fo r J a n u a ry th ro u g h N ovem ber

base, and the multipliers (money stock divided by
base) for the period January 1972 through May 1977.
All data are on a nonseasonally adjusted basis. As
shown in Table III, the difference between the mean
value of the old RAM and the new RAM is about $10
billion over the last 5 years.10 Consequently, the old
monetary base averaged about $10 billion more than
the base using the new method of computing RAM.
Correspondingly, the mean of the new money multi­
plier is about 10 percent higher than the mean value
of the old multiplier (2.788 vs. 2.535).
To examine whether the revision of RAM had an
effect on the relationship between the monetary base
and money (M l), the money multiplier was regressed
on a time trend. These results were compared to simi­
lar regressions using the previously reported monetary
base and the previously reported monetary base with
a RAM adjustment that included the waivers that are
10Since the new RAM is not a cumulative sum of past
changes in RAM, the level of RAM is not influenced by the
starting point for computation of RAM.




incorporated in the new RAM. The results of these
regressions are reported in Table IV. Nonseasonally
adjusted monthly data was used in all the regressions
and each regression included seasonal dummy
variables.
Since In m = In M — In B, the regressions reported
in Table IV indicate how much of the variance of the
difference between the growth rate of the money stock
and the monetary base is not explained by a time
trend in the multiplier, seasonal variation, or auto­
correlation in the errors. There have been several
changes in reserve requirement ratios in the last five
years and, consequently, if there was a major effect
resulting from our revision of RAM we would have
expected to observe its effects in the last five years. As
shown by a comparison of the standard errors associ­
ated with the three equations, the revision of the base
resulting from changing the method of computing
RAM has had essentially no effect on the residual
variance in the relationship between the base and Ml.
(Appendix I follows on next page.)

Page 23

APPENDIX I
Revised W eekly M onetary Base
(Billions of Dollars)
N o n se a son ally Adjusted
W eek Ended

1/ 7/76
1/1 4 /7 6
1 /21/76
1 /28/76
2/ 4/76
2 /1 1 /7 6
2 /1 8 /7 6
2 /2 5 /7 6
3 / 3/76
3 /1 0 /7 6
3 /1 7 /7 6
3 /2 4 /7 6
3/3 1 /7 6
4 / 7/76
4 /1 4 /7 6
4/2 1 /7 6
4 /2 8 /7 6
5 / 5/76
5 /1 2 /7 6
5 /1 9 /7 6
5 /2 6 /7 6
6 / 2/76
6 / 9/76
6 /1 6 /7 6
6 /2 3 /7 6
6 /3 0 /7 6
7 / 7/76
7 /1 4 /7 6
7 /2 1 /7 6
7 /2 8 /7 6
8 / 4/76
8 /1 1 /7 6
8 /1 8 /7 6
8 /2 5 /7 6
9 / 1/76
9 / 8/76
9 /1 5 /7 6

Source B a s T

Total R A M

113.5
111.9
111.6
110.2
110.2
109.5
111.3
110.4
110.4
110.1
111.3
111.7
111.8
111.6
112.6
114.3
113.2
114.0
112.7
113.8
113.3
113.7
113.5
114.7
114.3
115.0
115.4
115.3
116.4
115.0
115.6
114.8
116.2
115.6
115.2
115.1
115.6

-0.5
0.7
0.4
0.4
0.3
0.5
-0.1
-0.3
0.2
0.6
0.1
-0.4
0.0
0.3
0.5
-0.4
0.1
0.3
1.0
0.3
0.3
0.7
1.0
0.7
0.4
0.7
0.9
1.1
0.1
0.8
0.9
1.2
0.7
0.4
0.9
1.3
1.4

Se a so n a lly Adjusted

M onetary B a se

113.0
112.6
112.0
110.6
110.5
110.1
111.2
110.1
110.7
110.7
111.5
111.3
111.8
111.8
113.1
113.9
113.4
114.3
113.7
114.2
113.7
114.4
114.5
115.4
114.7
115.7
116.3
116.4
116.5
115.8
116.4
116.0
116.9
116.0
116.0
116.3
117.0

M onetary B ase

110.5
110.6
110.9
111.1
111.5
111.2
111.9
111.7
112.5
112.4
112.5
112.7
113.0
112.8
113.5
114.1
114.1
114.6
114.0
114.4
114.3
114.9
114.9
115.4
115.1
115.7
115.5
115.3
115.4
115.6
116.3
115.9
116.7
116.6
116.7
116.6
117.3

N o n se a so n a lly Adjusted_____________ Se a so n a lly Adjusted
Week Ended

Source B ase

9/2 2 /7 6
9 /2 9 /7 6
10/ 6/76
10/13/76
10/20/76
10/27/76
11/ 3/76
11/10/76
11/17/76
11/24/76
12/ 1/76
12/ 8/76
12/15/76
12/22/76
12/29/76
1/ 5/77
1/12/77
1/19/77
1/26/77
2/ 2/77
2/ 9/77
2 /1 6 /7 7
2/23/77
3 / 2/77
3/ 9/77
3/16/77
3/2 3 /7 7
3/3 0 /7 7
4 / 6/77
4/1 3 /7 7
4/2 0 /7 7
4/2 7 /7 7
5/ 4/77
5/11/77
5/18/77
5 /2 5 /7 7
6/ 1/77

115.8
115.5
115.8
115.8
117.7
116.4
116.9
116.8
118.8
118.9
119.4
118.7
120.0
120.8
121.3
121.1
120.0
120.1
119.0
117.6
117.3
117.8
118.2
117.5
117.6
118.5
119.4
119.3
119.3
119.9
121.9
120.9
121.0
120.5
121.4
120.5
121.1

Total RAM

Monetary B ase

0.4
1.1
1.1
1.4
0.1
0.7
1.1
1.4
0.9
0.5
1.1
1.4
1.6
0.8
1.2
1.5
1.9
1.7
1.7
1.8
2.0
1.8
1.0
1.6
1.8
2.0
1.0
1.6
1.9
2.3
0.9
1.6
2.0
2.4
1.9
1.8
2.1

116.2
116.5
116.8
117.2
117.8
117.1
118.0
118.2
119.7
119.3
120.5
120.1
121.6
121.6
122.5
122.6
121.9
121.8
120.7
119.5
119.3
119.6
119.3
119.2
119.3
120.4
120.3
120.9
121.2
122.1
122.8
122.4
123.0
122.8
123.3
122.3
123.2

M onetary B ase

117.2
117.6
117.8
117.7
118.0
118.2
118.7
118.6
119.3
119.1
119.5
119.0
119.6
119.2
119.4
119.6
119.9
120.0
120.9
120.4
120.6
120.5
120.6
121.1
121.2
121.5
121.9
122.4
122.2
122.8
123.1
123.0
123.4
123.3
123.4
123.0
123.7

Revised M onthly M onetary Base
(Billions of Dollars)
N o n se a so n a lly Adjusted
M onth

1/47
2/47
3/47
4/47
5/47
6/47
7/47
8/47
9/47
10/47
11/47
12/47
1/48
2/48
3/48
4/48
5/48

Source B ase

44.9
44.3
44.3
44.1
44.1
44.4
44.6
44.7
45.5
45.7
45.6
46.2
45.8
44.9
45.0
44.7
44.7


http://fraser.stlouisfed.org/
Page 24
Federal Reserve Bank of St. Louis

Total R A M '

-7.1
-7.0
-6.9
-6.8
-6.8
-6.9
-6.9
-7.0
-7.1
-7.2
-7.3
-7.3
-7.4
-7.4
-7.7
-7.6
-7.6

Se a so n a lly Adjusted

M onetary B ase

37.9
37.3
37.4
37.3
37.3
37.5
37.7
37.7
38.4
38.5
38.3
38.9
38.4
37.5
37.3
37.0
37.1

M onetary B ase

37.5
37.7
37.8
37.8
37.8
37.8
37.8
37.8
38.2
38.2
38.0
38.0
38.0
37.9
37.7
37.6
37.6

N o n se a so n a lly Adjusted
M onth

6/48
7/48
8/48
9/48
10/48
11/48
12/48
1/49
2/49
3/49
4/49
5/49
6/49
7/49
8/49
9/49
10/49

Source B ase

45.2
45.5
45.7
46.7
48.0
48.1
48.4
47.8
47.1
46.9
46.6
45.6
45.5
45.0
44.3
43.5
43.6

Total R A M 1

-7.9
-8.1
-8.1
-8.8
-10.2
-10.3
-10.3
-10.4
-10.3
-10.2
-10.1
-8.9
-8.8
-8.0
-7.1
-6.3
-6.4

Se a so n a lly Adjusted

M onetary B ase

37.3
37.4
37.6
37.8
37.8
37.9
38.1
37.5
36.8
36.7
36.5
36.6
36.7
37.0
37.1
37.2
37.2

M onetary B ase

37.6
37.5
37.6
37.6
37.5
37.5
37.2
37.1
37.1
37.1
37.1
37.1
36.9
37.1
37.2
37.0
36.9

N o n se a so n a lly Adjusted
M onth

11/49
12/49
1/50
2/50
3/50
4/50
5/50
6/50
7/50
8/50
9/50
10/50
11/50
12/50
1/51
2/51
3/51
4/51
5/51
6/51
7/51
8/51
9/51
10/51
11/51
12/51
1/52
2/52
3/52
4/52
5/52
6/52
7/52
8/52
9/52
10/52
11/52
12/52
1/53
2/53
3/53
4/53
5/53
6/53
7/53
8/53
9/53
10/53
11/53
12/53
1/54
2/54
3/54
4/54
5/54
6/54
7/54
8/54
9/54
10/54
11/54

Source B a s T

43.6
44.0
43.7
43.2
43.1
43.0
43.0
43.2
43.4
43.3
43.8
44.0
44.1
45.2
45.4
46.1
46.4
46.5
46.2
46.9
47.1
47.1
47.6
48.3
48.4
49.4
49.1
48.4
48.6
48.2
48.3
49.0
49.6
49.4
49.9
50.2
50.6
51.7
50.9
50.2
50.2
49.8
49.8
50.3
49.8
49.7
49.9
49.9
50.3
50.9
50.5
49.5
49.4
49.1
49.3
49.5
49.1
48.4
48.4
49.0
49.5




Total R A M 1

-6.4
-6.5
-6.5
-6.6
-6.5
-6.5
-6.4
-6.4
-6.5
-6.6
-6.6
-6.7
-6.7
-6.8
-7.7
-9.0
-8.9
-9.0
-9.0
-8.9
-9.0
-9.0
-9.0
-9.1
-9.2
-9.3
-9.5
-9.5
-9.4
-9.4
-9.3
-9.3
-9.4
-9.7
-9.6
-9.6
-9.7
-9.8
-10.0
-9.9
-9.7
-9.7
-9.5
-9.4
-8.5
-8.5
-8.6
-8.6
-8.5
-8.6
-8.7
-8.7
-8.6
-8.6
-8.5
-8.4
-7.9
-7.1
-7.2
-7.2
-7.4

Se a so n a lly Adjusted

M onetary B l s e

37.2
37.6
37.2
36.6
36.6
36.5
36.5
36.8
36.9
36.7
37.2
37.3
37.4
38.4
37.7
37.1
37.5
37.5
37.2
38.0
38.1
38.1
38.6
39.2
39.2
40.2
39.6
38.9
39.3
38.8
39.0
39.7
40.1
39.7
40.3
40.6
40.9
41.9
40.9
40.4
40.5
40.1
40.3
40.9
41.3
41.2
41.3
41.3
41.7
42.2
41.7
40.7
40.8
40.6
40.8
41.2
41.2
41.3
41.2
41.8
42.1

M onetary Base

36.8
36.6
36.9
37.0
36.9
37.1
37.1
37.0
36.9
36.8
37.0
37.0
37.1
37.4
37.4
37.5
37.8
38.1
37.8
38.1
38.1
38.2
38.5
38.9
38.8
39.1
39.3
39.3
39.6
39.5
39.6
39.8
40.1
39.8
40.2
40.3
40.5
40.8
40.6
40.8
40.8
40.8
40.8
41.1
41.3
41.3
41.2
41.1
41.3
41.1
41.5
41.2
41.1
41.1
41.4
41.3
41.2
41.4
41.2
41.6
41.6

_____________ N o n se a so n a lly Adjusted______________Se a so n a lly Adjusted
M onth

12/54
1/55
2/55
3/55
4/55
5/55
6/55
7/55
8/55
9/55
10/55
11/55
12/55
1/56
2/56
3/56
4/56
5/56
6/56
7/56
8/56
9/56
10/56
11/56
12/56
1/57
2/57
3/57
4/57
5/57
6/57
7/57
8/57
9/57
10/57
11/57
12/57
1/58
2/58
3/58
4/58
5/58
6/58
7/58
8/58
9/58
10/58
11/58
12/58
1/59
2/59
3/59
4/59
5/59
6/59
7/59
8/59
9/59
10/59
11/59
12/59

Source B ase

50.0
49.2
48.6
48.4
48.6
48.6
48.8
49.1
49.0
49.1
49.4
49.7
50.5
49.8
48.9
49.2
49.1
49.1
49.5
49.6
49.4
49.8
49.8
50.4
51.3
50.3
49.4
49.5
49.7
49.5
49.9
50.2
49.9
50.1
50.1
50.3
51.4
50.4
49.6
49.3
49.0
49.0
49.6
49.9
49.8
49.8
49.9
50.3
51.3
50.4
49.7
49.7
50.0
50.1
50.3
50.7
50.6
50.6
50.6
50.8
51.4

Total R A M 1

-7.5
-7.5
-7.5
-7.4
-7.3
-7.4
-7.4
-7.4
-7.4
-7.4
-7.4
-7.5
-7.5
-7.6
-7.6
-7.4
-7.4
-7.4
-7.4
-7.5
-7.4
-7.4
-7.5
-7.5
-7.6
-7.7
-7.6
-7.4
-7.5
-7.6
-7.5
-7.5
-7.6
-7.4
-7.5
-7.6
-7.5
-7.7
-7.6
-6.9
-6.5
-6.2
-6.3
-6.4
-6.4
-6.4
-6.4
-6.4
-6.5
-6.6
-6.6
-6.5
-6.4
-6.5
-6.5
-6.5
-6.5
-6.5
-6.5
-6.5
-6.5

M onetary B ase

42.6
41.7
41.1
41.0
41.3
41.2
41.4
41.7
41.6
41.8
42.0
42.2
43.0
42.2
41.4
41.8
41.6
41.6
42.0
42.1
42.0
42.4
42.3
42.9
43.8
42.7
41.8
42.0
42.2
41.9
42.4
42.7
42.3
42.7
42.7
42.7
43.8
42.7
42.0
42.4
42.6
42.8
43.4
43.5
43.4
43.4
43.5
43.8
44.8
43.8
43.2
43.2
43.5
43.5
43.8
44.2
44.1
44.1
44.1
44.3
44.9

M onetary B ase

41.4
41.5
41.7
41.4
41.8
41.7
41.5
41.7
41.7
41.7
41.8
41.8
41.9
42.0
42.0
42.2
42.1
42.1
42.1
42.0
42.1
42.3
42.1
42.5
42.6
42.5
42.4
42.5
42.7
42.4
42.5
42.6
42.4
42.6
42.5
42.4
42.7
42.5
42.7
42.9
43.0
43.2
43.4
43.3
43.5
43.3
43.4
43.5
43.7
43.6
43.8
43.7
43.9
43.9
43.9
44.0
44.1
44.1
44.0
44.0
43.8
Page 25

N o n se a son ally Adjusted
M onth

1/60
2/60
3/60
4/60
5/60
6/60
7/60
8/60
9/60
10/60
11/60
12/60
1/61
2/61
3/61
4/61
5/61
6/61
7/61
8/61
9/61
10/61
11/61
12/61
1/62
2/62
3/62
4/62
5/62
6/62
7/62
8/62
9/62
10/62
11/62
12/62
1/63
2/63
3/63
4/63
5/63
6/63
7/63
8/63
9/63
10/63
11/63
12/63
1/64
2/64
3/64
4/64
5/64
6/64
7/64
8/64
9/64
10/64
11/64
12/64
1/65

Source B a se

50.6
49.5
49.4
49.6
49.7
49.9
50.4
50.2
49.8
50.0
50.2
49.7
49.0
48.4
48.3
48.4
48.4
48.8
49.1
49.3
49.5
49.9
50.4
51.2
50.5
49.8
49.9
50.3
50.4
50.8
51.3
51.1
51.2
51.5
51.3
52.2
51.5
51.0
51.1
51.4
51.6
52.1
52.7
52.5
52.8
53.0
53.7
54.9
54.1
53.4
53.8
54.0
54.2
54.9
55.3
55.4
55.8
56.1
56.7
57.7
57.0


Page 26


Total R A M 1

-6.3
-6.3
-6.1
-6.1
-6.1
-6.1
-6.1
-6.1
-5.9
-5.5
-5.6
-5.3
-4.0
-4.1
-4.1
-4.2
-4.2
-4.2
-4.1
-4.1
-4.2
-4.2
-4.3
-4.3
-4.2
-4.1
-4.2
-4.3
-4.3
-4.3
-4.3
-4.3
-4.2
-4.2
-3.6
-3.5
-3.4
-3.4
-3.5
-3.6
-3.5
-3.5
-3.5
-3.5
-3.5
-3.5
-3.5
-3.5
-3.3
-3.4
-3.5
-3.6
-3.5
-3.5
-3.5
-3.5
-3.5
-3.5
-3.6
-3.6
-3.4

N o n se a so n a lly Adjusted

Se a so n a lly Adjusted

M onetary B a se

44.3
43.3
43.3
43.5
43.6
43.8
44.3
44.1
43.9
44.6
44.6
44.4
44.9
44.3
44.1
44.2
44.3
44.6
45.0
45.1
45.3
45.7
46.1
46.9
46.3
45.6
45.7
46.0
46.1
46.5
47.0
46.8
47.0
47.3
47.7
48.7
48.1
47.5
47.6
47.8
48.1
48.6
49.2
49.0
49.4
49.6
50.2
51.4
50.7
50.0
50.3
50.4
50.7
51.4
51.8
51.9
52.3
52.6
53.2
54.1
53.6

M onetary B ase

44.0
43.8
43.8
43.9
44.0
43.9
44.1
44.1
43.9
44.5
44.3
43.4
44.7
44.8
44.6
44.6
44.6
44.8
44.8
45.2
45.4
45.7
45.8
45.9
46.0
46.1
46.2
46.5
46.5
46.7
46.8
46.9
47.0
47.2
47.4
47.6
47.7
48.0
48.1
48.2
48.6
48.7
49.0
49.1
49.4
49.5
49.9
50.2
50.4
50.5
50.8
50.8
51.2
51.5
51.6
52.0
52.4
52.5
52.9
52.8
53.1

M onth

2/65
3/65
4/65
5/65
6/65
7/65
8/65
9/65
10/65
11/65
12/65
1/66
2/66
3/66
4/66
5/66
6/66
7/66
8/66
9/66
10/66
11/66
12/66
1/67
2/67
3/67
4/67
5/67
6/67
7/67
8/67
9/67
10/67
11/67
12/67
1/68
2/68
3/68
4/68
5/68
6/68
7/68
8/68
9/68
10/68
11/68
12/68
1/69
2/69
3/69
4/69
5/69
6/69
7/69
8/69
9/69
10/69
11/69
12/69
1/70
2/70

Source B a s T

56.5
56.6
57.0
57.1
57.7
58.3
58.2
58.5
59.1
59.6
61.0
60.4
59.7
59.8
60.4
60.6
61.0
62.0
61.6
62.3
62 5
63.0
64.1
63.7
63.2
63.1
63.2
63.3
64.0
64.7
64.6
65.2
65.8
66.4
67.8
67.6
67.1
67.5
67.8
68.1
68.8
69.6
69.8
70.0
70.8
71.7
73.1
72.8
71.9
71.7
72.3
73.3
73.5
73.6
73.8
73.7
74.3
75.5
76.7
76.3
75.2

Total R A M 1

-3.5
-3.5
-3.5
-3.6
-3.6
-3.6
-3.6
-3.5
-3.5
-3.6
-3.5
-3.4
-3.5
-3.5
-3.5
-3.6
-3.6
-3.7
-4.0
-3.9
-4.2
-4.3
-4.1
-4.1
-4.2
-4.1
-3.6
-3.7
-3.7
-3.6
-3.7
-3.7
-3.8
-4.0
-3.9
-4.1
-4.3
-4.5
-4.6
-4.5
-4.5
-4.6
-4.6
-4.7
-4.8
-4.9
-4.8
-4.9
-5.0
-4.9
-5.2
-5.7
-5.4
-5.3
-5.2
-5.1
-5.4
-5.6
-5.5
-5.6
-5.6

S e a so n a lly Adjusted

M onetary B a se

M onetary B ase

53.0
53.1
53.4
53.6
54.1
54.7
54.6
55.0
55.6
56.1
57.5
57.0
56.2
56.3
56.9
57.0
57.4
58.3
57.6
58.3
58.3
58.7
60.0
59.6
59.0
59.0
59.6
59.6
60.3
61.1
60.9
61.5
62.0
62.5
63.8
63.5
62.9
63.0
63.2
63.6
64.4
65.0
65.3
65.4
65.9
66.8
68.3
67.9
66.9
66.8
67.1
67.6
68.0
68.3
68.6
68.6
68.9
69.9
71.1
70.7
69.6

53.4
53.7
53.9
54.0
54.2
54.5
54.8
55.0
55.5
55.8
56.2
56.4
56.6
56.9
57.4
57.5
57.5
58.1
57.8
58.5
58.3
58.4
58.7
59.0
59.4
59.6
60.0
60.1
60.5
60.9
61.0
61.6
62.0
62.2
62.5
62.8
63.3
63.7
63.7
64.0
64.6
64.7
65.3
65.5
66.0
66.5
66.9
67.2
67.4
67.6
67.5
68.1
68.2
68.1
68.6
68.7
69.0
69.6
69.7
70.0
70.2

N o n se a so n a lly Adjusted
M onth

Source B ase

75.2
76.2
76.6
76.8
77.9
78.1
78.7
78.7
79.3
80.9
81.1
80.5
80.7
81.5
82.4
82.8
84.1
84.0
84.4
84.6
85.4
86.7
87.2
86.1
86.7
87.9
88.5
88.9
90.0
90.2
90.1
91.5
90.2
90.9
91.5
90.0
90.9
92.3
92.9
93.4
95.6
95.8
96.1
97.4

3/70
4/70
5/70
6/70
7/70
8/70
9/70
10/70
11/70
12/70
1/71
2/71
3/71
4/71
5/71
6/71
7/71
8/71
9/71
10/71
11/71
12/71
1/72
2/72
3/72
4/72
5/72
6/72
7/72
8/72
9/72
10/72
11/72
12/72
1/73
2/73
3/73
4/73
5/73
6/73
7/73
8/73
9/73
10/73

Total R A M 1

N o n se a so n a lly Adjusted

Se a so n a lly Adjusted

M onetary B ase

M onetary B ase

Month

Source B ase

Total R A M '

69.6
70.4
71.0
71.5
72.4
72.6
73.1
73.5
74.2
75.9
75.8
75.0
75.3
76.0
76.9
77.4
78.6
78.6
78.9
79.1
79.9
81.2
81.4
80.2
80.8
81.7
82.3
82.9
84.0
84.1
84.2
85.2
86.5
88.5
88.8
87.2
87.9
89.0
89.7
90.3
92.0
91.6
91.7
92.4

70.4
70.9
71.4
71.7
72.1
72.6
73.3
73.7
73.9
74.4
75.0
75.7
76.1
76.5
77.2
77.6
78.2
78.6
79.1
79.3
79.7
79.8
80.5
81.0
81.6
82.2
82.6
83.1
83.6
84.2
84.4
85.5
86.3
86.9
87.9
88.1
88.8
89.4
89.9
90.5
91.4
91.6
92.1
92.8

11/73
12/73
1/74
2/74
3/74
4/74
5/74
6/74
7/74
8/74
9/74
10/74
11/74
12/74
1/75
2/75
3/75
4/75
5/75
6/75
7/75
8/75
9/75
10/75
11/75
12/75
1/76
2/76
3/76
4/76
5/76
6/76
7/76
8/76
9/76
10/76
11/76
12/76
1/77
2/77
3/77
4/77
5/77

98.2
100.0
100.4
99.0
99.5
101.6
102.7
103.4
105.1
105.0
105.3
105.6
106.9
108.7
107.5
105.5
105.6
106.6
106.7
108.6
109.2
109.0
109.1
109.5
111.0
113.0
111.6
110.2
111.4
112.9
113.6
114.3
115.4
115.5
115.6
116.4
118.4
120.2
119.8
117.5
118.7
120.4
121.0

-4.8
-4.5
-4.4
-4.6
-4.7
-5.1
-5.3
-5.4
-5.6
-5.7
-5.5
-5.2
-4.9
-4.5
-3.9
-3.3
-2.8
-2.7
-2.4
-2.1
-1.8
-1.6
-1.5
-1.6
-1.1
-0.7
0.2
0.1
0.1
0.1
0.5
0.7
0.7
0.8
1.0
0.9
1.0
1.2
1.7
1.6
1.6
1.7
2.0

-5.6
-5.7
-5.6
-5.3
-5.5
-5.6
-5.6
-5.2
-5.1
-5.1
-5.3
-5.4
-5.4
-5.5
-5.5
-5.4
-5.5
-5.4
-5.5
-5.5
-5.5
-5.5
-5.8
-5.8
-5.9
-6.1
-6.2
-6.0
-6.0
-6.0
-5.9
-6.3
-3.6
-2.4
-2.6
-2.8
-3.0
-3.3
-3.2
-3.1
-3.6
-4.2
-4.4
-4.9

S e a so n a lly Adjusted

M onetary B ase

M onetary B ase

93.4
95.5
96.0
94.4
94.9
96.5
97.4
98.0
99.5
99.3
99.7
100.4
102.0
104.2
103.6
102.2
102.9
103.9
104.3
106.5
107.4
107.4
107.6
107.9
109.9
112.3
111.9
110.3
111.5
113.0
114.2
114.9
116.1
116.4
116.6
117.3
119.4
121.4
121.6
119.1
120.3
122.1
123.1

93.1
93.8
95.0
95.4
95.8
96.9
97.6
98.2
98.9
99.3
100.1
100.8
101.6
102.3
102.6
103.4
103.9
104.3
104.5
106.6
106.7
107.4
108.0
108.3
109.4
110.2
110.9
111.6
112.6
113.5
114.4
115.1
115.4
116.5
117.2
117.9
118.9
119.3
120.5
120.6
121.5
122.6
123.3

Com ponents of Revised RAM
(Billions of Dollars)
N o n se a so n a lly Adjusted
M onth

1/72
2/72
3/72
4/72
5/72
6/72
7/72
8/72
9/72
10/72
11/72
12/72
1/73

RAM on
D em and D e p o sits Time D e p o sits

-9.5
-9.2
-9.1
-9.3
-9.4
-9.2
-9.4
-9.4
-9.3
-9.5
-7.3
-6.4
-6.8




-2.1
-2.1
-2.1
-2.1
-2.2
-2.2
-2.2
-2.3
-2.4
-2.4
-2.4
-2.5
-2.6

N o n se a son ally Adjusted

Other R a m ?

V ault C a sh

Total R a m 3

-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
0.3
0.4
0.2

5.9
5.5
5.4
5.4
5.5
5.5
5.7
5.7
5.8
5.7
5.8
6.1
6.5

-5.8
-5.8
-5.9
-6.1
-6.2
-6.0
-6.0
-6.0
-5.9
-6.3
-3.6
-2.4
-2.6

M onth

2/73
3/73
4/73
5/73
6/73
7/73
8/73
9/73
10/73
11/73
12/73
1/74
2/74

R A M on
Dem and D e p o sits Tim e D e p o sits

-6.4
-6.3
-6.4
-6.4
-6.2
-6.8
-7.0
-6.9
-7.1
-7.1
-7.2
-7.8
-7.2

-2.6
-2.7
-2.9
-2.9
-3.0
-3.0
-3.1
-3.3
-3.3
-3.2
-3.2
-3.3
-3.4

Other R a m 2

0.2
0.2
0.1
0.1
O.O4
-0.2
-0.4
-0.6
-1.0
-0.8
-0.7
-0.5
-0.7

V ault C a sh

6.0
5.9
5.8
6.0
6.1
6.3
6.3
6.4
6.4
6.4
6.6
7.2
6.6

Total R

-2.8
-3.0
-3.3
-3.2
-3.1
-3.6
-4.2
-4.4
-4.9
-4.8
-4.5
-4.4
-4.6
Page 27

N o n se a so n a lly Adjusted
M onth

3/74
4/74
5/74
6/74
7/74
8/74
9/74
10/74
11/74
12/74
1/75
2/75
3/75
4/75
5/75
6/75
7/75
8/75
9/75
10/75

R A M on Net
R A M on
D em and D e p o sits Time D e p o sits

-7.1
-7.3
-7.3
-7.1
-7.4
-7.1
-7.1
-7.2
-7.2
-7.4
-7.4
-6.4
-5.9
-6.0
-6.0
-6.0
-6.1
-6.0
-6.0
-6.0

-3.4
-3.5
-3.6
-3.7
-3.7
-3.9
-3.9
-4.0
-4.0
-3.8
-3.9
-3.7
-3.5
-3.4
-3.2
-3.0
-2.8
-2.8
-2.8
-2.8

O ther R a m 2

-0.7
-0.8
-1.0
-1.3
-1.3
-1.5
-1.4
-0.9
-0.7
-0.4
-0.3
-0.3
-0.2
-0.2
-0.2
-0.1
-0.1
-0.1
-0.1
-0.1

N o n se a so n a lly Adjusted
V au lt C a sh

6.5
6.4
6.6
6.7
6.8
6.8
6.9
6.8
6.9
7.2
7.8
7.1
6.8
6.9
6.9
7.0
7.2
7.3
7.4
7.3

Total R a m 3

-4.7
-5.1
-5.3
-5.4
-5.6
-5.7
-5.5
-5.3
-4.9
-4.5
-3.9
-3.3
-2.8
-2.7
-2.4
-2.1
-1.8
-1.6
-1.5
-1.6

M onth

11/75
12/75
1/76
2/76
3/76
4/76
5/76
6/76
7/76
8/76
9/76
10/76
11/76
12/76
1/77
2/77
3/77
4/77
5/77

R A M on Net
R A M on
Dem and D e p o sits Time D e p o sits

-6.1
-6.2
-6.5
-6.2
-6.1
-6.2
-6.2
-6.1
-6.2
-6.2
-6.2
-6.3
-6.4
-6.4
-6.3
-5.8
-5.7
-5.9
-5.9

-2.2
-2.2
-1.8
-1.4
-1.4
-1.3
-1.2
-1.2
-1.2
-1.1
-1.0
-1.0
-0.9
-0.9
-1.0
-0.9
-0.9
-0.8
-0.8

Other R a m 2

-0.1
-0.1
o.o4
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1

V ault C a sh

7.4
7.8
8.4
7.6
7.5
7.6
7.8
7.9
8.1
8.0
8.1
8.0
8.2
8.5
8.9
8.3
8.1
8.4
8.6

Total R a m 3

-1.1
-0.7
0.2
0.1
0.1
0.1
0.5
0.7
0.7
0.8
1.0
0.9
1.0
1.2
1.7
1.6
1.6
1.7
2.0

•Monthly averages of weekly totals.
includes reserves required against Eurodollar borrowings, commercial paper, ineligible acceptances, waiver privileges, and "over
the base period” requirements on certain time deposits.
3Sum of monthly averaged weekly components.
4Less than $50 million.