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FEDERAL RESERVE BANK
OF ST. LOUIS
JUNE 1978
f
s
C O N T E N T S
IM ;
V o l. 6 0 , N
o. 6
Imports and Jobs — The Observed
and the U nobserved...........................
2
Benchmark Revisions of the Money Stock
and Ranges of Money Stock Growth ....
11
Imports and Jobs The Observed and the Unobserved
CLIFTON B. LUTTRELL
P LEAS for liberal trade policies are applauded by
the leaders of almost all commercial nations. Never
theless, free trade among nations may be facing its
most serious challenge since the adoption of the
Hawley-Smoot Tariff Act of 1930. This Act authorized
tariff rate increases on more than 800 items and led
to numerous retaliations by other nations. Professor
Melvin B. Krauss at New York University stated, “In
a scenario all too reminiscent of the beggar-thyneighbor policies of the 1930s, the United States is
now threatening to exceed the recent protectionist
measures of certain Western European countries . . .
under the dubious theory that caving in to protection
ist pressures today is necessary to prevent an even
greater cave-in tomorrow.”1 The new “protectionism”
has produced such nontariff barriers to trade as indus
trial and employment subsidies, discriminatory Gov
ernment purchasing practices and safety standards,
“voluntary” export quotas, and “orderly” marketing
agreements.2
Job Protection
Important Objective of
Recent Restrictions
—
An important factor in the move toward greater
protection for American products from foreign compeiMelvin B. Krauss, “Stagnation and the New Protectionism,”
Challenge (January/February 1978), p. 40.
2The United States Department of Agriculture in National Food
Review (April 1978), p. 32, has, for example, just announced
more stringent import rules for filberts and “voluntary” meat
import restrictions.
Page 2
tition has been the alleged job losses caused by such
imports. The alleged job losses have led to a shift in
attitude toward foreign trade by the major labor union
leaders. Before the late 1960s the AFL-CIO had
strongly supported relatively free trade policies.3 In
1961 Bert Seidman, economist with the AFL-CIO,
contended that unless our country is prepared to pur
sue a vigorous policy of trade liberalization it may
be confronted with three consequences: a decline in
our export opportunities, diminished influence in
world economic decisions, and a weakening of its
political leadership in the free world.4
By the late 1960s the attitude of labor leaders on
foreign trade policies had changed sharply. Instead
of advocating free trade, they had begun to actively
oppose tariff reductions, and push for import quotas
and other trade restrictive measures. In 1967, for ex
ample, labor leaders in the steel industry joined with
management in supporting import quotas on steel.5
At the hearings on the Trade Reform Act of 1973,
labor union opposition to free trade policies was pur
sued vigorously. AFL-CIO President George Meany,
in a lengthy statement before the Senate Committee
3Robert E. Baldwin, “The Political Economy of Postwar U.S.
Trade Policy,” The Bulletin, New York University (1976-4),
p. 23.
4U.S., Congress, Joint Economic Committee, Subcommittee on
Foreign Economic Policy, Hearings, Eighty-seventh Congress,
First Session, December 4-14, 1961, p. 325.
5Baldwin, “The Political Economy of Postwar U.S. Trade
Policy,” p. 24.
JUNE
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
on Finance, opposed both further imports of goods
from abroad and exports of farm products, which, he
felt, put the nations of the world in competition with
the American consumer for food products.6 He ar
gued, “The shutdown of manufacturing operations
here and their relocation abroad, where low-cost
operations are more profitable, depress the whole
American economy by the loss of domestic jobs, pay
rolls, domestic corporate revenues, . . . ” An AFL-CIO
report, included with Meany’s statement, argued that
“A tide of imports has wiped out more than a million
jobs as products and whole industries have been
engulfed.”7
Hence, labor unions have generally shifted from
proponents of free trade policies to supporters of pro
tectionist policies during the past two decades. Pro
tectionist policies, they allege, will protect domestic
employees from the loss of jobs resulting from rising
imports.
Some industry witnesses at the hearings also used
the loss-of-jobs argument in addition to the tradi
tional arguments in support of protectionist policies.
Representatives of the steel industry, for example,
argued that unrestricted imports almost wiped out
many product lines in the specialty steel industry in
the 1960s and early 1970s and had an adverse impact
on jobs.8
Employment Losses from Imports
Readily Observed
—
The alleged reductions in domestic employment
resulting from rising imports are highly visible and
readily observed by labor union leaders, workers,
and managements of domestic firms which produce
goods that are competitive with the imports. The
move toward relatively free trade during the 1950s
and early 1960s, after a period of protection, had
caused some disruptions in the domestic market for
6U.S., Congress, Senate, Committee on Finance, Hearings; The
Trade Reform Act of 1973, Ninety-third Congress, Second
Session, March 26-April 3, 1974, pp. 1136-37 and 1144.
7Ibid., pp. 1139 and 1168. Other labor leaders making state
ments in opposition to free trade during the hearings include:
I. W. Abel, President of United Steelworkers of America;
George Collins of the International Union of Electrical, Radio,
and Machine Workers; Leonard Woodcock, President of
United Automobile, Aerospace, and Agricultural Implement
Workers; and the Communication Workers of America. See
Ibid., pp. 1329-70, 1686-93, 857-72, and 2919-23, respectively,
for their statements.
8See statement by Roger S. Ahlbrandt with Allegheny Ludlum Industries, and by Mark Anthony with Kaiser Steel Cor
poration, Hearings; The Trade Reform Act of 1973, pp. 1055
and 1058, respectively.
1978
a number of goods such as shoes, clothing, and steel
mill and blast furnace products where imports are
highly competitive with domestic production. Such
disruptions caused unemployment for a time and loss
of wealth in those industries.
The increases in some major types of goods im
ported, which are highly competitive with U.S. pro
duced goods, and imports as a percent of total domes
tic sales are shown in Table I. Imports as a percent
of sales of automobiles, footwear, and mineral fuels
rose sharply from the average for the 1964-65 period
to the average for the 1975-76 period. During the lat
ter period average imports for each of the above goods
exceeded nine percent of total domestic purchases.
Rough estimates of the direct impact of imports on
employment in these industries with sharply rising
imports are shown in Table II. Column 1 indicates
the average number of employees in the industries
during the two years 1964-65. Column 2 indicates the
number of employees that would have been employed
by these industries in 1975-76 had the ratio of imports
to domestic purchases remained constant, and the
level of expenditure on these goods remained un
changed.9 The third column contains the actual num
ber of domestic employees in the industries in 197576, and the fourth column is the estimated loss of em
ployment resulting from imports (Column 2 minus
Column 3).
Actual employment in the automobile industry held
constant over the eleven-year period 1964-65 to 197576, but the industry experienced a sizable loss of po
tential employment from rising imports, as the ratio of
imports to domestic production rose sharply. On the
basis of the calculations in Table II, the number em
ployed by domestic automobile manufacturers in
1975-76 would have been about 67,000 higher had
the ratio of imports to domestic purchases remained
unchanged. The number of employees would have
been about 85,000 higher in mining operations and
about 40,000 higher in clothing manufacture had the
proportionate rise in these imports not occurred.
9This column is calculated as follows;
g
[ -——-------- 1 X [1-Pi964-6o] where E is the average number
l-P l9 7 5 -7 6
of domestic employees engaged in the production of the
good in 1975-76 and P is net imports as a percent of domes
tic purchases.
Since these calculations were designed to show only the
order of magnitude, several simplifying assumptions were
made. It was assumed that productivity of workers remained
constant, that increased volume of international trade did not
affect total consumption, and, in particular, that changes in
relative prices had minimal effects on labor usage (see
Appendix).
Page 3
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
1978
T a b le I
M A J O R INDU STRIES W ITH R IS IN G C O M P E T IT IO N FROM IMPORTS
N et Im ports
1 9 6 4 - 6 5 (a n n u a l a v e r a g e )
In d u stry G r o u p
T elecom m unications a p p a ra t u s
V a lu e
(m illio n d o lla r s)
$ -1 0 5
A u to m o b ile s, n o n -m ilita ry (n e w ) 2 4 9
1 9 7 5 - 7 6 (a n n u a l a v e ra g e )
Percent o f
Dom estic P u rc h a se s*
V a lu e
(m illio n d o lla r s)
- 2 . 3 % $ 1 ,2 6 2
.9
Percent of
D om estic P u rc h a se s*
8 .2 %
4 ,9 8 8
9.1
4 .3
Iron a n d Steel M ill Products
292
1.3 1 ,8 1 6
C lo th in g
355
1.3 2 ,6 6 3
F oo tw ear
150
2 .9
1 ,4 8 1
1 3 .2
2 ,3 5 1
7 .6
2 5 ,8 8 8
1 6 .9
M in e r a l Fuels a n d Related M a t e r ia ls
4 .3
^Percentages calculated as follow s: telecommunications apparatus — personal consumption expenditures fo r radio and television receivers, rec
ords. and musical instruments ; automobiles — final sales ; iron and steel mill products — shipments by blast furnaces and steel m ills ; clothing
— personal consumption expenditures fo r clothing and accessories, except footwear ; and mineral fuels and related materials — one hundred
percent less domestic production as a percent o f domestic consumption o f B.T.U.s o f coal, crude petroleum, natural gas, and electricity.
Source: U.S. Department o f Commerce, S t a t is t ic a l A b s tr a c t o f t h e U n ite d S t a t e s , 1976 and 1970; B u s in e ss S t a t is t ic s , 1975; T h e N a t io n a l I n
c o m e a n d P r o d u c t A c co u n ts o f t h e U n ite d S t a te s 1929-7b ; O v e r s e a s B u s in e ss R e p o r t s , “ United States Foreign Trade Annual 1970-76,”
A p ril 1977 ; S u r v e y o f C u r r e n t B u s in e ss , July 1977 ; and M o n th ly E n e r g y R e v ie w , January 1978.
These data are readily observable, and to one
whose vision is restricted to the production process
of these specific industries only, the conclusion fol
lows that the American market must not be opened
wide for foreign economic invasion. These data, how
ever, present a highly biased view of the impact of
international trade on total domestic employment,
overstating the depressive impact. Employment ac
tually declined in only a few industries which expe
rienced rising competition from imports; namely, blast
furnace and basic steel, clothing, and footwear, but
only a portion of the decline in these industries can
be attributed to rising imports. In blast furnace and
basic steel product industries, for example, total em
ployment declined by 97,000 workers (Table I I), but
there was only a moderate increase in imports of the
products by these industries (from 1.3% to 4.3% of
domestic purchases). Hence, on the basis of these
calculations, only about 17,000 of the decline can be
attributed to rising imports. Most of the decline in
T a b le II
NUMBER OF EMPLOYEES IN D O M ESTIC INDUSTRIES WITH R IS IN G COM PETITIO N FROM IMPORTS
A N D JOBS LOST IN THESE INDUSTRIES FROM IMPORTS
(t h o u s a n d s )
In d u stry G r o u p
(1)
(2 )
(3)
(4)
A ctual N u m b e r
1 9 6 4 -6 5
(a n n u a l a v e ra g e )
N u m b e r R equired
for 1 9 7 5 - 7 6
Purchases A ss u m in g
N o C h a n g e in
Percentage Im ported
A ctual N u m b e r
1 9 7 5 -7 6
(a n n u a l a v e ra g e )
Estim ated
Loss from
In crea se d
I m p o rts1
R a d io a n d TV receivin g eq uipm ent
124
1 3 9 .3
125
14.3
A u to m o b ile s2
743
8 0 9 .0
742
6 7 .0
B last fu rnaces a n d b a sic steel products
641
56 1 .0
544
1 7 .0
Iron a n d steel fo u n d rie s
220
22 7 .9
221
6 .9
1 ,3 3 2
1 ,3 0 6 . 7
1 ,2 6 7
3 9 .7
Footw ear, except rub b er
236
1 8 5 .7
166
1 9 .7
M in in g 4
634
8 4 9 .5
764
8 5 .5
3 ,9 3 0
4 ,0 7 9 .1
3 ,8 2 9
25 0 .1
C lo th in g 3
Total
1Assumes no change in 1964-65 ratio o f imports to domestic purchases, and that the number o f employees per dollar value o f imports are the
same as the number per dollar value o f domestic production.
2Automobile to totai transportation employees assumed to be in same ra tio as value o f automobile output to manufacturer’s sales o f all trans
portation equipment.
3Total apparel and other textile products.
4Includes oil and gas extraction plus metal, coal, and nonmetallic mining.
Source: U.S. Department o f Commerce, S t a t is t ic a l A b s tr a c t o f t h e U n it e d S t a t e s , 1976 and 1965 ; E m p lo y m e n t a n d E a r n in g s , U n ite d S t a t e s ,
1 9 0 9 -7 5 ; E m p lo y m e n t a n d E a r n in g s , March 1977 and March 1976; S u r v e y o f C u r r e n t B u s in e ss , July 1977 ; and B u s in e s s S t a t is t ic s , 1975.
Page 4
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
1978
T a b le III
M A JO R INDUSTRIES WITH SIZABLE G A IN S IN NET EXPORTS
N e t Exports
1 9 6 4 -6 5
A n n u a l A v e ra ge
(m illio n d o lla rs)
T ra n sp o rt eq u ip m en t other than
new au to m o b ile s
1 9 7 5 -7 6
Percent o f
D om estic P ro d u c tio n *
$ 2 ,2 4 8
4 .9 %
A n n u a l A ve rage
(m illio n d o lla r s)
$
8 ,9 8 1
Percent of
D om estic P ro d u c tio n *
10 . 0 %
N on ele ctrical m ach ine ry
4 ,0 5 2
1 0 .9
1 4 ,6 9 3
14.1
C he m icals
5 .3
1 ,6 4 8
4 .6
5 ,0 9 1
Food a n d live a n im a ls
566
1 .7
6,212
8.0
S o y b e a n s a n d textile fibers
906
1 9 .8
4 ,2 6 4
3 8 .8
3 .4
1 ,0 1 9
4 .3
1.1
37 1
1.1
P ro fe ssio n a l, scientific, photo, a n d
co n trollin g instrum ents
Textiles other than clothing
240
-1 8 8
-
♦Basis fo r domestic production as fo llow s: manufacturers’ sales fo r transport equipment other than new automobiles, nonelectrical machinery,
chemicals, professional, scientific, photo, and controlling instruments, and textiles other than clo th in g; cash receipts from farm marketings o f
livestock and products plus cash receipts from farm marketings o f crops less cotton (lin t and seed), oil-bearing crops, and tobacco fo r food
and live anim als; and cash receipts from farm m arketing o f cotton (lin t and seed) and oil-bearing crops fo r soybeans and textile fibers.
Source: U.S. Department o f Commerce, O v e r s e a s B u s in e ss R e p o r t s , “ United States Foreign Trade Annual 1970-76,” A p ril 1977; S t a t is t ic a l
A b s t r a c t o f th e U n ited S ta t e s , 1970 ; S u r v e y o f C u rr e n t B u s in e s s , July 1977 ; B u s in e s s S t a t is t ic s , 1975 ; and T h e N a t io n a l I n c o m e a n d
P r o d u c t A c c o u n ts o f t h e U n ite d S t a t e s , 19&9-7Jt; U.S. Departm ent o f Agriculture, F a r m I n c o m e S t a t is t ic s , July 1977.
employment in this industry was the result of such
factors as rising efficiency of production or declining
domestic demand for iron and steel mill products.
Similarly, only 20,000 of the total decline of 70,000
workers in footwear can be attributed to the competi
tive pressure of imports. Only in the clothing industry
can a major portion of the actual decline in employ
ment be attributed to rising imports, and the loss here
was less than 5 percent of total employment in the
industry.
General Effects of Foreign Trade on
Employment Same as Domestic Trade
The general effect of foreign trade on employment
is no different from that of domestic trade. For ex
ample, a reduction in the tariff barriers imposed on
new automobiles from Japan will have about the
same impact on total employment in the United States
as would the emergence of a new, more efficient auto
mobile manufacturing firm in the United States. As
suming no growth in demand for automobiles, sup
pose, for example, that imports from Japan rise from
zero to ten percent of domestic automobile sales. Em
ployment in automobile production in the United
States will decline and such employment in Japan
will rise. Imports into the United States, however,
increase the dollar holdings in Japan which will
eventually be spent in the United States. Total de
mand for U.S. goods and services will thus remain
unchanged.10 Hence, the employment lost through
10Of course, this adjustment is not immediate and a sudden
change in the international competitive situation would result
rising imports of automobiles will be gained through
rising exports of other goods and services after all
adjustments are made to the new demand patterns.
Similarly, if a new automobile manufacturing firm
is established in Springfield, Missouri, with new plants
in the vicinity manufacturing automobiles which ac
count for ten percent of U.S. sales, the older auto
mobile firms will lose a substantial number of workers
as they would in the case of rising imports. The new
firm will, in turn, employ new workers, they will
spend their incomes, and total employment in the
economy will not fall as much as the reported decline
at the older automobile manufacturing firms.
Unobserved Employment Gains Offset
Observed Losses
Offsetting the observed employment losses in some
industries attributed to free trade are the sizable gains
in sales and employment in other industries which
can likewise be attributed to free trade. When for
eigners sell us goods and services, they gain pur
chasing power which eventually leads to a rise in
employment in our export industries. Major gains
have occurred in employment since 1964-65 in a num
ber of industries as a result of rising exports. Among
in substantial general unemployment which could last for
some time. The experience in the United States since the oil
embargo is a case in point. This is a problem of adjustment
in the labor market which takes time, but is not reflective of
a general decrease in demand for U.S. output. For a more
comprehensive discussion of the impact of imports on un
employment, see Geoffrey E. Wood and Douglas R. Mudd,
“The Recent U.S. Trade Deficit — No Cause for Panic,” this
Review (April 1978), pp. 2-7.
Page 5
JUNE
FE DE RA L . R E S E R V E B A N K O F ST. L O U I S
C h a rt I
E xp orts of Farm C o m m o d itie s
Billions
of
Dollars
Billions
of D o l l a r s
1978
biles, nonelectrical machinery, chemicals, scientific
instruments, and farm products. Exports rose in these
industries, both in absolute amounts and relative to
domestic production. Net exports (exports less im
ports ) in transport equipment other than automobiles,
for example, rose from an average of 4.9 percent of
domestic production in 1964-65 to 10 percent in
1975-76 (Table III).
Greatest gains relative to production during the
period occurred in the agricultural sector. Total ex
ports of farm products rose from a $6.1 billion average
per year for 1964-65 to $22.3 billion for 1975-76 (Chart
I). During the period exports of food and live animals
rose from 1.7 to 8 percent of domestic sales, and
exports of soybeans and textile fibers (largely cotton)
rose from 20 to 39 percent. Exports of all farm prod
ucts rose from an average of 16.4 percent of domestic
sales (cash receipts) in 1964-65 to an average of 24.5
percent in 1975-76 (Chart II).
those industries with a rising proportion of total sales
abroad are transport equipment other than automo
Page 6
The impact of rising farm exports on farm produc
tion cannot be measured with precise accuracy since
weather and other factors have a major influence on
crop yields. However, the evidence indicates that
rising exports have had a major impact on crop prices
and production. As indicated in Chart I, crop exports
rose moderately in 1971 and 1972 and increased
C h a r t II
Farm Exports As Percent of Farm Commodity Sales
Source: U.S. D e p a r tm e n t of A g r ic u lt u r e
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
C h o r t III
United States Population and Crop Production Trends
Index
1967=100
Index
1978
1975-76 (column 3), and the estimated gain in direct
employment attributed to the rise in exports (column
4) (see Appendix).
1967=100
While farm employment during the period actually
declined from 4.4 million to 3.3 million, the number
of farm employees would have been only 3.1 million
in 1975-76 if farm commodity exports had not risen.
Hence, about 236,000 workers in this sector can be
attributed to the rise in exports.
sharply in 1973 and 1974. Crop production generally
had been rising at about the same rate as population
growth from 1960 through 1970. In 1971, however,
the rate of crop production growth accelerated, con
sistent with the rising exports. Following a temporary
decline in 1974 as a result of the worst crop growing
weather in three decades, crop output continued up at
a rate well above that of population growth (Chart III).
During the seven-year period 1970-77 population rose
at a compound annual rate of one percent per year
while crop production rose four percent per year. By
1977 exports accounted for 60 percent of U.S. soybean
production, 55 percent of rice production, 40 or more
percent of wheat and cotton production, and about
30 percent of corn, grain sorghum, and tobacco
production.11
The estimated gain in direct employment resulting
from the rise in exports of a selected group of com
modities is shown in Table IV. Calculated in the same
manner as its counterpart, Table II, this table shows
the average actual employment in the respective in
dustries for the years 1964-65 (column 1), the level
of 1975-76 employment had exports remained the
same percent of production as in the earlier period
(column 2 ), the actual number of employees in
n U.S. Department of Agriculture, 1977 Handbook of Agricul
tural Charts, Agriculture Handbook No. 524, p. 65.
This increased farm employment as a result of rising
farm exports, however, was not observed by some of
the nation’s labor union leaders. The failure to appre
ciate the impact of rising farm exports on employment
is indicated by the statement by I. W. Abel, President,
United Steelworkers of America: “It is most frighten
ing when the Secretary of the Treasury, Secretary of
State, and the Administration’s Executive Director of
International Economic Policy agree before this Com
mittee that our chief export five years from now will
be agricultural products. Are we regressing to the
status of a developing nation?”12 This implication,
that the highly sophisticated U.S. farm sector is at the
same stage of development as the so-called develop
ing nations, fails to comprehend the commercial na
ture of U.S. agriculture and its impact on the rest of
the economy. Much of the farming sector of the de
veloping economies is of the traditional self-sufficient
type. Few farm resources are purchased from the
nonfarm sector and few non-farm employees are en
gaged in the production of capital goods or current
inputs used for farm production purposes.
In contrast to the self-sufficient type of agriculture
in the developing economies, agriculture in the United
States is composed of highly commercial firms. Cash
expenditures for hired labor, capital, and operating
goods used for farming totaled $82 billion in 1976,
more than four-fifths of total farm cash receipts.
About $42 billion of the above expenditures were
for goods and services produced in the nonfarm sec
tor. These expenditures were for such items as trac
tors, combines, other farm machinery, farm building
materials, fertilizer, and other items the production
of which requires nonfarm labor. These purchases
resulted in part from the sharp increase in farm com
modity exports. Such exports thus had a major in
direct impact on nonfarm employment, another un
observed gain from free trade.
Employment increases attributed directly to rising
exports, in just these selected industries with in
12Hearings; The Trade Reform Act of 1973, p. 1175.
Page 7
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
1978
T a b le IV
NUMBER OF EMPLOYEES IN INDUSTRIES WITH SIZABLE G A IN S IN NET EXPORTS
(a ll em p lo ye e s, t h o u sa n d s)
(2 )
(3 )
(4 )
Num ber
of Em p lo yee s
in 1 9 7 5 - 7 6
A ss u m in g 1 9 6 4 - 6 5
Levels o f Exports
A ctu a l N u m b e r
of Em p loyee s,
1 9 7 5 -7 6
(a n n u a l a v e r a g e )
Estim ated
G a in in Direct
Em ploym ent from
In cre a se d Exports
(1 )
In d u stry G r o u p
T ra n sp o rt eq u ip m e n t oth er than
new a u to m o b ile s1
A ctu a l N u m b e r
of E m p lo yee s,
1 9 6 4 -6 5
{a n n u a l a v e ra g e )
939
9 0 5 .0
949
4 4 .0
1 ,6 7 4
2 , 0 1 3 .9
2 ,0 7 2
58.1
893
1 ,0 1 6 .2
1 ,0 2 3
6.8
Food, live a n im a ls, s o y b e a n s , a n d
textile fibers2
4 ,4 4 2
3 ,1 0 3 .1
3 ,3 3 9
2 3 5 .9
P ro fe ssio n a l, scientific, p hoto, a n d
co n trollin g instrum ents
379
4 9 4 .7
499
4.3
Textiles oth er than clothing
912
9 1 3 .6
934
2 0 .4
9 ,2 3 9
8 ,4 4 6 .5
8 ,8 1 6
3 6 9 .5
N on ele ctrical m ach ine ry
C he m icals
Total
A u tom ob ile to total transportation employees assumed to be in same ra tio as value o f automobile output to manufacturers’ sales o f transpor
tation equipment.
2Total farm employment. Tobacco employment, a small percent o f the total, is not excluded because o f inavailability o f data.
Source: U.S. Department o f Commerce, S ta t is t ic a l A b s t r a c t o f t h e U n ite d S t a t e s , 1976 and 1965; E m p lo y m e n t a n d E a r n in g s ,
S u r v e y o f C u rr e n t B u s in e ss , July 1977 ; and B u s in e ss S t a t is t ic s , 1975.
creases in net export sales during the period from
1964-65 to 1975-76, totaled 369,000 workers. These
workers are the “unobserved gains” in employment
resulting from the rise in foreign trade. Such unob
served gains in employment at least equaled the
losses in other industries observed by the free trade
opponents.
Unobserved Gains in Real Goods
Only Real Benefit from Trade
—
The
Also important is the impact of foreign trade on
the quantity and quality of goods available for con
sumers. Transactions among nations result in gains
to both parties in the transactions. The gains occur
as a result of the improvement in total output from
the greater specialization of resources. The gains can
be demonstrated with a simple example using two
countries — the United States and Taiwan — and
some hypothetical cost of production figures for
traded commodities. In the United States the cost of
resources used in producing a tractor is, say, $20,000
and the cost of producing a pair of shoes is $25,
while in Taiwan the cost of producing a tractor is
$25,000 and the cost of producing a pair of shoes is
$20. If each nation attempts to produce both 20
tractors and 20,000 pairs of shoes, the tractors and
shoes will cost $900,000 in both countries in terms of
resources foregone.
Page 8
March 1977;
Costs of Production
United States
Total
Cost
Per Unit
Costs
Taiwan*
Total
Cost
Costs
Per Unit
$20,000
$400,000
$25,000
$500,000
20,000 pairs
of shoes $25
$500,000
$20
$400,000
TOTAL
$900,000
20 tractors
$900,000
“Dollar costs at current exchange rates. These calculations
assume a constant rate of exchange between U.S. and Taiwan
money.
Through specialization and with the same quantity
of resources used in production, more of both types of
goods will be available in each nation. This is possible
since each nation will be utilizing its resources for the
production of the good where it has greatest relative
advantage — tractors in the United States and shoes
in Taiwan — and exchanging these goods.
Costs of Production
United States
45 tractors
45,000 pairs of shoes
TOTAL
$900,000
—
$900,000
Taiwan
—
$900,000
$900,000
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
On this basis, U. S. producers of tractors can ex
change 22 tractors ($440,000 cost of resources ex
pended) for 22,000 pairs of shoes ($440,000 expended
by Taiwan producers). Hence, for the $900,000 in
resources foregone U.S. producers will have 23 trac
tors plus 22,000 pairs of shoes. Taiwan will likewise
gain, having available 22 tractors and 23,000 pairs of
shoes. Hence, with specialization and trade each
nation was able to realize a gain of more than ten
percent in real goods available for its use. In other
words, with greater specialization and free exchange
through foreign trade, each country obtains more
goods for a given cost.
The gains from trade may still occur even though
one nation has an absolute advantage over another
in the production of all goods. Trade between the
nations will still be mutually advantageous if one
has a greater relative advantage in the production
of some particular goods. Both nations will gain by
specializing in the production of the goods where
they have the greatest relative advantage or least
relative disadvantage and exchanging the goods with
each other.
Summary
In summary, the job losses in some industries as a
result of reduced trade barriers are highly visible.
Many of the nation’s businessmen and labor union
leaders have reported job losses in their sectors from
free trade, and concluded that such trade produces a
decline in total domestic employment. As a conse
quence, such leaders have combined forces in the
affected industries in opposition to free trade.
Free international trade, however, will not perma
nently reduce overall employment. Trade is not a
unidirectional affair. Movement in the exchange rate
1978
between the dollar and other currencies is the bal
ancing mechanism in trade. If U.S. imports rise, we
pay for them in dollars which must eventually be
used to purchase our exports. Movement in the ex
change rates will equalize such payments. If U.S.
demand for foreign goods (imports) rises relative to
foreign demand for U.S. goods (assuming no change
in capital movements), the exchange value of the dol
lar will decline, making our goods less expensive to
foreigners and their goods more expensive to us.
Hence, any temporary tendency for industries facing
increased foreign competition to reduce employment
will likely be offset by the stimulative effects of a
falling dollar exchange rate on industries with rising
exports.
The data in this analysis illustrate the view that
employment gains from freeing up trade have offset
the employment losses. Sharp gains have occurred in
direct employment in a number of industries having
sizable gains in net exports. In other industries, such
as agriculture, the number of employees is well above
what it would have been without the rise in exports.
The rise in farm commodity exports thus prevented
a further decline in farm employment. These unob
served increases in employment resulting from freer
trade in this analysis have offset the observed losses.
Hence, international trade has not contributed to
overall unemployment.
Such trade has contributed to major real gains in
well-being which are also difficult to observe. The real
gains occur through the greater specialization of re
sources and the larger volume of goods resulting from
the use of a given quantity of resources. Through this
process of specialized production and exchange, more
goods are available to all nations and at less cost than
would be available with trade restrictions.
APPENDIX
The calculations presented in Tables II and IV are
rough estimates of the effect of international trade on
domestic employment in several industries. These estimates
are intended to show orders of magnitude.
The estimates presume that changes in spending reflect
only changes in quantity of output and thus are biased to
the extent the prices of domestically produced goods
change relative to those of foreign goods. This bias works,
however, to give underestimates of both job gains and
losses, and thus does not reduce the validity of the
analysis.
The measure of loss or gain is given by
N* — N > 0
(job loss)
N# — N < 0
( job gain)
where N is the actual employment in a particular industry
in 1975-76, N* is the employment that would result in that
industry in 1975-76 if the proportion of imported output
had remained at the ratio of 1964-65 (Column 2 in Tables
II and IV ).
Page 9
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
The correct measure of N*, given the assumptions used
in the article, is given by:
(1 ;)
u
N* —
N
in
-jn
(1_ pi)
• ^ ~ P°^-
where p0 is the proportion of domestic consumption (in
real terms) accounted for by imports in 1964-65 and
is
the proportion for 1975-76. The form used in this study
defines these proportions in terms of the ratio of imports
to domestic consumption in nominal terms.
The bias that is introduced by using nominal variables
can be seen by transforming equation (1 ) to logarithmic
form:
Real variables
InN® = InN + po ( qr - qd)
Nominal variables
InN* = InN + po (qf — qd) + po' (pf — Pd)
where (qf) is the rate of change of imported output, (qd)
is the rate change of domestic output, (pf) is the rate of
Page 10
JUNE
1978
change of import prices, (pd) is the rate change of do
mestic prices, and (p 0') is the ratio of imports to domestic
spending in nominal terms in 1964-65.
The two results differ only by the term p0' ( pr —pd)
which is the measure of relative rate of price change of
imported vs. domestically produced goods, all in dollar
terms.
In the case where domestic prices rise faster than import
prices, imports are stimulated and domestic jobs are lost.
The term p0' (pf - pd) would then be negative and lead to
an underestimate of N“ and thus an understatement of the
job loss (N “ - N ).
In the case where foreign prices rise faster than domes
tic prices, exports are stimulated and domestic employ
ment rises. Thus N will be greater than N*, showing a
gain of jobs. However, the term p0' (pf —pd) will be posi
tive, biasing the measure of N* upward and thus giving
an underestimate of the difference between N and N “.
Benchmark Revisions of the Money Stock
and Ranges of Money Stock Growth
RICHARD W. LANG
w
t T E E K L Y data on the monetary aggregates since
1973 have been revised usually three or four times
each year by the Board of Governors of the Federal
Reserve System. These frequent revisions are made
to incorporate “benchmark” adjustments to the com
ponents of the weekly monetary aggregates that are
estimated for banks which are not members of the
Federal Reserve System.
Data on deposits and vault cash for these nonmem
ber banks are available only for a few dates each year
and weekly data between these dates must be esti
mated. Initial estimates of nonmember bank deposits
and vault cash are subsequently revised as more infor
mation becomes available, in order to “benchmark”
the estimated weekly data to the few weeks of actual
nonmember bank data.1
The most recent benchmark revision of the mone
tary aggregates was made on March 23, 1978.® Due to
longer than usual delays in processing reports from
nonmember banks, this revision incorporated non
member bank data from four, rather than from one or
two, reporting periods. This revision resulted in a
$1.3 billion increase in the narrowly-defined money
stock (M l) at the end of 1977 — a figure which ap
pears to be quite large. The change in the level of the
money stock resulted, however, in less than a one-half
percentage point change in the growth rate of M l
during 1977.
This article explains how benchmark revisions of
money stock data are made and examines their effects
on rates of money growth relative to the Federal Re
serve’s ranges. Benchmark revisions generally have
resulted in relatively small changes in either short- or
1Since monthly data is constructed from weekly data, these
revisions affect monthly data as well. Weekly deposit data for
nonmember banks around call report dates have been available
only since March 1976. Prior to that date, single-day call re
port data was used.
“As this article was going into print, another benchmark revi
sion was announced on lune 22, 1978.
long-run rates of money growth compared with the
ranges set by Federal Reserve policymakers. Whether
or not benchmark revisions would have a more sig
nificant effect on money growth rates in the event
that bank membership in the Federal Reserve System
continues to decline remains an open question.
NONMEMBER BANKS AND
MONEY STOCK DATA
Although the basic definition of the narrowlydefined money stock (M l) seems quite straightfor
ward — M l is the sum of private demand deposits at
all commercial banks plus currency and coin held
by the nonbank public — the actual construction of
weekly M l data is more complicated. As shown in
Table I, not only are a number of adjustments made
to obtain the currency and demand deposit com
ponents of M l, but a number of these items must be
estimated as well. Two of the estimated items im
portant to the construction of M l are demand deposits
and vault cash of nonmember banks. These items must
be estimated to obtain a weekly series on M l since
actual nonmember bank data on deposits and vault
cash are only available for, at most, four weeks each
year.
Banks which are members of the Federal Reserve
System make weekly reports of selected assets and
liabilities to the Federal Reserve Bank in their district
in order for the Federal Reserve to verify their hold
ings of required reserves. These balance sheet data
are used to construct the member bank items which
are included in the money stock (Table I). Although
member banks make up less than half of the about
14,700 commercial banks in the United States (Table
II), they hold about 73 percent of the total deposits in
the banking system (Table III). Consequently, mem
ber bank data comprise the largest portion of the
weekly M l numbers.
Banks which do not belong to the Federal Reserve
System must meet reserve requirements of the various
Page 11
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
JUNE
1978
T a b le I
Construction of M l
A m o u n ts in m illion s o f d o lla rs; m o n th ly a v e ra g e s, not s e a s o n a lly ad justed
C o n trib u tio n
to M l ,
D ecem ber 1 9 7 4
lin e , item
S ou rce of d a ta
1.
C u rre n cy in circulation ..........................
7 8 ,9 3 3
2.
Less: M e m b e r b a n k vault cash .... .....
7 ,4 8 8
D a ily d a ta rep orted b y a ll m em ber b a n k s.
3.
N o n m e m b e r b a n k vault cash ___
2 ,3 9 9
Estim ated, b a se d on m em ber b a n k s a n d call report data.
4.
5.
E q u a ls: C u rre n cy co m p o n e n t of M l
....
D e m a n d d e p o sits at m em ber b a n k s 1 ..................
6.
Less: F.R. float
Plus:
D a ily d a ta rep orted b y F.R. B a n k s a n d T re a su ry Dept.
6 9 ,0 4 6
1 5 1 ,3 1 5
D a ily d a ta rep orted b y a ll m em ber b a n k s.
................... - .............. ....
2 ,7 3 2
D e m a n d d e p o sits at n on m e m b e r b a n k s 1 ....
5 7 ,9 5 4
Estim ated, b a se d o n d a ily d a ta reported b y sm a ll m em ber b a n k s
a n d call report data.
C IP C a sso c ia te d w ith fo re ig n a g e n c y a n d
b ranch tran sfers ............. ........... ........... ....
3 ,5 1 9
D a ily d a ta reported b y fo re ig n -re la te d institution s in N e w Y o rk
City.
D e m a n d d e p o sits d u e to fo re ig n com m ercial
b a n k s ................... ............ ............ ........... .
6 ,0 0 4
Estim ated, b a se d o n s in g le - d a y ( W e d n e s d a y )
b a n k s a n d call report d a ta fo r other b a n k s.
d a ta
for
la rg e
D e m a n d d e p o sits d u e to m utual s a v in g s
b a n k s ....... ..................................................
1 ,1 2 4
Estim ated, b a se d on s in g le - d a y ( W e d n e s d a y )
b a n k s a n d call report d a ta fo r oth er b a n k s.
d a ta
fo r
la rg e
11.
D e m a n d d e p o sits d u e to b a n k s in territories
a n d p o s se ss io n s ........................... ..............
116
12.
M l - t y p e b a la n c e s at fo re ig n -re la te d in stitu
tio n s in N e w Y o rk C ity ..............................
4 ,3 5 6
13.
D ep osits due to fo re ig n official institutions
at F.R. B a n k s ........... ........... .......................
7.
8.
9.
10.
14.
15.
E q u a ls: D e m a n d d ep o sits com p onent of M l
M o n e y stock ( M l ) — currency plus d e m a n d d e
p osits a d justed ....................................................
568
D a ily d a ta rep orted b y F.R. B an ks.
Estim ated, b a se d on call rep ort data.
Estim ated, b a se d on la s t -W e d n e s d a y -o f
D a ily d a ta reported b y F.R. Banks.
2 2 2 ,2 2 4
2 9 1 ,2 7 0
1Gross demand deposits less demand deposits due to the U.S. Govt., interbank deposits, and C IPC (cash items in process o f collection).
Source: I m p r o v in g t h e M o n e ta r y A g g r e g a t e s : R e p o r t o f t h e A d v is o r y C o m m itte e o n M o n e ta r y S t a t is t ic s (Bach Com m ittee), Board o f Gov
ernors o f the Federal Reserve System (June 1976), p. 22.
state banking authorities, and generally file extensive
reports on their assets and liabilities only on a few
dates each year.2 For example, nonmember banks in
sured by the Federal Deposit Insurance Corporation
(FD IC ) are required to file Reports of Condition
(call reports) with the FD IC four times each year.
Call reports are filed at the end of March, June, Sep
tember, and December. Balance sheet data from these
call reports are forwarded to the Federal Reserve by
the FDIC, usually after a delay, and are then used in
the construction of M l.3
2For a listing of state reserve requirements and their reporting
periods, see R. Alton Gilbert and Jean M. Lovati, “Bank Re
serve Requirements and Their Enforcement: A Comparison
Across States,” this Review (March 1978), pp. 22-32. The
reports discussed by Gilbert and Lovati are not generally
“Reports of Condition" such as are filed by insured banks
with the FDIC.
3“Improving the Monetary Aggregates: Report of the Advisory
Committee on Monetary Statistics” (Bach Committee), Board
of Governors of the Federal Reserve System (June 1976), p.
29. Prior to 1973, only the June and December call reports
Page 12
Nonmember banks which are not insured by the
FDIC (noninsured nonmember banks) file Reports of
T able II
Number of Commercial Banks
N o n m e m b e r B a n ks
End of Period
m ber 31
M em ber
B a n ks
Total
F D IC
Insured
Noninsured
1960
6174
1965
6221
7300
6948
352
7583
7320
1970
263
5767
7919
7735
184
1975
5787
8846
8585
261
1976
5758
8914
8639
275
19771
5720
8998
8705
293
1Call report o f June 30, 1977
Source : Federal Reserve B u lletin
were sufficiently detailed to be used to revise nonmember
bank data. See Darwin Beck and Joseph Sedransk, “Revision
of the Money Stock Measures and Member Bank Reserves and
Deposits,” Federal Reserve Bulletin (February 1974), p. 84.
JUNE
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
T a b le III
Distribution o f Commercial Bank Deposits
Percent o f Total D e p o sits H eld By:
Total
D e p o sits1
End o f Period
Decem ber 31
Mem ber
Banks
Nonm em ber
B an ks
F D IC
In su re d
N onm em ber
Banks
1 5 .4 %
1960
$ 2 2 9 ,8 4 3
8 4 .0 %
1 6 .0 %
1965
3 3 2 ,4 3 6
8 2 .9
17.1
1 6 .5
1970
4 8 1 ,7 4 5
8 0 .0
2 0 .0
1 9 .5
1975
7 8 6 ,5 3 2
75.1
2 4 .9
2 3 .5
1976
8 3 8 ,3 3 5
7 3 .8
2 6 .2
2 4 .6
19772
8 6 2 ,0 3 1
7 3 .0
2 7 .0
2 5 .3
1Mill ions o f dollars
2Call report o f June 30, 1977
Source: Federal Reserve B u lletin
Condition with their respective state banking author
ities in accordance with individual state requirements.
In general, such call reports are filed twice a year —
at the end of June and December. Balance sheet data
on these noninsured nonmember banks are also col
lected by the Federal Reserve for use in con
structing M l.4
FDIC-insured nonmember banks comprise the ma
jority of nonmember banks, both in terms of numbers
and in terms of deposits (Tables II and III). There
were only 293 noninsured nonmember banks as of
June 30, 1977, which accounted for less than 2 per
cent of the total deposits in the banking system.
Thus, the four call reports filed by nonmember banks
insured by the FD IC provide the majority of the non
member bank data used in the construction of M l.
However, since these call reports cover selected
balance sheet data only for the one-week period
surrounding each call report date, insured nonmem
ber bank data are known only four weeks out of each
year.5 Noninsured nonmember bank data are known
even less often — only twice each year. Consequently,
weekly data on nonmember bank demand deposits
and vault cash must be estimated between call re
port dates in order to obtain weekly M l numbers.
ESTIMATION OF NONMEMBER
BANK ITEMS
Deposits
Between call report dates, weekly data on non
member bank demand deposits are estimated using
4“Improving the Monetary Aggregates,” pp. 28-29.
5Prior to March 1976 the call reports filed with the FDIC
required balance sheet data for only one day — the date of
N o n in s u re d
Nonm em ber
Banks
1978
a subset of generally smaller member
banks which prior to November 1972
were classified as “country banks.”6 De
posit data are available with a one- to
two-week delay for these smaller mem-
member bank demand deposits are ob
tained by multiplying the smaller mem
0 .6 %
ber bank demand deposits for a particular
0 .6
week by the estimated ratio of nonmem
0 .5
ber bank demand deposits to smaller
1.4
member bank demand deposits.7 These
1.6
estimated ratios are based on the actual
1 .7
ratio of nonmember bank demand de
posits to smaller member bank demand
deposits as of the call report dates. How
ever, due to the delays in the processing
of call report data, there are generally at least three
estimates of the same set of weekly nonmember
bank deposit data.
For example, consider the estimation of nonmember
bank demand deposits for the last week of July.8 The
estimated ratio of nonmember bank demand deposits
to smaller member bank demand deposits for the last
week in July is based on a linear interpolation be
tween the ratios of these deposits for the two call
report dates surrounding the last week of July (see
Figure I). These two call reports are the end-of-June
and the end-of-September call reports.
At the time that the July data for member banks
become available, however, the September call re
port has yet to be collected while the data from the
the call report — rather than for the week surrounding the
call report date.
6Prior to November 1972, member banks were classified as
either “reserve city” or “country” banks. The “reserve city”
category included primarily large banks in financial centers
which were subject to higher required reserve ratios on demand
deposits than were “country” banks. The “country bank” cate
gory included all other banks, whether they were in urban or
rural areas, regardless of size. See “Recent Regulatory Changes
in Reserve Requirements and Check Collection, ’ Federal
Reserve Bulletin (July 1972), p. 628.
7That is:
Estimated weekly nonmember bank demand
deposits = ( Weekly smaller member bank demand deposits)
X (Estimated weekly ratio)
where the
( Nonmember bank demand deposits)
ratio ( Smaller member bank demand deposits)
is estimated from the actual ratios as of call report dates.
“Improving the Monetary Aggregates,” p. 29.
8Weekly time deposit data for nonmember banks, which are
used in constructing M2, are estimated in the same way as
nonmember bank demand deposits.
Page 13
JUNE
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
19 7 8
F ig u r e I
Illustration of Linear Interpolation of Ratio Used
to Estimate Weekly Nonmember Bank Deposits
T a b le IV
Benchmark Revisions
1971 - Present
Dqte of Revision
c a ll r e p o r t
w e e k of
c a ll r e p o r t
d a te
J u ly
d a te
* N o n m e m b e r B a n k D e m a n d D e p o s i t s d iv i d e d b y S m a l le r
M arch 23, 1 9 7 8
C a ll reports of D ece m be r 1 9 7 6 , M a rc h ,
June, a n d Se p te m b e r 1 9 7 7 . C h a n g e of
s e a s o n a l factors.
Ju n e 2 3 , 1 9 7 7
C a ll report o f D ecem ber 3 1 , 1 9 7 6 .
A p ril 2 1 , 1 9 7 7
C a ll report of Se p te m b e r 3 0 , 1 9 7 6 .
F e b ru a ry 1 7 , 1 9 7 7
C a ll rep ort o f Ju n e 1 9 7 6 . C h a n g e o f s e a
s o n a l factors.
O cto b e r 2 1 , 1 9 7 6
C a ll report o f M a rc h 3 1 , 1 9 7 6 .
M a y 20, 1 9 7 6
C a ll report o f D ece m be r 3 1 , 1 9 7 5 .
Jan uary 22, 1 9 7 6
C a ll reports o f J u n e a n d Sep tem b er
1 9 7 5 . C h a n g e o f se a s o n a l factors.
S e p te m b e r 1 8 , 1 9 7 5
C a ll report o f A p ril 1 6 , 1 9 7 5 .
M a y 22, 1 9 7 5
C a ll report o f D ece m be r 3 1 , 1 9 7 4 .
F e b ru a ry 2 0 , 1 9 7 5
C a ll report of O c to b e r 1 5, 1 9 7 4 .
N ovem ber 21, 1 9 7 4
C a ll report o f Ju n e 1 9 7 4 . C h a n g e o f s e a
so n a l factors.
A u g u st 22, 19 7 4
C a ll report of A p ril 2 4 , 1 9 7 4 .
M a y 23, 1974
C a ll report of D ece m be r 3 1 , 1 9 7 3 .
Jan uary 31, 197 4
C a ll reports o f Decem ber 1 9 7 2 , M a rc h ,
Ju n e , a n d O c to b e r 1 9 7 3 . C h a n g e o f s e a
s o n a l factors.
M e m b e r B a n k D e m a n d D e p o s it s .
June call report have not been processed.9 The delay
between the call report date and the release of money
stock revisions has generally been four to seven
months during the past few years (see Table IV ).
Consequently, for the June and September call report
dates, the ratio of nonmember bank demand deposits
to smaller member bank demand deposits is initially
estimated by using a regression equation.10 The ratio
for the last week of July is a linear interpolation be
tween the estimated June and September ratios (see
Figure I ). This ratio is multiplied by smaller member
bank demand deposits for the last week of July to
obtain the first estimate of nonmember bank demand
deposits for that week.
Processing the call report data takes a long time for a number
of reasons. First, the FDIC usually forwards the data to the
Federal Reserve with a two-month delay. Second, the data
must be edited to check for incorrect filing of reports and
omissions of data. Third, the data must be used to re-estimate
the ratios used in estimating the weekly data.
10The regression equation makes the ratio a function of linear
and quadratic time trends and the 3-month Treasury bill
rate.
Ratio=ao + ait + a2t2 + a3 TBR + e
where
t = time
TBR=;3-month Treasury bill rate
e - error term
Predicted values of the ratio for future call report dates based
on this regression equation may be judgmentally adjusted as
well. See Beck and Sedransk, “Revision of the Money Stock
Measures,” pp. 85-86; and “Improving the Monetary Ag
gregates,” p. 29.
Digitized for Page
FRASER
14
S ou rce of R evision
C a ll reports of D ece m be r 1 9 7 1 a n d June
1 9 7 2 . C h a n g e o f s e a s o n a l factors.
N ovem ber 18, 1971
C a ll reports o f Ju n e 3 0 , 1 9 7 1
cem ber 3 1 , 1 9 7 0 . C h a n g e o f
factors.
and D e
se a s o n a l
After the June call report data are processed, the
actual June ratio replaces the estimated June ratio —
that is, the data are “benchmarked” to the actual June
ratio. In addition, the September ratio is re-estimated
to incorporate the effect of the actual June ratio. The
ratio for the last week of July is then revised by lin
early interpolating between the (new) June and Sep
tember ratios. This revised ratio is multiplied by the
smaller member bank demand deposits for the last
week of July to obtain a second estimate of nonmem
ber bank demand deposits.
After the September call report data become avail
able, the actual September ratio is then known and
another benchmark revision is made. The ratio for the
last week in July is again estimated by linear interpo
lation between the June and September ratios, from
which a third estimate of nonmember bank demand
deposits is calculated for the last week of July.
Vault Cash
Weekly data on nonmember bank vault cash are
also estimated between call report dates. In this case,
the ratio of nonmember bank vault cash to all mem
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
ber bank vault cash is used to compute weekly esti
mates of nonmember bank vault cash — by multiply
ing the vault cash of all member banks for a particular
week by this ratio.
Nonmember bank vault cash for the last week of
July is also likely to have at least three estimates,
although in this case June and September ratios of
nonmember bank vault cash to member bank vault
cash are not estimated, such as is done for demand
deposits. Instead, the actual ratio, as of the latest
available call date, is used until the ratios for the
surrounding call report dates are known, at which
time the ratio for the last week of July is estimated
by linear interpolation between the June and Septem
ber ratios.
In the above example, nonmember bank vault cash
for the last week of July would initially be estimated
using the ratio of nonmember bank vault cash to mem
ber bank vault cash based on the latest available call
report. At the time member bank data for the last
week of July are available, the latest available call
report could be the end-of-March report, although it
is more likely to be the end-of-December call report.
If the latest available report is the December call
report, then the initial estimate of nonmember bank
vault cash for the last week of July will be based on
the December ratio.
When the March call report becomes available, the
March ratio replaces the December ratio, and a sec
ond estimate is obtained. The same substitution occurs
when the June ratio becomes available. When both
the June and September ratios are known, the ratio
for the last week of July is estimated by linear inter
polation between the two. Consequently, three or four
estimates of weekly nonmember bank vault cash could
be made.
Difficulties With Revisions
Given the four- to seven-month delays between the
call report dates and the publication of benchmark
revisions, the M l number for the last week of July
may be revised even under “normal” reporting condi
tions as late as eight or nine months after the first
estimate is made. In general, the “final” estimate of
weekly M l data is made between four and nine
months after the week occurs (see Table IV ). The
delay may be even longer if there are problems in col
lecting or processing the call reports, such as occurred
with the revision announced in March 1978.11
1:lThe delay could also be longer if there are substantial changes
in the behavior of deposits or vault cash at noninsured non
JUNE
1978
Another source of revisions in the estimates of
weekly nonmember bank data involves changes in
bank structure between call report dates. Such
changes include the formation of new nonmember
banks, the liquidation of existing nonmember banks,
mergers of nonmember banks, or the conversion of
member banks to nonmember status. Adjustments are
made to the weekly estimates of nonmember bank
data as these changes in bank structure occur.12
The size of benchmark revisions depends on how
close the earlier estimates of the nonmember bank
components of the money stock are to the later es
timates of these data. During the 1970s there has
been considerable concern over the size of these
benchmark revisions. The level of M l changed by
more than $1 billion as a result of a number of the
revisions since 1970, including an increase of $2.8
billion in June 1973.13
A special group (the Bach Committee) studied the
problems of benchmark revisions as part of a larger
study of the construction of the monetary aggregates,
and recommended in 1976 that changes be made to
improve the estimates of nonmember bank data.14
To reduce large errors in preliminary estimates of
deposits at nonmember banks, we recommend prompt
establishment of a weekly reporting sample of large
and small nonmember banks and collection of weeklyaverage-of-daily-deposits data from nonmember banks
four times annually in connection with call reports.15
As the Bach Committee report was being completed,
one of their recommendations — that weekly-averageof-daily-deposits, rather than one-day data, be collected
around call report dates — was being implemented by
the FDIC starting with the March 1976 call report.
Their recommendation that a sample of nonmember
banks be established to estimate nonmember bank de
posits and vault cash, rather than using member banks,
was begun by the FD IC in 1977. The results of this
sample are being evaluated by the Board of Governors
but have not yet been implemented.
member banks. However, these noninsured nonmember banks
represent only a very small proportion of deposits (Table
III). In addition, separate reports for branches of foreign
banks in New York City are available for spring and fall call
report dates. Since such branches account for the bulk of
noninsured nonmember bank deposits, a good estimate of
such deposits is generally available.
12Beck and Sedransk, “Revision of the Money Stock Measures,”
p. 85.
13Ibid., pp. 83-86; “Improving the Monetary Aggregates,” pp.
28-29.
14“Improving the Monetary Aggregates.”
15Ibid., p. 3.
Page 15
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
BENCHMARK REVISIONS AND
MONETARY GROWTH
JUNE
T a b le V
O ne-Y ear Growth Rates of M l
An important issue raised by the benchmark revi
sions of the money stock involves the extent to which
these revisions affect monetary growth. With regard
to the ranges of monetary growth set by the Federal
Open Market Committee (FOM C), the Federal Re
serve’s principal policymaking body, the issue is
whether the revised data substantially change rates of
money growth relative to the FOMC’s ranges.
Some information concerning this issue can be ob
tained by examining the impact of the March 1978
benchmark revision on the levels and rates of growth
of M l and M2. In so doing, it is useful to distinguish
between the short-run and long-run ranges of M l and
M2 growth which are set by the FOMC. Each quarter
the FOMC sets ranges of growth for M l and M2 over
the next four quarters, taking into consideration such
factors as the growth of the economy, the rate of un
employment, and inflation. These one-year ranges are
based on the quarterly average of M l or M2 for the
most recent quarter to the quarterly average for M l
or M2 one year in the future.16
In addition, at each of its monthly meetings the
FOMC sets two-month ranges for M l and M2 growth
which are expected to be consistent with the one-year
ranges. For example, at its June meeting the FOMC
specifies an M l growth range for the two-month JuneJuly period. Then at its July meeting the Committee
sets a new range for the July-August period. Although
longer-term fluctuations in money growth are more
important than short-term fluctuations in terms of ef
fects on output, employment, and prices, these twomonth ranges are guides in the implementation of
policy.
When deciding the long- and short-run growth
ranges for M l and M2, the FOMC examines past M l
and M2 growth and projections of future M l and M2
growth. Significant deviations of M l or M2 growth
from their short-run ranges (if the FOMC’s domestic
policy directive is a “money market conditions” direc
tive), or from the mid-points of their ranges (if the
FOMC’s domestic policy directive is a “monetary ag
gregates” directive), can lead to a change in the
FOMC’s Federal funds rate objective.17 Thus, the
issue is whether the benchmark revisions significantly
16For a discussion of the FOMC’s ranges, see Richard W. Lang,
“The Federal Open Market Committee in 1 9 7 7 ,” this Review
(March 1 9 7 8 ) , pp. 2 - 9 .
17Ibid., p p . 7 - 9 .
Digitized forPage
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16
19 7 8
and M 2
Before and After Benchmark Revision of
March 23, 1978
(n o t s e a s o n a lly a d j u s t e d )1
Ml
M2
R evised
O ld
Revised
O ld
1 / 7 6 -1 / 7 7
6 .3 %
5 .9 %
1 0 .9 %
1 0 .9 %
11/76-11/77
6 .6
6 .0
1 0 .7
1 0 .6
111/76-111/77
7.8
7 .3
1 1 .0
1 0 .9
I V / 7 6 - IV / 7 7
7.8
7 .4
9 .7
9 .6
1One-year growth rates using seasonally adjusted data are essentially
the same as the growth rates shown here.
alter the two-month or one-year growth rates of M l
or M2 relative to the FOMC’s ranges.
One-Year Growth Rates
For the one-year growth rate of M l to change by
more than one percent, M l would have to increase
(or decrease) relative to the current level of M l by
about $3.5 billion. Although such a large benchmark
revision is possible, even the March 1978 revision
(which incorporated four call reports instead of the
usual one or two) changed the level of M l at the
end of 1977 by only $1.3 billion. Since 1970, only the
benchmark revisions for 1973, which were the largest
in the history of the series, were large enough to
change the growth rate of M l by one percent.18 The
most recent benchmark revisions increased the growth
rate of M l from fourth quarter 1976 to fourth quarter
1977 by about four-tenths of one percent, from 7.4 to
7.8 percent (see Table V).
Since the difference between the upper and lower
limits of the one-year ranges for M l growth has gen
erally been at least 2 percentage points, the probabil
ity that a benchmark revision would significantly alter
the one-year rate of M l growth relative to the
FOMC’s longer-run range is quite small, unless M l
growth were already at the upper or lower limit of its
range before the revision.
Two-Month Growth Rates
Since money growth has often been more volatile
over time periods shorter than one year, it is also nec
essary to examine the effect of benchmark revisions on
M l growth for shorter time periods. Table VI gives
18Beck and Sedransk, “Revisions of the Money Stock Measures,”
p. 81.
JUNE
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
the two-month rates of M l growth for 1977 using old
data and old seasonal factors, revised data and old
seasonal factors, and revised data and revised seasonal
factors. Calculating growth rates for revised data us
ing old seasonal factors is necessary to separate out
the effects of the revision of the seasonal factors for
1977 from the revisions due to benchmark adjustments
alone. As can be seen from Table VI, the two-month
growth rates of M l changed by more than one per
centage point during the first quarter of 1977. How
ever, in the January-February and February-March
periods, neither of the revised growth rates (using old
seasonal factors) are outside of the FOMC’s short-run
range( which was 3 to 7 percent in both periods). In
the March-April period, both the old and revised (us
ing old seasonal factors) growth rates are outside of
the FOMC’s 4Vz to 8V2 percent range. So even though
the benchmark revision results in about a 1.5 percent
age point increase in the March-April growth rate,
the old growth rate was already substantially outside
the short-run range.
stantially alter these growth rates relative to the
FOMC’s ranges. This is particularly true since the
spread between the upper and lower limits of the
short-run ranges is generally four or more percentage
points — much wider than the spread for the longerrun ranges.
One-year and two-month growth rates for M2 in
1977 were also little changed by the recent benchmark
revisions (Tables V and V II). Relative to the
FOMC’s short- or long-run ranges for M2, changes in
M2 growth rates due to benchmark revisions are also
not likely to be very significant.
T a b le V II
M2
Two-Month Simple Annual
Rates of C hange
(s e a s o n a lly a d ju ste d )
O ld D a ta
FOMC
Sho rt-R u n
Ranges
O ld
S e a s o n a ls
R evised D a ta a s of
M a rc h 23, 1978
O ld
S e a s o n a ls
New
S e a s o n a ls
1977
T a b le V I
10.1%
Ml
Jan.-Feb.
7 -1 1
8 .4 %
8 .9 %
Two-Month Simple Annual
F e b .-M a r.
6'/2 - i o y 2
7.9
8.4
9.4
Rates of C h ange
M a r .-A p r.
7-11
11.1
11.6
10.2
(s e a s o n a lly a d ju ste d )
A p r.-M a y
8-12
9.1
9.3
8.2
3'/2 -7!/2
6.4
6.7
7.3
FOMC
Sho rt-R u n
Ranges
O ld D ata
O ld
S e a s o n a ls
R evised D a ta as o f
M a rc h 2 3 , 1 9 7 8
O ld
S e a s o n a ls
New
S e a s o n a ls
M a y -J u n e
Jan.-Feb.
3 -7
F e b .-M a r.
3 -7
4 '/ j - 8 Vi
A p r.-M a y
6 -1 0
M a y -J u n e
0 -4
%
3 .1 %
4 .4 %
7 .1 %
3.1
4 .6
6 .5
1 2 .4
1 3 .9
10.1
1 0 .6
7 .7
2 .6
2.8
4 .3
6-10
12.4
12.8
11.3
Ju ly -A u g .
6 ’/2 -10'/2
11.6
11.7
10.6
A u g .-Se p t.
3-8
7.2
7.3
8.4
Sept.-O ct.
4-8
9.1
9.1
9.4
O ct.-N o v .
5'/2- 9 ’/2
7.4
7.4
7.6
N ov.-D ee.
5-9
5 .2
5 .2
5 .5
10.8
J u n e -Ju ly
2 % -6 %
1 1 .4
1 1 .5
9 .5
J u ly -A u g .
3 ’/2 -7 '/ 2
12.1
1 1 .7
9.1
7 .5
A u g .-Se p t.
0 -5
6.6
6 .0
Sept.-O ct.
2 -7
9 .7
9.1
9 .8
O c t.-N o v .
3 -8
5 .3
4 .9
5 .6
N ov.-D ee.
1 -7
3.1
3 .0
3 .8
A comparison of the remaining two-month growth
rates for old data (old seasonals) and revised data
(old seasonals) for 1977 indicates that in no case
did the rate of M l growth substantially change, nor
did the revised growth rate fall inside the FOMC’s
short-run range if the old growth rate did not (and
vice versa). Thus, although shorter-term M l growth
rates may change by larger amounts than one-year
growth rates as a result of benchmark revisions,
it is still not very likely that such changes will sub
%
Ju n e -J u ly
19 7 7
M a r .-A p r.
1978
Benchmark revisions seem particularly minor
comparison to revisions of money stock data due to
the revision of seasonal adjustment factors (see Tables
VI and V II).19 For the two-month growth rates of
M l, the revisions based on the new seasonal factors
for 1977 result in much larger changes in rates of M l
growth compared to the changes due to the bench
mark revisions alone.
BENCHMARK REVISIONS AND
FEDERAL RESERVE MEMBERSHIP
Nonmember bank deposits have comprised an in
creasing proportion of the monetary aggregates since
1960 (Table III). This has been the result of a num
19Also see the Bach Committee’s discussion of revisions of
preliminary estimates of the money stock; “Improving the
Monetary Aggregates,” pp. 25-26.
Page 17
F E D E R A L R E S E R V E B A N K O F ST. L O U I S
ber of factors, including more rapid growth of de
posits at nonmember banks than at member banks,
and the recent decline in membership in the Federal
Reserve System (Table II ).20 Consequently, estimates
of the weekly deposits of nonmember banks have be
come a larger item in the construction of M l. If Fed
eral Reserve membership continues to decline, will
benchmark revisions become larger? Would these re
visions become large enough to affect significantly
rates of money growth relative to the FOMC’s ranges?
Answers to these questions are not clear-cut, as
scenarios can be drawn which give opposite conclu
sions on the matter. Some of the possible effects of
declining Federal Reserve membership can be de
scribed, although additional research is necessary to
provide conclusive evidence on these questions.
For example, since the size of nonmember bank
deposits would increase as Federal Reserve member
ship declined, the same percentage errors in estimat
ing nonmember deposits as have occurred in the past
would result in an increase in the size of the bench
mark revisions relative to the level of the money stock.
Larger revisions would result in larger changes in
short- and long-run growth rates of the monetary
aggregates relative to the FOMC’s ranges.
However, it is possible that the percentage errors
in estimating nonmember deposits could either in
crease or decrease as Federal Reserve membership
declines. The present estimates of weekly nonmember
deposits depend upon the ratio (as of the call report
dates) of nonmember bank deposits to smaller mem
ber bank deposits. The present approach implicitly
assumes that the relationship between smaller mem
ber deposits and nonmember deposits does not change
much over time. The larger the changes in this rela
tionship from one call report date to the next, the
more likely it is that the initial estimates of this ratio
will be off the mark, resulting in larger benchmark
revisions. Thus, whether or not the relationship be
tween smaller member deposits and nonmember de
posits is changed as membership declines becomes an
important factor in assessing whether the size of
benchmark revisions will increase or decrease.
If the characteristics of banks which drop member
ship are similar to other nonmember banks’ character
istics, then the estimates of the ratio would have errors
20For a discussion of the factors affecting the growth of nonmember bank deposits, see John T. Rose, “An Analysis of
Federal Reserve System Attrition Since 1960,” Staff Eco
nomic Studies No. 93, Board of Governors of the Federal
Reserve System, 1977.
Digitized forPage
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18
JUNE
1978
similar to those that have occurred in the past. Al
ternatively, if the former member banks’ characteris
tics remain the same after they are nonmembers, the
estimates of the ratio could, over time, become less
subject to errors. The nonmembers’ characteristics
would become more similar to the members’ charac
teristics in this case, and (after an adjustment period)
the ratio of nonmember deposits to member deposits
would become more, rather than less, stable.
Alternatively, if the characteristics of former mem
ber banks change significantly once they are nonmem
bers, and if they are not similar to the other non
members’ characteristics, then the estimates of
nonmember data could have even larger errors than
the present errors.
The possibility that benchmark revisions will be
come larger as Federal Reserve membership declines
would be reduced by a number of proposals. Sugges
tions have been made to reduce the incentives for
member banks to withdraw from the System, or to
actually increase the incentives for nonmember banks
to join the System.21 These include the payment of
interest on reserves held at Federal Reserve Banks. Of
course, if all nonmember banks joined the Federal Re
serve System or if all nonmember banks reported
weekly as member banks do now, the problem of esti
mating nonmember deposits would disappear.
Other proposals have centered on improving the
estimates of nonmember bank data in order to reduce
the size of benchmark revisions. As mentioned ear
lier, the Bach Committee concluded that errors in
estimates of nonmember components of M l could be
significantly reduced if a sample of nonmember banks
would report weekly. This recommendation was based
upon an experiment in which the FD IC requested
that 573 insured nonmember banks report daily bal
ance sheet data on a weekly basis. This sample of
banks included all “large” nonmember banks (177
banks having total deposits in excess of $100 million)
and groups of smaller nonmember banks in various
size classes based on their total deposits.22
During the period from summer 1974 to spring 1975,
this sample was used to estimate nonmember bank
deposits and vault cash. In principle, large nonmem
ber deposits and vault cash were available for each
week and did not have to be estimated.23 The weekly
deposits and vault cash for smaller nonmember banks
21Ibid., p. 41.
22“Improving the Monetary Aggregates,” pp. 29-30.
23In fact, not all banks reported on a regular basis.
FE DE RA L . R E S E R V E B A N K O F ST. L O U I S
were estimated using the same technique as illustrated
in Figure I.
Thus, instead of estimating weekly data for all
nonmember banks between call report dates, weekly
data for large nonmember banks would be known
and only data for small nonmember banks would be
estimated. After experimenting with a number of
other estimation and sampling techniques, the Bach
Committee concluded that the technique described
above would significantly improve the construction of
the monetary aggregates, and that the costs of in
creased reporting by nonmember banks compared fa
vorably to the benefits.
After reviewing current procedures, the sample
explorations, and various alternative proposals, the
Committee concluded that the inaccuracies in the
estimate of demand deposits of nonmember banks
represent a major defect in up-to-date monetary
statistics and a significant defect in historical statistics
of M l and that marked improvements are feasible at
reasonable costs for both reporting nonmember banks
and the Federal agencies involved.24
The Bach Committee’s proposal would reduce er
rors in estimating nonmember deposits and vault cash
so that growth rates of M l and M2 would be less
affected by benchmark revisions. If declining Federal
Reserve membership tends to increase the size of
benchmark revisions, then such reductions in estima
tion errors will become more important.
SUMMARY
Benchmark revisions of the money stock are made
usually three or four times each year to incorporate
24“Improving the Monetary Aggregates,” p. 30.
JUNE
1978
new information on nonmember bank deposits and
vault cash. Although these revisions have at times
changed the level of the money stock by more than
$2 billion as of a call report date, only during 1973
have these changes represented as much as a one per
cent change in the money stock.
The changes in one-year growth rates of M l and
M2 as a result of these benchmark revisions have been
quite small, generally changing the growth rates by a
few tenths of one percentage point or less. Compared
with the two or more percentage point spread in the
one-year ranges of M l and M2 growth set by the
FOMC, such changes in M l and M2 growth rates
appear to have little effect on monetary growth rel
ative to the FOMC’s ranges.
The changes in two-month growth rates of M l and
M2 as a result of benchmark revisions have been
larger, at times changing these short-run growth rates
by more than one percentage point. However, the
two-month ranges of M l and M2 growth set by the
FOMC are much wider than the one-year ranges —
four percentage points or more. Changes in short-run
M l and M2 growth rates also are likely to have little
effect on monetary growth relative to the FOMC’s
ranges.
Whether or not a continuing decline in Federal Re
serve membership will increase the size of benchmark
revisions remains an open question. In the event that
declining membership does increase the errors in esti
mating nonmember bank components of the money
stock, the proposals to reduce the size of the revisions
by alternative sampling and estimation techniques, or
to encourage increased Federal Reserve membership,
will become more important issues.
Page 19
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