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Volume 49

Number 5

Bank Profits Rise Sharply
A Look at the 7 9 6 6 Income and Expenses of Eighth
Federal Reserve District M em ber Banks

I r O FIT S A T MOST Eighth District member banks
rose sharply in 1966. Profits after taxes at these banks
totaled $85 million last year, 14 per cent above 1965.
Major factors influencing the rise w ere an increase in
the volume of loans and a higher rate of return on
both loans and securities.

throughout the 1956-66 period. They hit a peak of
10.2 per cent at district banks in 1960. After declining
to 8.0 per cent in 1963, the postwar low, net profits
after taxes rebounded to 9.3 per cent of capital
accounts in 1966.

R evenues

N et profits after taxes at member banks in the
Operating revenues at district mem ber banks totaled
nation rose less rapidly, increasing 5 per cen t.1 Gains
$503 million in 1966, an increase of 16 per cent from
in net current earnings (operating income less operata year earlier (Table I). Revenues at these banks
ing expenses) at banks in both the nation and district
have risen at an average 9 per cent rate since 1956.
w ere similar, rising about 14 per cent in each case.
This growth reflects largely an increase in total
The difference in the rates of
gain in profits betw een district
banks and banks in the country
Table I
as a whole was almost entirely
crease in net losses, charge-offs,



, _ „


and transfers to valuation reserves at the latter banks.



h a v e risen a t an 8 .1 p e r c e n t ra te
a n d in th e n atio n at a 7 .9 p e r




Revenue on loons.........................






other .....................................
am other revenue........................











1 0 9 .0

5 9 .5



1 3 8 .6

Cent rate.




. . l


Relative to capital accounts,



net profits after taxes in both the
district and the nation have flue,
tuated in the comparatively narc o m .
row range of 8 to 10 per cent

1Preliminary estimates. Income and

S a la rie s , w a g e s , an d b e n e f i t s . . . .




In terest on tim e d e p o s its ......................




other expenses...............................


114 .2


2 1 .4

2 3 .4





Total operating exp enses. . .






Net current e a rn in g s .............











Recoveries, transfers from
reserves, and profits...............

expense data tor all member banks
----------- ------------ -----------in the nation are published annually
Net incom e
in the Federal Reserve Bulletin. The
= ------ = = = = =
1965 data for all member banks may
Taxes on net income...........
be found in the June 1966 Bulletin
„, ,
and for all insured banks in the July
Nef income af,er ,ax e‘ • * •
85 3
75 0
1966 issue. Income and expense data
Cash dividends on common stock.
for all national banks are published
interest on capital notes
in the Annual Report of the Compnnd debentures1
troller of the Currency, while data
for all insured banks are contained i i nciu(jes small amount of cash dividends on preferred stock.
in the Annual Report of the Federal
Deposit Insurance Corporation.
* Less than 0.05.

Page 2

_ .

Per C e n t C h an g e
A n n u a l Rate

Total operating revenues. . .

During the past decade m em b e r b a n k profits in th e d istrict

r> i


M illio n s o f D o llars



25.7 2.6


39 0 13 7
17.1 6.5



assets, a shift from nonearning assets and relatively
low yielding securities to higher earning assets, and
a marked rise in the average level of interest rates.

C h a rt 2

A verage Return on Securities and Loans
Eighth District M em ber Banks


Total resources of district member banks grew from
$6.5 billion in 1956 to $11 billion in 1966, an average
annual rate of 5.4 per cent. Earning assets of these
banks grew somewhat more rapidly, from $4.9 billion
in 1956 to $8.6 billion in 1966, a 5.7 per cent rate.
The slightly faster growth in earning than total assets
reflects the fact that member banks placed an in­
creasing proportion of their available funds in loans
and investments. Nonearning cash balances were
reduced from 23 per cent of assets in 1956 to 19 per
cent in 1966. Reductions in reserve requirements
facilitated this move.
In addition to the growth in total earning assets,
banks have enhanced operating revenues by adjust­
ing their portfolios to higher earning types of assets.
Over the past decade, holdings of U. S. Government
securities dropped from 29 to 16 per cent of assets
(Chart 1). In contrast, loans rose from 40 per cent
to 50 per cent of assets during this period. Meanwhile,
“other” securities (mostly tax exempt issues of state
and local governments) rose from 8 to 13 per cent.
Another factor tending to increase revenues of

Ch a r t 1

D istribution of A ssets
Eighth District M em b er Banks
Per Cent
6 0 -------

Per Cent







U.S. G o vernm ent S e c u ritie s



C a sh a n d O ther A sse ts



Other S e c u ritie s

q I--------1------ i------- 1------ 1 ____I ____I ____I ____L
_ _ _ _








banks during the past decade has been the upward
trend of interest rates. The average return on bank
loans increased from about 5 per cent in 1956 to 6.1
per cent in 1966 (Chart 2). The average return on
Government securities rose from 2.3 per cent to 4.2
per cent.
Growth in interest and charges on loans has ac­
counted for a major portion of total bank revenue
growth during the past decade. From $130 million
in 1956, or 62 per cent of the total, revenue from loans
rose to $335 million, or 67 per cent of the total in
1966. Returns on loans increased at an average rate
of 10 per cent during the period.
Although accounting for less than one-tenth of total
revenues, interest on securities other than U. S. Govern­
ments has been the most rapidly growing revenue
source. Interest on other securities rose from $12
million in 1956 to $44 million in 1966, an average
annual increase of 14 per cent.
In contrast to the rising importance of revenue
from loans and other securities, revenue from U. S.
Government securities has declined relative to the
total since 1956. At that time, interest on Government
securities was $44 million, 21 per cent of total reve­
nues, while in 1966 such revenue was $76 million, 15
per cent of the total. From 1956 to 1966 such revenue
Page 3


Net Losses or Profits on Securities and Loans
Eighth District Mem ber Banks
Per Cent

Per Cent


0 .5

-0 .5




rose at an annual rate of 5.7 per cent.
Income from sources other than loans and invest­
ments has also grown during the past decade but
contributed less to total revenues in 1966 than in
earlier years. Service charges on deposit accounts, trust
department earnings, and other receipts have risen
at an average annual rate of 7.5 per cent since 1956.
These items accounted for 12 per cent of total revenue
in 1956 compared with about 10 per cent in 1966.

Operating expenses of district member banks total­
ed $360 million in 1966, up 16 per cent from the pre­
vious year (Table I). Interest paid on time and sav­
ings deposits, up 21 per cent, was the most rapidly
rising major expense item. Wages, salaries, and em­
ployee benefits rose 9 per cent, and all other ex­
penses increased 18 per cent.
Since 1956 operating expenses of member banks
in the district have risen from $123 million to $360
million, an annual rate of 11.4 per cent. Reflecting
both the sharply rising volume of time and savings
deposits and the upward trend in interest rates on
these accounts, interest expense was the major factor
in the overall increase.
Interest expense rose from $17 million in 1956 to
Page 4

$139 million in 1966, an average annual rate of 23 per
cent. This is in sharp contrast with the immediate
postwar decade when such expense rose at a 10 per
cent rate. In 1946 cash and Government securities
accounted for almost three-fourths of assets at member
banks in the district. This liquidity enabled banks to
meet most of their loan demand through shifts in
portfolio holdings and growth in reserves during the
1946 to 1956 period. Banks accepted time and savings
deposits at relatively moderate interest rates.
Since 1956, however, with the opportunities for
profitable lending and with a minimum of other
assets for shifting into loans, banks have bid aggres­
sively for time and savings deposits. Both the volume
of such deposits and the average rate paid have in­
creased rapidly. Time and savings deposits rose at a
rate of 3.7 per cent per year from 1946 to 1956 com­
pared with rates of 7 per cent from 1956 to 1960 and
15 per cent since 1960. The average rate of interest
paid on time and savings deposits rose from 0.8 per
cent in 1946 to 1.36 per cent in 1956, 2.37 per cent in
1960, and 3.77 per cent in 1966.
Other major expense items have increased but less
rapidly than interest expense during the past decade.
Salaries, wages, and fringe benefits rose at an average
annual rate of 7 per cent, and all other expenses at
an 8 per cent rate.

N et Losses on Loans an d S ecu rities
Net losses on loans (exclusive of transfers between
undivided profits and valuation reserves) totaled $7
million in 1966, an increase of 8 per cent from the
previous year. The ratio of net losses on loans to total
loans was 0.13 per cent, unchanged from a year
earlier. Although this is a reasonably low rate, it is
slightly greater than the average level of the 1950’s.
Net losses on securities at district member banks
in 1966 totaled $11 million compared with net profits
of $0.3 million in 1965. The large losses resulted
from the combination of an exceptionally strong loan
demand and depressed security prices during the
past year. To meet the rapidly rising loan demand,
banks found it profitable to liquidate some of their
security holdings at the depressed price levels pre­
vailing during most of the year. The sale of some
securities may also have been motivated by tax con­
siderations. Banks may deduct capital losses result­
ing from security sales from ordinary income taxed at
a maximum rate of 48 per cent. By selling some of
their securities when prices decline and simply buying
others, banks obtain expected future capital gains
which are taxed at a maximum 25 per cent rate. In
this manner, banks trade ordinary income for future
capital gains which are taxed at a much lower rate.
The ratio of net losses on securities to total secu­
rities was 0.35 per cent in 1966. The ratio of losses or
gains on securities to total securities fluctuates con­
siderably from year to year (Chart 3). During the
past decade it has ranged from a net gain of 0.8 per
cent in 1958 to a net loss of 1.2 per cent in 1959.

offs, and transfers to valuation reserves was a re­
duction in net income before taxes of $25 million in
1966 compared with a reduction of $19 million in 1965.
Net income before taxes amounted to $117 million
in 1966, 10 per cent above the previous year. Income
taxes rose only 2.6 per cent, reflecting both the greater
losses on security sales and the greater tax-exempt
income on municipal securities.
Net profits after taxes totaled $85 million in 1966,
an increase of 14 per cent from 1965. Since 1956, after­
tax profits at district member banks has risen at an 8
per cent rate. Net profits relative to capital accounts
in 1966 were 9.3 per cent, up from 8.8 per cent a year
earlier. During the past decade the ratio of profits to
capital at member banks in both the district and the
nation has fluctuated from 8 to 10 per cent (Chart 4).
Although average profits in other businesses over this
period have generally been higher, profits at banks
have shown greater stability. Comparisons of the rates
of return on capital between banks and other busi­
nesses, however, may be somewhat misleading. The
primary purpose of capital in a nonfinancial business
is to provide physical plant and equipment. In bank­
ing these requirements are usually quite modest rel­
ative to total resources. The primary function of
capital in banking is to provide safety, or protection
against unexpected losses and shrinkage in value of
C h a rt 4

Net Profits and Dividends
as a Per Cent of Total Capital

Although net losses on loans and securities com­
bined were greater than in other recent years (ex­
cept 1956 and 1959), banks were able to show a net
addition to total valuation reserves. These reserves
at the end of 1966 were $103 million, 4.4 per cent
above a year earlier. In comparison, valuation reserves
rose at a 10 per cent rate from 1956 to 1966. Such
reserves, while not included in capital accounts, serve
much the same purpose. They are in a sense a form
of hidden capital in banks. Loan and security valua­
tion reserves at district member banks are currently
about 11 per cent of the volume of total capital ac­

N et Earnings a n d Incom e
Net current earnings of member banks in the dis­
trict totaled $142 million in 1966, an increase of 14
per cent from a year earlier (Table I). Since 1956 net
current earnings have risen at a 5 per cent annual rate.
The result of all adjustments for net losses, charge






Page 5

B ank C apital

the net addition to capital accounts during these years.

Determining the optimum amount of capital for
a bank is not an easy task. Stockholders generally
prefer to have as little as possible in order that profits
on invested funds (which come primarily from invest­
ing deposits) will be maximized. Depositors, particular­
ly those with large accounts, prefer to have as much
capital cushion for protection as possible. With capital
in banking designed to serve this somewhat unique
function of protecting depositors, the amount of cap­
ital invested is heavily influenced by regulation and
supervision. As a result, the adequate capital require­
ments set for banks for safety purposes may some­
times be at the expense of higher returns on capital.
Total capital accounts of district member banks
were $912 million in 1966, an increase of 6.8 per cent
from 1965. Since 1956, capital of these banks has
risen at a 6.5 per cent rate. In the late 1950’s capital
was rising somewhat more rapidly than either total
deposits or total assets. As a result the capital-toassets and capital-to-deposits ratios both rose (chart
5). Since 1960 these ratios have shown very little net
change. In contrast the ratio of capital to risk assets
(total assets less Government securities and cash)
has declined from about 16 per cent, prevailing in the
1956-60 period, to 13 per cent in 1966.
Traditionally banks have raised nearly all of their
capital through the issue of common stock and re­
tained earnings. In several recent years a significant
portion of new capital was raised through the sale of
capital notes and debentures. During the 1963-66
period district member banks sold $42 million of such
debt capital. This represented about 24 per cent of

C h a rt 5

Total Capital
as a Per Cent of Assets and Deposits
Eighth District M ember Banks
P e rC e n t


---------------------------------------------- 20

Total A sse ts L e ss U .S. G ov e rn m en t Se c u ritie s and Cash








Total D e p o sits





Page 6


Total A ssets
_1 _






Somewhat over $20 million of capital notes and
debentures were sold by district member banks in
1963, the first year of sizable sales of such capital.
During 1966 such sales totaled slightly under $1
million compared with $14.8 million in 1965 (Table
II). The lower level of sales in 1966 is probably in­
dicative of the unwillingness of banks to make long­
term capital commitments of this type, given the
relatively high market interest rates prevailing during
the year.
T a b le II

(Thousands o f D ollars)
S old d u rin g


Retired during

O u tstan d in g at
end o f y e a r






1Includes small amount of preferred stock.

Interest on capital notes and debentures at district
member banks totaled $1.9 million in 1966, an in­
crease of 35 per cent from a year earlier. The average
rate of interest paid on debt capital was 4.6 per cent.

The year 1966 was a profitable one for most member
banks in the Eighth District. Net operating earnings
rose 14 per cent, nearly triple the average rate of the
past decade (5 per cent per year). After adjustments
for net losses, charge-offs, and transfers to valuation
reserves, net income before taxes rose 10 per cent
from the previous year. Despite the sharp drop in
security prices and substantial losses on security sales,
bank earnings were sufficient to provide small net
additions to loan and security valuation reserves.
The increase in capital and valuation reserves com­
bined was 6.6 per cent last year compared with a 9 per
cent increase during 1965 and a 7 per cent rate of
increase from 1956 to 1966.
Net profits after taxes at district member banks rose
14 per cent from 1965 to 1966 compared with an
average growth of 8 per cent per year during the past
decade. Net profits relative to capital accounts in
1966 were 9.3 per cent, up from 8.8 per cent a year
earlier and a postwar low of 8.0 per cent in 1963.

S UBSCRIPTIONS to this bank’s

R e v ie w

are available to the public without

charge, including bulk mailings to banks, business organizations, educational
institutions, and others. For information write: Research Department, Federal
Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166.

Page 7

The Domestic Economy in Transition
Recent indications of growth follow stimulative
monetary and fiscal actions


INCE EARLY SPRING the economy has indicated
a renewed strength in contrast to the weakness exhib­
ited through the fall and winter. After slowing for
several months, consumer spending on goods and serv­
ices and business investment in plant and equipment
apparently have started to rise again. This improve­
ment in total spending follows stimulative monetary
and fiscal actions taken during the winter.
The U.S. balance-of-payments deficit has shown little
improvement thus far in 1967. There is some concern
that the deficit will increase substantially this year over
1966, particularly in view of declining short-term in­
terest rates in the United States. However, some
foreign interest rates have also fallen, and this may
reduce such concern.

Slow dow n in L ate 1966 a n d Early 1967
Total spending slowed markedly in late 1966 and
early 1967, and real output showed no growth. Indus­
trial production, which represents about one-third of
real output, declined at a 4 per cent annual rate from
October 1966 to March 1967.
A sharp increase in inventories held by businesses
I n d u s t r i a l P ro d u c tio n
R a t io S c a l e

R a t io S c a l e

relative to their total sales was another indication of
weakness in the fall and winter months. The inventorysales ratio rose at a 12 per cent annual rate from
August to February. This measure tends to rise as the
pace of economic activity slows because production
usually adjusts to weakness in sales with a lag of sev­
eral months. As inventories build up relative to sales,
they generally act as an additional drag on economic
activity. Businesses reduce inventories to more effi­
cient levels by slowing production. Final sales, which
is measured by total spending minus inventory invest­
ment, showed some improvement in early 1967. From
the fourth quarter of 1966 to the first quarter of 1967,
these sales increased at a 9 per cent annual rate com­
pared with a 7 per cent increase during last year.
The upward pressure on commodity prices moder­
ated as spending slowed. Consumer prices increased
at a 1.8 per cent rate from August to March compared
with a 3.5 per cent rate of increase in the previous year.
Wholesale prices declined at a 2 per cent rate from
August to March, reflecting primarily a 15 per cent
rate of decline in prices of farm products. Wholesale
industrial prices increased at a 1.3 per cent annual
rate, somewhat slower than the 2.4 per cent rise in the
previous year.
The decline in farm commodity prices since late
summer has pertained both to crops and to livestock
products. Of the crops, soybean prices have shown

Farm C om m odity Prices

P e rc e n ta g e s a r e a n n u a l r a te * o f c h a n g e b e tw e e n m o ntns in d ic a t e d .
L a te s t d a ta p lo tte d : M a rc h p r e lim in a r y

Page 8


I n v e n t o r ie s C o m p a r e d W ith M o n t h ly S a le s *

S tim u la tiv e M onetary
a n d F iscal A ction s since
L ate 1966
Government stabilization actio n s
since late last year have been of a
character generally regarded as stimu­
lative. Monetary expansion has been
rapid, and the Federal budget has
become even more stimulative than in
late 1966.

Monetary developments, which had
been restrictive from last spring to
late 1966, have since become quite
expansionary. From October to April
Federal Reserve open market opera­
tions added $3 billion to reserves of
member banks, a 14 per cent annual
S h a d e d a r e a s r e p r e s e n t p e r io d s o f b u s in e s s re c e s s io n a s d e fin e d b y th e N a t io n a l B u r e a u o f E c o n o m ic R e s e a r c h .
rate of increase. March reductions in
’ R a tio s b a se d on season ally a d ju ste d da ta.
S o u r c e : U .S . D e p a rt m e n t o f C o m m e rc e
L a t e s t d a t a p lo t t e d : M a r c h p r e lim in a r y
legal reserve requirements on cer­
tain time deposits of member banks
the sharpest drop, declining about 22 per cent. Hog
had an effect similar to increasing reserves an addition­
prices have fallen 31 per cent. Eggs and wool have
al $850 million. As a result of these actions, a measure
recorded large price declines, dropping 24 and 22 per
of Federal Reserve credit which includes member
cent respectively. Although prices of farm products
bank borrowing from Federal Reserve Banks and
have declined sharply since their peaks of last August,
which is adjusted for changes in reserve requirements
they remain somewhat above the average for most
increased $3.2 billion or at a 15 per cent annual rate
recent years.
from October to April. The interest rate at which
Federal Reserve Banks lend to member banks was
Much of the change in farm commodity prices can
reduced from 4'A to 4 per cent in early April. This
be traced to the current phase of the livestock pro­
move was generally considered a further sign of easier
duction cycle. Production has been in a rising phase
monetary policy.
since late 1965, tending to depress prices. Livestock
marketing may now have already reached a peak and
may be expected to slow in the coming months. As a
consequence farm prices will probably become firmer
and perhaps start rising by the fall of the year.
Private demands for credit declined relative to sup­
ply in late 1966 as total spending grew more slowly.
Consequently some interest rates (the price of loan
funds) also declined. The rate on short-term com­
mercial paper declined from 6 per cent in October
1966 to 5%per cent in February and to 4% per cent in
early May. Yields on highest-grade long-term corpo­
rate bonds receded from the 5.5 per cent peak reached
early last fall to 5 per cent in February. The average
yield in early May was 5.15 per cent, up 15 basis
points from the February low.
The excessive total demand and price inflation,
which were of much concern during most of last year,
have moderated. Whether this moderation is temporary
or of a longer-run nature depends in considerable meas­
ure upon recent and forthcoming monetary and fiscal

Total bank reserves, reflecting the growth of Federal
Reserve credit, increased $1.1 billion or at a 10 per
cent annual rate from October to April. These reserves
had declined at a 2.3 per cent rate during the previous
six months. A major share of these additional reserves
was used as reserves required for time deposits. These
deposits rose rapidly when interest rates paid on time
deposits became attractive relative to other market
In addition to reserves supplied for time deposit
expansion, reserves available for private demand de­
posits increased at a 2.7 per cent rate from October to
April. By comparison these reserves decreased at a 3.9
per cent rate from April 1966 to last October. Demand
deposits, which had declined at a 3 per cent rate from
April to October 1966, subsequently have increased
at a 2.1 per cent rate. Money stock (private demand
deposits plus currency in the hands of the public)
showed a similar pattern, decreasing at a 1.5 per cent
rate from April 1966 to last October and then rising at
Page 9

M o n ey Stock
R a tio S c a le
B illio n s o f D o lla rs

R a tio S c a le

M o n th ly A v e r a g e s o f D a ily F ig u re s
S e a s o n a lly A d ju s te d


18 0
+3 07.



A frequent topic of discussion among economic ana­
lysts at the present time is whether the upturn is now
occurring or will be delayed to the third or fourth
quarter. Some analysts have expressed concern that
current Governmental actions, if continued much long­
er, may foster excessive demands and the renewal of


Effects o f P olicy A ction s on th e Balance
of P aym en ts

+ 42 •/ / /






14 0
July 59


June '60





June 64

Apr 65






Apr 6 6 O






P e rc e n ta g e s a r e a n n u a l r a te s o f c h a n g e b e tw e e n m onths in d ic a te d .
L a te s t d a t a p lo tt e d : A p r il p r e lim in a r y

3 per cent rate. Since the first of the year this expan­
sion has been at about a 5 per cent rate.
Fiscal developments have also been more expansion­
ary in recent months. The Federal Government im­
parted an additional $4 billion annual rate stimulus to
the economy from the fourth quarter of last year to
the first quarter, according to the high-employment
budget. This was about $3 billion more than was
planned in the January budget, and reflected higherthan-expected Government expenditures. Defense
spending, which has risen rapidly each quarter since
mid-1965, continued its advance in the first quarter.
The deficit in the national income accounts budget
is expected to exceed $9 billion in the first quarter. This
measure of budget developments reflects the slowdown
in economic activity and its associated effect on tax
receipts, as well as increased Government expenditures.

R en ew ed S tren g th in th e D om estic
E conom y
Some economic developments indicate that stimu­
lative monetary and fiscal actions in the first few
months of this year are now moving the economy up­
ward from the plateau of late 1966 and early 1967.
Such expansionary actions usually take some time to
affect the economy. By now there is scattered evi­
dence that some sectors of the economy are showing
renewed strength. Retail sales in March increased
sharply over February, and preliminary April figures
indicate continuation of this strength. Construction
outlays have risen since the first of the year. Capital
market interest rates have firmed in recent months as
new security offerings have been quite large.
Page 10

The recent expansionary monetary actions have stim­
ulated an increase in the supply of credit. At the same
time slower growth in total demand for goods and
services contributed to a decline in the demand for
credit. Both of these forces have contributed to lower
interest rates. Some concern has been expressed that
the decline in short-term interest rates will tend to
aggravate the already serious U. S. balance-of-payments
The rapid increase in interest rates in the summer of
1966 attracted a large amount of foreign funds into
the United States and, to a lesser extent, encouraged
some Americans to hold their dollar balances at home
rather than depositing them abroad.1 It is feared by
some that the current easing in financial markets and
decline in interest rates in the United States will in­
duce a sharp short-term capital outflow in 1967.
Preliminary evidence indicates that the balance-ofpayments deficit on the official settlements basis was
at a faster rate in the first quarter of 1967 than in the
last half of 1966. This was due chiefly to the outflow of
a significant portion of the short-term funds which
came into the United States during the summer of
1966. Continued easing of domestic financial markets
and U.S. interest rate declines could lead to a con­
tinued weakening balance of payments during the
rest of 1967.
Comparison with 1960. Increased concern about
the balance of payments in 1967 may be in part
based on the 1960 experience. That was a year of
softness in the United States domestic economy and
of sharply declining interest rates. The decline in the
demand for credit caused Treasury bill rates to decline
from a peak of close to 5 per cent in early 1960 to 3
per cent in early 1961. At the same time rates were
rising abroad, especially in the United Kingdom,
Germany, and Canada. The resulting spread between
U.S. and foreign interest rates lead to a sizable short1 Since American corporations have been cooperating in the
President’s voluntary program to strengthen the balance of
payments, corporate short-term funds might not have been
invested abroad even if U .S. short-term rates had not risen.

term capital outflow from the United States.2

G o v e rn m e n t Bond Y ie ld s

This outflow of funds, combined with the Presiden­
tial election uncertainties, led to foreign speculation
about devaluation of the dollar. As a result there was
a heavy run on the London gold market which pushed
the free market price of gold from its normal range
of around $35 per ounce to close to $40 per ounce.
This speculative attack was subdued by the strong
statement of President-elect Kennedy assuring main­
tenance of the international value of the dollar at $35
per ounce of gold and by the development of institu­
tional arrangements among central banks to stabilize
the London gold market.
Contrast with 1960. Although conditions in the
United States in 1967 with respect to the decline in
short-term interest rates are similar to those in 1960,
conditions abroad are not the same. The United King­
dom, Germany, and Canada, instead of having boom­
ing domestic economies and high interest rates, have
recently been experiencing some economic weakness
2 A large share of the recorded short-term outflow in 1960
was in the form of bank loans to Japan. This not only was
due to high rates in Japan but also to a change in Japanese
government policy in July 1960, which made it much easier
for Japanese banks to borrow short-term funds abroad.

Y ield s on Euro-D ollar Deposits
and Certificates of Deposit

Per Cent
9 .5

Per Cent
9 .5

3 .5|
------------ 1 --------- -------------1
------------ --------------------------1
------------ --------------------------13.5
________ I _______ I _______ I _______ I _______ 1 _______ !________ I ----------- 1------------1
L i M o rtg ag e b o nd y ie ld th ro u g h M a rc h 1961; P u b lic A u th o ritie s bond y ie ld th e r e a ft e r.
• N e w s e rie s .

S o u rc e : IM F

Late st d a ta p lo tte d : U .S .- A p r il;O t h e r s - A p ril e s tim a te d

and softening in their interest rates. This is also true
of the Netherlands, Belgium, Switzerland, and Sweden.
Thus the incentive for moving short-term funds from
the United States to these financial markets is not so
strong this year as in 1960.
Financial markets in France, Italy, and Japan also
do not now provide attractive interest rate incentives
for moving funds from the United States. Although
the economies of these countries are relatively buoyant
and their interest rates are rising, the absolute level of
their rates is still not unusually favorable relative to
rates in the United States.
Other important differences between the current
situation and 1960 are the President’s voluntary pro­
gram initiated in February 1965 to support the balance
of payments and the interest equalization tax (IE T )
initiated in July 1963. The voluntary program is de­
signed to discourage banks from making loans and
investments in developed countries and to encourage
corporations to finance their foreign investments with
funds obtained abroad. The IE T on foreign securities
is designed to discourage portfolio managers from in­
vesting abroad.







D ata fo rth e la s t F r id a y of the month.
[1 Rates on three-month deposits.
|2 _Secondary m arket rate s for n e g o tia b le three-month CD's.
S o u rce s: Board of Governors of the Fed e ra l R eserveSystem and Salom o n Brothers
and Hutzler
Latest d a ta p lotted: A pril

The different conditions existing in 1967 compared
with 1960 are illustrated by developments in the Euro­
dollar market in the two periods. Since this market is
sensitive to changes in international financial condi­
tions, it tends to reflect net demand and supply
conditions of many countries. In 1960 U.S. short-term
rates declined as they are doing now, but the Euro­
dollar rates did not decline. Therefore, an unfavorable
interest rate differential against the United States
was created, and short-term funds flowed from the
Page 11

United States to Europe. By comparison, Euro-dollar
rates have fallen even more rapidly in recent months
than U.S. short-term rates on instruments of com­
parable liquidity.3 The reduced spread between these
rates has thus provided less incentive for U.S. funds
to move abroad.
3 The Euro-dollar market is much larger now than in 1960,
and U .S. banks are participating more actively in it. The
United States probably plays an important part in determin­
ing the Euro-dollar rate. Heavy bidding by U .S. banks in the
summer of 1966 probably helped push this rate up, and the
runoff of a large share of these funds since January has
helped push this rate down.

S u m m a ry
Stimulative monetary and fiscal actions since late
1966 are probably contributing to improvement in
economic activity. Acceleration of total demand may
be expected to develop as the full effect of these
actions takes hold. The general decline in interest
rates in late 1966 and early 1967 in most leading
countries may enable the United States to continue to
pursue a monetary policy directed at domestic con­
siderations without seriously aggravating the balanceof-payments problem.