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October 1964 /





Recent Employment Trends


Recent Employment
Trends ..........................


Bank Loam, 1961-1964 . .


Agricultural Conditions in
the Central Mississippi
Valley............................. 11

E s t i m a t e d TOTAL EM PLO YM EN T declined slightly from
August to September and has shown no net increase since last
April. The relative stability of employment during this recent
period might indicate a weakness in the demand for labor. But,
while estimated employment has fluctuated around 70.5 million
since April, the period involved is short and may not necessarily
reveal underlying trends in the labor market. If the data are re­
viewed in greater perspective and along with other estimates,
conclusions may be substantially different.

Total Employment vs. Payroll Employment

Volume 46


Number 10


P.O. Box 442, St. Louis, Mo. 63166

In order to judge whether such a lack of increase in the esti­
mate of total employment for five months as we have just ex­
perienced necessarily indicates a slackening in the demand for
labor, the experience of the past 16 years has been examined.
Two widely used broad measures of employment in the nation
are available: total employment and total nonfarm payroll em­
ployment. Estimates of total employment are based on a monthly
survey of about 35,000 households. Payroll employment estimates
are based on monthly reports from employers.1
In order to facilitate analysis of these employment data, rates
of change of each measure of employment from mid-1948 to the
present have been computed.- These rates of change are pre1 For a description of both series see 1962 S u p p lem en t to E co n o m ic Indicators,
U. S. Government Printing Office, 1962, pp. 30 and 40.
- These computations were based on seasonally adjusted data and smoothed by a
1-2-1 moving average technique. Tables of monthly rates of change data are
available on request. This method of analysis of time series data was first used
by this bank in analysis of the money stock and other financial magnitudes in
its R ev iew for October 1961.

Annual Rates of Change
T o tal E m p lo y m e n t 1










l H ousehold survey d ata. Latest data p lotted : September, estim ated.
- N onfarm establishm ent data. Latest data p lotted : A ugust, estim ated.

Source: U . S. D epartm ent of Labor.

sented in the chart. For purposes of analysis each of
these series has been divided into periods of relatively
rapid rates of increase of employment and periods of
relatively slow rates of increase or of decrease.
Terminal dates of these periods and the average rates
of increase for each period are shown in Tables I and
II (page 3) and are represented by the horizontal bars
on the charts.
The two employment series show similar cyclical
movements, registering reductions of employment
during periods of general economic recession and sus­
tained rates of increase during periods of economic
expansion. During these 16 years there have been
Page 2









T hree-m onth m oving averages of annual rates of change, w eighted 1-2-1,
com puted from seasonally adjusted d ata.
Bars indicate average rates for periods of no m arked and sustained change in
the rates of change (d a ta in Tab les I and I I ) .
V ertical shaded areas indicate periods of business recessions.

four periods of rapid increase of employment and four
periods of decrease or very slow increase. The ampli­
tude of cyclical fluctuation is greater for payroll em­
ployment than for total employment. The secular up­
ward trend is greater for payroll than for total em­
ployment. The average annual rate of increase of total
employment has been 1.07 per cent and of payroll
employment, 1.68 per cent. Within cycles the monthto-month changes in estimates of total employment
(based on household surveys) are erratic, while move­
ments in the rate of change in payroll employment
estimates are relatively gradual. The wide fluctuations
in the total employment series probably indicate
some short-run technical inadequacies. The payroll

Table I

Table II



Compounded Annual Rates of Change
Periods of No Marked and Sustained
Change in the Rate of Change
(Represented by bars on charts)
J u ly

Compounded Annual Rates of Change
Annual Rate
of Change2

1948 - July 1949 ............................................... .. —
1949 - Feb. 1953 ...............................................
1953 - Dec. 1954............................................... .. —
1954 - July 1957...............................................
1957 - May 1958 ............................................... .. —
1958 - June 1960 ..............................................
1960 - May 1961 .............................................. .. —
1961 - Sept. 1964 ..............................................
1 9 4 8 - Se p t.



1 H ousehold survey data.
2 Com puted from 3-m onth m oving averages,
adjusted d ata.
Source: U . S. D epartm ent of Labor.

w eighted

1 -2 -1 ,

1.7 e
1.1 e

of seasonally

data seem to be a better indicator of short-run em­
ployment developments than the total employment
During the course of the current business expansion
both total employment and payroll employment have
increased rapidly. Since April 1961, three and one-half
years ago, total employment has increased at an an­
nual rate of 1.7 per cent and payroll employment, at
a 2.9 per cent rate. Since the first of the year, both
total employment and payroll employment have
grown at an accelerated rate, showing annual rates
of increase of 2.2 per cent and 3.1 per cent, respec­
tively. As is typical, payroll estimates have increased
more steadily and plausibly than total employment
estimates. For example, the estimate of total employ­
ment jumped at a 13 per cent annual rate from March
to April and then showed a slight net decline from
April to September. Payroll employment rose at a
rate of 3.6 per cent from March to April and at a 2.3
per cent rate from April to August. One may presume
that the plateau of estimated total employment since
April has not evidenced economic weakness. For cur­
rent analysis the payroll data would seem to be a bet­
ter indicator of recent employment trends. This meas­
ure has indicated continued strength in the labor
market since last spring.
At the same time that employment has been in­
creasing strongly, estimates of unemployment have
also improved. For example, the unemployment rate
for married men, probably a relatively reliable esti­
mate,8 has recently averaged about 2.7 per cent, the
lowest rate in many years.
3 It is believed that the reliability of response and reporting of
employment and especially of unemployment for married
men is greater than for other classes of the population.

Periods of No Marked and Sustained
Change in the Rate of Change
(Represented by bars on charts)

Annual Rate
of Change2

Sept. 1948 - Nov. 1949..............................................
Nov. 1949 - June 1953 ..............................................
June 1953 - Aug. 1954 ..............................................
Aug. 1954 - Mar. 1957 ..............................................
Mar. 1957 - June 1958 ..............................................
June 1958 - Mar. 1960 ..............................................
Mar. 1960 - Apr. 1961 ..............................................
Apr. 1961 - Aug. 1964 ..............................................

— 3.7
— 2.9
— 3.2
— 1.4
2.8 e

Se p t.

1 .7 e

1948 - A ug.



l N on farm establishm ent data.
- See footnote 2 , T ab le I.
Source: U . S. D epartm ent of Labor.

Employment and Population Trends
In order to make judgments about the strength of
employment, it is useful to relate changes in employ­
ment to changes in underlying employment potential.
A possible indicator of employment potential is that
portion of the population which is of approximate
working age. It is suggested here as a supplement to
the commonly used “labor force” concept as a basis of
comparison for the growth of employment. Increases
of total employment4 at a substantially greater rate
than the growth of population of approximate labor
force age may be viewed as an indication of strength
in the demand for labor and in the employment situa­
During the past 16 years (1948-64), while total
employment has increased at an average rate of 1.07
per cent, the total population of approximate working
age (20-64) has increased at about a 0.90 per cent
rate. Since April 1961, while total employment has
increased at a 1.7 per cent annual rate, population
aged 20 to 64 is estimated to have increased at a rate
of about 1.1 per cent per annum, and population aged
18 to 64 increased at a 1.3 per cent rate. So far this
year, while employment has increased at an annual
rate of about 2.2 per cent, the 20 to 64 age group is
estimated to have been increasing at a rate of about
1.2 per cent and the 18 to 64 age group, at a
1.4 per cent rate. It is estimated that the 16 to
64 group is now increasing at a rate of about 1.6
per cent per annum. In three or four years each of
these groups will be increasing at a rate of about 1.6
4 W hile this article indicates the probable unreliability of esti­
mates of total employment data based on household surveys
so far as changes during a very few months are concerned,
it is believed that these data do give adequate indications of
trends over longer periods of time and of the order of magni­
tude of employment at any one time.
Page 3

per cent per annum. It seems likely that approximately
that rate will then continue for a considerable number
of years. The rate of growth of employment since
1961, and especially the rate in 1964, has been as great
or greater than any rate of increase of population of
labor force age that is anticipated for a number of

August. The August increase of 0.8 of a point was the
eleventh consecutive monthly advance. The advance
was widespread as output in most major industries
moved higher. Since December, total output has in­
creased at an annual rate of 8 per cent, nearly double
its average rate of growth since 1951. Preliminary data
suggest that output gained further in September.

Whether viewed from the 1948 business peak 16
years ago, from the 1960 peak 4 years ago, or simply
over the past year, the increase of employment and
jobs has been rapid. Jobs and employment have
grown faster than the increase in population of ap­
proximate labor force age. The rapid increase in em­
ployment has been made possible not only by an in­
crease in the number of people of approximate labor
force age but also by attraction of an increasing pro­
portion of women into the labor market. (The propor­
tion of women aged 20 to 64 who were employed
increased from 38 per cent in 1953 to 43.5 per cent
in 1964, while the proportion aged 18 to 64 increased
from 36.5 per cent to 41 per cent.) Contrary to the
widely held view that jobs are disappearing or grow­
ing more slowly than population, the fact is that the
economy has been providing net new jobs at a very
high rate.

Personal income also continued to grow in August,
reaching a seasonally adjusted annual rate of $494
billion. Spurred by expanding output, increased em­
ployment, and a gradual improvement in both hours
worked per week and average weekly earnings in
many industries, personal income has grown at an
annual rate of 5 per cent since December. The $2.5
billion increase from July to August was above the
average since December.

The fact that the number of persons who are work­
ing plus those who report they are looking for work,
the so-called labor force, has increased somewhat
more rapidly than employment over the past decade
or so (though less rapidly since the beginning of the
current economic expansion nearly four years ago)
does not detract from the impressive rate of increase
of jobs and employment in the country. Further, the
very rapid rate of increase of nonfarm payroll employ­
ment reflects not only the strength of total demand for
labor but also the adaptability of the economy in ab­
sorbing the agricultural workers released by techno­
logical change in that field.5

Other Business Developments
According to most measures of business activity, the
economy has been continuing its well-balanced ad­
vance. Output, incomes, and spending have all grown
substantially since the first of the year. Most major
indicators showed farther improvement in August
and September. At the same time prices have re­
mained relatively stable.
Output of the nation's factories, mines, and utilities
rose to 133.5 per cent of the 1957-59 average in
5 Agricultural employment has been declining since 1961 at a
compounded annual rate of 4 per cent and since 1951 at a
3 per cent rate. Tables of monthly rates of change data are
available from this bank upon request.

Page 4

Retail sales in September fell about 1 per cent below
August to a level of $22.0 billion. Since December,
sales have increased at an annual rate of 6 per cent.
The September decline came in nondurable goods, for
which sales were down 3 per cent from August. A
slight increase in food-store sales was more than offset
by declines in such other soft goods as apparel and
general merchandise.
Outlays for new construction in September were at a
seasonally adjusted annual rate of $66 billion, remain­
ing on the plateau which was reached a year ago.
Both private and public construction continued at
about the levels of recent months. Housing starts,
which averaged an annual rate of 1,616,000 units
from December to March, have since declined, reach­
ing 1,380,000 units in August. Movements in housing
starts often presage changes in outlays on residential
Most price indexes held steady in August and early
September. The consumer price index in August, at
108.2 per cent of the 1957-59 average, was down
slightly from July but up 1 per cent from a year ago.
The wholesale price index edged downward by 0.1
per cent in August, reaching 100.3 per cent of the
1957-59 average. Prices of both farm products and
processed foods declined during the month, while
industrial prices were unchanged. In September
weekly wholesale prices averaged higher as prices of
farm products and processed foods edged upward.

Financial Develop?nents
Financial developments since last spring have con­
tinued to be expansive. Since May, the money supply
has risen at an advanced rate, and commercial bank
credit has continued to expand at the same rapid
(C ontinued on Page 12 )

Bank Loans, 1961-1964


substantially during the economic expansion which
began in early 1961. Some analysts view the commer­
cial banking system’s accommodation of customer loan
demand as a strategic ecotiomic variable. Accordingly,
from time to time it is of interest to analyze the bank­
ing system s potential for future loan expansion. Other
observers who place emphasis on the effects of
changes in the money supply on economic activity
may also be interested in loan developments. The
credit-expansion process, of which bank loan expan­
sion is an integral part, is the principal mechanism by
which changes in the stock of money are effected.1



R a te s of C h a n g e in B a n k Lo an s
A ll Com m ercial Banks
Pe r C e n t

3 -M o n t h M o v i n g A v e r a g e s (we ig ht ed 1-2-1)

Per Cent


This article reviews briefly the behavior of loans
during periods of strong economic activity since 1954,
with special attention to developments during the cur­
rent expansion. Following this, there is a discussion of
the banking system's loan behavior in relation to other
banking developments. In particular, the ability of
the commercial banking system to accommodate cus­
tomer loan demands is discussed in relation to the
bank deposit-expansion process, the broader portfolio
management activities of commercial banks, and cen­
tral bank actions. Based on this analysis, there is a
discussion of prospective loan developments.

this economic expansion, banks added to both their
loan and their investment portfolios. It was not until
the twenty-second month of the expansion that the
banking system’s holdings of loans as a per cent of
total earning assets (loans plus investments) rose
above the levels reached at the trough of the 1960-61
recession (Chart 2). Since that time, loans as a per
cent of total earning assets have risen substantially,
Chart 2

R a tio of Lo an s to E arn in g A sse ts

Loan Developments Since 1961
Commercial bank loans have risen at an annual rate
of nearly 12 per cent since February 1961, the trough
of the 1960-61 recession (Chart 1). During this period
there has not yet been a marked and sustained mod­
eration in the rate of increase in bank loans.
In order to retain valued depositors, commercial
banks have an incentive to accommodate the loan
demands of customers. Moreover, as profit-making in­
stitutions, banks have an incentive to hold those assets
which have the greatest return. During periods of
strong loan demand, banks tend to shift their earning
assets toward loans (which generally carry higher
yields than investments). During the first two years of
1 See “Bank Loans and Investments, 1951-1963” in the October
1963 issue of this R ev iew .

accounting for 64 per cent of the total in August 1964
compared with 61 per cent in December 1962.
Loans in relation to bank deposits have also reached
new highs in recent months. In August the loans-todeposits ratio reached 60 per cent. In May 1960, the
previous peak in business activity, the ratio was 56
per cent; in July 1957 and July 1953, the two preced­
Page 5

ing peak months, the loans-to-deposits ratio reached
50 and 40 per cent, respectively (Chart 3).

in what sense is there currently an absence of such
pressures? As Chart 5 shows, during the two earlier

Chart 3

Required Reserves and Nonborrowed Reserves

C ha rt 5

Ratio of Loans to Deposits

M o n t h l y A v e r a g e s of D a il y Fig ur e s
S e a s o n a l l y A dj us t e d

In other periods of economic expansion since 1954,
there were rapid increases in bank loans in the early
stages of expansion. However, as these expansions
progressed (about two years after the beginning of
recovery), there were moderations in the rate of in­
crease (Chart 1). The financial literature during those
periods suggested that banks came under reserve
pressure — that is, in common parlance, they became
“loaned up” or “tight” — and took steps to inhibit
further loan extensions. In both of these expansions
interest rates on short-term business loans rose (Chart
4). In contrast, during the current expansion the averChart 4

Interest Rates on Short-Term Business Loans
Per Cent Per A nnu m


age rate of interest charged by banks on short-term
business loans has remained virtually unchanged.
However, rate increases are but one example of
changes in the various terms which surround the loan
contract and, thus, may not give a complete indication
of the availability of bank loans.
In what sense did banks come under reserve pres­
sure during the 1958-60 and 1954-57 expansions, and
Page 6

economic expansions, required reserves rose (reflect­
ing increases in bank deposits), but nonborrowed re­
serves2 declined. In the expansion since 1961, required
reserves have increased at an average annual rate of
3.8 per cent, and nonborrowed reserves have risen at
a 3.5 per cent rate. If over a period of time there is
a greater rate of increase in required reserves than in
nonborrowed reserves, then an increasing number of
individual banks will experience difficulties in meeting
their reserve requirements and will need to make ad­
According to one way of viewing the matter, a
means by which the banking system can adjust to an
emerging imbalance between the rate of increase in
2 Nonborrowed reserves consist of total reserves minus borrow­
ing from the Federal Reserve.

required reserves and the rate of increase in nonbor­
rowed reserves is to accommodate itself to lower
levels of excess reserves. It may be more meaningful,
however, to regard reductions of excess reserves as
reflecting changes in the banking system’s demand for
such reserves rather than as a means of adjusting to
"pressures.” During periods of economic expansion
since 1954, as interest rates rose there were reduc­
tions in excess reserves (Chart 6). Conversely, during

C ha rt


Rates of Change in Bank Investments
A ll C om m ercial B anks
Per C en t

P er C e n t

3-Mon th M o v i n g A v e r a g e s (weighted 1-2-1]

C ha rt 6

Excess Reserves
M e m b er Banks
M o n t h l y A v e r a g e s of D a il y Figures

M il lio n s of D o lla r s

M il lio n s of D o lla r s

e-esti mated

posit trends by selling assets, they must borrow. At
an early stage of the 1958-60 and 1954-57 expansions,
member banks borrowed substantially and remained
heavily in debt throughout much of these expansion
periods (Chart 8). While member bank borrowing has
e-esti mated

periods of economic contraction excess reserves in­
creased. In the period of economic expansion
since 1961, the dollar volume of excess reserves has
declined about as much as might have been expected
on the basis of cyclical experience over the previous
decade. This decline has occurred despite the marked
growth in bank reserves.
Another means by which the banking system can
avoid reserve deficiencies is to sell assets. At an early
stage of both the 1958-60 and 1954-57 expansions
there were reductions in security holdings. Because
bank loans rose during these periods (Chart 1) and
bank reserve expansion was limited (Chart 5), banks
found it necessary to make adjustments by selling
assets (Chart 7). Although bank loans have risen sub­
stantially during the current expansion, the rise in
loans has been accompanied by an increase in non­
borrowed reserves; consequently, there has not yet
been a marked reduction in bank holdings of securi­
Finally, banks can make reserve adjustments by
borrowing from the Federal Reserve System. To the
extent that individual banks find it advantageous to
do so, they can maintain or expand their assets by
borrowing. That is, if they are unwilling or unable to
meet discrepancies between loan demands and de­

Chart 8

M em ber Banks

M o n t h l y A v e r a g e s of D a i l y F i g u r e s

Ratio Scale
M illio n s of D o lla r s





Ratio Scale
M illio n s of D o lla r s



e-estim ated

risen during the current expansion, it has remained at
much lower levels than in earlier expansions.

Important Variables in the
Loan-Expansion Process
In order to consider the possibilities for loans to
grow further in the current expansion it seems de­
sirable to outline some of the general principles of
the bank expansion process. An analysis of the extent
to which the banking system is “tight” or “loaned up”
Page 7

is, substantively, an investigation of specific, though
interrelated, crucial variables relating to the behavior
of the monetary authority, the banking system, and
the public.
The banking system acquires or loses reserves as a
result of Government actions, principally those of the
Federal Reserve, as a result of such money market de­
velopments as gold inflows and outflows and changes
in the nonbank public's holdings of currency and coin,
and by borrowing from the Federal Reserve. For ex­
ample, purchases of Government securities by the
Federal Reserve result in increases in the commercial
banking system’s holdings of reserves. The extent to
which an increase in the reserve base is accompanied
by an increase in total bank credit and bank deposits
depends upon two factors: (1) whether the dollar
amount of excess reserves which the banking system
desires to hold remains constant and (2) the mix of
the deposit expansion.
The volume of excess reserves held by the banking
system is not large nor does it undergo wide variation
in terms of absolute dollar magnitudes. However,
what variation there is appears to be related to op­
portunity costs.3 Specifically, the greater the cost of
holding nonearning assets (in terms of foregone earn­
ings), the smaller is the volume of excess reserves
which the banking system finds efficient to hold.
The banking system brings its actual holdings of
excess reserves into alignment with its desired hold­
ings by increasing or decreasing earning assets. As
total bank credit expands — that is, as commercial
banks make loans or purchase securities from the nonbank public — the publics deposit holdings rise. Be­
cause banks must maintain reserves against their de­
posit liabilities, an increase in deposits is reflected in
a rise in required reserves and a corresponding decline
in excess reserves.
When bank credit and deposits expand, required
reserves will rise at varying rates, depending upon the
character of the deposit expansion. Although total
deposits are closely associated with changes in bank
credit, the breakdown of deposits into demand and
time deposits depends upon factors other than varia­
tion in bank reserves and bank credit. During any
given period there will be some variation in deposits
which is chiefly associated with what is happening to
bank assets. Thus, variations in private demand depos­
its are closely related to variations in bank reserves. At
the same time there is likely to be deposit variation
3 See “Excess Reserves” in the April 1963 issue of this bank's
R eview .
Page 8

which bears only an indirect relationship with move­
ments in reserves. Variations in time deposits are of
this latter variety. A deposit expansion that occurs
largely in time deposits will result in a less rapid rise
in required reserves (and a smaller decline in excess
reserves) than a deposit expansion which is concen­
trated in demand deposits.4
If nonborrowed reserves do not rise as rapidly as
required reserves in the credit- and deposit-expansion
process, it becomes necessary for banks to make ad­
justments in order to avoid running reserve deficien­
cies. At their own initiative member banks can acquire
reserves by borrowing from the Federal Reserve Sys­
tem. Alternatively, it is possible for them to make re­
serve adjustments by selling investments. By selling
securities to the nonbank public the banking system
in effect induces the public to hold securities instead
of bank deposits. The resulting decline in deposits is
accompanied by a decline in required reserves, there­
by reducing reserve pressures.
Banks will tend to make adjustments in that manner
which is least costly. What considerations are relevant
in deciding whether to sell securities or to borrow?
Looking to the individual bank at a point in time, if
market interest rates rise (security prices fall), there
is an increase in the cost of obtaining funds by selling
securities. A rise in interest rates means that there is
an increase in the foregone returns from securities
which are sold. Unless there is an accompanying
increase in the Federal Reserve discount rate, borrow­
ing becomes relatively more attractive.
Looking to the banking system as a whole, the
analysis becomes increasingly complicated. It may be
an acceptable type of analysis to regard interest rate
movements as given to the individual bank and then
to discuss the likely adjustments which the bank will
make in the face of its given alternatives. In consider­
ing the banking system as a whole, however, these
individual bank adjustments have significant “feed­
back” effects on the very same interest rates which are
assumed to be given to the individual bank. If a sig­
nificant number of banks begin selling securities, up­
ward pressures are placed on interest rates (downward
4 There are several other “slippages” which introduce variation
between the rate of increase in deposits and the rate of in­
crease in required reserves. Because reserve city member
banks have higher reserve requirements, required reserves rise
more rapidly if the deposit expansion is centered in these
banks. Also, to the extent that the public relates its currency
holdings to its total deposit holdings, it is quite likely that a
rise in total deposits will be accompanied by a rise in cur­
rency in the hands of the public. This results in a dollar-fordollar loss to the banking system of both deposits and re­
serves but a lesser decrease in required reserves (and, hence,
an increase in reserve pressures).

pressures on security prices), and the cost of obtaining
funds by selling securities tends to rise.
As the focus of attention shifts from a point in time
to a discussion of developments through time, addi­
tional factors need to be taken into account. There
are limitations on the amount of borrowing which an
individual bank and, hence, the banking system can
undertake.5 Thus, even though there may be no
change in the nominal cost of borrowing (as repre­
sented by the discount rate) as indebtedness increases,
there may be a rise in the real cost of borrowing. Also,
there are increasing costs associated with continued
reductions in securities holdings. The banking system
cannot reduce indefinitely its holdings of securi­
ties, especially short-term, highly liquid, Govern­
ment securities. For one thing, there are standards
concerning the minimum levels of these secondary re­
serves which may be regarded as prudent. Second,
such securities may be used as collateral for bank bor­
rowing from the Federal Reserve System or may be
“pledged” as security for certain deposit accounts.
Thus, in a very real sense, banks need to hold some
minimum dollar volume of Government securities.

Prospective Loan Developments
Whether bank loans can continue to expand as
rapidly in the future as they have in the past three
and one-half years depends upon what happens to the
“crucial” variables discussed above. Thus, in the light
of the foregoing analysis, judgments concerning loan
expansion potentialities on the supply side rest on an
examination of:
1. The probabilities concerning the provision of
nonborrowed reserves to the banking system.
2. The probabilities concerning excess reserves be­
3. The probabilities concerning changes in the mix
of deposits.
4. The probabilities concerning changes in mem­
ber bank borrowing.
5. The probabilities concerning bank portfolio
The probabilities concerning each of these crucial
variables will be discussed in turn.
N onborrow ed R eserves

To a significant extent the banking system accrues
reserves as a result of Federal Reserve System pur­
5 In addition, for th§ individual bank there are limitations on
the frequency and duration of borrowing. Thus, as more
banks borrow more often, it becomes increasingly difficult for
total borrowing to expand.

chases of securities, i.e., open market operations. Thus,
the probabilities concerning prospective changes in
nonborrowed reserves rest on basic policy decisions
of the monetary authorities. For example, there would
be a likelihood of an acceleration in the rate of in­
crease in nonborrowed reserves if a recession devel­
oped and a more rapid monetary expansion was
needed. On the other hand, if it were felt that the
nation faced balance-of-payments problems or needed
to prevent price inflation, a less rapid expansion would
be more likely.
In addition to depending on basic policy decisions,
the probabilities as to likely movements in nonbor­
rowed reserves depend on the specific analytical
framework within which monetary policy is formu­
lated and carried out. If, for example, the monetary
authority were to concentrate on providing the eco­
nomy with that stock of money which was appropriate
to the economic environment, it may be that there
would be little interest in the course of nonborrowed
reserves alone. Instead, the monetary authority may
need to concentrate on bringing about a certain level
of or change in total reserves. If this were the case, in­
creases in borrowing would be “offset” by decreases
in nonborrowed reserves. However, if a different guide
were followed, the implications for movements in
nonborrowed reserves would be different; if, for ex­
ample, the monetary authority were to maintain a
given level of “free” reserves (excess reserves minus
borrowing), an increase in borrowing would be “off­
set” by an increase in nonborrowed reserves. Thus,
according to either of these guides, short-run move­
ments in borrowing would determine movements in
nonborrowed reserves, though the direction of change
would depend upon the guide being followed.
Excess Reserves

As Chart 6 shows, the dollar volume of excess re­
serves is low compared both with what it was earlier
in the current expansion and with what it was in
comparable stages of earlier expansions. This impres­
sion is especially pronounced if excess reserves are
related to such other balance sheet magnitudes as
total deposits.
The probabilities for further declines in excess re­
serves may hinge on prospective interest rate devel­
opments. Thus far in the current expansion, short-term
interest rates have not risen to the extent which
characterized earlier periods of economic expansion.
Page 9

Deposit Mix

As stated above, deposits variation Ynay be thought
of as consisting of two components. One component,
which includes private demand deposits, is closely
associated with variations in total bank reserves.
Moreover, in view of the fact that private demand
deposits are the chief segment of the money supply,
variations in this component may be closely tied to
public policy decisions regarding desired movements
in the stock of money. Variations in time deposits
are primarily related to other factors. During the cur­
rent expansion, time deposits have risen rapidly. In
contrast, during the 1958-60 and 1954-57 periods of
economic expansion there were declines in the rate of
time deposit growth.6 In these expansion periods
yields on short-term marketable securities rose above
maximum rates which banks were permitted to pay
on time deposits. The continued rapid rate of increase
in time deposits in the current expansion may reflect
the fact that short-term market interest rates have
not risen above maximum permissible rates on time
According to this view, the probabilities concern­
ing the character of prospective deposits growth de­
pend on public policy decisions and on forthcoming
interest.rate developments. Changes in privately held
demand deposits will depend largely on the necessi­
ties which arise in achieving an appropriate rate of
growth in the money supply. Turning to time deposits
developments, this analysis suggests that if short-term
market yields rise above the maximum rates that
banks can pay on time deposits there will be an in­
centive for large corporations, savings and loan asso­
ciations, state and local governments — and others
with large sums of money to invest for short periods
— to shift from time deposits (principally negotiable
certificates of deposit) into other short-term market
Borrow ing and Asset Adjustments

The probabilities concerning prospective move­
ments in bank holdings of securities and bank bor­
rowing cannot meaningfully be discussed separately.
The probabilities depend upon likely movements in
nonborrowed reserves and the relationship between
the cost of obtaining funds by borrowing and the cost
of obtaining funds by selling securities. As suggested
above, if nonborrowed reserves expand sufficiently,
banks can accommodate rising loan demands without
0 F o r a discussion see “Movements in Time and Savings D e­
posits, 1951-1962” and “Recent Trends in Time Deposits” in
the M arch 1963 and July 1964 issues, respectively, of this

Page 10

resorting either to asset adjustments or to borrowing
If resort is made to these alternatives, there will be
a tendency to choose that one which is least costly.
As stated, there are limitations on the amount of
borrowing which can be undertaken and on the extent
to which banks can reduce their holdings of securities.
Member bank borrowing averaged about $310 million
in the three months ending in September. Borrowing
reached and remained near the $1 billion level during
the advanced stages of both the 1958-60 and 1954-57
expansions (Chart 8). Although banks have not made
marked reductions in security holdings during the cur­
rent expansion ( Chart 7), such holdings are at an unprecedentedly low level in relation to total deposits.

Summary and Conclusions
Bank loans have risen markedly since 1961, simi­
larly to the rise in other periods of economic expan­
sion since 1954. Unlike experience in the two preced­
ing periods, however, the rate of loan expansion has
not yet moderated. In these earlier expansions inter­
est rates rose rapidly, and the rate of bank loan ex­
pansion declined. In contrast, since early 1961, the
average rate of interest charged by banks on business
loans has remained stable, and the rate of expansion
of bank loans has been maintained.
Whether loans can continue to expand at an undi­
minished pace depends upon numerous factors. For
one thing, prospective loan increases are related to
the strength of loan demand. Given this, the pace at
which banks can make loans depends upon their abil­
ity and willingness to reduce holdings of securities
and excess reserves, the amount of time deposits they
can attract, the amount of nonborrowed reserves made
available by the Federal Reserve, and their ability
and willingness to borrow from Reserve Banks. If
nonborrowed reserves increase in pace with an ex­
pansion in loans and total deposits, it is less likely that
the banking system will need to borrow or sell securi­
ties. However, if nonborrowed reserves do not in­
crease sufficiently to meet the rise in required re­
serves accompanying an expansion in deposits, it be­
comes likely that the banking system will eventually
sell securities.
Since early 1961, the stock of money has grown at
a 3.1 per cent annual rate. During this same period
time deposits have risen at a 14.5 per cent rate. The
steady rise in nonborrowed reserves accompanying
the exceptional expansion in time deposits since 1961
has enabled the banking system to accommodate ris­
ing loan demand without an increase in loan rates and
without marked increases in borrowing or reductions
in security holdings.
W i l l i a m R. B r y a n

Agricultural Conditions in the
Central Mississippi Valley
Mississippi Valley are less favorable this year than
last. Cash income has lagged year-earlier amounts in
recent months after being slightly higher than a year
before in the early part of the year. Prices have
averaged slightly less than in 1963, and crop produc­
tion is estimated to be well below the 1963 level.
The relatively high level of cash receipts in the
early months of the year (Table I) was the result of
Table 1

Central Mississippi Valley
January - July


Per cent

(Thousands of dollars)
Total 5 States
United States



+ 10
— 2
+ 11
+ 7






2 7 2 ,229


Source: U S D A .

late marketings of.last years crops (tobacco in Ken
tucky and Tennessee and cotton in Mississippi). Dur
ing June and July of this year,
receipts were slightly less
than a year ago. Receipts
from sales of livestock and
l i v e s t o c k products were
slightly less in the January to
July period than in the like
— 35
period a year earlier in all
— 19
the states except Mississippi
+ 7
— 23
and Arkansas.
A major factor in the de­
cline of cash farm receipts
has been the generally lower
average prices for livestock.
Cattle prices averaged about
12 per cent below year-earlier

levels throughout the eight-month period January
through August. Hogs averaged about 3 per cent and
broilers 5 per cent less. Livestock prices have increased
in recent weeks and, in the case of hogs, have ex­
ceeded levels of a year earlier. It is unlikely, however,
that average livestock and livestock product prices for
1964 will equal the 1963 average.
Prices of most important crops in the area are also
somewhat below year-earlier levels. Cotton has been
about 7 per cent lower in recent weeks and, with the
reduced Government support price, will probably
average lower throughout the marketing season. Corn
and soybean prices have been slightly below yearearlier levels, and rice has been about unchanged.
Tobacco support prices are about 1 per cent above
1963 levels.
Production of two major crops in the area is esti­
mated at less than 1963 output (Table II). Corn pro­
duction for the five states is estimated at 17 per cent
less. Tobacco is expected to be down 19 per cent. The
cotton, wheat, rice, and soybean crops are estimated
to be greater than in 1963. In the Corn Belt States of
Illinois and Indiana, however, the oats, wheat, and
soybean crops are also down. Most of the gain in
wheat output was in Arkansas and Mississippi, where
production rose 10 million and 3 million bushels, re­
spectively, primarily due to major acreage increases.
Table II

Central Mississippi Valley
Percentage Change, 1963- 19641




+ 182
+ 19
+ 241
+ 22
+ 39
+ 44


Total 5 States

— 17



— 7
— 13





United States

— 13





— 3





+ 8
+ 8
— 10
+ 7


— 22



— 14
— 11


— 5
— 10
— 19

— 22



l U S D A O ctober 1 estim ates.

Page 11

Table III
The decline in crop produc­
tion estimated for the area re­
Central Mississippi Valley
flects a shortage of moisture
throughout most of the plant­
Percentage Change, 1963 - 19641
ing and growing seasons.
Hardest hit by the drought
— 26
+ 6
were central and southern Illi­
— 18
+ 3
+ 7
— 10
— 13
+ 19
— 6
— 3
+ 5
nois, southern Indiana, and
+ 1
— 21
— 10
— 2
— 14
— 4
+ 4
central Missouri. Yield esti­
— 2
+ 18
+ 7
+ 14
— 1
+ 1
mates for most crops are well
— 8
— 12
below 1963 levels in the major
— 7
— 22
— 13
— 27
— 11
— 11
— 14
producing sections of the Cen­
tral Mississippi Valley (Table
— 4
United States
— 9
— 8
+ 1
III), Corn yields, for example,
1 U S D A O ctober 1 estim ates.
are down 21 per cent in Mis­
souri. Soybean yields are down 14 per cent in Mis­
cotton yields, however, are greater in the other major
souri and 10. per cent in Kentucky. Cotton yield esti­
producing states of the area. Tobacco yields in Ken­
mates are below 1963 yields in Missouri. Estimated
tucky are down 13 per cent.

R ecen t E m p lo y m en t Trends-(Continued from
rate as it has since the February 1961 trough in eco­
nomic activity. Interest rates have changed only
slightly in the most recent months despite a seasonal
rise in the demand for credit and the continued in­
crease in business activity.
The nation’s money supply (currency plus demand
deposits) rose at a 7 per cent annual rate from May to
September compared with a 3.5 per cent rate since
last November. From the beginning of the current
economic expansion in early 1961, money has risen at
a 3.1 per cent annual rate. Most of the recent sharp
expansion in money occurred in the demand deposit
component; currency in the hands of the public has
continued to rise at approximately its earlier rate.
Although the rate of expansion of the money supply
has been at an increased rate since May, the rate of
commercial bank credit expansion has continued
about the same as during the entire current period of
economic expansion. From May to September total
bank credit rose at a 9 per cent annual rate, the same
rate that has prevailed since early 1961.
From May to September total loans at commercial
banks and most major categories of loans continued
to increase at about the same rate as over the entire
February 1961 to September 1964 period. During the
past forty-three months total loans have risen at an
average annual rate of 12 per cent, business loans at
a 9 per cent rate, real estate loans at a 13 per cent
rate, and consumer loans at a 10 per cent rate.
Interest rates have changed only slightly in recent
months. The supply of bank credit and the flow of
Page 12

Page 4)

new savings available for investment have about kept
pace with rising seasonal credit needs and demands
for funds that have accompanied the expansion in
economic activity. The three-month Treasury bill rate
was 3.58 per cent in mid-October, higher than
in mid-summer but about the same as last March.
Since November of last year, three-month bill rates
have remained within the narrow 3.40 to 3.60 per
cent range. Yields on long-term Government bonds,
rose slightly from June to early October but re­
mained below their April level. Yields on highest
grade corporate issues have been about unchanged
since last spring. According to traditional seasonal
patterns, interest rates on marketable securities would
be higher now than during the late spring.

N ew M em b er H unks
The First National Bank of Iuka, Iuka, Mississippi,
opened for business on September 5 with capital of
$120,000 and surplus of $120,000. Its officers are:
Reuben E. Grisham, Jr., Chairman of the Board;
Kelly S. Segars, M .D., President; Eugene C. Bonds,
Executive Vice President and Cashier; and Edna V.
Richardson, Assistant Cashier.



The First National Bank of Brinkley, Brinkley,
Arkansas, opened for business on September 8. The
bank has capital of $160,000 and surplus of $160,000.
Its officers are: Otto W. Clifton, President; Mark
M. Davis, Executive Vice President; and Joe McCain,