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FEDERAL RESERVE B A N K
OF ST. L O U IS
OCTOBER 1972

Vol.
 54, No.


M eat Prices — Too High or About R igh t?...
Money Stock Control .............................

10

3
10

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

O C T O B E R 1972

Reprint Series
O VER THE YEARS certain articles appearing in the

R e v i e w have proven helpful to banks,
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articles, our reprint series has been made available on request. The following articles have
been added to the series in the past four years. P lease indicate the title and number of article in
your request to: Research Department, Federal Reserve Bank of St. Louis, P. O. Box 442,
St. Louis, Mo. 63166.

NUMBER
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TITLE OF ARTICLE

The Federal Budget and Stabilization Policy in 1968
1967 — A Year of Constraints on Monetary Management
Does Slower Monetary Expansion Discriminate Against Housing?
The Role of Money and Monetary Policy
The Monetary Base — Explanation and Analytical Use
Interest Rate Controls — Perspective, Purpose, and Problems
An Approach to Monetary and Fiscal Management
Monetary and Fiscal Actions: A Test of Their Relative Importance
in Economic Stabilization
A Program of Budget Restraint
The Relation Between Prices and Employment: Two Views
Monetary and Fiscal Actions: A Test of Their Relative Importance in
Economic Stabilization — Comment and Reply
Towards a Rational Exchange Policy: Some Reflections on the
British Experience
Federal Open Market Committee Decisions in 1968 —
A Year of Watchful Waiting
Controlling Money
The Case for Flexible Exchange Rates, 1969
An Explanation of Federal Reserve Actions (1933-68)
International Monetary Reform and the "Crawling Peg”
Comment and Reply
The Influence of Economic Activity on the Money Stock: Comment; Reply;
and Additional Empirical Evidence on the Reverse-Causation Argument
A Historical Analysis of the Credit Crunch of 1966
Elements of Money Stock Determination
Monetary and Fiscal Influences on Economic Activity —
The Historical Evidence
The Effects of Inflation (1960-68)
Interest Rates and Price Level Changes, 1952-69
The New, New Economics and Monetary Policy
Some Issues in Monetary Economics
Monetary and Fiscal Influences on Economic Activity: The Foreign Experience
The Administration of Regulation Q
Money Supply and Time Deposits, 1914-69
A Monetarist Model for Economic Stabilization
Neutralization of the Money Stock, and Comment
Federal Open Market Committee Decisions in 1969 —
Year of Monetary Restraint
Metropolitan Area Growth: A Test of Export Base Concepts
Selecting a Monetary Indicator— Evidence from the United States and
Other Developed Countries
The "Crowding Out” of Private Expenditures by Fiscal Policy Actions
Aggregate Price Changes and Price Expectations
The Revised Money Stock: Explanation and Illustrations
Expectations, Money and the Stock Market
Population, The Labor Force, and Potential Output: Implications for
the St. Louis Model
Observations on Stabilization Management
The Implementation Problem of Monetary Policy
Controlling Money in an Open Economy: The German Case
The Year 1970: A "Modest” Beginning for Monetary Aggregates
Central Banks and the Money Supply
A Monetarist View of Demand Management: The United States Experience
High Employment Without Inflation: On the Attainment of Admirable Goals
Money Stock Control and Its Implications for Monetary Policy
German Banks as Financial Department Stores
Two Critiques of Monetarism
Projecting With the St. Louis Model: A Progress Report
Monetary Expansion and Federal Open Market Committee
Operating Strategy in 1971
Measurement of the Domestic Money Stock
An Appropriate International Currency — Gold, Dollars, or SDRs?


Page 2


ISSUE
March 1968
May 1968
June 1968
July 1968
August 1968
September 1968
November 1968
November 1968
March 1969
March 1969
April 1969
April 1969
May 1969
May 1969
June 1969
July 1969
February 1969
July 1969
August 1969
September 1969
October 1969
November 1969
November 1969
December 1969
January 1970
January 1970
February 1970
February 1970
March 1970
April 1970
May 1970
June 1970
July 1970
September 1970
October 1970
November 1970
January 1971
January 1971
February 1971
December 1970
March 1971
April 1971
May 1971
August 1971
September 1971
September 1971
October 1971
November 1971
January 1972
February 1972
March 1972
May 1972
August 1972

Meat Prices —Too High or About Right?
by CLIFTON B. LUTTRELL

_L HE SHARP increases in retail meat prices in
recent months have been the subject of much discus­
sion. The increases have had a major impact on total
consumer outlays since meat expenditures account for
about one-third of the average family food budget.
Reflecting their disappointment at these higher costs,
some people have accused farmers, meat packers, and
grocery stores of “gouging consumers” by forcing meat
prices up. These views are generally stated without a
full understanding of the underlying economic pro­
cesses involved in price determination.

C hart I

Price Trends - M e a t, M e a t Anim als,
an d A ll Consum er Items
R atio S cale

R atio Scale

1 9 5 0 -5 4 = 1 0 0

Annual Averages*

1 9 5 0 -5 4 = 1 0 0
170
160
150
140
130

120
110

This article presents an economic analysis of the
forces which have led to meat price increases both
this year and over a longer-run period. The analysis
emphasizes the function of the market system in pric­
ing meat, in allocating meat products to consumers,
and in allocating resources to meat production. As
pointed out by Kenneth Boulding in rhythmic form,
the production and allocation of food involves both
humane and incentive considerations.
The young, the old, the sick, the crazy
Even the shiftless, and the lazy,
E a t at the common human table
Spread by the Active and the Able.
The problem is, to organize
This monumental enterprise
So that — to see that all are boarded —
Both Need and Virtue get rewarded.1

The consumer price index for all meat2 in the first
eight months of this year averaged 9 percent above
the average for the same period a year ago. This, how­
ever, was just one episode in the upsurge of meat
prices. With the exception of one minor setback, aver— s>-------

1Kenneth E. Boulding, Principles o f Econom ic Policy (Engle­
wood Cliffs, N.J.: Prentice-Hall, Inc., 1958), p. 233.
2Beef and veal, lamb and mutton, pork, fish, and poultry.



100
90

80

70

60
1950

1954

1958

1962

1966

1970

Sources: U.S. Departm ent o f A g ricu ltu re a n d U.S. Departm ent of Labor
U. Includes b e ef an d veal, pork, la m b an d mutton, poultry, an d fish.
12 Includes b e ef cattle, hogs, and sheep.
*1972 b ased on average o f first six months.

age meat prices have risen since 1964 (Chart I). Aver­
age consumer prices for meat rose at a 12.9 percent
annual rate from late 1964 to early 1966. They de­
clined slighdy in late 1966 and early 1967, rose some­
what from late 1967 to early 1969 when they accel­
erated again, rising at a 10.4 percent rate until April
1970. They held almost stable from April 1970 to early
1971 when the recent acceleration began.

Economic Analysis of Price Determination
An economic approach to factors determining prices
of meat or any other commodity is developed briefly
Page 3

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

O C T O B E R 1972

in this section. The analysis holds that changes in meat
prices at grocery stores result from a series of economic
factors rather than arbitrary decisions by farmers,
meat packers, wholesalers, and retailers. Behind retail
price increases is often found greater consumer de­
mand as indicated by a rising volume of sales. When
the demand for a commodity increases, the first
change one typically observes is a higher sales volume
which results initially in a reduction of inventories. In
order to restore depleted inventories retail grocers
increase their meat orders from packers hoping to
continue selling a larger volume at the prevailing
price. Upon receiving increased orders for meat the
packers in turn increase their rate of meat slaughter
and seek to restore meat animal inventories by addi­
tional purchases from farmers. Since the prevailing
price only provides sufficient incentive for producing
the current number of animals, additional animals are
not available for immediate delivery at current prices.
As packers compete among themselves in an attempt
to obtain more animals, they raise their offering prices
to farmers.3
In the short run the number of animals available
for marketing is relatively fixed. The number of ani­
mals on farms cannot be increased rapidly and the
increase in meat production per animal is relatively
limited. In other words, the supply of meat is “in­
elastic” with respect to price in the short run; only a
small percent increase in quantity will be forthcoming
with a relatively large percent increase in price. Such
a short-run supply curve is indicated by the relatively
steep upward sloping line Sj in Figure I. With the
demand for meat represented by the curve D , and
supply represented by Si the price is P j. An increase
in demand to D 2 results in a relatively sharp shortrun price increase as shown by the D^-Sj intersection
at P2.“
Over the longer run, however, the supply of meat
is more “elastic,” meaning that with each incremental
increase in price, a larger quantity will be offered than
in the short run. This situation is illustrated by the
supply curve S2, wherein a small increase in price
provides incentive for a relatively large increase in
production. Given sufficient time, farmers and ranch­
ers find it profitable to expand their meat animal
3See Armen A. Alchian and William R. Allen, University
Econom ics, 3rd ed. (Belmont, California: Wadsworth Pub­
lishing Company, Inc., 1972), pp. 95-97, and Kenneth Bouid­
ing, “A Liquidity Preference Theory of Market Prices,” C ol­
lected Papers —Bouiding (Boulder: Colorado Associated Uni­
versity Press, 1971), pp. 135-143.
4The shift of the demand schedule from Di to D 2 indicates
that consumers have registered in the market a willingness to
purchase larger quantities of meat at each price.

Page 4


breeding herds and produce additional animals for
slaughter. The fact that the long-run meat supply
curve is more elastic than the short-run supply curve
means that a given increase in demand for meat has a
smaller impact on prices after passage of some time.
For example, the rise in demand from D x to D 2
would result in the relatively small price increase
from P j to P3 in Figure I after farmers have adjusted
meat animal production to the new demand condi­
tions. Nevertheless, with an upward sloping supply
curve any upward shift in the demand for meat in­
volves a rise in the price paid by consumers. The
higher price equates the larger amount demanded
with the amount supplied.
Conversely, advancements in production technology
which tend to increase supply (shift the supply curve
to the right), or declines in meat demand, result in
lower prices. More meat animals are offered to pack­
ers and more meat to consumers than can be sold at
previous prices. Prices are thus marked down by retail
grocers until the quantity of meat demanded by con­
sumers equals the amount supplied.

Demand for Meat has Increased
Demand for meat has increased substantially in
recent years, as evidenced by the fact that consumers
have purchased larger quantities of meat at higher
prices. Factors contributing to the greater demand
include rising per capita incomes, increased food sub­
sidy programs, and a larger population.

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

O C T O B E R 1972

C hart II

Trends in Per C ap ita M e a t Consum ption
1 9 5 0 -5 4 = 1 0 0

1 9 5 0 -5 4 = 1 0 0

induce consumers to purchase a larger quantity. For
example, a larger volume of meat production caused
by livestock cycles or by unusually favorable weather
conditions will increase the supply and result in lower
prices. The lower prices will induce some consumers
to purchase larger quantities of meat. This is indicated
by the downward slope of the D] line in Figure I.
Conversely, a cyclical or seasonal decline in meat
output will cause an increase in meat prices, which
will in turn cause some consumers to substitute other
types of food for meat and reduce their meat pur­
chases. These short-run shifts in supply can cause
price changes without a shift in demand. For example,
a shift of the supply curve S i to the left will intersect
the demand curve D j at a higher price. Such shortrun shifts in supply have no doubt been a factor in
the irregular upward course of meat prices since 1964.
However, consumers have purchased larger quantities
of meat at higher prices per pound indicating that
demand has increased.

Personal Incomes Have Accelerated
Both Consumption and Prices Have Risen
During the period of rapid increase in average meat
prices from 1964 to 1971 as shown in Chart I, total
meat consumed rose from 42 to 52 billion pounds, an
increase of 22 percent. Per capita consumption rose
from 224 to 253 pounds, an increase of 13 percent.
The rise in per capita consumption was at a faster
rate during this period of rapid price increase than
during the previous 14 years (1950-64) when prices
were relatively stable. In the recent period total meat
consumption per capita rose at an annual rate of 1.8
percent, whereas from 1950 to 1964 per capita con­
sumption rose at the rate of 1.6 percent (Chart II).
According to the United States Department of Agri­
culture per capita consumption of meat will increase
slightly again this year. An estimated decline of one
percent in red meat consumption will be more than
offset by a four percent increase in poultry.
The fact that meat consumption has increased re­
veals little about meat demand without information
on prices.5 Meat consumption, like consumption of
any other commodity or service, depends in part upon
its price. Given no change in the demand schedule
(line D, in Figure I), a decline in meat prices will
Economists explain a larger quantity of a good being pur­
chased in two different ways. One way is for the dem and
schedule to shift to the right, indicating a greater quantity
will be taken at each price. The other way is a movement
along a given dem and schedule, indicating that price changes
are the result of a shift in the supply schedule. The latter
means that larger quantities are purchased only at lower
prices.



While numerous factors contribute to rising meat
demand, rising per capita personal income is perhaps
the most important. In numerous studies research
analysts have found that rising demand for meat re­
sults from gains in per capita income.6 Per capita
consumption of beef, veal, lamb, pork, and poultry
have all been positively associated with income. All
studies confirm the common explanation that as per­
sonal incomes rise people spend more for food.
Personal incomes have accelerated since the mid1960s. Disposable personal income rose at the average
annual rate of 5.9 percent from 1950 to 1955, at 4.9
percent from 1955 to 1960, and 6.2 percent from 1960
to 1965. With the rising rate of inflation, personal in­
come growth accelerated to 7.8 percent per year from
1965 to 1970 and has continued at a relatively high
6.9 percent rate since 1970 (Table I). While the ac­
celeration in personal income growth has been pri­
marily in nominal rather than real terms, it has added
6For examples of such studies see Edward Uvacek, Jr., “A
New Look at Demand Analysis for Beef,” American Journal
o f Agricultural Econom ics (November 1968), p. 1505; Willard
Williams, “The Meat Industry,” Market Structure o f Agri­
cultural Industries, ed. John R. Moore and Richard G. Walsh
(Ames: The Iowa State University Press, 1966), p. 40; Larry
Langemeier and Russell G. Thompson, “Demand, Supply,
and Price Relationships for the Beef Sector, Post-World War
II Period,” Journal o f Farm Econom ics (February 1967), p.
179; Frederick Lundy Thomsen and Richard Jay Foote, Agri­
cultural Prices (New York: McGraw-Hill Book Company, Inc.,
1952), p. 362; and Russell G. Thompson, J. Michael Sprott,
and Richard W. Callen, “Demand, Supply, and Price Relation­
ships for the Broiler Sector, with Emphasis on the Jack-Knife
Method,” American Journal o f Agricultural Econom ics (May
1972), p. 247.
Page 5

FED ER AL. R ESER VE

O C T O B E R 1972

B A N K O F S T . L O U IS

T a b le III

T a b le I

D is p o s a b le

P e rs o n a l

In c o m e a n d

In fla tio n

Im p o r ta n c e o f M e a t in the F o o d - A t - H o m e

( A n n u a l Rates o f C h a n g e )

Budget

(P ercent o f F o o d -a t-H o m e O u tla y s )

D isp o sa b le
Personal Incom e

Red M e a l

P o u ltry

Fish

T o ta l

2 8 .3 %

4 .1 %

2 .9 %

3 5 .2 %
3 4 .7

In fla tio n *
1960

1 9 5 0 -1 9 5 5

5 .9 %

2 .5 %

1 9 5 5 -1 9 6 0

4 .9

2 .6

1965
1.4

6 .2

1 9 6 0 -1 9 6 5
1 9 6 5 -1 9 7 0

7 .8
6 .9 * *

4 .2 * *

4.1

2 .9

31.1

4 .3

3 .3

3 8 .7

1971

3 1 .3

4 .2

3 .4

3 8 .9

4.1

1 9 7 0 -1 9 7 2

2 7 .8

1970

♦Based on GNP price deflator
**11/1970 to 11/1972
***E stim ated from 1972 Report o f Council of Economic Advisers
Source: U .S. Departm ent of Commerce

to meat demand by providing more dollars for the
family budget.
The contribution of rising personal incomes to the
higher demand for meat is indicated by the pattern of
consumer expenditures. While the share of total con­
sumer expenditures spent on meat declined substan­
tially in the early post World War II years, it leveled
off in the mid-1960s (Table II). In 1950 purchases of
red meat, poultry, and fish accounted for 7.4 percent
of total consumer expenditures, but by 1965 such pur­
chases had declined to 5.6 percent of the total. Since
1965 the share of total consumer expenditures spent
on meat has held constant and total outlays for meat
have risen at the same rate as outlays for other
purposes.
T a b le II

Estimated

M eat

Expenditures

as Percent

o f Total Consumer O utlays
( D o lla r A m o un ts in B illio n s )
T o ta l P ersonal
C o n su m p tio n
E xp e nd itu res

T o ta l M e a t
E xp e nd itu res

M e a t as
Percent
o f T o ta l

1950

$ 1 9 1 .0

$ 1 4 .2

1955

2 5 4 .4

1 6 .4

7 .4 %
6 .4

1960

3 2 5 .2

2 0 .0

6.2

1965

4 3 2 .8

24.1

5 .6

1970

6 1 6 .8

3 5 .0

5 .7

1971

6 6 4 .9

3 6 .5

5 .5

Source: Calculated from U .S. Department of Agriculture and U.S.
Department of Labor data

Among the foods, the proportion of expenditures on
meat has turned upward in recent years. In 1965 all
meats accounted for about 35 percent of the total
expenditures on food consumed at home (Table III).
By 1970 the meat portion of food-at-home expendi­
tures had increased to 39 percent, and the quantity
of meat consumed per capita had increased sharply.
Furthermore, evidence indicates that the higher pro
Page 6


Source: Calculated from U.S. Department of Agriculture a nd U.S.
Department of Labor data

portion of such expenditures for meat has continued
into 1972. Per capita consumption of red meat in the
first six months was about one percent less than a year
ago, but the decline was more than offset by a six
percent increase in poultry consumption. This increase
in consumption of red meat and poultry combined,
along with the sharp rise in prices, points to a con­
tinuation of the upward trend in demand for meat
and in consumer expenditures for meat in relation to
other foods.

Food Subsidies Have Increased
Larger Government issues of food stamps to the
lower income groups and increased donations of meat
products to schools, institutions, and low-income fam­
ilies occurred during the recent upswing in meat
prices. Total issues of food stamps rose from less than
$1 billion in 1969 to more than $3 billion in 1971
and to an annual rate of $3.4 billion in the first
two quarters of 1972. Federal outlays on the school
lunch program have more than doubled during the
last two years, rising from $227 million in 1969 to $594
million in 1971. Food distributions to low-income fam­
ilies, institutions, and others also have increased, but
at a lower rate than the school lunch programs. Total
cost of the Federal food programs, including food
stamps, food distribution, and money donated for
food purchases, rose from $1.2 billion in 1969 to $3.1
billion in 1971 and to an annual rate of $3.5 billion in
the first half of 1972. In 1969 Government outlays for
these programs amounted to only 1.4 percent of the
total costs of food used at home by all consumers. By
1971 these outlays amounted to more than 3 percent
of total food-at-home costs, and this year they may
total 3.7 percent.
An important effect of the food stamp program has
been to shift the recipients to higher income brackets
for food consumption purposes. As indicated earlier,
studies of meat demand show that such a shift pro­
duces a sizable increase in meat consumption, which
may be partially offset by a reduction in consumption
of some other types of foods such as dried beans,

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

cereals, and fresh potatoes.7 In addition to the in­
creased demand for meat resulting from the food
stamp program, the share of meat in direct Govern­
ment food donations has been rising sharply in recent
years. In constant dollar terms, donations of all live­
stock products rose 11 percent from 1970 to 1971 and
donations of meat rose by one-third.8
Although the food stamp program and other Gov­
ernment food donations are intended to improve
the diets of the lower income groups, it is unlikely
that total food expenditures rise by the same dollar
amount as such donations. Some of the recipients will
likely use less of their own earnings for food purchases
as a result of the programs. Nevertheless, the pro­
grams may have added one or two percent to total
food expenditures since early 1971 and a somewhat
greater percentage to total meat expenditures.9 This
increase in food subsidies was a factor contributing to
the recent increase in demand for meat.

Impact of Population Growth
An increasing population has certainly been a factor
in the rising demand for meat, but it has been less
important during the sharp increases in meat prices
since 1964 than in earlier years. The nation’s popula­
tion grew from 192 million in 1964 to 207 million in
1971, an annual growth rate of 1.1 percent. This, how­
ever, was well below the 1.7 percent annual popula­
tion growth rate from 1950 to 1964 when meat prices
were relatively stable. Also, during the sharp increase
in meat prices since last year population has increased
at less than a one percent rate.

Meat Supply

OCTOBER

1972

output of chickens almost tripled. Meat imports in
1971 were equivalent to 6 percent of domestic red
meat production, whereas imports were insignificant
in 1950. Meat import controls were relaxed this year,
and if they are not reimposed, rising meat production
in other nations, along with rising domestic meat pro­
duction efficiency, should have an even more favorable
impact on the nation’s meat supply in future years.
Between 1950 and 1971, when meat consumption
was increasing rapidly, prices of meat animals rose
less than one percent per year, and red meat prices
rose only 1.8 percent per year. Poultry prices de­
clined about one percent per year. In comparison, the
consumer and general price indexes rose at average
annual rates of 2.5 and 2.8 percent, respectively.
As indicated earlier, the long-run supply curve S2
in Figure I, which assumes no change in technology,
is relatively elastic, indicating that a small increase in
price provides sufficient incentive for a sizable gain
in production. In addition, over the very long run
rapid gains in technology increase the efficiency of
crop and livestock production causing the supply
curve to shift to the right, assuming general price
stability for other goods and services. The man-hours
of labor used for crop production are now less than
one-third the number in 1950, and labor used for
livestock production has declined more than 50 per­
cent. Efficiencies in feed utilization have increased
substantially for poultry. Overall, the productivity in­
dex for agriculture (output per unit of input) rose 36
percent from 1950 to 1971.10 These efficiency gains
tended to offset the price effects of rising meat de­
mand and reduce meat prices from the early 1950s
until the mid-1960s.

sIbid. (August 1972).

In the mid-1960s, however, accelerated monetary
growth led to general price inflation which had ad­
verse effects on the supply of meat. Inflation, which
had averaged less than 2 percent per year in the early
1960s, accelerated to more than 4 percent per year
after 1965 (Table I). This higher rate of monetary
growth raised the demand for all goods and services
and for productive resources. Meat producers were
thus faced with rising production costs and the meat
supply curve S2 shifted to the left (Figure I). In
other words, at each level of meat prices following
the inflation, producers were willing to produce less
meat than previously because of higher production
costs. The accelerated monetary growth was thus a
major factor in the sizable increase in average meat
prices. It contributed to an increase in the demand

9This assumes that the gain in meat consumption by the
lower income groups is not offset by a reduction caused by
the increased taxes on the higher income groups.

10United States Department of Agriculture, C hanges in Farm
Production and Efficiency.

Over the longer run, production technology and
imports have tended to increase the nation’s meat
supply and offset part of the impact on prices of the
rising demand for meat. As shown in Charts I and II,
meat production plus net imports have risen at a suffi­
cient rate to provide consumers with increasing quan­
tities at less than average price increases for other
consumer items. From 1950 to 1971, red meat and
poultry production combined rose from 25.9 to 48.4
billion pounds per year, a 3 percent annual rate of
gain. Production of red meat rose from 22.1 to 37.8
billion pounds, an annual rate of 2.7 percent, while
7United States Department of Agriculture, National F ood
Situation (May 1969).




Page 7

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

The analysis in the accompanying article assumes
that all phases of the meat industry are reasonably
competitive. The following quotes from studies by
the National Commission on Food Marketing pub­
lished in 1966 tend to confirm this view.
The meat industry involves mainly three large groups
— the farmers, ranchers, and feeders who grow the live­
stock; the packers who slaughter the animals and turn
them into dressed meat; and the retailers who sell meat
to consumers.1
Livestock producers are numerous and widely scat­
tered. Each markets only a small share of livestock sold,
even though average firm size has increased markedly,
especially in cattle feeding.2
Concentration in meat packing declined markedly
after World War II. Census data show the largest four
companies accounted for 41 percent of the value added
by manufacture in 1947 and 31 percent in 1963. The
total number of slaughtering firms rose from 1,999 to
2,833 in this period.3 Earning rates for large meat
packers have averaged lower than rates for leading
firms in most other branches of the food industry since
World War II. The largest four packers (ranked ac­
cording to red meat sales in 1963) consistendy reported

iNational Commission on Food Marketing, F o od From
Farm er to Consumer (June 1966), p. 21.
2Ibid.
3National Commission on Food Marketing, Organization and
Com petition in the Livestock and M eat Industry (June
1966), p. 7.

for meat through its impact on personal incomes (in
nominal terms) and at the same time tended to re­
duce the meat supply. Its impact, along with other
factors contributing to a growing meat demand, thus
tended to submerge the impact of factors increasing
the supply of meat since 1964.

Concluding Comments and Summary
The data indicate that meat prices in recent years
have been determined largely by basic supply and
demand conditions. As indicated by reports of the
National Commission on Food Marketing, the meat
industry is reasonably competitive (see screened in­
sert). With the exception of the Government crop
control and price support programs and import re­
strictions, the meat industry has generally operated in
a competitive free enterprise atmosphere.
The meat industry meets a major competitive test
of easy entry and exit. The industry is not hampered
by rules and regulations such as chartering, licensing

Page 8


O C T O B E R 1972

net income after taxes at around 5 or 6 percent of net
worth from 1948 through 1963.4
Between 1958 and 1963, . . . The market position of
the largest four retail (food) chains declined approxi­
mately 1.7 percentage points while the market share of
the largest eight firms combined declined about 1 per­
centage point. The market share of the largest 20 com­
panies remained constant. These data again illustrate
the more rapid growth of smaller firms when compared
to the largest food retailers. It also indicates that while
the largest retailers are growing, they are not growing
as rapidly as the food market expands.5 For the in­
dustry as a whole, net profit as a percent of sales has
followed an irregular but slightly downward trend since
1950.® Profits of retail food chains were high relative to
other industries during most of the postwar period. This
high level of profits resulted from a rapid rise in the
popularity of the supermarket. In response to this in­
crease in demand, many thousands of supermarkets
were built. As this rapid building program caught up
with demand around 1960, profits for food retailers
returned to levels comparable to other industries.7
Corporate profits after taxes averaged 11.4 percent
of stockholders’ equity in all of private manufacturing,
11.3 percent in nondurable goods manufacturing, and
9.8 percent in the manufacture of food and kindred
products.8
i Ibid., p. 59.
"'National Commission on Food Marketing, Organization
and Competition in F oo d Retailing (June 1966), p. 39.
Hbid., p. 277.
7Ibid., p. 304.
8National Commission on Food Marketing, F o od from
Farm er to Consumer (June 1966), p. 99.

or long periods of apprenticeship. Virtually all are free
to enter all phases of meat production and distribu­
tion. It has numerous participants in all stages of pro­
duction and distribution. The efficient prosper and
the inefficient fail. This incentive has permitted the
price mechanism to bring into equality the quantity
of meat supplied and demanded at a relatively high
level of consumption per capita and at prices which
have risen only moderately compared with other con­
sumer items.
If people want more meat they will bid up the
price and the higher prices of meat will provide the
incentive for increased production. Productive re­
sources will flow freely to this sector when anticipated
returns are attractive. The higher meat prices in re­
cent years have been necessary to attract the addi­
tional resources used in producing the larger volume
of meat demanded by consumers. If prices had been
set arbitrarily at a lower level a smaller volume would
have been produced and some consumers would
have had less meat. Therefore, in the absence of a

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

responsive price system in which the quantity sup­
plied and the quantity demanded are equated, the
available quantity must be rationed among consumers
by some other means.
In summation, the fact that meat prices have in­
creased sharply since last year and have generally
risen since 1964 is not a sufficient reason for the be­
lief that the consumer is being taken advantage of or
that the meat industry is callous or inefficient. The
meat industry is reasonably competitive and takes
advantage of developing technology. Meat produc­
tion has increased at a high rate since the upward
trend in meat prices began in 1964.
Excessive monetary growth and other forces which
led to a sharp increase in demand for meat and a
slower growth in supply have been the chief factors




O C T O B E R 1972

contributing to the higher prices since 1964, rather
than basic problems in the industry. Consumers have
demanded a higher level of meat production per
capita and have paid a higher price for the increased
output.
The higher prices were necessary to provide incen­
tive for producers to supply the amount of meat de­
manded. Without the higher prices output would
have been less. Unforeseen events such as livestock
cycles and unusual weather conditions may cause
livestock and meat prices to fluctuate around their
long-run equilibrium levels. However, given the gen­
erally competitive conditions in the industry, the
market price of meat is always near that level re­
quired to match production with consumer demand.
The recent price increases were probably no excep­
tion to this general rule.

Page 9

Money Stock Control
by ALBERT E. BURGER

In early September 1972 the Federal Reserve Bank of Boston sponsored a conference entitled
“Controlling Monetary Aggregates II: The Implementation.” A series of articles was presented
which analyzed problems arising from the implementation o f monetary policy. The following arti­
cle is an abridged version of one paper presented at this conference. Much o f the technical ma­
terial has been omitted from this abridged version with the intent o f conveying in concise form
the main ideas and conclusions of the article. The complete article, including comments by the
discussant, Professor James Duesenberry, will b e published in 1973 by the Federal Reserve
Bank of Boston as part of its Monetary Conference series. The forthcoming publication also will
contain the other papers presented at the Conference.

T

HE FEDERA L RESERVE stated in 1960, when
it began publishing a separate and distinct money
stock series, that:
T h e amount of money in existence and changes
in this amount influence the course of economic
developments . . . .
T h e Federal Reserve System has primary respon­
sibility for regulating the total volume of money
available to m eet the public’s demands.1

Over the next ten years a major controversy
developed over whether the Federal Reserve recog­
nized or placed enough emphasis on its responsibility
for controlling the growth of the money stock. The re­
lated question of which operating strategy to follow
in controlling the money stock was pushed to the
background.
Economists can argue at great lengths over the
extent to which the Federal Reserve tried to control
money in the past. However, one thing is clear; since
early 1970, the Federal Open Market Committee
(FOM C) has moved in several stages to a position
of placing more emphasis on controlling the money
stock, relative to other intermediate objectives, than
had previously been the case.2 Along with this de­
velopment, there has been increased scrutiny of alter­
native short-term operating strategies and analysis of
problems involved in controlling growth rates of mon­
etary aggregates.
*The author wishes to express his appreciation to Anatol
Balbach and Robert Rasche for their many comments on
this study.
X
“A New Measure of the Money Supply,” Federal Reserve
Bulletin (October 1960), p. 1102.
2The Federal Open Market Committee consists of the seven
members of the Federal Reserve Board of Governors and

Page 10


In this paper the control of one monetary aggre­
gate, the money stock, is considered. It is assumed
that the Federal Open Market Committee has chosen
a growth path for the money stock that is expected to
be consistent with its policy objectives for output,
employment, and prices. All the problems relating
to how this growth path for money was chosen are
ignored. The control problem is to use open market
operations to achieve that growth path for money.
This involves predicting the effects of open market
operations on the money stock. Because of informa­
tion lags and random weekly fluctuations in money,
the Federal Reserve does not aim open market opera­
tions directly at the money stock, but picks an operat­
ing target intermediate between open market opera­
tions and the money stock. The two main candidates
for this operating target have been money market
conditions, chiefly represented by the Federal funds
rate, and some reserve aggregate.

The Control Procedure
A general reserve aggregate-multiplier approach is
used here to derive a control procedure the Federal
Open Market Committee could use to achieve a
given growth path for money. The link between the
five of the twelve Federal Reserve Bank Presidents. The
President of the New York Federal Reserve Bank is a per­
manent voting member of the Committee and is its ViceChairman. All other Federal Reserve Bank Presidents attend
the meetings and present their views, but votes may be cast
by only four of these Presidents, who serve as voting mem­
bers for one-year terms on a rotating basis. The Committee
meets about every four weeks to discuss economic trends
and to decide upon the future course of open market opera­
tions. The decisions on the exact timing and amount of daily
buying and selling operations of securities in fulfilling the
Committee’s directive are the responsibility of the Account
Manager at the Trading Desk of the New York Bank.

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

reserve aggregate — total reserves, non­
borrowed reserves, the monetary base,
or some variant of these — and the
money stock is called a multiplier. The
money stock control procedure involves
predicting the effect on the money
stock of setting the reserve aggregate
at a given value.3
The determination of the money
stock is summarized in a multiplierbase expression of the following
form:4

O C T O B E R 1972

T a b le 1

S o u rc e s a n d

B a se

A ugust 1 9 7 2 *
( m illio n s o f d o lla rs )
Sources
F ederal Reserve h o ld in g s o f
G o ve rn m e n t securities
Federal Reserve flo a t
G o ld stock p lu s sp ecia l d r a w ­
in g rig h ts
T re a sury currency o u ts ta n d in g
O th e r Federal Reserve assets

Uses
$ 7 1 ,9 3 6
3 ,3 4 7
1 0 ,8 1 0
8 ,1 3 7
957

M e m be r b a n k d e p o s its a t Fed­
e ra l Reserve Banks less
loa n s
C urre n c y h e ld b y b anks
C urre n cy h e ld b y th e p u b lic

$ 2 7 ,0 1 8
7 ,4 2 6
5 5 ,3 0 0

Less:
T re a sury cash h o ld in g s
T re a sury d e p o s its a t Fed­
e ra l Reserve Banks
F oreign d e p o s its a t Fed­
e ra l Reserve Banks
O th e r d e p o s its a t F. R.
plus o th e r F. R.
lia b ilitie s a n d c a p ita l

M = mB
-|
where “M i” is the money stock
(demand deposits plus currency held
by the nonbank public), “B” is the
net source base, and “m” is the
money multiplier. The net source
base (B ) can be controlled by Fed­
eral Reserve open market operations.
Sometimes this base concept is re­
ferred to as the nonborrowed base
to denote that member bank borrow­
ings are excluded. The net source

U se s o f the N e t S o u rc e

319
2 ,0 2 5
171

2 ,9 2 8

E quals:

E quals:

NET SOURCE BASE

$ 8 9 ,7 4 4

Plus:

NET SOURCE BASE

$ 8 9 ,7 4 4

Plus:

Loans a t Federal Reserve
Banks
Equals:
Source base
Plus:
Reserve a d ju s tm e n t
E quals:
M o n e ta ry base

439
$ 9 0 ,1 8 3
3 ,9 0 4
$ 9 4 ,0 8 7

Loans a t Federal Reserve
B anks
E quals:
S ource base
Plus:
Reserve a d ju s tm e n t
E qu als:
M o n e ta ry base

439
$ 9 0 ,1 8 3
3 ,9 0 4
$ 9 4 ,0 8 7

♦Prelim inary data, not seasonally adjusted.

base is taken as the control variable in the procedure
set forth in this article. In its day-to-day operations

this would be the variable toward which the Desk
would primarily direct its open market operations.5

3This is not the only approach that could be used to address
the problem of controlling the money stock. Other economists
within the Federal Reserve have attacked the problem from
a different approach. James Pierce and Thomas Thompson
have studied the problem with their monthly money market
model using the Federal funds rate as the control variable.
See James L. Pierce and Thomas D. Thompson, “Some Issues
in Controlling the Stock of Money” (paper prepared for the
Federal Reserve Bank of Boston Conference on “Controlling
Monetary Aggregates II: The Implementation” ). Richard
Davis has used a reduced form relationship that takes the
demand deposit component of the money stock as the varia­
ble to be explained. His reduced form equation includes
nonborrowed reserves (or alternatively the Federal funds
rate), business sales, Government deposits and a variable to
capture the effects of Regulation Q. His results are discussed
in the Pierce-Thompson paper.

On a daily basis, the Federal Reserve has informa­
tion on the value of the previous day’s net source
base ( B) . This information comes from totaling the
sources of the base, as shown in Table I. Special care
should be taken to distinguish between the sources
and uses of the base. In order to measure the base,
the Desk does not have to estimate excess reserves
and currency. This would be the case only if the
Manager of the System Open Market Account had to
rely solely on information about the uses of the base.
By collecting data on the sources of the base, which
come from the books of the Federal Reserve and the
Treasury, a more accurate estimate can be obtained
on a short-run basis.

4The specific procedure presented in this paper is designed
within the framework of a non-linear money supply hypothe­
sis developed by Karl Brunner and Allan Meltzer:
(r -b )(l+ t+ d )+ k
where k, t, and d, respectively, are the ratios of currency
held by the public, time deposits, and U. S. Government
demand deposits at commercial banks to the demand deposit
component of the money stock. The variables r and b,
respectively, are the ratios of bank reserves and member bank
borrowings to commercial bank deposit liabilities (excluding
interbank deposits). See Karl Brunner and Allan H. Meltzer,
“Liquidity Traps for Money, Bank Credit, and Interest Rates,”
Journal o f Political Econom y (January/February 1968), pp.
1-37, and Albert E. Burger, T he M oney Supply Process
(Belmont, California: Wadsworth Publishing Company, 1971).



The money multiplier ( m ) is the connecting link be­
tween the net source base and money stock. Changes
in the multiplier reflect portfolio decisions by banks
and the public, Treasury actions, and Federal Reserve
policy actions such as changes in reserve requirements
and the discount rate. The multiplier is not constant.
Therefore, under this proposed procedure, the Federal
“The Manager of the System Open Market Account may be
referred to as the “Account Manager” or the “Desk,” mean­
ing the Trading Desk of the New York Federal Reserve
Bank.
Page 11

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

Reserve must estimate the multiplier to determine
how much base to supply to achieve a desired path
for the money stock.

Forecasting the Money Multiplier
The procedure used in this paper to forecast the
money multiplier takes as inputs only those variables
that the Federal Reserve could be assumed to know
without error. The two major independent variables
used to forecast the next month’s money multiplier
are the lagged 3-month moving average of the multi­
plier and the percent change in the Treasury bill rate
in the previous month.6 This procedure is an extension
of the procedure used in a previous article co-authored
with Lionel Kalish and Christopher Babb. The major
modification is to remove the reserve adjustment mag­
nitude and include the lagged percentage change in
the Treasury bill rate.7
In essence, this is a very mechanical method that
does not attempt to incorporate any information the
Federal Reserve might have concerning expected
movements of key factors such as Treasury deposits
in the forecast month. Therefore, the results of simu­
lations based on this procedure should not be viewed
as an indication of the best control the Federal Re­
serve could attain. Instead, they provide a standard
against which other procedures could be evaluated.
Any alternative procedure should be able to perform
at least as well as this simple, mechanical method.

Simulating the Control Procedure
The forecasting horizon and the net source base
target period are set at one month. For example, at
the start of each month, a money multiplier for that
month is forecast, and a new setting for the net
source base is determined. This procedure was simu­
lated over the 96-month period, 1964-71. The fore­
casted multiplier times the actual net source base for
each month gives the money stock the Federal Re­
serve would have expected to achieve if it had been
6The regression equation used to forecast the multiplier was
estimated using not seasonally adjusted data. The coefficients
used to forecast each month’s multiplier were estimated by
least squares using the previous 36 months’ observations.
Each month the coefficients were re-estimated by adding the
most recent month and dropping the first month of the
previous 36 observations. In making the forecasts put-i was
added, where u t-i is the lagged value of the error in the
estimate of the money multiplier and p is the correlation
coefficient for consecutive error terms in the equation during
the sample period.
7Albert E. Burger, Lionel Kalish III, and Christopher T. Babb,
“Money Stock Control and Its Implications for Monetary
Policy,” this Review (October 1971), pp. 6-22.

Page 12


O C T O B E R 1972

using this procedure.8 The results of this exercise and
statistics relevant for evaluating these results are given
in the Appendix at the end of this article. Since no
forecasting errors are involved in the independent
variables, the results of these simulations indicate how
well the procedure would have worked over the
1964-71 period.
The evaluation of the performance of a money
stock control procedure should not be based solely on
monthly errors. For example, a one-half percent error
in one month, converted to an annual rate becomes a
6 percent error. This does not necessarily imply that
using this method would result in that magnitude of
error over a relevant control period. Errors resulting
from the simulation do not tend to accumulate, and
positive errors are offset by negative ones. The mean
forecasting error is $140 million and the mean percent
forecasting error is less than 0.1 percent; this indicates
that the procedure, on average, does not substantially
over- or underestimate the money stock associated
with a set value of the net source base.
Comparing consecutive 3-month moving averages
of the money stock resulting from simulating the con­
trol procedure to actual money over the 1964-71
period results in a mean percent error of .07 percent
and an absolute mean percent error of 0.31 percent.
In other words, if the desired level of the money
stock can be expressed as a moving average for
3-month periods, the procedure should permit its
achievement with only small errors.
Another means of analyzing the effectiveness of the
control procedure is to compare the expected growth
rates of the money stock resulting from simulating the
control procedure with actual growth rates of the
money stock. The simulated monthly values of the
money stock are what the FOMC would have ex­
pected from setting the net source base at its historical
values if it had been using this procedure to forecast
the money multiplier.
In this way, an analysis can be made of the effec­
tiveness of the control procedure at times when there
were marked reversals in the growth rate of the
money stock. During the period 1964-71 there were at
least 6 marked changes in the growth rate of the
money stock. Table II presents a comparison of actual
growth rates of money and the growth rates that the
8The forecasted not seasonally adjusted money multiplier was
multiplied by the actual not seasonally adjusted net source
base to obtain not seasonally adjusted money (N SAM ). Then
NSAM was multiplied by the implicit seasonal factor for that
month (computed by dividing seasonally adjusted money by
not seasonally adjusted money) to obtain the seasonally ad­
justed money stock.

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

T a b le

O C T O B E R 1972

II

A c t u a l C o m p a r e d to
E x p e c te d R ates o f M o n e y G r o w th 1

A v e ra g e o f
3 M o n th s Ended

A ctu a l
G ro w th Rate
o f M oney2

G ro w th Rate
o f M oney
Expected
U sin g th e
C o n tro l
P rocedure3

M ay

'6 6 - Dec. '6 6

0 .2 %

1 .1 %

Dec.

’6 6 - Ja n . '6 9

7 .2

7.1

J a n . '6 9 - Feb. '7 0

3 .4

3 .7

Feb. '7 0 - Dec. '7 0

5 .4

5 .0

Dec.

'7 0 - J u ly ’ 71

9 .4

9 .5

J u ly

'71 - Dec. '71

2 .4

3 .2

’ Periods were chosen on the basis of a significant change in the growth
rate of the money stock.
2Simple annual rates.
3Computed by comparing 3-month average o f actual money in the
initial period to 3-month average of forecasted money in the terminal
period.

FOMC would have expected if it had been using the
control procedure over these periods.
For example, beginning in mid-1966 the growth rate
of money slowed markedly. By setting the net source
base at its historical values, the FOMC would have
expected, given the forecasts of the money multiplier,
that the money stock would have grown at a 1.1 per­
cent annual rate from the average of 3 months ending
May 1966 to the average of 3 months ending Decem­
ber 1966. The actual growth rate of the money stock
over this same period was 0.2 percent. In early 1967
the FOMC moved to a much more expansionary pol­
icy. Simulating the control procedure results in an
expected growth rate of the money stock of 7.1 per­
cent from the average of 3 months ending December
1966 to the average of 3 months ending January 1969.
The actual growth rate of money associated with set­
ting the net source base at its historical values was
7.2 percent over this period.
As shown in Table II, the FOMC would also have
been able to achieve the growth path of money
through the slowdown in 1969, the renewed growth
in 1970, the acceleration in the first half of 1971, and
the sharp slowdown in the last half of 1971. These
results indicate that even if the FOMC sought very
marked reversals in the growth of money, over at
least a 6-month period it could quite accurately
achieve the growth of money it desired by using the
procedure presented in this article.

Impediments to Money Stock Control
The 1964-71 period presented an especially difficult
period for money stock control. A significant part of



this difficulty was introduced by Federal Reserve
actions. During this 8-year period there were several
major reversals in the direction of the influence of
Federal Reserve policy actions on the money stock.9
In addition, reserve requirements were changed 7
times and lagged reserve requirements were intro­
duced in this period. The Federal Reserve also per­
mitted Regulation Q ceiling rates to frequently re­
strain banks from responding in a competitive manner
to changes in market rates.10
The money stock control procedure outlined above
is not designed to capture the initial effects of these
actions by the Federal Reserve. Since a lagged 3month moving average of the multiplier is used, a
sharp reversal of policy may cause a change in the
multiplier that is not immediately captured by the pro­
cedure used to forecast the multiplier. For example,
at times of sharp reversals in the growth rate of the
money stock relatively larger errors occur for a short
period. After mid-1966 the forecasting procedure sub­
stantially over-estimates the multiplier; the opposite
occurs in early 1967. Also, a similar tendency seems
to have been in effect in 1971 as forecasting errors
tended to be negative in the first half of the year and
positive in the second half. The exact size and direc­
tion of this effect depends upon a number of factors.
However, given the characteristics of the procedure
for forecasting the money multiplier, it does seem
likely that a substantial change in the thrust of policy
actions on the money stock will introduce additional
problems for accurately predicting the initial influ­
ence of open market actions on the money stock.
The results shown in Table II indicate that through
the use of this procedure the FOMC could quite
accurately achieve sharp changes in the growth path
of money over a longer period of time. The same
results point out that, in the initial stages of a marked
change in the desired growth rate of the money stock,
the Federal Open Market Committee should not aban­
don the procedure just because they initially observe
larger than average monthly errors. However, given
that the policymakers are also concerned with large
movements in short-term interest rates, large monthly
9Policy actions resulted in an acceleration of the base from
late 1965 through mid-1966 followed by a deceleration of
the base through the end of 1966. This was followed by a
renewed acceleration during 1967-68, followed by a decel­
eration in 1969, then a more rapid growth in 1970. A rapid
acceleration in the growth rate of the base over the first
half of 1971 again was followed by a rapid deceleration
in the second half of 1971.
10The secondary market yield on large 6-month CDs ex­
ceeded the Regulation Q ceiling rate in the 8-month period
from June 1966 through January 1967, the 9-month period
from November 1967 through July 1968, and the 24-month
period from November 1968 through October 1970.
Page 13

F E D E R A L. R E S E R V E B A N K O F ST. LOUIS

errors may make the task of returning to the desired
money stock path more difficult. The author conjec­
tures that most methods would tend to show relatively
larger errors at times when the target growth of money
is markedly changed. Again, the point should be em­
phasized that it is the performance of the procedure
over a period of several months or longer that is
crucial.
With regard to reserve requirements, there is clear
evidence that reserve requirement changes create sub­
stantial difficulties for predicting the growth path of
money with this technique. The root mean square
forecasting error for months when reserve require­
ments were changed and the following month is about
63 percent larger than for the whole sample period,
$1.74 billion compared to $1.07 billion.11
If reserve requirements are raised, the money multi­
plier is reduced, and hence the money stock resulting
from simulating this procedure would be expected
to exceed actual money, resulting in positive errors.
In July and September 1966 reserve requirements
were raised and the period July - October 1966 en­
compasses some of the largest positive errors of the
sample period. Likewise, large positive errors occur
following the raising of reserve requirements in midJanuary 1968 and mid-April 1969. Several of the larg­
est negative errors followed lowering of reserve re­
quirements in March 1967 and October 1970.
Although the exact magnitude of the influence of
Regulation Q ceilings is difficult to isolate empirically,
it can be conjectured from a theoretical analysis that
this impediment added to the errors in money stock
control. For example, as market interest rates rise
above Regulation Q ceiling rates, this results in a rapid
decline in the growth of time deposits, hence affecting
the t-ratio in the money multiplier, and therefore
influencing the growth of the money stock.

Comparison of RPDs and the Net Source
Base as Operating Targets
Prior to 1972 a key element of open market strategy
had been use of a configuration of measures of money
market conditions as operating guides for the Man­
ager of the System Open Market Account. At the
u Most reserve requirement changes occurred in the middle
of a month. Hence, their potential influence carried over
to the following month. The dates of reserve requirement
changes and the amount of reserves released or absorbed
are as follows: July 1966 ($420 million), September 1966
($445 million), March 1967 ( —$850 million), January 1968
($550 million), April 1969 ($660 million), introduction of
a 10 percent marginal reserve requirement on certain for­
eign borrowings by banks in October 1969 ($400 million),
October 1970 (-$ 5 0 0 million).

Page 14


O C T O B E R 1972

start of 1972 the Federal Open Market Committee
began a series of steps that moved open market oper­
ating strategy decidedly closer to a reserve aggregate
approach. At the February 15 FOMC meeting, the
Committee adopted, as its reserve aggregate target,
reserves available to support private nonbank deposits
(RPDs), defined specifically as total member bank
reserves less those required to support Government
and net interbank deposits.12
The move toward guiding open market operations
more by an RPD target than an interest rate target is
a major constructive development, especially to those
individuals who emphasize the System’s role in con­
trolling the growth of the money stock. However,
RPDs are only one among several reserve aggregates
that might serve the same purpose.
In choosing a reserve aggregate as an operating
target for controlling money it seems desirable to
select one that (1) has the most predictable relation­
ships to money stock and (2) is easiest for the Desk
to track in its day-to-day operations. The first criterion
concerns the selection of a target path for the reserve
aggregate. The second criterion concerns how well the
Desk can stay on that path.13

Choosing a Growth Path for an Operating Target —
Although the Federal Reserve has not made public the
method used in selecting the RPD path, there are
at least two ways this path could be chosen. One
approach would be to predict the RPD-money stock
multiplier, a procedure very similar to the one dis­
cussed in this paper. The simulation of this money
stock control procedure was repeated wherein an
RPD-money multiplier was predicted in the same
manner as a base-money multiplier. Not seasonally
adjusted RPDs were used as the control variable
instead of not seasonally adjusted net source base.
The results with RPDs were substantially worse. For
example, the root mean square forecasting error for
money over the 1964-71 period was $1.60 billion
using RPDs, compared to $1.07 billion with the net
source base as the control variable.
12Deposits subject to reserve requirements include all time
and savings deposits, and net demand deposits, which are
defined as total demand deposits less cash items in process
of collection and demand balances due from domestic com­
mercial banks. Net interbank demand deposits include all
demand deposits due to domestic and foreign commercial
banks and due to mutual savings banks, less demand bal­
ances due from domestic commercial banks. In the April
1972 revision of the reserve series, net interbank deposits
were revised to reflect the netting of a portion of cash
items in process of collection against interbank deposits.
Formerly, all cash items were netted against other private
demand deposits.
13See Charlotte E. Ruebling, “RPDs and Other Reserve
Operating Targets,” this Review (August 1972), pp. 2-7.

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

An alternative procedure stresses that RPDs are
reserves used to support private member bank de­
posits, one component of which, member bank private
demand deposits, is a part of the money stock. This
alternative first takes a projected value for GNP over
the forecasting horizon. It then assumes that the
effect of alternative growth rates of money on financial
conditions could be worked out without any effects on
GNP during the forecasting period. A relationship
between M 1 and interest rates is then developed,
and this relationship, along with other factors, is used
to project a pattern of member bank time, demand,
government, and interbank deposits.14 From these re­
sults a path for RPDs could then be developed.
RPDs can be determined in the following expression:
RPDs = TR — rDG - rDIB = rD + r‘T + ER
where TR = total member bank reserves
DG = member bank U.S. Government demand
deposits
DIB = member bank net interbank demand deposits
D = member bank private demand deposits
T = member bank time deposits
E R = excess reserves
r = reserve requirement against D6 , D, DIB
rl z= reserve requirement against time deposits

Therefore, to select a path for RPDs consistent with
the member bank demand deposit component of the
money stock ( D) , which, given the projected values
of the currency and nonmember bank deposit com­
ponents of money, would result in the desired money
stock, requires that the Federal Reserve estimate the
path of time deposits (T ) and member bank excess
reserves ( ER) . At present there are no means to
evaluate how accurately the Federal Reserve can
make forecasts of the nonmember bank deposit com­
ponent of the money stock, currency, member bank
time deposits, and excess reserves.
Predicting the relationship between any reserve ag­
gregate and the money stock involves explicitly or
implicitly predicting a multiplier relationship. There­
fore, some evidence on the stability of the overall
relationship between RPDs, other reserve aggregates,
and money can be obtained by comparing the stabil­
ity of the multiplier relationships. An examination of
regressions relating the current values of the RPDmoney multiplier and the net source base-money mul­
tiplier to a lagged 3-month moving average of these
multipliers did not provide any basis for conjecture
■•For a discussion of this type of procedure see Steven H.
Axilrod and Darwin L. Beck, “Role of Projections and
Data Evaluation with Monetary Aggregates as Policy Tar­
gets,” (paper prepared for Federal Reserve Bank of Boston
Conference on “Controlling Monetary Aggregates II: The
Implementation” ).



O C T O B E R 1972

that there has been a more stable relationship be­
tween the money stock and RPDs than between the
net source base and money.15
These results are not conclusive evidence on the
relative predictability of base-money relationships
versus RPD-money relationships. There may exist a
method of relating RPDs to money which past evi­
dence indicates would have permitted the Federal
Reserve to have more accurately predicted the effect
of an RPD target on money than the results in this
paper indicate for a base target. Also, there may be
other money stock control procedures in which both
the net source base and RPDs perform better.

Tracking an Operating Target —The second cri­
terion for selecting an operating target concerns the
information required by the Desk to track its reserve
aggregate on a daily basis. RPDs require information
that would appear to be considerably more difficult
to project than the net source base data. Referring
to the previous formula for RPDs, it can be seen that
the following have to be estimated to track RPDs:
Government demand deposits, interbank demand de­
posits, member bank borrowings, currency demands
of the public and nonmember banks, and float.16 Re­
ferring back to Table I, it can be seen that all the data
for tracking the net source base comes from the daily
records of the Federal Reserve and the Treasury. The
most troublesome component on a daily basis, which
is oommon both to RPDs and net source base, would
be Federal Reserve float.17
15The regressions used the appropriate reserve aggregate
multiplier as the dependent variable and a 3-month moving
average of past values of the multiplier and the lagged
percent change in the Treasury bill rate as independent
variables. The sample period was 1966-71. Since RPDs,
nonborrowed reserves, and total reserves include only mem­
ber bank reserves and exclude currency, these multipliers
were computed on the basis of the member bank com­
ponent of the money stock. The base-money multipliers
were computed on the basis of the total money stock.
All equations were run with seasonally adjusted data. The
coefficients of variation show that the standard error of
estimate is much larger relative to the mean of the RPD
multiplier than for the base multiplier. These results are
shown in detail in the complete version of this paper to
be published by the Federal Reserve Bank of Boston.

16Richard G. Davis discusses the characteristics of short-run
operating targets in “Short-Run Targets for Open Market
Operations,” Open M arket Policies and Operating Proced­
u re s— Staff Studies (Washington, D. C.: Board of Gov­
ernors of the Federal Reserve System, 1971), pp. 37-69.
He points out additional difficulties that may arise when, in
addition to the operating transactions, behavior of factors
such as Treasury deposits at commercial banks must be
forecast and other factors such as member bank borrowing
and excess reserves, which are functionally related to open
market operations, must be forecast.
17Proposed changes in the Federal Reserve’s check collection
procedures are expected to reduce substantially the average
level of Federal Reserve float, from about $3 billion to
around $1 billion. The only sizable component that would
Page 15

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

Conclusions
A simple procedure for determining the effect on
the money stock of setting the net source base at a
given value was presented. This proposed method
was not intended to be the definitive answer to the
money stock control problem. It does, however, pro­
vide a useful framework within which several aspects
of money stock control can be analyzed.

remain would be transportation float. One would expect that
even this component would be predictable, within limits,
by monitoring such factors as weather conditions and rail
or truck strikes. For a discussion of this change, see “Recent
Regulatory Changes in Reserve Requirements and Check
Collection,” Federal Reserve Bulletin (July 1972), pp.
626-630.


Page 16


O C T O B E R 1972

The results of simulating the procedure over an
8-year period suggest that, using a method for fore­
casting the net source base-money multiplier which
relies only on past, known data, the Federal Open
Market Committee could exercise close control over
the trend growth of the money stock. The simulation
results indicate that errors resulting from using this
method to determine the effect on the money stock of
setting the net source base at a given value do not tend
to accumulate, signifying that use of this procedure
would not result in “loss of control over money” for a
prolonged period. An analysis of errors for 3-month
moving averages and periods of marked shifts in pol­
icy support the conclusion that the growth of the
money stock could be set at about the rate desired by
the Federal Open Market Committee.

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

O C T O B E R 1972

APPENDIX
Monthly Forecasting Errors of the Money Stock Control Procedure: 1964-1971
(Dollar Amounts in Billions)
Forecasted
NSA
Multiplier

Date

Actual
NSA
Multiplier

Forecasted
SA
Money

Actual
SA
Money

Forecasted
Minus
Actual

Percent
Forecasting
Error1
0.2%
0 .6
0.5
0.3
0.5
0.4
- 0 .6
- 0 .2
0
0.1
0.8
0.2

1964

J
F
M
A
M
J
J
A
S
O
N
D

2 .9 4 9
2 .9 2 4
2.8 8 5
2 .9 0 6
2.851
2 .8 3 5
2 .8 1 6
2.8 2 8
2 .8 5 0
2 .8 7 3
2 .8 9 6
2 .8 8 5

2 .9 4 3
2 .9 0 6
2.871
2 .8 9 6
2 .8 3 6
2 .8 2 3
2 .8 3 2
2 .8 3 4
2 .8 5 0
2.871
2 .8 7 3
2 .8 7 9

$ 1 5 4 ,4 0 9
1 5 5 .4 7 0
1 5 5 .7 7 2
155.714
15 6 .7 0 8
1 57.055
1 5 6 .5 7 3
1 5 8 .0 7 2
15 9 .0 9 6
159.851
1 6 1.573
1 60.829

$ 1 5 4 ,1 0 0
1 54.500
1 5 5 .0 0 0
155.200
1 5 5 .9 0 0
156.400
1 5 7 .5 0 0
1 5 8 .4 0 0
15 9 .1 0 0
1 5 9.700
1 6 0 .3 0 0
1 6 0 .5 0 0

$ .309
.970
.772
.514
.808
.655
- .9 2 7
-.3 2 8
-.0 0 4
.151
1.273
.329

1965

J
F
M
A
M
J
J
A
S
O
N
D

2 .9 2 5
2 .8 8 8
2 .8 4 8
2 .8 7 8
2 .8 2 2
2.801
2.8 0 5
2 .8 0 2
2 .8 1 6
2 .8 4 7
2 .8 6 6
2.8 6 5

2.921
2 .8 6 9
2 .8 5 2
2 .8 8 2
2 .8 0 7
2 .8 1 3
2 .8 0 5
2 .8 0 3
2 .8 3 6
2 .8 4 8
2 .8 4 8
2.861

1 61.113
1 6 2 .3 0 8
161.473
161.759
163.111
1 62.403
1 63.663
1 6 4 .1 4 9
164.001
1 6 6 .3 2 6
1 67.919
1 6 8.217

160.900
1 6 1 .2 0 0
1 6 1 .7 0 0
1 6 2 .0 0 0
1 6 2 .2 0 0
1 6 3 .1 0 0
1 6 3 .7 0 0
1 6 4 .2 0 0
1 6 5 .2 0 0
16 6 .4 0 0
1 6 6 .9 0 0
1 6 8.000

.213
1.108
-.2 2 7
- .2 4 1
.911
- .6 9 7
- .0 3 7
- .0 5 1
- 1 .1 9 9
-.0 7 4
1.019
.217

0.1
0 .7
-0 .1
- 0 .1
0.6
-0 .4
0
0
-0 .7
0
0 .6
0.1

1966

J
F
M
A
M
J
J
A
S

2 .9 0 2
2.861
2 .8 3 4
2 .8 6 6
2 .8 1 3
2 .8 1 2
2 .8 1 4
2 .8 0 2
2 .8 0 4
2 .7 9 2
2.8 0 7
2 .7 7 4

2 .9 0 3
2 .8 5 0
2 .8 5 0
2 .8 8 6
2 .8 0 5
2 .8 1 9
2 .7 6 3
2 .7 6 5
2 .7 7 9
2 .7 7 8
2 .7 6 9
2 .7 8 2

1 6 9 .1 2 2
1 70.374
1 6 9 .5 4 4
1 70.520
1 7 2.023
1 71.245
17 4 .1 4 6
1 73.405
173.421
1 72.215
1 7 3 .5 0 2
1 7 1 .2 1 0

1 6 9 .2 0 0
1 6 9.700
1 7 0 .5 0 0
17 1 .7 0 0
1 7 1 .5 0 0
1 7 1.700
1 7 1.000
1 7 1 .1 0 0
1 7 1 .9 0 0
1 7 1 .4 0 0
1 7 1 .2 0 0
1 7 1 .7 0 0

-.0 7 8
.674
- .9 5 6
- 1 .1 8 0
.523
- .4 5 5
3 .1 4 6
2 .3 0 5
1.521
.815
2 .3 0 2
- .4 9 0

0
0.4
-0 .6
-0 .7
0.3
-0 .3
1.8
1.3
0.9
0 .5
1.3
-0 .3

2 .8 1 6
2 .7 2 7
2.7 0 3
2 .7 4 5
2.6 8 7
2.7 1 8
2 .7 1 7
2.738
2 .7 7 2
2 .7 7 9
2 .7 7 7
2.7 9 0

2 .7 8 5
2 .7 3 4
2 .7 5 3
2 .7 7 4
2 .7 2 6
2 .7 5 3
2.741
2 .7 4 6
2 .7 6 3
2.771
2 .7 7 4
2 .7 9 3

1 7 3 .2 9 0
172.748
171.626
172.289
173.301
1 7 5.085
177.084
1 79.222
1 81.488
1 8 2.198
182.593
1 8 2 .8 7 2

1 7 1 .4 0 0
1 7 3 .2 0 0
1 7 4 .8 0 0
1 7 4 .1 0 0
1 7 5 .8 0 0
1 7 7 .3 0 0
178.700
179.800
1 8 0 .9 0 0
1 8 1.700
1 8 2 .4 0 0
183.100

1.890
- .4 5 2
-3 .1 7 4
-1 .8 1 1
-2 .4 9 9
-2 .2 1 5
- 1 .6 1 6
- .5 7 8
.588
.498
.193
-.2 2 8

1.1
-0 .3
- 1 .8
-1 .0
- 1 .4
-1 .2
-0 .9
-0 .3
0.3
0 .3
0.1
-0 .1

2 .8 2 6
2 .7 6 7
2 .7 5 7
2 .7 8 7
2.7 2 5
2 .7 6 4
2 .7 3 7
2 .7 4 6
2.769
2 .7 7 9
2.771
2 .7 9 7

2.811
2 .7 4 6
2 .7 5 5
2 .7 9 4
2 .7 4 9
2 .7 6 6
2 .7 5 2
2 .7 4 0
2.7 6 4
2 .7 6 2
2.781
2 .8 1 2

1 84.870
186.351
1 8 6 .0 0 3
1 8 6 .0 8 9
1 8 6.888
1 89.922
1 9 0 .3 2 2
1 9 2 .9 6 0
1 9 3.727
1 9 5.518
1 9 5.289
1 96.383

1 8 3 .9 0 0
1 8 4 .9 0 0
185.900
1 8 6.600
1 8 8 .5 0 0
1 9 0 .1 0 0
1 9 1 .4 0 0
1 9 2 .5 0 0
1 9 3 .4 0 0
1 9 4 .3 0 0
1 9 6 .0 0 0
1 9 7 .4 0 0

.970
1.451
.103
- .5 1 1
-1 .6 1 2
-.1 7 8
-1 .0 7 8
.460
.327
1.218
- .7 1 1
- 1 .0 1 7

0 .5
0.8
0.1
-0 .3
-0 .9
-0 .1
- 0 .6
0 .2
0.2
0 .6
- 0 .4
- 0 .5

o

N

1967

D
J
F
M
A
M
J
J
A
S
O
N
D

1968

J
F
M
A
M

J
J
A
S

O
N
D




Page 17

F E D E R A L R E S E R V E B A N K O F ST. LOUIS

Forecasted
NSA
Multiplier

Date
1969

Actual
NSA
Multiplier

Forecasted
SA
Money

Actual
SA
Money

2.841
2.783
2.797
2.832
2.783
2.776
2.767
2.760
2.774
2.773
2.773
2.794

2.833
2.784
2.802
2.834
2.749
2.783
2.784
2.753
2.774
2.776
2.764
2.776

$198,937
199.432
199.909
200.867
203.870
201.692
201.666
202.933
202.746
203.022
204.133
204.991

$198,400
199.500
200.300
201.000
201.400
202.200
202.900
202.400
202.700
203.200
203.500
203.700

$ .537
-.0 6 8
-.3 9 1
-.1 3 3
2.470
-.5 0 8
-1.234
.533
.046
-.1 7 8
.633
1.291

2.801
2.745
2.748

2.725
2.755
2.728
2.709
2.734
2.714
2.722
2.741

2.806
2.736
2.757
2.777
2.715
2.736
2.732
2.700
2.709
2.725
2.732
2.744

205.126
205.371
206.048
209.043
209.750
210.799
210.027
212.295
214.761
212.179
212.852
214.553

205.500
204.700
206.700
208.300
209.000
209.400
210.300
211.600
212.800
213.100
213.600
214.800

-.3 7 4
.671
-.6 5 2
.743
.750
1.399
-.2 7 3
.695
1.961
-.9 2 1
-.7 4 8
-.2 4 7

2.765
2.687
2.696
2.730
2.690
2.705
2.722
2.699
2.707
2.711
2.710
2.720

2.741
2.690
2.705
2.732
2.679
2.718
2.714
2.703
2.697
2.699
2.700
2.715

217.184
217.425
218.929
221.044
224.688
224.401
228.057
227.683
228.426
228.705

215.300
217.700
219.700
221.200
223.800
225.500
227.400
228.000
227.600
227.700
227.700
228.200

1.884
-.2 7 5
-.771
-.1 5 6
.888
-1.099
.657
-.3 1 7
.826
1.005
.805
.424

A

M
J

J

A
S
O
N

D
J

F

M
A

M
J
J
A

S

O
N

D
1971

J
F
M
A

M
J
J
A

S

O

N
D
1

2.787

Forecasted — Actual
Actual

2 2 8 .5 0 5

228.624

1972

Percent
Forecasti:
Error1

Forecasted
Minus
Actual

J
F
M

1970

OCTOBER

0.3%
0
- 0 .2
-0 .1
1.2

-0 .3
-0 .6
0.3
0
-0 .1
0.3
0.6
-0 .2
0 .3
- 0 .3

0.4
0.4
0.7
-0 .1
0.3

0.9
-0 .4
-0 .4
-0 .1
0 .9

-0 .1
-0 .4
-0 .1

0 .4
-0 .5
0 .3

-0 .1
0.4
0 .4
0 .4
0.2

^qq

NOTE: SA and NSA refer to seasonally and not seasonally adjusted data, respectively.
Summary Results
Levels

1964

Mean Square
Forecasting Error .............................................. $.4747
Root Mean Square
Forecasting E rro r....................................................6890

1965

1966

1967

$2.2479

.6602

1.4993

1969

1970

1971

$2.6592

$.4359

1968
$.8710

$.8942

$.8299

$.7744

1.6307

.9333

.9456

.9110

.8800

Summary Results for Selected Periods
Levels
Mean Square
Forecasting Error .............................................................................................
Root Mean Square
Forecasting Error .............................................................................................
Mean Error ............................................................................................................
Absolute Mean Error ...........................................................................................
Percent
Forecasting
Error
Mean Error .................
Absolute Mean Error

Page 18


1964-1971

1966-1971

1969-1971

1970-1971

$1.1483

$1.3795

$.8328

$.8021

1.0716
.1404
.8273

1.1745
.1114
.9220

.9126
.2743
.7379

.8956
.2865
.7725

1964-1971
.0760%
.4469

1966-1971
.0514%
.4875

1969-1971

1970-1971

.1306%
.3528

.1375%
.3625

F E D E R A L R E S E R V E B AN K O F ST. LOUIS

O C T O B E R 1972

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