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FEDERAL RESERVE BANK
O F ST. L O U IS
OCTOBER 1977


Vol. 59, No.


The Growing Similarities Among
Financial Institutions ................
The Early 1960s: A Guide to the
Late 1970s ....................................

10

The Growing Similarity Among
Financial Institutions
JEAN M. LOVATI

D e POSITORY financial institutions are able to
exist because of certain efficiencies which allow them
to provide credit to borrowers at lower rates and higher
net returns to depositors than would be available
without such intermediaries.1 These efficiencies, com­
bined with nationally mandated priorities concerning
the roles of these institutions in society, have pro­
duced institutions which are specialized in scope.
Despite some efforts to maintain this specialization,
financial institutions are forming a new framework
within which to operate. By creating and reacting to
competitive challenges, financial institutions are break­
ing away from their specialized roles and successfully
altering traditional distinctions.

CHANGES IN ASSET COMPETITION
Response of Thrifts to Rising Interest Rates
Most depository financial institutions are subject to
regulatory ceilings on the rates they are allowed to
offer to attract funds. In general, these ceilings pose
few problems to the institutions as long as the ceiling
rates remain competitive with market rates. However,
during periods of rising interest rates, short-term
money market rates rise above the interest rate ceil­
ings imposed on these institutions.
Because of their more diverse and more stable
source of funds, commercial banks are not as seriously
affected as “thrifts” by such an imbalance in relative
interest rates;2 being very specialized institutions,
thrifts suffer more acutely from deposit outflows,
called disintermediation, as market rates rise. When
other short-term interest rates become more attractive
than those which can be earned at the thrifts, de­
positors transfer their funds out of savings accounts
and into other instruments. Twice during the last eight
years, once in the second half of 1969 and again in
1This article focuses only on commercial banks, savings and
loan associations, mutual savings banks, and credit unions.
2Thrifts here include saving and loan associations and mutual
savings banks.

Digitized for Page 2
FRASER


1974, disintermediation put severe financial strain on
the operations of thrifts.
To complicate matters, thrifts further suffer from
problems relating to short-term financing of long-term
assets (mortgages). Since only a fraction of thrifts’
mortgage portfolios are replaced in any one year, the
average return on mortgages ( the major earning asset
of the institutions) typically does not rise fast enough
to match increases in short-term rates. At such times,
thrifts are caught in an earnings squeeze.
As these situations arise, thrift institutions increas­
ingly are being pressured to stabilize their deposit
sources of funds. Thrifts, taking advantage of the
current level of technology, are attempting this sta­
bilization by offering new deposit services (which are
discussed in a following section).
At the same time, when high and variable interest
rates have forced many institutions to examine the
structure of their assets, thrifts are emphasizing
shorter-term assets in their portfolios.
Such assets typically have shorter maturities than
mortgages, yet still are within regulatory bounds. In­
vestments, such as U.S. Government and agency
securities and state and local government securities,
are growing in importance. Investment securities at
savings and loan associations (S&Ls) rose $23 billion
between 1970 and 1976, or at an 18 percent annual
rate, compared to an 11 percent rate between 1960
and 1970 (Table I ). These securities increased to 9
percent of assets in 1976 from 7 percent in 1970.
Investment in corporate and other securities by mu­
tual savings banks ( MSBs) increased at a 17 percent
rate over the six-year period, compared to a 10 per­
cent rate in the 1960-70 period, and rose from 16 to
25 percent of total assets between 1970 and 1976.
To shorten the average maturity of other assets,
some thrifts are emphasizing the development of con­
sumer loans, often forging new regulatory powers.
Mutual savings banks and state-chartered S&Ls in
Connecticut, Maine, and New York state have been
authorized to expand the type of consumer loans they

OCTOBER

FEDERAL RESERVE BANK OF ST. LOUIS

T a b le

1977

1

DISTRIBUTION OF ASSETS
A n n u a l Rates of C h a n g e

I9 6 0

1970

1976

($ m illio n s )

( $ m illio n s )

19601970

1970 1976

($ m illio n s )

C O M M E R C IA L B A N K S 1
$ 1 1 2 ,2 1 5

$ 1 7 7 ,1 2 8

2 8 ,6 9 4

7 3 ,0 5 3

1 4 9 ,2 7 6

9 .8

1 2 .7

C o n su m er Lo an s

2 6 ,3 7 7

6 6 ,0 0 6

1 1 8 ,0 5 1

9 .6

1 0 .2

U .S . T re a s u ry an d A g e n c y S e cu ritie s

6 0 ,4 2 3

6 1 ,6 1 7

1 3 6 ,7 2 9

0 .2

1 4 .2

S ta te & Lo cal S e cu ritie s

1 7 ,3 3 7

6 9 ,3 9 0

1 0 4 ,3 7 4

1 4 .9

7 .0

O th e r A ssets

8 0 ,3 6 0

1 9 4 ,0 7 0

31 8 ,4 6 2

9 .2

8 .6

2 5 6 ,3 2 3

5 7 6 ,3 5 1

1 ,0 0 4 ,0 2 0

8 .4

9 .7

$ 6 0 ,0 7 0

$ 1 5 0 ,3 3 1

$ 3 2 3 ,1 3 0

TO TAL

1 0 .0 %

7 .9 %

$ 4 3 ,1 3 2

B u sin ess Loans
M o rtg a g e s

S A V IN G S & L O A N A S S O C IA T IO N S
M o rtg ag e s

9 .6 %

1 3 .6 %

In ve stm e n t S e cu ritie s2

4 ,5 9 5

1 3 ,0 2 0

3 5 ,6 6 0

11.0

1 8 .3

O th e r A ssets

6 ,8 1 1

1 2 ,8 3 2

3 3 ,2 0 9

6 .5

1 7 .2

7 1 ,4 7 6

1 7 6 ,1 83

3 9 1 ,9 9 9

9 .4

1 4 .3

$ 2 6 ,7 0 2

$ 5 7 ,7 7 5

$ 8 1 ,6 3 0

6 ,2 4 3

3 ,1 5 1

5 ,8 4 0

-

6 .6

1 0 .8

TO TAL
M U T U A L S A V IN G S B A N K S
M o rtg ag e s
U .S . G o ve rn m e n t S e cu ritie s

8 .0 %

5 .9 %

672

197

2 ,4 1 7

- 1 1 .6

5 1 .9

C o rp o ra te a n d O th e r S e cu ritie s

5 ,0 7 6

1 2 ,8 7 6

3 3 ,7 9 3

9 .8

1 7 .5

O th e r A ssets

1 ,8 7 8

4 ,9 9 6

1 1 ,1 3 1

1 0 .3

1 4 .3

7 8 ,9 9 5

1 3 4 ,8 1 1

6 .9

9 .3

S ta te & Lo cal S e cu ritie s

TO TAL

4 0 ,5 7 1

C R E D IT U N IO N S
Lo a n s O u tsta n d in g
O th e r A sse ts
TO TA L

1 4 ,1 5 2

$ 3 4 ,2 9 3

1 2 .4 %

1 5 .9 %

1 ,2 5 7

3 ,7 9 8

1 0 ,5 4 2

1 1 .7

1 8 .6

5 ,6 5 9

1 7 ,9 5 0

4 4 ,8 3 5

1 2 .2

1 6 .5

$ 4 ,4 0 2

$

i n s u r e d banks.
2Includes cash.
S ources: B anking and M onetary Statistics 1941-1970; Federal Reserve Bulletins.

bylaws to permit membership for M SB s, and in M ay

term market rates. With variable rate mortgages, the
returns to the thrifts on their mortgage portfolios
adjust more rapidly to changes in the level of interest
rates than with traditional mortgages.

1976, membership was extended to S&Ls. As of A u ­
1977, 124 of the nation’s 469 savings banks were

Increased Competition from Credit Unions

make, which includes overdraft checking. Credit card
services also have been accorded increased impor­
tance b y thrifts. In 1974, Visa U .S .A . Inc. altered its

gust

offering bank credit card services.3
O n e of the most publicized changes in thrifts’ asset
structure is the variable rate hom e m ortgage ( V R M ),
which is being successfully marketed by some statechartered S&Ls in California and the M idw est.4 The
interest rate on a variable rate m ortgage is tied to
a cost of funds index such that the mortgage rate
adjusts, within certain bounds, to changes in short­

In addition to pressures from high and variable
interest rates, thrift institutions will be faced with
increased competition for mortgages from credit
unions (C U s). In the past, length of loan maturity at
credit unions was restricted to not more than 10 years,
effectively excluding CUs from the mortgage market.
Although state laws often permitted more latitude to
credit unions with respect to real estate loans, mort­
gage holdings of state-chartered CUs typically have
been small.

3Savings Bank Journal (August 1977), p. 40.
4In 1976, five California S&Ls together made about $6.4
billion in new mortgage loans. O f this amount, $4 billion, or
63 percent, were VRMs. These five associations represent
approximately 30 percent of the S&L industry in California.
American Banker, May 23, 1977.




This is likely to change as a result of legislation
recently passed by Congress which enables CUs to
supply mortgage loans within expanded size and ma­
turity ranges. As a result of legislation which was
Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER

1977

T a b le II

A COM PARISON OF SELECTED INTEREST RATES
N EW
C re d it
U n io n s 1

AU TO

LO A N S

A u to
C o m m ercial
F in an ce
Banks
C o m p an ie s

O TH ER C O N S U M E R G O O D S
F e d e ra l
C re d it
U n io n s1

C o m m ercial
B a n ks

C o n su m er
Fin a n ce
C o m p a n ies

1 9 .0 4 %

PERSO N AL
F e d e ra l
C re d it
U n io n s1

LO A N S

C o n su m er
C o m m e rcial
Fin a n ce
B an ks
C o m p an ie s

1973
Ja n u a ry

9 .9 8 %

1 0 .0 1 %

1 1 .8 9 %

1 1 .3 6 %

1 2 .4 6 %

F e b ru a ry

9 .9 8

1 0 .0 5

1 1 .8 6

1 1 .3 7

1 2 .5 1

M arch

9 .9 0

1 0 .0 4

1 1 .8 5

1 1 .3 3

1 2 .4 8

A p r il

9 .8 9

1 0 .0 4

1 1 .8 8

1 1 .3 0

1 2 .5 0

M ay

9 .9 0

1 0 .0 5

1 1 .9 1

1 1 .2 4

1 2 .4 8

Ju n e

1 0 .0 2

1 0 .0 8

1 1 .9 4

1 1 .2 6

1 2 .5 7

J u ly

1 0 .1 2

1 0 .1 0

1 2 .0 2

1 1 .2 7

1 2 .5 1

A u g u st

1 0 .0 6

1 0 .2 5

1 2 .1 3

1 1 .2 6

1 2 .6 6

S e p te m b e r

9 .9 9

1 0 .4 4

1 2 .2 8

1 1 .2 7

1 2 .6 7

O c to b e r

9 .9 7

1 0 .5 3

1 2 .3 4

1 1 .3 2

1 2 .8 0

N o vem b e r

1 0 .0 2

1 0 .4 9

1 2 .4 0

1 1 .4 3

1 2 .7 5

Decem ber

1 0 .2 2

1 0 .4 9

1 2 .4 2

1 1 .4 3

1 2 .8 6

1 2 .6 5 %
1 2 .7 6

1 1 .4 4

1 2 .7 1

1 1 .4 3

1 8 .9 2

1 1 .3 9 %
1 1 .4 0

1 2 .7 4

1 1.41

1 2 .7 8

1 1 .4 4

1 8 .8 8

1 1 .4 4

1 2 .7 5

1 1 .4 9

1 2 .9 6

2 0 .5 5

1 3 .0 2

1 1 .4 3

1 2 .9 4

1 1 .3 6

1 8 .7 7

2 0 .7 6

1 2 .8 4

1 1 .4 8

1 8 .6 9

2 0 .7 9

1 2 .7 8

1 1 .5 1

1 8 .9 3

2 1 .0 0 %

2 0 .5 2

1 3 .1 2

2 0 .6 5

1974
Ja n u a ry

1 0 .2 0

1 0 .5 5

1 2 .3 9

1 1 .4 1

1 2 .7 8

F e b ru a ry

1 0 .2 7

1 0 .5 3

1 2 .3 3

1 1 .3 8

1 2 .8 2

M arch

1 0 .0 6

1 0 .5 0

1 2 .2 9

1 1 .2 3

1 2 .8 2

A p r il

1 0 .0 0

1 0 .5 1

1 2 .2 8

1 1.31

1 2 .8 1

M ay

1 0 .1 7

1 0 .6 3

1 2 .3 6

1 1.31

1 2 .8 8

Ju n e

1 0 .2 3

1 0 .8 1

1 2 .5 0

1 1 .4 0

1 0 .3 1

1 0 .9 4

1 2 .5 8

1 1 .3 9

1 3 .1 4

A u g u st

1 0 .1 9

1 1 .1 5

1 2 .6 7

1 1 .2 5

13.1 1

Se p tem b e r

1 0 .3 9

11 .3 1

1 2 .8 4

1 1 .2 6

1 3 .2 0

O c to b e r

1 0 .4 4

1 1 .5 3

1 2 .9 7

1 1 .2 4

1 3 .2 8

N o vem b e r

1 0 .4 5

1 1 .5 7

1 3 .0 6

1 1 .3 9

1 3 .1 6

D ecem ber

1 0 .3 4

1 1 .6 2

1 3 .1 0

1 1 .4 6

1 0 .2 9

11 .6 1

1 3 .0 8

1 1.51

1 3 .2 8

F e b ru a ry

1 0 .4 5

1 1.51

1 3 .0 7

1 1 .5 5

M arch

1 0 .4 8

1 1 .4 6

1 3 .0 7

1 1 .4 8

1 3 .0 7

1 0 .6 6

1 1 .4 4

1 3 .0 7

1 1 .6 0

M ay

1 0 .7 7

1 1 .3 9

1 3 .0 9

1 1 .6 7

13.1 1

1 0 .8 6

1 1 .2 6

13.1 2

1 1 .6 3

1 3 .0 4
1 3 .0 0

1 1 .2 3

1 3 .1 0

1 3 .1 0

1 9 .4 9

1 1 .2 8

2 0 .5 7

1 3 .4 2

1 1 .2 9

1 3 .4 1

2 0 .5 7

1 3 .4 5

1 1 .4 4

1 9 .3 0

2 0 .6 8

1 3 .2 0

1 1 .2 3

1 3 .2 2

Ju n e

1 9 .2 4

1 3 .2 0

A p r il

1 1 .1 6

1 1 .3 1

1 8 .9 0

1 3 .2 7

Ja n u a ry

1 2 .9 6
1 3 .0 2

1 1 .1 5

1 8 .6 9

1 1 .3 7
1 1 .3 4

1 3 .0 1

J u ly

1 8 .9 0

1 3 .6 0

1 1 .6 0

1 3 .4 7

1 1 .5 6

2 0 .7 8
2 0 .9 3

1 3 .6 0

2 1 .1 1

1975

J u ly

10 .7 1

1 1 .3 0

1 3 .0 9

1 1 .5 6

1 3 .1 3

A u g u st

1 0 .5 9

1 1.31

1 3 .1 0

1 1 .5 2

10 .5 1

1 1 .3 3

1 3 .1 8

1 1 .5 2

1 3 .0 6

O cto b e r

1 0 .6 2

1 1 .2 4

1 3 .1 5

1 1 .6 4

1 0 .5 8

1 1 .2 4

1 3 .1 7

1 1 .6 5

1 2 .9 6

Decem ber

1 0 .6 1

1 1 .2 5

1 3 .1 9

1 1 .7 1

1 1 .5 0

1 3 .4 0

13.1 1

1 1 .5 7

1 3 .4 1

1 1 .5 0

1 3 .4 9

1 1 .5 5

1 3 .4 1

1 1 .6 4

1 3 .4 0
1 3 .4 6

1 1 .5 9

1 3 .4 0

1 1 .5 9

1 3 .2 4

1 1 .5 6

1 3 .1 3

1 1 .4 8

2 0 .9 7

1 3 .3 8

1 1 .6 1

1 9 .6 6

2 0 .7 2

1 3 .3 7

1 1 .6 8

1 9 .6 9

2 0 .8 6

1 3 .4 0

1 1 .5 5

1 9 .8 7

2 1 .0 9

1 3 .5 5

1 1 .5 7

1 9 .6 3

1 3 .0 0

N o vem b e r

1 3 .6 0
1 3 .4 4

1 1 .5 2

2 0 .0 0

1 3 .0 5

Se p tem b e r

1 1 .5 2
1 1 .4 8

1 9 .8 0

2 1 .1 4

1 3 .1 6

2 1 .0 9

1976
Ja n u a ry

1 0 .6 8

1 1 .2 1

1 3 .1 8

1 1 .6 8

1 3 .1 4

F e b ru a ry

10 .8 1

1 1 .1 8

1 3 .1 4

1 1 .6 5

1 3 .0 2

M arch

1 0 .7 3

1 1 .1 3

1 3 .1 3

1 1.61

1 3 .0 2

A p r il

1 0 .6 1

1 1 .0 8

1 3 .1 3

1 1 .5 9

1 2 .9 5

M ay

1 0 .5 9

1 1.00

1 3 .1 5

1 1.61

1 2 .9 6

Ju n e

1 0 .6 5

1 1 .0 2

1 3 .1 7

1 1 .5 9

1 2 .9 9

J u ly

1 0 .6 8

1 1 .0 6

1 3 .1 6

1 1 .6 0

1 3 .0 2

A u g u st

1 0 .6 8

1 1 .0 7

1 3 .1 8

1 1 .5 6

1 3 .0 2

S e p tem b e r

1 0 .7 3

1 1 .0 7

1 3 .2 1

1 1 .5 2

1 3 .0 8

O c to b e r

1 0 .8 7

1 1 .0 4

1 3 .2 0

1 1 .5 2

1 3 .0 3

N o vem ber

1 0 .8 7

1 1 .0 2

1 3 .2 2

1 1 .5 5

1 3 .0 6

D ecem b er

1 0 .8 6

1 1 .0 2

1 3 .2 1

1 1 .6 1

1 2 .9 7

1 9 .5 8

1 1 .4 6

1 3 .2 7

1 1 .5 0

1 3 .3 2

1 1 .5 5

1 9 .3 7

1 3 .3 8
1 3 .3 1

2 0 .9 3

1 3 .4 0

1 1 .4 3
1 9 .5 7

1 1 .5 0
1 1 .4 2

1 9 .5 1

2 1 .1 3

1 3 .2 6

1 1 .4 4

1 3 .4 0

1 1 .5 2

2 0 .8 6

1 3 .3 1

2 1 .2 3

1Credit union rates are centered 3 m onth m oving averages o f weighted interest rates.
Sources: Credit union rates are from N ational Credit U nion A dm inistration. Other rates are from Board o f G overnors o f the Federal Reserve
System.


Page 4


FEDERAL RESERVE BANK OF ST. LOUIS

formally passed in April 1977, CUs are able to make
mortgages with maturities up to 30 years and home
improvement or mobile home loans with maturities up
to 15 years.

Consumer Loan Market
While credit unions are recent competitive addi­
tions to the mortgage market, they are mature and
effective competitors with commercial banks in the
consumer loan market.5 Credit unions, with $34 billion
in consumer loans in 1976, represent the third largest
consumer instalment lender in the country and hold
over 16 percent of the 1976 dollar volume of consumer
instalment loans outstanding. Over 76 percent of
credit union assets is devoted to consumer loans.
Commercial banks, with $118 billion devoted to con­
sumer loans, hold 48 percent of the total outstanding
consumer instalment debt.
From 1960 to 1970, consumer loans at CUs increased
strongly at a 12 percent annual rate. Since 1970,
growth has been even more rapid; CU loans have
more than doubled between 1970 and 1976, increasing
at an average annual rate of 16 percent. The con­
sumer loan business at commercial banks has not
grown as fast. Between 1960 and 1970, these loans
grew at an annual rate of 9.6 percent, slightly slower,
on average, than in the subsequent six years.
The growth of CU loans, and therefore their assets,
has been aided by favorable loan rates compared to
those of commercial banks and other lending institu­
tions (See Table II). Credit unions are able to profit­
ably offer lower instalment loan rates because they
experience lower fixed costs on loans. Several factors
contribute to lower fixed costs, including lower costs
in assembling information on loan applicants and
collecting payments. Regulations governing CUs re­
quire a common bond among members before organ­
ization of a credit union is permitted. This common
bond often provides an established source of informa­
tion on members and facilitates the payment of the
loan through payroll deductions, for example. More­
over, because of the subsidies granted them, credit
unions often realize free office space and clerical help,
pay no Federal taxes and generally pay little state
tax, thus escaping many expenses other institutions
face.6
Com m ercial banks, finance companies, and credit unions
comprise the three largest sources of consumer loans. As
mentioned above, S&Ls' and MSBs are not yet strong com­
petitors in this market.
•
’Peggy Brockschmidt, “ Credit Union Growth in Perspective,”
Federal Reserve Bank of Kansas City Monthly Review
(February 1977), pp. 3-13.




OCTOBER

1977

During December 1974, for example, direct loans
on new cars carried an interest rate of 11.62 percent
at commercial banks, while at credit unions such
loans carried a rate of 10.34 percent. Personal loans at
commercial banks were made at an interest rate of
13.60 percent at that time; at CUs they were made at
an 11.56 percent rate.7 (Table II) Since credit union
rates already include such factors as the cost of credit
life insurance, the basic rates would be even lower
than those indicated here.
Although the difference in rates charged has not
been so great since 1974, it is nevertheless noteworthy.
During 1976, interest rates for new auto loans at CUs
varied between 15 and 53 basis points below those at
commercial banks. Personal loans at credit unions fluc­
tuated between 157 and 198 basis points below per­
sonal loan rates at commercial banks.
As a result, credit unions are advancing their posi­
tion in the consumer loan market. Based on instalment
credit outstanding, CUs held 13 percent of the total
credit outstanding in 1972 (15 percent of automobile
credit). In 1976, they held about 17 percent of total
credit outstanding (23 percent of automobile credit).
Commercial banks, on the other hand, have held a
fairly constant share of instalment credit, averaging
about 48 percent of the total. The share of automobile
credit held by commercial banks declined from 62
percent in 1972 to 58 percent in 1976.
Thus, CUs have found themselves in a favored posi­
tion relative to commercial banks in the consumer
loan market. This advantage, combined with favorable
interest rates at a time when the public has become
increasingly interest-rate conscious in the face of in­
flation, has propelled the growth of CUs. As a result,
credit unions are providing commercial banks with
intensifying competition for consumer loans. More­
over, as S&Ls and MSBs continue to move to shorten
the maturity of their asset portfolios, thrifts will be­
come more effective competitors in this market as
well.
Future competition in this market is likely to focus
on credit card services. Membership rules of Visa
U.S.A. Inc. were extended in 1976 to include credit
unions. Recently, Visa approved 32 credit unions as
card-issuing members, 22 of which participate in a
pilot program sponsored by Credit Union National
7Interest rates for credit unions are from the National Credit
Union Administration and are centered three-month moving
averages of weighted interest rates; those for commercial
banks are from the Board of Governors of the Federal Re­
serve System.
Page 5

FEDERAL RESERVE BANK OF ST. LOUIS

T a b le

OCTOBER

1977

III

SELECTED REGULATORY AND INSTITUTIONAL CHAN GES
D A TE

C O M M E R C IA L B A N K S

O T H ER

F IN A N C IA L

IN S T IT U T IO N S

S e p te m b e r 1 9 7 0

S a v in g s a n d lo an a ss o c ia tio n s (S & Ls) a re perm itted
to m ake
p re a u th o rize d n o n n e g o tia b le tra n s fe rs
from
s a v in g s
acco u n ts
fo r
h o u se h o ld -re la te d
e xp e n s e s .

Ju n e 1972

M a ssa ch u se tts m utual s a v in g s b a n k s (M S B s ) b eg in
to o ffe r N e g o tia b le O rd e r of W it h d r a w a l (N O W )
acco u n ts.

S e p te m b e r 1 9 7 2

N e w H a m p sh ire M SBs b eg in to o ffe r N O W acco u n ts.

Ja n u a ry 197 4

A ll d e p o sito ry in stitu tio n s in M a ssa ch u se tts an d N e w H a m p sh ire (e x c e p t cre d it u n io n s ) a re a u th o riz e d by
C o n g re s sio n a l a ctio n s to o ffe r N O W a cco u n ts. T h is a ctio n lim ite d in te re s t-b e a rin g n e g o tia b le d e p o sits to th ese
tw o s ta te s . T h u s, in te re s t-b e a rin g n e g o tia b le tra n s fe r acco u n ts a t b a n k s b eg in on a n e x p e rim e n ta l b a s is .

Ja n u a ry 197 4

N e b ra s k a S&L b eg in s P o in t-o f-S a le
(P O S ) e le c ­
tro n ic fu n d s tra n s fe r system . F irst F e d e ra l S&L of
Lin c o ln , N e b ra s k a p la ce s an e le ctro n ic te rm in a l in a
" H in k y D in k y S u p e r m a r k e t." Th e te rm in a l a llo w s
custom ers o f the S&L to p a y fo r g ro c e rie s , m ake
d e p o sits to , o r w ith d ra w a ls from th e ir sa v in g s
acco u n ts.

A p r il 1 9 7 4

M ay 1974

S ta te o f W a s h in g to n en acts le g is la tio n w h ich a llo w s sta te -ch a rte re d co m m e rcial b a n k s , M S B s, S&Ls to e sta b lish
a n y num b er of a u to m ate d f a c ilit ie s th ro u gh ou t the s ta te , p ro vid e d th a t th ose o p e ra tin g th ese fa c ilit ie s sh a re the
cost an d o p e ra tio n s o f the te rm in a ls w h en a s k e d to do so b y the state a u th o ritie s . C o m m e rcia l b a n k s a re
re q u ire d to sh a re fa c ilit ie s w ith o th e r co m m ercial b a n k s an d h a ve the o p tio n o f s h a rin g them w ith th rift
in s titu tio n s . T h rifts a re p erm itte d , but not re q u ire d to s h a re f a c ilit ie s .
E xp e rim e n ta l

2 4 -h o u r e le ctro n ic f a c ilit y o p e n s on
a s h a re d b a s is b y 15 W a s h in g to n M SBs an d S&Ls.
N ew
Y o rk sta te b a n k
re g u la tio n
p erm its M SB
to
o ffe r
n o n in te re st
b e a rin g
NOW
accou n ts
(N IN O W s ).

Ju n e 1 9 7 4

A u g u st 1 9 7 4

S e p tem b e r 1 9 7 4

D ecem b er 1 9 7 4

Ja n u a ry 197 5

A d m in is tra to r o f the N a tio n a l C re d it U n io n A d m in ­
istra tio n g ra n ts 3 F e d e ra l cre d it u n io n s te m p o ra ry
a u th o rity to b eg in o ffe rin g sh a re d ra fts . T h e se 3
cre d it u n io n s w e re jo in e d b y 2 sta te cre d it u n io n s
in a 6-m onth p ilo t p ro g ram
(la u n c h e d O c to b e r
1 9 7 4 .)
P e n n s y lv a n ia

C o m p tro lle r o f the C u rre n c y 's in te rp re tiv e ru lin g
p erm its n a tio n a l b a n k s to o p e ra te C u sto m e r-B a n k
C o m m u nicatio n T e rm in a ls ( C B C T s ) .

C a lifo r n ia

A tto rn e y G e n e ra l ru les M SB m ay le ­
g a lly o ffe r a form o f n e g o tia b le o rd e r
d ra w a l accou n t.

of

w ith ­

F e d e ra l Hom e Loan B a n k B o a rd (F H L B B ) a d o p ts a
re g u la tio n w h ich g ive s d e p o sito rs tra v e lin g more
th a n 5 0 m iles from th e ir hom es a ccess to th e ir
s a v in g s acco u n t b a la n c e s thro ugh a n y o th e r f e d ­
e ra lly - in s u re d S&L b y m ean s o f a T ra v e le rs C o n v e n ­
ien ce W it h d r a w a l (w ir e o r te le p h o n e a c c e s s ).
s ta te -ch a rte re d S&L o ffe rs V a ria b le
M o rtg a g e s (V R M s ).

Rate

M in n e so ta M SB in tro d u ces P a y -B y -P h o n e s e rv ice .

Ju n e 1 9 7 5


http://fraser.stlouisfed.org/
Page 6
Federal Reserve Bank of St. Louis

FHLBB
j j

A u th o rize s F e d e ra l S&Ls to o ffe r th e ir custom ers
b ill- p a y in g se rv ice from in te re s t-b e a rin g sav; ng S acco u n ts.

2 ).

M ay 1975

Co m m ercial b a n k s a re a u th o rize d to m ake tra n s fe rs
from a custom er s s a v in g s acco u n t to a d em an d
d e p o sit account upon te le p h o n e o rd e r from th e
custom er.

A p r il 1 9 7 5

a d o p ts

tw o

re g u la tio n s :

A llo w s F e d e ra l S&L se rv ice c o rp o ra tio n s an d
co m p a n ies to m ake co nsum er lo a n s (lim ite d to
sta te s w h ich a llo w such a c tiv ity a n d su b je ct to
state r e s t r ic t io n s ).

C B C T o p e ra te d e x c lu s iv e ly b y a n a tio n a l b a n k is
su b je cte d to a 5 0 -m ile g e o g ra p h ic a l restrictio n
u n less C B C T is a v a ila b le to be s h a re d w ith on e or
m ore d e p o sit in s titu tio n s . A n a tio n a l b a n k m a y use
a C B C T e s ta b lis h e d an d o p e ra te d b y som e oth e r
in stitu tio n a n d m a y p a rtic ip a te in a sta te w id e EFTS
system .
O re g o n g o ve rn o r sig n s in to la w le g is la tio n w h ich
a llo w s the sta te 's o n ly M SB to o ffe r ch eckin g
a cco u n ts.

OCTOBER 1977

FEDERAL RESERVE BANK OF ST. LOUIS

SELECTED REGULATORY AND INSTITUTIONAL CH A N G ES (Continued)
DATE

C O M M E R C IA L B A N K S

Ju n e 3 1 , 1 9 7 5

U .S . D istrict C o u rt Ju d g e Rob inson ru le s C B C Ts
a u th o rize d fo r n a tio n a l b a n k s b y the C o m p tro lle r
o f th e C u rre n c y a re ille g a l a n d must be shut d o w n .
(A b o u t 7 2 C B C T s, o w n e d b y n a tio n a l b a n k s , h ave
been in s ta lle d in v a rio u s p a rts o f the co u n try under
the in te rp re tiv e ru lin g issu ed b y C o m p tro lle r D e ­
cem ber 1 2 , 1 9 7 4 .) R o b in so n 's d ecisio n d ire c tly a t ­
tack s th e D ecem b er 1 2 , 1 9 7 4 in te rp re ta tio n , c a llin g
the te rm in a ls b ra n c h e s , both a s d efin e d b y th e U .S .
Su prem e C o u rt in its 1 9 6 9 P la n t C it y ca se an d as
co n stru ed b y C o n g re ss w h en it p a sse d the M cFadd en
A c t in 1 9 2 8 .

Se p tem b e r 1 9 7 5

C o m m e rcial b a n k s a re a u th o riz e d to m ake p re ­
a u th o riz e d n o n n e g o tia b le tra n s fe rs from a cu s­
to m e r’s sa v in g acco u nt fo r a n y p u rp o se . P re v io u sly
(s in c e
1 9 6 2 ) , such
tra n s fe rs
w ere
lim ite d
to
m o rtg a g e -re la te d p a ym e n ts.

O T H ER F IN A N C IA L IN S T IT U T IO N S

S ta te le g isla tio n p erm its sta te -ch a rte re d th rift in s ti­
tu tio n s in M a in e to o ffe r p e rs o n a l ch eckin g accou n ts.

O cto b e r 1 9 7 5

N o vem b e r 1 9 7 5

M a ssa ch u se tts M SB in tro d u ces VRM p ro g ra m .

F e d e ra l Reserve am e n d s d e fin itio n o f s a v in g s d e ­
p o sits in R e g u latio n s D a n d Q to p erm it b u sin e ss
sa v in g s acc o u n ts, up to $ 1 5 0 ,0 0 0 , a t m em ber
b an ks.
S ta te le g is la tio n p erm its th rift in stitu tio n s in
necticut to o ffe r p e rso n a l ch e ckin g acco u n ts.

D ecem b er 1 9 7 5

Con­

W h ile th e a u th o rity to o ffe r sh a re d ra fts w a s still
o ffic ia lly te m p o ra ry , a d d itio n a l cre d it u n ion s b eg in
to o ffe r sh a re d ra ft accou n ts fo llo w in g the end o f
th e 6-m onth p ilo t p ro g ram in itia te d in F a ll 1 9 7 4 .
A s o f th e y e a r e n d , 2 2 2 cre d it u n io n s (ro u g h ly
1 p e rce n t) in 4 4 sta te s h a v e b een ap p ro v e d to
o ffe r sh a re d ra fts to th e ir sh a re h o ld e rs .
F e d e ra l R e se rve System a d o p ts a p o lic y fo r a u to ­
m ated check c le a rin g system s (A C H s ) to o ffe r th e ir
se rv ice s on a n o n d iscrim in a to ry b a s is to a ll typ e s
o f fin a n c ia l in stitu tio n s.

Ja n u a ry 1 9 7 6

Illin o is S&Ls b eg in
N O W acco u n ts.

o ffe rin g

n o n in te re st

b e a rin g

C o n g re ss a u th o rize s a ll d e p o sito ry in stitu tio n s in
N e w E n g la n d to o ffe r in te re s t-p a y in g N O W accounts
(e ffe c tiv e M arch 1 , 1 9 7 6 ) .

F e b ru a ry 1 9 7 6

M ay 1976

U .S . Co u rt o f A p p e a ls fo r the D istrict o f C o lu m b ia
u p h o ld s e a r lie r ru lin g b y the U .S . D istrict C o u rt fo r
the D istrict of C o lu m b ia th a t n a tio n a l b a n k s ’ C B C Ts
a re b ra n ch e s un der th e M cFad d e n A c t.

O c to b e r 4 , 1 9 7 6

U .S . S u p re m e C o u rt lets stan d ru lin g th a t C B C T s a re
b a n k b ra n c h e s.

F e b ru a ry 1 4 , 1 9 7 7

N e w Y o rk g o ve rn o r sig n s le g is la tio n p erm ittin g
ch e ckin g a cc o u n ts, in clu d in g o v e r- d ra ft p riv ile g e s , at
sta te -ch a rte re d M SBs a n d S&Ls.

Io w a s ta te w id e e le ctro n ic b a n k in g system b eg in s
o p e ra tin g an d re p rese n ts th e n a tio n s first sh a re d
sta te w id e n e tw o rk , e n co m p assin g a b ro a d ro n g e o f
la rg e a n d sm all b a n k s in Io w a . (A t la s t co u n t, the
system h ad 3 3 p a rtic ip a tin g b a n k s ; 9 2 m erch an t
te rm in a ls o p e ra te th ro u g h a sw itch o r ce n tra l
c o m p u te r).

A p r il 1 9 7 7




A ll but 15 of th e n a t io n ’s 4 7 0 M SBs h ave e ith e r
N O W acc o u n ts, tra d itio n a l ch e ckin g acco u n ts, o r a
co m b in a tio n o f the tw o .
Le g isla tio n e n a cte d to e x p a n d cre d it union le n d in g
a u th o rity , in clu d in g a u th o rity to m ake 3 0 - y e a r
m o rtg age lo a n s .

Page 7

FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER

Association. As CUs are given endorsement to apply
for Visa credit, they undoubtedly will improve their
competitive position. Federal credit unions are lim­
ited by regulation to charging no more than one
percent per month on the unpaid balance of a loan.
Under present conditions, this regulation would limit
interest rates on credit card services to 12 percent per
year, while many banks typically are charging 18
percent annually.

CHANGES IN LIABILITY COMPETITION
Deposit liabilities of financial institutions are also
undergoing change, primarily surrounding the distinc­
tion between demand and savings deposits. Important
institutional changes have occurred since 1970 which
have allowed more vigorous competition for deposits
among institutions (See Table III for a listing of
some of these developments). Combined with various
maximum rates of interest allowed financial institu­
tions, these changes will likely translate into new posi­
tions in the competition for deposits (See Table IV ).
Some thrifts were permitted in 1970 to make pre­
authorized nonnegotiable transfers from savings ac­
counts for household-related expenditures. However,
the major impetus for change occurred in 1972 when
MSBs in Connecticut and New Hampshire began to
offer Negotiable Order of Withdrawal (N O W ) ac­
counts. These accounts are essentially interest-bearing
savings accounts on which checks can be written.
While, at first, introduction of NOW accounts was
limited to these two states, authorization for NOW
accounts was expanded in 1976 to include MSBs, S&Ls,
and commercial banks in all New England states
(Table V ).8 Moreover, expanded authority for NOW
accounts is currently being proposed to include all
states.9
At credit unions, similar services are called “share
draft accounts.” Introduced at five credit unions in
1974, share drafts are now available at more than 940
CUs in 46 states.1 These accounts, offered through a
0
Credit Union National Association program, permit
8On January 1, 1974, total NOW account balances in Massa­
chusetts amounted to $1.38 million. Three years later, in
January 1977, N O W balances totalled $1.47 billion. During
the same time period, NOWs in New Hampshire increased
from $5 million to $186 million.

1977

payable-through drafts which are drawn on the mem­
bers’ interest-bearing share accounts. Share drafts
are processed through the credit union’s account at
a commercial bank.
In addition to NOW accounts, savings and loan
associations have also initiated several services which
allow them to compete for demand deposit business
that has gone, traditionally, to commercial banks. Pri­
marily through the use of electronic services, these
thrifts have access to another source of deposits, one
which they may be able to more successfully retain
than other sources during business cycle fluctuations.
At the same time, these services allow thrift depositors
to use their savings accounts more like the transaction
accounts of demand deposits.
Through electronic terminals, called remote service
units (RSU s), depositors of thrift institutions are
able to perform within seconds many of the transac­
tions formerly conducted through demand deposit
accounts, such as withdrawing cash, making charge
account and loan payments, and transferring funds
from one account to another.1 One basic advantage
1
of these units is that they frequently are located in
such convenient places as supermarkets, airports, and
factories. Moreover, S&Ls as well as MSBs have in­
troduced telephone transfers to third parties and auto­
matic payment services which allow their customers
to more easily utilize their savings accounts for trans­
actions purposes.1As far as customers are concerned, the new deposit
services at nonbank institutions are little different
from demand deposit accounts of commercial banks,
except in one important respect: typically, nonbank
deposit services explicitly pay interest, whereas those
of commercial banks do not.1 Commercial banks
3
have been prohibited since 1933 from explicitly pay­
ing interest on demand deposits. Savings deposit ac­
counts at S&Ls and MSBs, on the other hand, are
permitted by law to bear interest which is one-quarter
of one percent higher than similar accounts at com­
mercial banks.1 Thus, not only have thrifts begun to
4
11Between January 1974 and December 1976, 112 applica­
tions for remote service units have been approved by the
Federal Home Loan Bank Board. Federal Home Loan Bank
Board Journal (April 1977), p. 39.
’ -’Fourteen savings banks in New York, Connecticut, Maine,
New Jersey, Pennsylvania, and Washington offer pay-byphone services (Table V I).

''Some institutions, mainly state-chartered thrifts, have sur­
passed the initial offering of N O W accounts. Savings banks in
New England and five other states are authorized to offer
demand deposit accounts.

13In a few areas, nonbank deposit accounts called NonInterest
Negotiable
Order of
Withdrawal
accounts,
(N IN O W s) do not bear interest.

10About 200,000 CU members wrote
million in share drafts during 1976.

14Current ceilings on passbook accounts at commercial banks
and thrifts are 5 and 5Vi percent, respectively.


Page 8


approximately

$800

OCTOBER 1977

FEDERAL RESERVE BANK OF ST. LOUIS

T a b le IV

COM POSITION O F DEPOSITS
A n n u a l R ates of C h a n g e

End of Period

19601970

19701976

1960

1970

1976

(m illio n s )

(m illio n s )

(m illio n s )

$ 1 5 5 ,3 8 6

$ 2 4 6 ,1 6 8

$ 3 3 2 ,2 8 3

7 3 ,0 1 5

2 3 3 ,0 0 6

4 9 2 ,7 1 9

1 2 .3

1 3 .3

2 2 8 ,4 0 1

4 7 9 ,1 7 4

8 2 5 ,0 0 2

7 .7

9 .5

$ 6 2 ,1 4 2

$ 1 4 6 ,4 0 4

C O M M E R C IA L B A N K S 1
D em and
Tim e & S a v in g
NOW

5 .1 %

$ 1 ,2 6 5

TO TA L
S A V IN G S & L O A N

4 .7 %

A S S O C IA T IO N S

S a v in g s C a p ito l

$ 3 3 6 ,0 3 0

9 .0 %

1 4 .9 %

$ 1 2 1 ,9 6 1

7 .0 %

9 .4 %

1 80

NOW
M U T U A L S A V IN G S B A N K S
Tim e an d S a v in g s

$ 3 6 ,0 8 6

$ 7 1 ,1 5 7

NOW

580

O th e r

916

5.1

1 3 .7

1 2 2 ,8 7 7

423

257

7 .0

9 .4

493

Dem and
TO TA L

7 1 ,5 8 0

3 6 ,3 4 3

C R E D IT U N IO N S
M e m b e rs' S a v in g s

$

4 ,9 8 1

$

$ 3 8 ,9 6 8

1 5 ,4 8 6

S h a re D rafts

1 2 .0 %

1 6 .6 %

803

‘ Insured banks
S ources: B anking and M onetary Statistics 1941-1970; Federal Reserve B ulletin s; N ational F a ct B ook o f Mutual Savings Banking, 1971, 1975,
1977 ; Statistical A b stra ct o f the U nited States, 1974.

compete with commercial banks for demand deposits,
but by servicing their “demand deposits” from savings
accounts, thrifts generally seem to be making the
most of their interest rate advantage.
Credit unions are in an even better competitive
position. The maximum rate permitted members’ sav­
ings accounts at CUs is 7 percent. Although not all
CUs pay the highest rate, about 50 percent paid
between 6 and 7 percent in 1975, significantly higher
than the ceiling rates at other institutions. This favor­
able rate differential for CUs not only appeals to
current and potential members, but also allows credit
unions to retain funds when other institutions are
suffering from disintermediation.
By increasing the convenience of the services which
compete with demand deposits, nonbank institutions
effectively have decreased the transactions cost to
customers of their accounts. Coupled with the higher
maximum interest rates allowed these institutions,
their deposit growth rates generally have been
stronger than those of commercial banks. Since 1970,
savings of credit union members have increased at a
17 percent annual rate, and in the last two years,
have grown at about a 19 percent rate (Table IV ).
Total deposits of commercial banks, on the other
hand, grew at nearly a 10 percent rate in the period




between 1970 and 1976, up from the 8 percent rate
which prevailed between 1960 and 1970. Savings
capital of S&Ls and deposits of MSBs grew at annual
rates of 9 and 7 percent, respectively, between 1960
and 1970. The latter institutions maintained deposit
growth rates of 15 and 9 percent, respectively, since
1970.
While many new demand deposit services began in
1974, data on such services tend to be incomplete,
making comparisons difficult. However, NOW account
data are the most complete, and available across
institutions. These data indicate that the dollar vol­
ume of NOW accounts at commercial banks in­
creased from $65 million in 1974 to $1.3 billion by
the end of 1976. NOWs at S&Ls and MSBs have also
shown intense growth, though not as strong as at
commercial banks. Between 1974 and 1976, NOWs
at thrift institutions increased $146 and $367 million,
respectively (Table V ). In the same two-year period,
share draft balances at CUs grew from $375,000 to
$803 million.
In an era of rising prices, people have become more
aware of the cost of holding money. More money
holders are seeking methods of reducing noninterestbearing claims in favor of highly liquid earning assets
that can either be easily transformed into payments
Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER 1977

T a b le V

N O W Account Activity in New England
C o m m e rcial B an ks

M onth Ended

N um b er of
B a n k s o ffe rin g
NOWs

O u ts ta n d in g
b a la n c e s
( $ th o u sa n d s)

M u tu a l S a v in g s B an ks
N u m b er o f M SBs
o ffe rin g N O W s

S a v in g s a n d Loan A sso cia tio n s

O u ts ta n d in g
b a la n ce s
( $ th o u s a n d s )

S e p te m b e r 1 9 7 2 1

23

D ecem b er 1 9 7 2 2

59
90

O u ts ta n d in g
b a la n c e s
( $ th o u s a n d s !

$ 3 3 ,6 6 6

4 5 ,2 7 2

D ecem b er 1 9 7 3 2

N u m b er o f S&Ls
o ffe rin g N O W s

1 4 3 ,2 5 4

$

1 1 ,0 9 4

D ecem b er 1 9 7 4 2

63

6 5 ,2 4 9

151

2 1 3 ,6 6 1

81

D ecem b er 1 9 7 5 2

134

3 5 8 ,9 4 0

175

3 8 6 ,5 6 0

121

9 3 ,7 5 6

D ecem b er 1 9 7 6

242

1 ,2 6 5 ,2 6 2

248

5 8 0 ,5 9 6

159

1 7 9 ,6 2 2

Ju n e 1 9 7 7

247

1 ,5 0 1 ,1 3 5

250

6 6 1 ,7 6 0

1 58

2 1 3 ,4 9 8

$

1Massachusetts only.
M assachu setts and N ew H am pshire only.
S ou rce: Federal Reserve Bank o f Boston.

media or used indirectly for payments. The above
figures tend to indicate the extent to which these
preferences are influencing relative rates of deposit
growth.

Communication Terminals (C B C T s), placement of
them has been limited and certainly more restrictive
than that of the similar Remote Service Units of sav­
ings and loan associations. The courts have judged
that CBCTs are branches as defined in the McFadden

IMPACT
In certain areas, new competition has prompted
commercial banks to retaliate in order to maintain or
regain their competitive position. In some cases, com­
mercial banks have been successful in initiating tele­
phone transfers and automatic payment services simi­
lar to those at nonbank institutions.15 Perhaps the
best example of a situation in which commercial
banks have been able to equalize competition is the
case of N O W accounts in New England. Initiating
N OW accounts in 1974, two years after their intro­
duction by MSBs, commercial banks have surpassed
savings banks in NOW balances and have about
equalled the number of savings banks offering the
accounts (Table V ) .1
8
In other cases, commercial banks have been less
successful. For example, although national banks have
initiated electronic terminals, called Customer Bank

T a b le V I

Selected Services Offered by Mutual Savings Banks
June 30, 1976
N u m b er
o f M u tu al
S a v in g s
Banks
A u to m a te d te lle r f a c ilitie s
C h e ck in g acco u n ts1
C lu b accounts
C o lla te r a l lo a n s
C re d it card s
E d u c a tio n a l lo a n s

16See Ralph C. Kimball, “ Recent Developments in the NOW
Account Experiment in New England” and Donald Basch,
“ The Diffusion of N O W Accounts in Massachusetts,” Fed­
eral Reserve Bank of Boston, New England Economic
Review (N ovem ber/Decem ber 1976), pp. 3-19 and pp.
20-30, respectively.


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Page 10
Federal Reserve Bank of St. Louis

1 2 .4 %
4 6 .7
8 6 .5
8 6 .3

79

1 6 .6

Home im p rovem en t lo an s
2 4 -h o u r cash d isp e n sin g
In d iv id u a l R etirem en t A cco u n ts1

376
447
48
379

7 9 .2
9 4 .1

M o n e y o rd ers
N O W accou n ts

455
254

9 5 .8
5 3 .5

P assb o o k lo an s

469

9 8 .7

P ay-b y-p h o n e2

14

2 .9

P a y ro ll d ed u ctio n s

281

5 9 .2

P e rso n al lo a n s 3

369

7 7 .7

51

1 0 .7

(in te re s t b e a r in g ) 1

P e rso n a l trust se rvice s

15One area in which commercial banks have been successful
in attaining an equal footing with S&Ls is for Individual
Retirement Accounts (IR A s) and Keogh plans. S&Ls offer
these accounts to savers at a 7.75 percent interest rate,
while commercial banks offered comparable accounts at a
maximum rate of 7.5 percent. Effective July 6, 1977, com­
mercial banks which are members of the Federal Reserve
System can introduce a new category of time deposit
accounts which are available for use as IRAs and Keogh
plans and pay a maximum rate of 7.75 percent.

59
222
4 11
410

P ercen t of
T o ta l

10.1
7 9 .8

7

1 .5

S a fe d e p o sit b o xe s

378

7 9 .6

S a v in g s

325

6 8 .4

P o in t-o f-sa le se rvice s
Bank

Life In su ra n c e

94

1 9 .8

119

2 5 .1

S e lf-e m p lo y e d retire m e n t
s a v in g s ( K e o g h ) 1

259

5 4 .5

T ra v e le rs checks

453

9 5 .4

S a v in g s p a ym e n t p lan
Sch oo l sa v in g s

T o ta l n u m b er o f m utual
s a v in g s b a n ks

475

1A s o f Decem ber 31, 1976
2A s o f June 1977
3Ineludes overd ra ft loans.
S ou rce: 1977 N ational F a ct B ook o f Mutual Savings Banking.

FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER 1977

Act of 1928, a severe competitive blow to commercial
banks. This ruling subjects placement of CBCTs to
state laws prohibiting or limiting branch banking by
commercial banks. S&Ls are not subject to any com­
parable ruling.

coming blurred, and with it, the distinction between
the institutions themselves.

Moreover, as more institutions pay interest on their
“checking accounts,” more pressure is placed on com­
mercial banks to pay interest on comparable accounts.
Legislation has been proposed which would allow all
financial institutions in the nation to offer NOWs, with
an identical ceiling rate.1 Legislation of this sort
7
would eliminate the interest rate differential on passbook/N O W accounts among institutions.

Commercial banks, savings and loan associations,
mutual savings banks, and credit unions perform
many similar functions. They accept the savings of
economic units and allocate them to borrowers. Since
1970, these institutions have been becoming similar in
more specific ways. Nonbank institutions are diversify­
ing and broadening the scope of their assets. S&Ls are
including shorter-term assets in their portfolios; MSBs
and CUs are devoting more assets to various types of
consumer loans. In terms of liabilities, demand deposit
accounts are no longer the exclusive domain of com­
mercial banks. All types of thrift institutions are per­
mitted some type of demand deposit services.

With one uniform interest rate, it is a short step to
complete elimination of all interest rate differentials.
Moreover, if nonbank institutions have formal access
to other sources of funds, regulators may argue that
the institutions no longer “require” the advantage
of the interest rate differential to maintain deposit
flows.
Whether or not such proposals pass, the innovations
which have occurred already have increased the num­
ber of alternative services available to consumers.
Consumers are now able to obtain larger mortgages at
CUs, a wider range of consumer services at MSBs, and
closer substitutes for checking accounts at S&Ls. More­
over, the quantity and variety of services offered at
each type of financial institution will probably con­
tinue to increase in the future.
Such changes are altering the focus of most financial
organizations. Having begun as basically specialized
institutions, they are now taking on a more diverse
character. The distinction between the asset and lia­
bility powers of bank and nonbank institutions is be­
17Credit unions have been included among such legisla­
tive packages for share drafts.




CONCLUSION

Thus, competition is intensifying among the institu­
tions and will likely provide them with incentives to
increase efficiency and reduce costs to customers in
the future. As a result, consumers have more alterna­
tives for “banking” services from which to choose. In
the process, asset and liability powers of the institu­
tions have yielded to equalizing forces. Begulations
and incentives for specialization, which maintained
the distinction among institutions, are being broken
down.
The traditional roles of nonbank financial institu­
tions are changing; their domain, once narrow, is now
much more extensive and similar to that of commer­
cial banks. However, there is likely to be some limit
to this process of financial institutions becoming more
similar. Given current trends, the extent o f specializa­
tion of the institutions is likely to be determined by
competitive forces as well as by public policy to
channel credit to specific uses.

The Early 1960s: A Guide to the Late 1970s
NORMAN N. BOWSHER

T

J ESSONS can be learned from a study of the past.
Future mistakes can be avoided, using the informa­
tion gained through analysis of the policy actions that
were taken and evaluating the resulting economic
performance. Similarly, for these periods when eco­
nomic performance was successful, an analysis of the
contributing forces provides some positive guidance
to policymakers. From an economic growth and sta­
bilization viewpoint, the four-year period from 1961
to 1965 was one of the most successful in our history.
Throughout the early 1960s, as in other periods of
economic expansion, the desires of the public for
rapid gains were strong. Policymakers sought to in­
crease economic welfare by additional stimulus. Taxes
were reduced, Government spending was increased,
and money growth was accelerated. Yet, the net
stimulus from policy actions was more moderate and
steadier than in other periods of economic expansion.
Although the economic policy actions which
evolved were not necessarily completely intended, in
retrospect it appears that they were appropriate. As
such, this earlier period can serve as a useful guide to
the present by analyzing the economy’s responses to
the chief causal forces in operation over this period.

Policy Actions and Other Causal Forces
Operating on the Econom y
The record of the early 1960s demonstrates the
strength of the private economy and its movements in

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Page 12
Federal Reserve Bank of St. Louis

the absence of shocks from outside forces. In part, the
lack of shocks was the result of fortuitous circum­
stances. Although there was apprehension caused by
the Berlin crisis, resulting in some precautionary
buildup of U.S. defenses, no outside force such as a
foreign war, an international commodity cartel, or
major adverse weather developments caused any ma­
terial constraints on supply or huge shifts in demand.
However, much of the credit for developments in
the early 1960s should probably go to Governmental
economic policies followed during that period. These
policies were both less restrictive and less stimulative
to the economy than those prevailing during most
other expansionary periods in our history.
Reliance was placed primarily on competition as a
means of regulating economic activity in the late
1950s and early 1960s. There were some Government
regulations, price guidelines, and a major confronta­
tion with the steel industry on pricing, but, on bal­
ance, it was a period of relative regulatory calm. As
pointed out at the time by Beryl W . Sprinkle, “A sur­
prising number of political actions have been consist­
ent with the free market doctrine.”1 This is in sharp
contrast to the period of the early 1970s when the
Government engaged in a massive regulatory effort in
the areas of prices, the environment, safety, and
employment.
1Discussion of a paper by Neil H. Jacoby, “ The Fiscal Policy
of the Kennedy-Johnson Administration,” Journal of Finance
( May 1964), p. 391.

FEDERAL RESERVE BANK OF ST. LOUIS

Fiscal actions of the Federal Government, when
used, were relatively moderate during the early 1960s.
Government spending expanded at a 5 percent annual
rate from 1961 to 1965 (national income accounts
budget). However, from 1955 to 1961 Government
expenditures rose at a 7 percent rate, and since 1965
have increased at an average 11 percent rate.
Tax reductions were also implemented, but
amounts were relatively small. New depreciation
guidelines combined with an investment tax credit
enacted in 1962, increased the annual cash flow to
corporations by about $2.5 billion and raised the after­
tax rate of return on new investment projects. After a
prolonged debate, which began in the summer of
1962, taxes were finally lowered in early 1964 by $11
billion on personal incomes and $3 billion on corpor­
ate profits to add further stimulus.
The tax decrease and the rise in Government out­
lays only partially offset a so-called “fiscal drag”
emanating from an increase in Government tax re­
ceipts as consumer and business incomes grew during
the period of pronounced expansion. As a result, the
average Federal budget deficit from 1960 through
1965 was just over $1 billion per year. By comparison,
in the last three years of the 1950s the average annual
deficit was $3 billion. During 1966 through 1970,
which included most of the Vietnam buildup, the
deficit averaged $5 billion, and since 1970 the deficit
has averaged $32 billion.
Monetary actions in the early 1960s were expan­
sionary, but the acceleration of money growth came
later than in most other periods of economic recovery
and growth. Inflation changed little in that period
since most of the increased monetary expansion came
after 1963. Nevertheless, these monetary actions con­
tributed to an increase in the rate of inflation in the
late 1960s. The money stock grew at an average 2.4
percent rate from 1960 to 1963, and at a 4 percent
rate in 1964 and 1965, compared with a 2 percent
rate in the 1952-60 period. By contrast, money has
been growing at an average 6 percent rate since 1965.
According to a number of studies, the trend growth
of money over a period of four years or more primarily
determines the rate of inflation.2 The results of these
2See W . Philip Gramm, “ Inflation: Its Cause and Cure,” this
Review (February 1975), pp. 2-7. Leonall C. Andersen and
Denis S. Kamosky, “ The Appropriate Time Frame for Con­
trolling Monetary Aggregates: The St. Louis Evidence”
(Paper presented at the Federal Reserve Bank of Boston
Conference on “ Controlling Monetary Aggregate II; The
Implementation,” Melvin Village, New Hampshire, Septem­
ber 8, 1972); Milton Friedman, The Optimum Quantity of




OCTOBER

1977

studies strongly suggest that the moderate money
growth from 1952 through 1963 was a major factor in
the relative price stability of the early 1960s, and that
the more rapid money growth since 1965 has been
largely responsible for the much higher inflation rates
in recent years.
There were no large prolonged decreases in the
growth rate of money in the 1961-65 period, except
for a brief period preceding the pause in activity dur­
ing 1962. Marked and sustained declines in the rate
of money growth, such as occurred from early 1969
to early 1970 and from mid-1973 to early 1975, are
usually followed within a few months by a decline in
the demand for goods and services, resulting in de­
creased production, employment, and incomes. The
absence of any large and sustained slowing in money
growth during the 1961-65 period eliminated a force
which has preceded most recessions in this country
as well as many countries abroad.3

Policy Performance Versus Expectations
Despite a robust expansion with little inflation,
public desire for aggressive policies to obtain further
gains remained strong, as is usually the case during
economic expansions. Many analysts in the early 1960s
concluded that the pronounced and sustained growth
of the economy was not “fast enough.” Although un­
employment declined from 7 percent of the labor
force in early 1961 to 5 percent in 1964 and to 4.5 per­
cent in 1965, these analysts considered such perform­
ance inadequate when compared with an “interim
target” of 4 percent or less. As late as 1965, the
President’s Council of Economic Advisers calculated
that “a gap of $25-30 billion still remains between the
nation’s actual output and its potential output . . .
4 percent of our current potential.”4
Because of the challenge to policymakers to achieve
even greater levels of production, employment, and
purchasing power, pressures for more expansive fiscal
M oney and Other Essays (Chicago: Aldine Publishing Com­
pany 1969); and Irving Fisher, The Purchasing Power o f
M oney (N ew York: Augustus M. Kelley, 1963).
3See “ Production, Prices, and Money in Four Industrial Coun­
tries,” this Review (September 1972), pp. 11-15; Leonall C.
Andersen and Jerry L. Jordan, “ Monetary and Fiscal A c­
tions: A Test of Their Relative Importance in Economic
Stabilization,” this Review (November 1968); Milton Fried­
man and Anna Schwartz, A Monetary History of the United
States 1867-1960” (Princeton, New Jersey: Princeton Uni­
versity Press, 1963).
4Economic Report of the President (Washington, D .C .: United
States Government Printing Office, 1965), p. 39.
Page 13

FEDERAL RESERVE BANK OF ST. LOUIS

policies increased. With prices relatively stable and
an observed “excess” capacity believed plaguing the
economy, inflationary potentialities received only
nominal attention. However, “The record suggests
that the Kennedy-Johnson Administrations were frus­
trated in their efforts to attain professed goals. It re­
veals the great power of Congress which, by pulling
against the Executive Branch . . ., kept them chained
near the middle of the fiscal road.”5 As noted above,
Government expenditures were increased and tax
rates reduced, but the actual extent of these actions
was both moderate and delayed.
Actual monetary developments were not as stimula­
tive as some would have desired for domestic pur­
poses. The monetary authorities accepted, as a prime
objective during much of this period, the reduced cost
and increased availability of borrowed funds. It was
contended that through this goal growth in the na­
tion’s liquidity would contribute to continued orderly
economic expansion.8 However, during much of the
time the nation also faced a large deficit in the bal­
ance of payments and a sizable net outflow of gold.
This situation apparently called for maintaining or
raising short-term interest rates in order to discourage
an outflow of funds seeking more favorable interest
rates abroad. These two objectives were partially con­
flicting, and the dilemma brought compromises.
Efforts were made by the Federal Reserve System
to reconcile the conflict by “twisting the yield curve.”
This was supposed to be accomplished by buying
long-term obligations to provide bank reserves and to
obtain lower capital market yields for domestic pur­
poses, and by selling some short-term Treasury bills
to maintain the higher rates in this sector for inter­
national balance-of-payments objectives. During 1961
through 1965 about $8 billion of Government securi­
ties with maturities over one year were purchased by
the System.7 On balance, short-term interest rates did
rise relative to long-term rates in this period. How­
ever, cost and availability of domestic credit changed
only marginally, and the shift in the yield curve was
similar to that which occurred in other periods of

5Neil H. Jacoby, “ The Fiscal Policy of the Kennedy-Johnson
Administration,” Journal of Finance (M ay 1964), p. 357.
6See Annual Report of the Board of Governors of the Federal
Reserve System, covering operations for the year 1964, p. 9.
7The System received a powerful assist in twisting the yield
curve from debt-management policy aimed at heavy concen­
tration of Treasury financing in short-term paper. See John J.
Balles, “The Outlook for Fiscal, Monetary and Debt Man­
agement Policies,” Journal of Finance (M ay 1964), p. 407.


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Federal Reserve Bank of St. Louis

OCTOBER

1977

expansion where no massive purchases of longer-term
obligations by the System occurred.8
There was a sizable growth in total credit extended
in the early 1960s. Total new funds raised by individ­
uals, businesses, and state and local governments ad­
vanced steadily by a 16 percent annual rate from
early 1961 to 1965, compared with an average 9 per­
cent rate since 1965. Large personal and business
saving contributed to the growth. Monetary authori­
ties attempted to bolster the availability of credit by
maintaining net “free” reserves at member banks (that
is, smaller borrowings from Reserve Banks than re­
serves held in excess of requirements) throughout
most of the period. However, the free reserves were
a misleading measure of bank credit availability. The
small borrowings from Reserve Banks reflected the
position of the discount rate, which remained at
higher levels than market rates on alternative sources
of bank funds.

The Econom y’s Response to
Moderate Policies
The economy’s performance in the period 1961-65
was exceptional. There was little inflation, and pro­
duction grew at a relatively rapid and steady pace for
one of the longest spans on record. Over that period
industrial production rose at nearly an 8 percent aver­
age annual rate, and total real output increased at
over a 5 percent rate (see accompanying chart). Em­
ployment rose faster than the population of labor
force age, and real output per capita expanded at
about a 4 percent rate — or double the trend rate
since 1965. Corporate profits (after taxes) increased
at a 15 percent pace. Notwithstanding, the consumer
price index inched up at only a 1.3 percent rate.
The 1961-65 period was characterized by growth.
The recession of 1960-61 had been relatively mild,
and the upward movement after early 1961 was not a
quick rebound, but a period of relatively steady ex­
pansion of capacity as well as demand. Investment
“Two studies found little, if any, effect on the term structure
of interest rates from a shift in the maturity composition of
the debt. Frank De Leeuw, “A Model o f Financial Behavior,”
Chapter 13 in The Brookings Quarterly Economic Model of
the United States Economy, ed. James S. Duesenberry et al.
(Chicago: Rand McNally & Company, 1965); and Franco
Modigliani and Richard Sutch, “ Debt Management and the
Term Structure of Interest Rates: An Empirical Analysis of
Recent Experience” (Paper delivered at the Conference of
University Professors, The American Bankers Association,
September 1966). See also Richard W . Lang and Robert H.
Rasche, “ Debt-Management Policy and the Own Price Elas­
ticity of Demand for U.S. Government Notes and Bonds,”
this Review (September 1977), pp. 8-22.

FEDERAL RESERVE BANK OF ST. LOUIS

R eal G ro ss N atio n al Product
T ro s g h s = 1 0 0

T ro u g h s = 1 0 0

OCTOBER 1977

compared with near price stability in the early 1960s.
Also, real production had dropped at a 5 percent
annual rate from late 1973 to early 1975 versus a
moderate net increase in real output from 1960 to
1961.
The dramatic change in supply and demand condi­
tions for energy resources since 1973 has had a sub­
stantial adverse effect on the productive capabilities
of the U.S. economy.9 Hence, even though real pro­
duction had dropped sharply from 1973 to early 1975,
excess economic capacity did not rise proportionately,
and was probably about similar to that in 1961. This
decrease in capacity, without an offsetting decrease in
money growth, also accounted for much of the rise in
the rate of increase in the price level,from 5 percent
in the early 1970s to 11 percent from late 1973 to
early 1975.1
0

La te st d a ta p lo tte d :

QUARTERS FROM TROUGH
2n d q u a rte r 1977

expenditures accelerated in response to an increase in
demand for final products, improved rates of profit
and cash flow, relatively steady interest rates, reduced
taxes, and an improved outlook. From the previous
cyclical peak in 1960 to 1965, real output grew at an
average 4.7 percent rate, compared with 2.8 percent
in the previous cycle and about a 3 percent average
in the period since 1965.
During this period there were relatively few large
fluctuations in demand or constraints on supply, and
the economy expanded in a balanced fashion. Balance
was maintained between production and sales at rela­
tively stable prices, thus avoiding both temporary
shortages and sizable inventory accumulation. Balance
was maintained between the expansion of effective
demand and the expansion of productive capacity to
satisfy that demand, avoiding the need for cutbacks
in capital expenditures. Also, balance was maintained
between wages and productivity, and unit labor costs
as well as prices changed little. Hence, few destabiliz­
ing endogenous forces developed during this extended
period.

Recent Period of Recovery and Expansion
The current economic expansion, which began in
the spring of 1975, started with an economic situation
much worse than the one in the early 1960s. Inflation,
as measured by the GNP deflator, had risen at an
11 percent annual rate in the previous six quarters,




After turning up in the early spring of 1975, the
economy has progressed in the past two and one-half
years at a pace remarkably similar to or even stronger
than that of the early sixties. There was a very rapid
recovery in the first year following the business trough
of early 1975 as activity rebounded from the previous
drop, but expansion was fairly rapid in most of 1961
also. Then, there was a hesitation in the rate of the
upswing during much of 1976, similar to the pause in
1962, and in both cases the slowdown was attributable
to a decline in the rate of inventory accumulation. So
far in 1977, economic expansion has been vigorous,
similar to that in 1963.
On balance, real production rose at a 5.9 percent
annual rate from early 1975 to the second quarter of
1977, somewhat faster than the 5.1 percent rate re­
corded in the first nine quarters of the expansion in
the early 1960s. Other indicators of the strength of the
recent expansion have been a 10 percent rate of in­
crease in industrial production and a rise in employ­
ment at a rate about 25 percent faster than the
population of labor force age since March 1975. Per­
sonal income has grown at an 11 percent rate in the
same period.
Rasche and Tatom, using a production function
which accounts explicitly for capital and energy re­
sources, calculated that because of the new energy
regime imposed in 1974, current production is cur­
9Robert H. Rasche and John A. Tatom, “ The Effects o f the
New Energy Regime on Economic Capacity, Production, and
Prices,” this Review (M ay 1977), pp. 2-12.
i"See Denis S. Kamosky, “Another Recession, But Different,
this Review (D ecem ber 1974), pp. 15-18.
Page 15

FEDERAL RESERVE BANK OF ST. LOUIS

rently near potential output.1 Hence, they concluded
1
that attempts to obtain much greater output now
through stimulative policy actions are likely to fail and
will add to inflationary pressures. There is little pro­
spect for an extended period of real growth at rates
higher than the rate of potential output expansion,
which is currently about 3.5 percent a year.
Early in the current recovery some progress had
been made at reducing inflation. Overall prices (GNP
deflator) rose at an average 5.5 percent rate from the
first quarter of 1975 to the fourth quarter of 1976,
considerably faster than the 1.6 percent pace observed
in the corresponding period in the early 1960s. Expe­
rience indicates that eliminating inflation takes time,
and the 1975-76 price developments should be judged
against the 1970-75 average rate of 7 percent. In the
first two quarters of 1977, however, these prices rose
at a faster 6.2 percent rate, reflecting both constraints
on supply from the severe weather last winter and a
faster money growth since early 1976.
On balance, the causal forces bearing on economic
activity since early 1975 have moderated from those
of the earlier 1970s. Although business has been
hampered by numerous Governmental regulations
and much higher energy prices, the constraints on
production recently have been less than in the imme­
diately preceding period. During the 1972-74 period,
the economy received a host o f shocks to production
which contributed to both the inflationary bulge and
the recession. Major shocks include a marked rise in
energy prices caused by the cartel of oil producing
nations, a hampering of production by Governmental
price, environmental, safety, and other regulations, a
pronounced realignment of exchange rates among
currencies, and a drouth which adversely affected
food production.

OCTOBER

1977

exhibited in the early 1960s, has been a contributing
force to the economic expansion since early 1975.
In addition, Governmental actions bearing on the
economy have been more moderate, on balance, than
in the immediately preceding period. Since the second
quarter of 1975, total Federal outlays have risen at an
8 percent annual rate, or at about a 2 percent rate in
real terms. In the early 1960s, nominal expenditures
rose at a 5 percent rate, or at about a 3 percent rate
in real terms. By contrast, from 1970 to 1975, Govern­
ment outlays rose at a 12 percent rate (a 5 percent
real rate). Although deficits have been enormous
(averaging about $62 billion per year since early
1975), they have been financed primarily through
saving.
Despite an acceleration of money stock growth re­
cently, money increased at an average 5.8 percent
annual rate from early 1975 to mid-1977. This was
faster than in the early 1960s, but the rate was moder­
ated from the 7 percent average rate which occurred
from early 1971 to mid-1974. The average monetary
growth since early 1975 has lowered the trend growth
of money slightly, contributing to a slightly lower
fundamental rate of inflation. Large and sustained
fluctuations in money, such as occurred from mid-1974
to early 1975 when the pace abruptly fell to a 3 per­
cent rate, were avoided. The avoidance of such fluc­
tuations in the pace of money growth has prevented
shocks to the economy from this source.
The current situation and many evaluations o f it are
similar to the situation in early 1963, which was de­
scribed by the President’s Council of Economic Ad­
visers as follows:
Despite the gains of the past 2 years, the economy
has not yet regained full use of its labor and capital
resources . . . As 1963 begins, too many workers
remain without jobs; too many machines continue
idle; too much output goes unrealized as our econ­
omy runs below its potential.12

Fortunately, most of these constraints on production
have not intensified. For example, general price con­
trols were abolished in 1974, although selective con­
trols remain in place. The weather generally has been
better for crops since early 1975, and energy prices
have been much more stable, albeit at a higher level.
However, Government continues to regulate business
in a myriad of ways, and expectations are that Gov­
ernment regulation will increase in the future. H ow­
ever, the absence of further shocks to production to
date, combined with the same underlying strength
and resiliency of the private enterprise system as was

Beflecting this evaluation, President Kennedy rec­
ommended a “major tax reduction” and an increase in
Federal purchases for stepping up the U.S. growth
rate. His report also suggested that monetary policy,
as well as debt policy, must be coordinated with fiscal
policy to secure the objectives of higher employment
and growth. But, as mentioned earlier, there were
delays in implementing these recommendations, and
some were scaled down as a result of changing cir­

1'Robert H. Rasche and John A. Tatom, “Energy Resources
and Potential GNP,” this Review (June 1977), pp. 10-24.

12Economic Report of the President (Washington, D .C.: United
States Government Printing Office, 1963), p. 9.


Page 16


OCTOBER 1977

FEDERAL RESERVE BANK OF ST. LOUIS

cumstances and conflicting objectives. As a result,
actions became only moderately more expansive, but
the stimulation was comparatively even.
Now, in the fall of 1977, the economic recovery is
roughly 2% years old. To some analysts the volume of
unused resources appears sizable. Official reports in­
dicate that unemployment has recently been at about
7 percent of the labor force, and that output has been
running at roughly 83 percent of measured capacity.1
3
There is considerable discussion in the business com­
munity of a marked slowdown in the rate of eco­
nomic expansion in the near future. A number are
calling for increased stimulation to accelerate the
progress toward a higher level of resource utilization.
The announced policies of the Government to date
have been similar to those follow ed in the 1961-65
period. The Administration has stated its intention to
trim Government expenditures and to attain a bal­
anced budget by fiscal 1981. Monetary policies have
been directed to holding money growth at a moderate
rate and gradually reducing this rate over time. Since
early 1975 the long-range money targets have been
lowered. Also, it is the stated policy to reduce the
burden of Government on the private enterprise sys­
tem by eliminating regulations which cannot be justi­
fied on a cost-benefit basis.
Nevertheless, recent Government actions have
tended to approximate those in other expansionary
periods when heavy reliance was placed on increased
Government stimulation to bring about more rapid
expansion, and when more Government controls were
substituted for competition in regulating business
activity. Despite a Federal budget deficit of over $40
billion in the first half of 1977, the probabilities are
relatively high that there will be some net tax rate
reductions and further increases in Government ex­
penditures in the near future. Money growth, which
had been at a 4.1 percent annual rate from the second
quarter of 1974 to the first quarter of 1976 when the
recession was halted and a rapid expansion was
launched, has accelerated to an average 6.5 percent
rate since the first quarter of 1976 and then about a
9 percent rate since February of this year. Current
discussions and actions concerning the energy pro­
gram indicate more Government involvement in the
productive process.

13These statistics probably greatly underestimate the degree
that potential output is being utilized. See Rasche and
Tatom, “ Energy Resources and Potential GNP.”




Summary and Conclusions
The early 1960s was a period of relative regulatory
calm and few disruptions from fiscal and monetary
actions. Although no two periods in our history are
identical, support for using the early sixties as a guide
to the late seventies is strengthened by a large body
of economic analysis, based on an examination of
policy actions and economic responses over a wide
range of circumstances. These studies support the
conclusions that the experience of the early 1960s
was not unusual, but, upon reflection, was the result
expected from the policies pursued.
In the early 1960s the private sector of the economy
was not shocked or stimulated greatly by outside
forces. There were no large shifts in factors determin­
ing either demands or supplies, and the economy
responded commendably. The early 1960s was one of
the longest periods on record of rapid economic
growth with little inflation. All during the period, de­
sires of the public for still better performance were
strong; the record indicates that policymakers gener­
ally sought to provide more stimulus, but they were
partially thwarted in their attempts by conflicting ob ­
jectives, lack of agreement, and inertia.
The economy has expanded rapidly for about two
and one-half years, just as it had in 1963; if anything,
the more recent expansion has been even more pro­
nounced than in the corresponding earlier period.
When capacity is adjusted for energy developments
and other constraints on production, output currently
is rapidly approaching potential. In the early 1960s
relative price stability was maintained, and during
1975 and 1976 there was a slowing in the rate of
inflation. Yet, as in most periods of expansion, the
desire for even better short-run economic perform­
ance is strong.
Typically, in periods of economic expansion, the
attraction of expected short-run benefits to production
and employment from ever increasing stimulation has
become irresistable. However, these actions have led
to boom-bust situations. With more stimulation, up­
ward pressures on prices develop. Removal o f the
stimulation, once it becomes anticipated, depresses
production and employment for a time, but the infla­
tion built up during the period of stimulation remains
for several years.
Now, it would seem prudent to adopt intentionally
moderate economic policies. This would imply a re­
duction in the growth rate of Government spending,
Page 17

FEDERAL RESERVE BANK OF ST. LOUIS

and a gradual move toward a balanced Federal
budget, a policy advocated by the current Adminis­
tration. Monetary authorities might well follow the
course which they have charted since 1975 — that of
relatively steady and moderate money growth and a
gradual reduction of this rate over time. Regulations


Page 18


OCTOBER

1977

on the private sector might be critically assessed, and
those that cannot be justified on a rigorous cost-benefit
basis removed. Uncertainties caused by potential
changes in the energy program and by possible tax
law revisions should be clarified soon as they only
serve to hamper investment decisions.

FEDERAL RESERVE BANK OF ST. LOUIS

OCTOBER

1977

Reprint Series
The following R e v i e w articles have been added to our Reprint Series in the last eight years.
Single copies of these articles are available to the public without charge. Please indicate the title
and number of the article(s) selected and send your request to: Research Department, Federal
Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Mo. 63166.
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TITLE OF ARTICLE

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
FOMC Policy Actions in 1972
The State of the Monetarist Debate
Commentary: Lawrence R. Klein and Karl Brunner
The Russian Wheat Deal — Hindsight vs. Foresight
A Comparative Static Analysis of Some Monetarist Propositions
Balance-of-Payments Deficits: Measurement and Interpretation
Real Money Balances: A Misleading Indicator of Monetary Actions
The Federal Open Market Committee in 1973
A Primer on the Consumer Price Index
Channels of Monetary Influence: A Survey
A Primer on Inflation: Its Conception, Its Costs, Its Consequences
The FOMC in 1974: Monetary Policy During Economic Uncertainty
A Monetary View of the Balance of Payments
A Monetary Model of Nominal Income Determination
Observed Income Velocity of Money: A Misunderstood Issue in Monetary Policy




ISSUE
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
March 1973
September 1973
October 1973
December 1973
November 1973
February 1974
April 1974
July 1974
November 1974
January 1975
April 1975
April 1975
June 1975
August 1975

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