Full text of Review (Federal Reserve Bank of St. Louis) : September 1965

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September 1965

FEDERAL RE

ANK OF ST. LOUIS
#

,

Page

Interest Rates, B udget
Policy, and Monetary
Policy .........................

1

Fiscal Policy, Monetary
Policy, and Internation­
al Disequilibrium . . . .

7

Economic Expansion in
Central M ississippi
Valley C ities ..............

12

Agriculture in the Central
Mississippi Valley . . . .

16

Volume 47

•

FEDERAL RESERVE B A N K
OF ST. LOUIS
P.O. Box 442, St. Louis, Mo. 63166



DEVELOPMENTS in recent months have been more
stimulative than earlier this year, while monetary actions con­
tinue to be moderately expansive. The Federal budget position
has moved from a modest surplus to a deficit. The stock of money
has risen at about the same rate since spring as from November
1964 to April 1965. Longer-term interest rates have tended up­
ward.
F

Number 9

,

Interest Rates Budget Policy
and Monetary Policy

CO NTENTS

is c a l

Movements in the Policy Variables
The Money Supply
The rate of increase in money gyrated sharply from April to
August but av­
Money Supply
eraged 3 per
cent per annum. Billions of Dollars Weekly Averages of Dally Figures Billions of Dollars
166
This r at e is 166 Annual rata o chang* four
w •ndinp Stptomb•r 1,1965
hJcs
about the same
fro four W§l s • c g
m
0 n ftn
164
0
<7965 *
as since Novem­ 164 Aug. 7,1965 H2.-0%
July
1
16 !.8
June 9,1965 ►5.7%
ber 1964 but is 162 May 12,1965 M.0%
f\/ ' W '
162
—
D c. 2, 1964 +2.9%
e
somewhat less
\ ,, I
160
than the aver­ 160
Vi
\J
VV
age since Sep­
158
tember 1962. A 158
3 per cent rate
156
156
of monetary
growth is about
J-LLi M M L,1J_L M M L L U M J 1 1111 mi I1 L L -L-U-1 ,1111.LLU.
OCT. NOV. DEC. JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT.
the same as the
1964
1965
Seasonal adjustment com
puted using 1959 through June 1965 data.
rate of increase
Latest data plotted: Week ending September 1,1965 preliminary

since the beginning of the current economic expansion
in February 1961 and since May 1960, the last peak
in national business activity. It is higher than the
average 2 per cent rate of increase since 1951.
According to some analysts, variations in the money
stock introduce—
through a complicated chain of cau­
sation—
variations in total demand for the product of
the economy.

Bank Credit
The earning assets of commercial banks have been
increasing somewhat less rapidly in recent months
than earlier. During the four months ending with
August, bank credit increased at a 7 per cent rate,
substantially less than the 12 per cent rate in the pre­
vious eight months. The decline in the rate of increase
of bank credit reflects a slight moderation in the pace
of loan expansion and a continued reduction in the
banking system’s holdings of U. S. Government debt
(Table I). Fluctuations in the rate of increase in total
bank credit do not necessarily reflect a shift in the
stimulative influence of the commercial banking sys­
tem on total spending. Instead, they may result from
shifts in the volume of flow's of funds through the
banking system compared with other avenues.

The Fiscal Situation
The budget of the Federal Government moved to a
more stimulative position in the third quarter. Current
estimates indicate that the consolidated cash budget
will shift from a $2 billion dollar surplus in the second
quarter to a deficit in the third quarter. It is antici­
pated that the national income accounts budget will
also move from surplus to deficit. The full employ­
ment budget, which indicates how the national inU.S. Governm ent Fiscal Operations
Billions of Dollars

20

(+)5urplus; (-)Deficit
Seasonally Adjusted Annual Rates

20

1
1
F ll E p y e t B d t
u mlo mn u ge

15

10

\

5 \

0

A J

15

/

/-—A
+7.3

1 ^
Ntion l Ino n
a a c ne
A c u ts B d
co n ui
e ^
7
j

+2.9\

/yL 2
+ .o
I V
,
V4

10
5

0

A fiscal surplus or deficit may affect economic activ­
ity by two inconsistent primary routes. (1) A deficit
may indicate that more funds are being placed in the
spending stream than are being withdrawn by taxes.
Thus a deficit may reflect a situation wherein total
demands for the economy’s product are being stimu­
lated. (2) A deficit or surplus affects the flows in
financial markets and, hence, influences interest rates.
To the extent that the Treasury runs a deficit and does
not draw down its cash balances, it must borrow; this
tends to place upward pressure on interest rates, tend­
ing to inhibit investment and total demand. Running
a surplus puts the Treasury in a position to repay debt
and thereby place downward pressure on interest
rates, with resulting encouragement of investment and
final demand.

Maturity of the Federal Debt
The maturity distribution of the Federal debt has
changed little in recent months. What changes have
occurred have been in the direction of lengthening
the debt. Thus, debt management policy has recently
been essentially neutral in its effect on economic activ­
ity, but with a slight tendency toward restriction.
How the maturity composition of the debt may have
an influence on total demand for goods and services is
not agreed upon by all observers. According to some
analysts, an increase in the amount of longer matu­
rities reduces the “liquidity” of the public, thereby
limiting final demand. An alternative view focuses on
the relation of the structure of the debt to the struc­
ture of interest rates. Lengthening the Federal debt
may tend to place upward pressure on long-term rates
and thereby tend to restrict investment and total eco­
nomic activity.

Interest Rates

-15

Most interest rates have risen moderately in recent
months. Since late February yields on short-term Gov­
ernment debt have declined; yields on intermediate
and long-term issues have moved up.

Latest da a plotted: 2nd Quarti r1965; Las half 1965 estim
ated.
-20
1958
1959
1960
1961
1962 1963 1964 1965
Sources: U.S. Treasury Departm Council of Econom Advisers, Board of Governors
ent,
ic
of the Federal Reserve System and Departm of Com erce
,
ent
m

iSee the testimony of Gardner Ackley, Chairman of the Coun­
cil of Economic Advisers, before the Subcommittee on Fiscal
Policy of the Joint Economic Committee, July 20, 1965.

-5

\\

-10 \ \

/
V t\

-15

-20

Billions of Dollars

come accounts budget would move in the absence
of shifts in economic activity, is expected to change
from a $7 billion surplus to a smaller surplus.1 The
movement from surplus toward deficit has resulted
from increased expenditures (largely associated with
expanded Social Security benefits and expanded mil­
itary buying) and a lessening in the rise of revenues
(largely associated with the cut in excise taxes).

/

-5

-10
C sh B d e
a ugt

Page 2



TABLE I

EARNING ASSETS OF COMMERCIAL BANKS1
TOTAL BANK CREDIT
C o m p o u n d e d A n n u a l Ra te s o f C h a n g e
In itia l M o n th
M illio n s
T e rm in al
4 -6 4
M o n th

5 -6 4

5 -6 4
6 -6 4
7 -6 4
8 -6 4
9 -6 4
10 -6 4
11 -64
12 -64
1-65
2 -6 5
3 -6 5
4 -6 5
5 -6 5
6 -6 5
7 -6 5
8 -6 5

11.2
6 .7
6.4
9.2
8.5
8.6
9.5
9.5
9 .7
10.1
10.3
10.1
10.2
9.8
9.4

5.1
8.1
6.2
6.1
8.4
7.9
8.1
8.9
9.0
9.3
9 .7
9.9
9 .7
9.8
9.5
9.2

6 -6 4

7 -6 4

2.4
4.1

3 -6 4

5.8
11.8
9 .7
9.6
10.6
10.4

8.6
7.9
8.1
9.2
9.3
9.5
10.0
10.2
10.0
10.1
9 .7
9.3

18.2
11.8
10.9
11.8
11.4
11.4

10.6
11.0

11.8
11.8
11.4
11.4
10.8
10.2

11.1
10.8
10.8
10.4
9.9

of
10 -6 4

9 -6 4

5 .7
7.4

9.1
11.9
11.1
11.2

9.8
9.8
10.1
10.7
10.9
10.6
10.6
10.1
9 .5

11.8
11.8
11.3
11.3
10.6
9.9

1 1-64

12 -64

14.8
12.2
12.0
12.5
12.4
11.6
11.6
10.8
10.0

1 -65

9.6
10.6
11.7
11.8
11.0
11.0
10.2
9.4

2 -6 5

11.5
12.7

3 -6 5

13.9
12.9
11.3
11.3
10.0
9 .0

12.5
11.4
11.3
10.3
9 .3

5 -6 5

4 -6 5

12.0
10.1
10.4

8.1
9.6
8.1
7.1

9.1
8.0

11.1
8.1
6 .7

6 -6 5

5.3
4 .6

7 -6 5

3 9

D o lla rs
2 5 2,65 0
25 4,90 0
2 5 5,40 0
25 6,60 0
26 0,20 0
26 1 ,4 0 0
26 3,30 0
26 6,35 0
26 8,40 0
27 0,85 0
27 3,80 0
27 6 ,4 0 0
27 8 ,2 0 0
28 0 ,6 5 0
2 8 1,85 0
2 8 2 ,7 5 0 e

EARNING ASSETS OTHER THAN U. S. GOVERNMENT SECURITIES
C o m p o u n d e d A n n u a l Ra te s o f C h a n g e
In it ia l M o n th
M illio n s
T e rm in al
4 -6 4
M o n th

5 -6 4

5 -6 4
6 -6 4
7 -6 4
8 -6 4
9 -6 4
10 -6 4
1 1 -6 4
12 -6 4
1-65
2 -6 5
3 -6 5
4 -6 5
5 -6 5
6 -6 5
7 -6 5
8 -6 5

17.9
13.5
11.3
12.0
11.2
11.1
11.7
12.5
13.2
13.8
14.3
14.2
14.6
14.5
14.2

13.0
15.4
13.3
11.7
12.2
11.5
11.4
11.8
12.5
13.2
13.7
14.2
14.1
14.5
14.4
14.1

6 -6 4

7 -6 4

9.3
8.1
10.1
9 .6
9.8
10.6
11.7
12.6
13.3
13.9
13.9
14.3
14.3
14.0

8 -6 4

9 -6 4

10-64

1 2 -6 4

11 -6 4

1 -65

2 -6 5

3 -6 5

4 -6 5

5 -6 5

6-6 5

7 -6 5

of
D o lla rs
1 9 2,10 0
1 9 4,75 0
19 6,20 0
19 7,30 0

7.0
10.5
9 .7
10.0
10.9
12.1
13.1
13.8
14.4
14.4

14.2
11.1
11.0
11.9
13.2
14.2
14.9
15.4
15.2
15.6
15.4

14.8
14.7
14.3

15.0

8.1
9.4
11.2
12.9
14.1
15.0
15.6
15.3
15.7
15.5
15.0

10.7
12.7
14.6
15.7
16.4
16.8
16.4
16.7
16.4
15.7

14.9
16.6
17.4
17.9
18.1
17.4

18.4
19.1
19.1
19.2
17.8
18.0
17.3
16.2

18.7
18.9
19.0
17.9
18.1
17.5
16.5

17.6
17.1
16.3

19.2
19.2
17.4
17.8
16.9
15.8

19.2
16.5
17.3
16.4
15.1

13.8
16.4
15.5
14.1

19.0
16.3
14.2

13.7
11.9

10.0

1 9 9,50 0
20 0 ,8 0 0
2 0 2 ,5 0 0
20 4 ,8 5 0
20 7 ,7 5 0
21 0 ,8 0 0
2 1 3 ,9 0 0
21 7 ,0 5 0
2 1 9 ,4 0 0
2 2 2 ,6 0 0
2 2 5 ,0 0 0
2 2 6 ,8 0 0 e

U. S. GOVERNMENT SECURITIES
C o m p o u n d e d A n n u a l R a te s o f C h a n g e
In it ia l M o n th
M illio n s
T e rm in a l
M o n th
4 -6 4
5 -6 4
6 -6 4
7 -6 4
8 -6 4
9 -6 4
10 -6 4
11 -6 4
1 2 -6 4
1 -6 5
2 -6 5
3 -6 5
4 -6 5
5 -6 5
6 -6 5
7 -6 5
8 -6 5

—
—
—
—
—
—
—
—
—
—
—
—
—
—

16.2
12.0
13.9
10.1
2.9
2.7
1.8
0.1
1.7
2 .7
2.7
3.4
4 .0
4.8
6 .0

—

6.8

5 -6 4

—
7.6
— 12.7
—
8.0
0.8
0.2
0.8
2.7
0.3
—
1.1
—
1.3
—
2.2
—
—
—
—

2.9
3.8
5.3
6.1

6 -6 4

7 -6 4

8 -6 4

9 -6 4

1 0 -6 4

11 -6 4

12 -6 4

1 -65

2 -6 5

3 -6 5

4 -6 5

5 -6 5

6 -6 5

7 -6 5

— 17.4
—

8.2
3 .7
2.3
2.6
4.5
1.4

—
—
—
—

0.3
0 .6
1.6
2.4

—
—
—

3.5
5.1
6 .0

—
—
—
—

2 .0
16.2
9.8
8.3
9.6
5.0
2.5
1.8
0 .3
0.8
2.1
4 .0
5.1

—
—
—
—

3 2 .3
13.9
10.5
11.6
5.6
2.6
1.7
0.1
1.1
2.5
4 .5
5.6

— 2.0
1.0
5.4
— 0.2
— 2.6
— 2.6
— 3.8
— 4 .7
— 5.8
— 7.6
— 8.5

4 .0
9.3
0.3
— 2.7
— 2.7
_ 4.1
_
—
—
—
—

5.0
6.2
8.2
9.1

14.8
—
1.5
— 4.8
—
4.4
—
5.6
— 6.5
—
7.6
— 9.6
— 10.5

—
—
—
—
—
—
—
—

15.4
13.3
10.0
10.1
10.2
10.9
12.6
13.2

—
—
—
—
—
—
—

11.3
7.2
8.3
8.9
10.0
12.1
12.9

—
2.9
—
6.8
—
8.1
—
9.7
— 12.3
— 13.2

—
—
—
—
—

10.5
10.5
11.8
14.5
15.1

— 10.6
— 12.4
— 15.8
— 16.2

— 14.3
— 18.3
— 18.0

— 22.2
— 19.8

— 17.4

of
D o lla r s
6 0 ,5 5 0
6 0 ,1 5 0
5 9 ,2 0 0
5 9 ,3 0 0
6 0 ,7 0 0
6 0 ,6 0 0
6 0 ,8 0 0
6 1 ,5 0 0
6 0 ,6 5 0
6 0 ,0 5 0
5 9 ,9 0 0
5 9 ,3 5 0
5 8 ,8 0 0
5 8 ,0 5 0
5 6 ,8 5 0
5 5 ,9 5 0 e

1D
ollar am
ounts are averages of seasonally adjusted data for end of preceding and current m
onth. C pounded annual rates of change w com
om
ere
puted from

these averages.
e-Estimated.




Page 3

Yields on U.S. G overnm ent Securities

Data are (or weeks ending on Friday.
Latest data plotted: Week ending September 3,1965 preliminary

Yields on most maturities of private debt have risen
moderately in recent months. Medium-grade corpo­
rate bond yields (Baa) rose from 4.78 per cent in
February to 4.88 per cent in early September; yields
on highest grade corporate securities rose from 4.41
per cent to 4.49 per cent during the period. Secondary
market rates on large-denomination certificates of de­
posit rose from 4.20 per cent in February to 4.28 per
cent in August.
Interest rate increases are desirable when they are
part of a monetary-fiscal policy mix which promotes
optimum total demand and international payments
balances.
Interest rates may affect final demand, production,
employment, and prices through several channels. To
the extent that interest rates represent a cost to the
borrower, higher rates may inhibit borrowing. Fur­
thermore, because current interest rates determine the
capital value of rights to anticipated future income
streams, a rise in interest rates decreases the value
of any anticipated future income stream, thereby re­
ducing wealth.
Appropriate interest rates may depend upon the
combination (or mix) of policies used to achieve op­
timum total demand for goods and services. To the
extent that there is increased reliance on fiscal policy
to expand demand, there is a corresponding rise in
the appropriate structure of interest rates. In this
sense and context, an interest rate increase does not
necessarily indicate that the combined effects of sta­
bilization policies are restrictive; that is, rising inter­
est rates in themselves do not necessarily indicate a
“tightening” in policy.

Impact of the Policy Variables
We have indicated above that monetary and fiscal
developments have recently been more stimulative.
Page 4



But, while this interpretation is indicated by a simple
examination of current data, the timing of the effect of
such policy measures is not certain.
Consider first the stock of money. Movements in the
stock of money may affect the economy with a lag—
perhaps a variable one. It is not at all clear whether
very recent changes in money are most relevant for
economic developments of the near future— whether
or
changes which occurred some time ago are more im­
portant. Similarly, with respect to the Federal bud­
get the major impact of Federal spending decisions
on the private economy may be when contracts are
let, not when payments are made. Private firms make
decisions which affect economic activity at the time
Government contracts are let. According to this view,
the payments simply represent an “unwinding” of
commitments. Accordingly, some of the economic ef­
fects of the current Federal budget position may al­
ready have occurred.

The Policy Setting
Monetary and fiscal policies are bearing upon a do­
mestic economy which is continuing a strong expan­
sion. Production, employment, spending, and prices
have increased rapidly in recent months. The domes­
tic expansion is occurring within an international
environment in which, recently, there has been a sur­
plus in the U. S. international accounts. Over a long
previous period, however, the nation had large chronic
payments deficits.

Domestic Business Activity
Industrial production in July reached 144 per cent
of its 1957-59 average, up sharply from June. Output
had risen at about an 8 per cent annual rate since
spring, approximately the same rate as from a year
earlier. Much of the rise since spring has been in
metals industries, where increases have been influ­
enced by possibilities of a steel work-stoppage.
In August automobile assemblies, which were at an
annual rate of 9.5 million units from April to July, re­
mained near this level—
having declined seasonally for
model changeover. Steel ingot production was cur­
tailed in August; this adjustment was made in antici­
pation of reduced production of finished steel in Sep­
tember.
Employment has continued to show strong gains.
From last spring to August, total employment rose at
about a 3 per cent annual rate. Payroll employment
has risen at a 4 per cent rate, with especially strong
increases in durable goods manufacturing but also
with gains in trade and service industries. Unemploy­

ment reached 4.5 per cent of the labor force in July
and August, continuing the downtrend of the past two
years. The unemployment rate for married men aver­
aged 2.4 per cent in the three months ending with
August, compared with 2.5 per cent in the previous
three months and 2.7 per cent in the corresponding
year-earlier period.

ic shifts in supply conditions—
have declined since
spring. In comparable periods of recent years such
prices have moved up or been about unchanged.
Final demand is probably being further expanded
currently by the stepped-up military effort. However,
in order to present a balanced picture, it should be
noted that the economy may face substantial adjust­
ments after the resolution of steel wage negotiations.
The dimensions of the adjustments depend upon nu­
merous factors. There has been the basic question of
whether there will be a strike. There is also a question
of whether the inventories of steel consumers are sub­
stantially in excess of current needs. To the extent
that steel users have excessive inventories which must
be worked down, steel production will be adversely
affected.

Prices of wholesale industrial commodities have
crept upward in recent months, continuing the rise
which began in mid-1964. In August these prices
reached 102.6 per cent of their 1957-59 average, some­
what higher than the level attained near the last peak
in business activity in early 1960. Consumer prices
other than for services—
whose short-run movements
are heavily influenced by a strong, long-run, upward
tendency—
and other than for food—
whose short-run
movements are heavily influenced by seasonal or errat­

T a b le II

WHOLESALE PRICES— INDUSTRIALS1
C o m p o u n d e d A n n u a l R a te s o f C h a n g e
In it ia l M o n th
T e rm in a l
M on th
4 -6 4
5 -6 4
6 -6 4
7 -6 4
8 -6 4
9 -6 4
1 0 -6 4
1 1 -6 4
1 2 -6 4
1 -6 5
2 -6 5
3 -6 5
4 -6 5
5 -6 5
6 -6 5
7 -6 5

3 -6 4

4 -6 4

0 .0
0 .0
^ —0 . 8
0 .0
0 .0
0.0
0 .7
0 .7
0 .9
1.0
0 .9
0 .9
0 .9
1.0
1.1
1.0

0 .0
— 1.2
0 .0
0.0
0.0
0.8
0.9
1.0
1.1
1.0
1.0
1.0
1.1
1.2
1.1

5 -6 4

6 -6 4

7 -6 4

9 -6 4

8 -6 4

1 0 -6 4

1 1 -6 4

1 2 -6 4

1 -65

2 -6 5

3 -6 5

4 -6 5

5 -6 5

6 -6 5

1 9 5 7 -1 9 5 9
= 100
101.1
101.1
100.9

— 2.3
0.0
0.0
0.0
1.0
1.0
1.2
1.2
1.1
1.1
1.1
1.2
1.3
1.2

2 .4
1.2
0.8
1.8
1.7
1.8
1.7
1.5
1.5
1.4
1.5
1.6
1.5

101.1
0 .0
0 .0
1.6
1.5
1.7
1.6
1.4

0 .0
2.4
2 .0
2.1
1.9
1.6
1.5
1.5
1.6
1.7
1.5

1.3
1.3
1.4
1.5
1.4

4 .9
3 .0
2.8
2.4

1.2
1.8
1.6
1.2
1.2
1.2
1.4
1.5
1.3

1.9
1.8
1.7
1.8
1.9
1.7

2.4
1.8
1.2
1.2
1.2
1.4

1.2
0 .6
0.8
0 .9
1.2
1.4
1.2

1.5
1.3

0 .0
0.6
0.8
1.2
1.4
1.2

1.2
1.2
1.6
1.8
1.4

1.2
1.8
2.0
1.5

2.4
2.4
1.6

2.4
1.2

0 .0

101.1
101.1
1 01.5
101.6
101.8
101.9
101.9
102.0
102.1
1 02.3
1 02.5
10 2.5 p

1 N seasonally adjusted.
ot
p-Prelim
inary.
Source: U S. D
.
epartm of Labor.
ent
T a b le I I I

CONSUMER PRICES— COMMODITIES LESS FOOD1
C o m p o u n d e d A n n u a l R a te s o f C h a n g e
In it ia l M o n th
T e rm in a l
M o n th
4 -6 4
5 -6 4
6 -6 4
7 -6 4
8 -6 4
9 -6 4
1 0 -6 4
1 1 -6 4
1 2 -6 4
1 -6 5
2 -6 5
3 -6 5
4 -6 5
5 -6 5
6 -6 5
7 -6 5

1 9 5 7 -5 9
3 -6 4
0 .0
0 .0
0 .0
0 .0
— 0.2
0 .0
0 .5
0 .7
0.8
0 .7
0 .4
0 .5
0 .6
0 .7
0 .6
0.3

4 -6 4

0 .0
0 .0
0 .0
— 0 .3
0 .0
0 .6
0 .8
0 .9
0.8
0 .5
0.5
0 .7
0.8
0 .7
0.3

5 -6 4

6 -6 4

7 -6 4

8 -6 4

9 -6 4

1 0 -6 4

1 1 -6 4

1 -6 5

2 -6 5

3 -6 5

4 -6 5

5 -6 5

6 -6 5

=

100

104.3
104.3
0 .0
0 .0
— 0 .4
0 .0
0 .7
1.0
1.0
0.9
0 .5
0.6
0 .7
0.9
0 .7
0.3

0 .0
— 0 .6
0.0
0 .9
1.2
1.2
1.0
0 .6
0 .6
0.8
0 .9
0.8
0 .4

— 1.1
0 .0
1.2
1.5
1.4
1.2
0 .7
0 .7
0 .9
1.0
0.8
0 .4

1.1
2.3
2.3
2.0
1.6
1.0
1.0
1.2
1.3
1.0
0 .5

104.3
104.3
104.2
104.3
1 04.6
104.8
104.9
104.9
10 4.7
104.8
1 05.0
105.2

3 .5
2.9
2.3
1.7
0.9
1.0
1.2
1.3
1.0
0.5

2.3
1.7
1.2
0.3
0 .5
0.8
1.0
0 .7
0.1

1.2
0 .6
— 0 .4
0 .0
0.5
0.8
0 .5

0 .0
— 1.1
— 0 .4
0.3
0 .7
0 .4

— 0.1

— 0 .3

1 Includes hom purchase costs w w classified under services prior to 1964.
e
hich ere
N seasonally adjusted.
ot
Source: U. S. Department of Labor.



1 2 -6 4

— 2.3
— 0 .6
0.4
0.9
0 .5
— 0 .4

1.1
1.7
1.9
1.2
0 .0

2.3
2.3
1.2
— 0 .3

2.3

0.6
—1.1

—1.2
—2.8

105.1

—4.5

104.7

In te rn a tio n a l D e v e lo p m e n ts

The U. S. balance of payments for the second quar­
ter showed a surplus, the first since 1957. Net receipts
from foreigners were at a $528 million annual rate,
compared with a first quarter deficit of $3 billion.
Major factors contributing to the second quarter gain
were a $1.4 billion improvement on merchandise ac­
count and a marked reduction in private capital out­
flows. Bank-reported capital movements resulted in a
net inflow of $1.5 billion at an annual rate, in con­
trast with a first quarter outflow of $1.8 billion.
United States Balance of Trade
and Net Payments Position

terly improvements in the future. The dock strike
early in the year tended to exaggerate the improve­
ment in the trade balance from the first to the second
quarter. The trade balance for the first half of 1965
was $2.0 billion less than for the first half of 1964,
primarily because of greatly expanded imports. In
the present context of world trade, growing at a 6 per
cent rate compared with last year’s 12 per cent, the
prospects for export growth are less promising. On
the other hand, prospects for poor European harvests
give rise to the possibility of increased U. S. grain
exports.
Despite the U. S. net payments surplus, the gold
stock declined in the second quarter by nearly $600
million to about $14 billion.
Long-term interest rates have been rising in Europe,
especially in Germany. The German bank rate was
increased from 3.5 to 4.0 per cent on August 13. Such
developments intensify the forces attracting capita
funds from the United States to Europe and prolonj
imbalances in international accounts.

Summary

LL E x c lu d in g m ilitary tra nsfe rs u n d e r g ran ts.
[2 Deficit m easure d b y nef decline in U.S. m onetary re se rve assets plus net increases in
foreign-held liq uid d o lla r assets, adjusted for sp ecial no n -liq u id govern m e nt
transactions.

Source: U.S. Deportment of Commerce
Latest data plotted: 2nd quarter prelim
inary

The second quarter figures reflected, to a great ex­
tent, temporary influences. The impact of the Vol­
untary Credit Program on capital outflows, very large
initially, will probably not produce continuing quar­

To the extent that Government fiscal policies ar<
relatively more relaxed, a rise in the structure of inter
est rates is consistent with that mix of total Govern
ment policy which is appropriate to optimum tota
demand. Such a rise in rates cannot meaningfully be
interpreted as restrictive. Such a policy mix which
relies more heavily on stimulative fiscal actions—
and
hence, implies higher optimum interest rates—
may be
more conducive to needed basic adjustment vis-a-vii
foreign countries than a mix wherein low interest
rates are associated with restrictive fiscal policy.

J B t/L X MAILINGS of this bank’s REVIEW for classroom use will be
made monthly during the school year to teachers requesting this service.
Requests should be directed to: Research Department, Federal Reserve
Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166.

Page 6



Fiscal Policy, Monetary Policy, and
International Disequilibrium
In tr o d u c tio n
T h e in t e r n a t io n a l f in a n c ia l s y s t e m
has been unable to avoid persistent imbalances of
international payments over the past several years.
One aspect of this problem has been the “chronic defi­
cit” in the U. S. balance of payments with its obverse,
a “chronic surplus” for certain European countries.
During the last two years rising U. S. capital outflows
to various developed countries1 have maintained and
perhaps increased this international financial disequi­
librium.
The traditional remedy for controlling capital ex­
ports is to reduce the interest rate differentials which
provide the incentive for foreign lending. Monetary
policies in either the capital importing or capital ex­
porting country can be employed to influence interest
rate differentials between countries. Such policies
may, however, have undesirable domestic consequen­
ces. The policy problem at hand in such cases is to
find means which foster international adjustment with­
out undue cost in terms of internal goals.
This article discusses stabilization policies from two
standpoints. First, some of the relationships between
national stabilization policies and desired economic
goals—
both internal and external—
are outlined. Sec­
ond, recent experience in various major countries is
examined to determine whether stabilization policies
being pursued are most appropriate for the attainment
of national objectives and the preservation of interna­
tional financial equilibrium.

S t a b iliz a t io n P o lic ie s — C o n c e p ts a n d
M ea su rem en ts
Government policies in most industrialized, welldeveloped market economies are directed toward goals
of economic growth, full employment, price stability,
and appropriate balance in external transactions. It
is generally recognized that two main responsibilities
of government—
regulation of the private financial sys­
tem and management of the public finances—
can exert
1See this R ev iew of M arch 1965 for a discussion of capital ex­
ports by type and area.




a powerful influence on the total demand for goods
and services in an economy. Hence, policies regarding
monetary and fiscal actions have come to play a major
role in the attempts of governments to stabilize their
economies and attain national economic goals.
Whenever an economy is operating with less than
appropriate total demand, either monetary or fiscal
actions can be taken to raise the level of total spending
and output. An increase in the money supply can be
brought about which will tend to lower interest rates
and encourage spending; or the government may
stimulate total demand by increased spending or by
reduced taxes.
Monetary and fiscal actions can also be used to
restrain total spending whenever it appears that
planned expenditures would lead to excessive total
demand with unwanted general price increases or an
undesirable deficit in the balance of payments. Mon­
etary expansion can be reduced, contributing to
higher interest rates and reduced private spending.
Taxes can be increased or government expenditures
reduced in order to moderate the level of over-all de­
mand.
There is little unanimity among economic analysts
and observers as to the appropriate method of assess­
ing monetary and fiscal policies. Some, in viewing
monetary experience, choose to emphasize changing
credit conditions or interest rates as the best measure
of monetary actions. Others prefer to examine the
liquidity of the banking system for signs of monetary
ease or restraint. A third view finds that the close his­
torical relationship between the money stock and
economic activity is significant evidence for judging
monetary policy by the behavior of the money supply.
Until further advances in economic analysis permit
the resolution of these alternative views, it may be
useful to weigh and consider each in evaluating mon­
etary experience.
As with monetary policy, there are a variety of ways
of measuring changes in fiscal policy. At first glance,
the government net budget position (administrative,
cash, or national income accounts basis) may seem
to be a good measure of the impact of fiscal actions
on aggregate spending. Tax receipts reduce private
Page 7

purchasing power, and government expenditures
raise total spending. Hence, a deficit in the govern­
ment accounts is a net stimulus, and a surplus is a
net restraint on the economy.
However, the actual deficit or surplus may not indi­
cate fiscal stimulus or restraint, respectively. A dimi­
nution of private expenditure may lower total in­
comes and hence Federal tax receipts. Similarly, cer­
tain government expenditures (e.g., unemployment
compensation) may increase. The consequent “pas­
sive” deficit then reflects the effects of reduced private
spending on government accounts and is not a good
measure of affirmative fiscal policy. To arrive at a
better measure of discretionary fiscal actions, the “full
employment budget” is used.2 This device estimates
what the net budget position might be, given tax and
expenditure programs, at a desired or optimal level
of business activity. When total spending is insuffi­
cient to attain this desired level of activity, the full
employment budget figure isolates the contribution of
Federal fiscal actions to realized aggregate demand
and indicates what fiscal actions are appropriate.

P o lic y M ix in a n E c o n o m y w i t h L i t t l e
F o r e ig n T ra d e
In terms of regulating total spending in the econ­
omy, it might seem to be a matter of indifference
whether main emphasis is placed on monetary or fiscal
policies. Each policy tool has its merits and draw­
backs, however, which under various circumstances
tend to establish a preference between the two. Ad­
ministratively, monetary policy can be applied rather
quickly and flexibly, compared with fiscal policy oper­
ating under present-day administrative procedures and
political restraints. On the other hand, it has often
been acclaimed a virtue of fiscal policy that, by direct­
ly increasing or decreasing total spending, its effects
are realized much faster and more reliably than those
of monetary actions, which affect spending less direct­
ly via interest rates and portfolio readjustments.
Perhaps a more important consideration regarding
the desirable mix of policies is that the composition of
total demand is affected by the relative weight given
each arm of policy. Total demand, employment, and
price goals might be attained by any one of several
policy combinations, but economic growth might not
be the same, depending on the policy mix. If expan­
sionary government actions are appropriate and main
reliance is placed on monetary policy, lower interest
rates would be an inducement for greater private in­
vestment and contribute to a faster rate of economic
2See this Review of April 1965 for a discussion of the full em­
ployment budget and recent U. S. fiscal policy.
Page 8



growth. If fiscal policy is utilized to provide the mai
forces of economic expansion, the government could
either reduce taxes or increase expenditures. In either
case, increased borrowings resulting from the larger
government deficit would tend to put upward pressure
on interest rates, which could inhibit private invest­
ment and retard the pace of capital formation, produc­
tivity increases, and economic growth.

P o l ic y M ix in a n E c o n o m y w it h
S ig n if ic a n t F o r e i g n T r a d e
When taking into account the maintenance of bal­
ance in international transactions, further problems
arise of choosing a mix of policies appropriate to meet­
ing all desired policy goals. If the demand for a na­
tion’s exports is determined by the state of foreign
markets and imports are related primarily to its na­
tional income, a given level of total demand will have
the same implications for the balance on goods and
service transactions3 regardless of the combination of
monetary and fiscal policy. But if capital is free to
move internationally and is responsive to interest rates
at home and abroad, net capital flows will be affected
by policy mix. If, in pursuing a policy stimulative to
the domestic economy, monetary ease is effected, do­
mestic interest rates will be lower than if fiscal policy
had been employed. The relative attractiveness of
foreign versus domestic investment will encourage
outward private capital flows. Conversely, when tak­
ing actions to restrain total demand, primary reliance
on monetary policy will tend to raise interest rates and
increase net capital inflows.

P o l ic y M ix a n d t h e A d j u s t m e n t o f
In te r n a tio n a l I m b a la n c e s
It is possible that the economies of nations pursuing
similar policy goals will fall short of achieving those
goals in differing ways. Total demand may be exces­
sive or deficient; the balance of payments may be in
deficit or surplus; and differing combinations of these
problems may exist in the respective national econ­
omies. In countries facing excessive total demand
along with deficit on foreign account, actions of re­
straint are called for. Deficient total demand accom­
panied by a foreign surplus calls for policies of ease.
In neither of these simple cases is there a conflict of
domestic and international goals which suggests a
particular mix of monetary and fiscal policies.
In other situations requiring domestic and foreign
adjustment, the combination of monetary and fiscal
policy used to influence total demand may not be a
3Neglecting, in the short run, income on foreign investment.

Chart 1
matter of indifference. If a nation
Balance of Payments
faces excessive total demand and is ex­
periencing a balance-of-payments sur­
plus, monetary restraint, while mod­
erating inflationary developments, by
raising interest rates would lead to
capital inflows and a yet greater for­
eign surplus. In the case of a nation
with deficient total demand and a
balance-of-payments deficit, monetary
ease may stimulate the domestic econ­
omy, but at the cost of promoting
greater capital outflows and an in­
creased foreign deficit. Had fiscal pol­
icies been used to influence total de­
mand and monetary policies been
directed toward influencing internat­
ional capital flows, both domestic and
foreign policy goals might be attained
in each instance. If a policy mix which
is inappropriate for foreign goals is
1 9 58
1959
19 60
1961
1962
1963
1964
1965
U. Includes remittances and pensions.
followed to achieve domestic goals,
[2 Includes errors and unrecorded transactions.
L2 Before special Government transactions.
the international payments situation
Latest data plotted: Over-All Balance-2nd quarter 1965 preliminary. Others-lst quarter 1965.
may deteriorate further and call for
Source: U.S. Department of Commerce
reversal of policy actions before de­
and price increases have remained negligible relative
sired domestic results have been achieved. In the end,
to past experience or to recent European inflation
such vacillating actions may result in failure to attain
either domestic or foreign aims. It may then be
(Chart 5).
deduced incorrectly that the policy goals are insoluble
Over the past several years there has been a body
by general policy instruments and recourse will be
of opinion which has advocated higher U. S. interest
had to unconventional measures of economic control.
rates in order to reduce capital outflows and thus
the over-all payments deficit of the United States. To
R e c e n t E x p e r ie n c e iv it h S t a b i l i z a t i o n
some extent, policy measures in accord with this view
P o l ic ie s
have been taken. Maximum rates payable by com­
mercial banks on time and savings deposits have been
The U. S. balance-of-payments deficit averaged $3.4
raised three times— January 1962, July 1963, and
in
billion from 1958 to 1964, despite a rising net surplus
November 1964—
and the Federal Reserve discount
on goods and services and relatively stable outflows
rate was raised on each of the latter two dates. Ear­
on government account (Chart 1). By contrast, the
lier, in 1960 and 1961, short-term interest rates were
balance of payments of six selected European coun­
tries has shown a persistent surplus as
a declining balance on goods and serv­
Chart 2
ices was more than offset by rising
Balance of Payments
capital inflows (Chart 2).
on i r> ii
r ,i- „ c
B illio n s of D o lla r s Selected European Countries B :illio n s ot D o lla r s
r

Similarly, experience with the do­
mestic goals of stabilization policy has
differed in Europe and the United
States. In Europe total demand for
goods and services probably has been
excessive in recent years; unemploy­
ment has remained remarkably low
(Table I), and prices have risen. In
the United States a larger portion of
the labor force has been unemployed,




LLE.E.C. and Switzerland.
Latest data plotted: Over-All Balance-first half 1965 at annual rate. Others-1964.

Page 9

Table I

UNEMPLOYMENT
Annual averages
1958
Belgium1 ................
France2 ................
Germany1 .............
Italy1 ...................
Netherlands1 .........
Switzerland2 ..........
United States1 ........

1959

1960

1961

1962

1963

5.2
3.2
3.5
6.6
2.3
0.8
6.8

6.0
7.9
2.4
5.6
1.8
0.5

5.2
5.3
1.2
4.2
1.2
0.2

2.3

1.8
0.8

2.2

5 .6

3.3
1.8
0.7
3.1
0.8
0.1
5.6

2.7

5 .5

4.2
3.0
0.8
3.5
0.9
0.1
6.7

1964

0.7
2.7

2.5
0.9

0.1

0.8
0.1

5.7

5.2

flows averaged $0.2 billion over the next
year. Over the six quarters from mid-1963
to the end of 1964, increases in bank
credit to foreigners averaged $2.2 billion
per annum, compared with an annual
rate of $0.6 billion for the preceding two
years. As a result, in February 1965 the
Voluntary Credit Restraint Program was
introduced to provide restraints on all
major U. S. lenders to foreigners.

In most major European nations, gov­
ernment policies since 1962 have given
consideration to control of excessive de­
mand and price inflation.5 Monetary
growth has been at a somewhat reduced rate in most
countries (Table II), and interest rates have risen
( Charts 3 and 4). On the other hand, the effect of
government fiscal operations on total demand was
generally expansionary in 1962 and 1963 relative to
1961. In April 1964 the European Economic Commu­
nity Council of Ministers recommended a greater de­
gree of fiscal restraint as part of a general anti-infla­
tionary policy for the Community. It also recommend­
ed that the member countries “maintain or tighten
present restrictive credit policies.”6 In the United
States during 1962 and 1963 fiscal policy, as measured
by the full employment budget surplus,7 was relatively

IPer cent of labor force.
2N ber unem
um
ployed relative to job vacancies.
Sources: O
rganization for Econom C peration and D
ic o-O
evelopm U
ent; nited N
ations.
Chart 3

„

„

Per C ent

—\
'
\

Government Bond Yields
Jtaly
v--\

G an l
erm y

-N

\ ^ s
---s / ----- >
N

S'
y

V
fv fn n S
C triOd

/

~ iu
7y.B * \ '
elg m

y

\s

I

S itzerlan ■
w
d
"- s

Per C e n t

In StateS2L
ited

—

r , i ,~ir . . ,~ir__L,i i~ir , i i~ = , , ,~ , , i~
1=
1960
1961
1962
1963
LLPublic Authorities Bond Yield
Latest data plotted: 2nd quarter preliminary,

1964

1965

5See the May 1964 issue of this R ev iew for a discussion of
these policies.
6E u ro p ea n C om m u n ity, May 1964, p. 4.

Source I.M.F.

not permitted to decline to the low levels of previous
periods of business recession. The Treasury bill rate,
which had fallen below 1 per cent in both the 1954
and the 1958 recessions, stayed above 2.2 per cent
during 1960 and 1961 (Chart 4). However, develop­
ments abroad, primarily in Canadian and British
money markets, made foreign short-term investments
attractive and led to outflows averaging $1.4 billion for
these two years.

7To compare the U. S. full employment budget position with
actual European budget figures seems appropriate. It is gen­
erally believed that the European unemployment rates reflect­
ed full utilization of economic resources during this period,
whereas U. S. rates indicated that total demand was not such
as to attain potential levels of output. See above, p. 8.

Since mid-1962 capital outflows in the form of U. S.
purchases of foreign securities, bank loans to foreign­
ers, and direct investments have assumed increasing
importance. With U. S. long-term rates relatively
stable and considerably below most foreign rates
(Chart 3), net outflows from foreign security trans­
actions, which had averaged less than $1 billion per
annum from 1959 to mid-1962, rose sharply and had
doubled by the first half of 1963. The Administration
then proposed an interest equalization tax, and these
4See Samuel I. Katz, “Yield Differentials in Treasury Bills,
1959-64,” Federal Reserve B ulletin, October 1964, for a dis­
cussion of short-term capital movements.

Page 10



1960
1961
1962
19 63
19 64
19 65
[] Yields on three-month Treasury bills for United States, Netherlands, and Belgium;
__
day-to-day money rates for France and Germany; and three-month deposit rates
for Switzerland.
Latest data plotted: 2nd quarter preliminary.
Source: Board of Governors of the Federal Reserve System and O.E.C.D.

Chart 5

Table II

Consumer Price Indexes /
Annual Averages of Monthly Data

\?6

//

120

" ilv
116

112

J

/

y
/ .
/ y
//
//

£ France
i

X

iwitzerland
^Germany
/
a .Belgium
/

y

104

Government Net Budget Position as a Per Cent of GNP*
Nelheildnds

y J
\/^<>

/
^

/

//

108

19 6 0 —100

/

/

y

y-

MONETARY AND FISCAL DEVELOPMENTS
UNITED STATES AND SELECTED EUROPEAN COUNTRIES

1961
Belgium .........
France ............
G e rm a n y.........
Italy ..............
Netherlands .. . .
Switzerland . . . .
United States ...

— 1.4%
— 1.4
0.1
— 0.4
— 0.2
0.8
2.0

1962
— 1.5%
— 1.7
— 0.4
— 0.7
— 1.1
— 0.1
1.2

1964
— 1.5%
— 0.4
— 0.1
— 1.0
— 1.2
0.7
0.6

/

Monetary Growth
Annual rates

iled States

1958-62

100
19 60
1961
1962
1963
1964
1965
Latest data plotted: Italy, France, and Netherlands-1965 is average of first five
months data. Switzerland, Germany, Belgium, and United States-1965 is average
of first six months data.
Source: O.E.C.D.

restrictive, and monetary policy was easy compared
with previous expansion periods. The money supply
expanded at a 4.1 per cent annual rate, compared with
the 1951-62 rate of 1.9 per cent.
Interest rate differentials between countries, while
not providing a full explanation for all international
capital movements, are a major determinant of much
foreign investment. These differentials result from a
number of factors. Gross savings and marginal pro­
ductivity of capital in each country are perhaps fun­
damental. Market organization, willingness or ability
of lenders to acquire long-term assets, and the degree
to which the savings-investment process is subject to
government control are also important.8 But beyond
these considerations, monetary and credit policies are
of major significance in the economic and financial
processes by which interest rates are generated. For
this reason, the preceding examination of the mix of
national stabilization policies may contribute to an
understanding of comparative interest rates and inter­
national capital flows.

Conclusion
This article has related recent stabilization policies
pursued in Europe and this country to policy goals.
Domestic objectives seem to have been pursued in
8See U. S., Congress, Joint Econom ic Committee, E c o n o m i c
P o l i c i e s a n d P r a c t i c e s ( P a p e r N o . 3 ) : A D e s c r i p t i o n a n d A n a ly ­
s is o f C e r t a i n E u r o p e a n C a p i t a l M a r k e t s , 88th Cong., 2d. Sess.,

1964, for an account of the extent to which government con­
trol of some capital markets may result in higher interest rates
in the uncontrolled markets.




1963
— 2 .0%
— 2.1
— 0.8
— 1.3
— 0.5
0.2
1.8

Be lgiu m ................
F ra n ce .................
G e rm a n y..............
Italy ...................
Netherlands . . . . . . .
Switzerland .........
United S t a t e s ........

5 .4 %
18.1
11.4
19.5
7.4
11.9
1.1

19631964
9 .7 % 7 .1 %
14.78.0
7.48.7
13.94.6
9.28.1
7.26.6
4.14.1

*G N P in current prices; cash budget deficit (— ) or surplus for European
countries; full employment budget for the United States.
Sources: Board of Governors of the Federal Reserve System; International
Monetary Fund.

both cases by a set of policy “mixes” that might have
been inappropriate had the reduction of external im­
balances been accorded greater consideration in policy
formulation. A greater reliance on tight fiscal policy
rather than monetary restraint in Europe during re­
cent years might have moderated the rise in interest
rates and at the same time dampened inflationary
pressures. Similarly, had stimulative fiscal measures
been employed earlier in this country in recent years,
it is possible that less expansionary monetary policies
would have been in order. Under these circumstances,
it seems likely that comparative interest rate develop­
ments would not have produced so great an incentive
for the excessive capital movements which were a ma­
jor factor in the balance-of-payments disequilibria of
the United States and Europe. In the present inter­
national payments system, the maintenance of given
exchange rates, currency convertibility, and freedom
of capital movements logically call for a greater degree
of international cooperation with regard to national
interest rate policies.9
9F o r further discussion of this point, see Bank for International
Settlements, T h i r t y - f i f t h A n n u a l R e p o r t , June 1965, pp. 29
and 164-66; Hal B . Lary, statem ent presented at hearings
before the Subcommittee on Econom ic Statistics of the Joint
Econom ic Committee, 89th Cong., 1st Sess., Part 2, June 8,
1965, p. 161; Harry G. Johnson, “M ajor Issues in Monetary
and Fiscal Policies,” Federal Reserve B u lle t in , November
1964, pp. 1403-04.

Page 11

S t , L o u is
Payroll Em
ploym
ent

1957-59=100

1957-59=100

Economic Expansion
in
Central Mississippi
Valley Cities

Manufacturing Output

1 9 57 -59 =1 00
160

1961

1957-59=100

1957 -59 =1 00

1962

1963

Check Paym
ents

Business Loans

1957-59=100
160

1964

1965

1957-59=100

1957-59=100

E

ICONOMIC ACTIVITY in the Central Mississippi
Valley has advanced at about the same rate in 1965
as in the previous four years of the current business
expansion. Growth in the four largest metropolitan
areas— Louis, Louisville, Memphis, and Little Rock
St.
—
has generally kept pace with the nation since De­
cember and since early 1961.

St, Louis
Economic growth in the St. Louis metropolitan area
has been more rapid in 1965 than earlier in the cur­
rent expansion. Payroll employment has increased at
a 2.4 per cent annual rate since December 1964, re­
flecting primarily a large gain early in the year, com­
pared with a 1.7 per cent average annual rate from
the first quarter of 1961 to the fourth quarter of 1964.1
Manufacturing employment has remained near the
high December level in the first seven months of 1965.
Nonmanufacturing employment has risen moderately
since December, reflecting growth in trade and serv­
ices.
Output of manufacturing firms has increased more
slowly since December than from early 1961 to late
1964. Manufacturing output has advanced at a 6 per
cent annual rate since December, compared with a
9 per cent average rate in the longer run period.

1957 -59 =1 00

Total Deposits

1957 59=100

Spending in St. Louis has followed the national
pattern of more rapid growth since December. The
volume of spending as measured by check payments
has increased at a 15 per cent annual rate in St. Louis
*A11 data are seasonally adjusted. Sources of data used in this
article are: payroll employment, state employment security
offices; manufacturing output, U. S. Departm ent of Com­
merce, public utility companies, and firms using self-generated
power; check payments, samples of commercial banks; busi­
ness loans and total deposits, weekly reporting commercial
banks. T he statistics used in this article appear in “Selected
Econom ic Indicators,” a monthly publication of the Research
Departm ent, Federal Reserve Bank of St. Louis, P. O. Box
442, St. Louis, Missouri 63166.

Page 12



since December, compared with a 12 per cent rate in
the earlier period. Nationally, check payments have
also risen at a 15 per cent rate in 1965, compared with
a 10 per cent rate from 1961 to late 1964.

L o u is v ille
1957-59=100

Payroll Employment

1 9 57 -59 =1 00

1957-59=100

M«»«f»Ct»ri»| Output

1957-59=100

1957-59=100

Cl,ecl( Pa*meB,s

1957-59=100

Banking activity has advanced at a brisk pace in
1965. Total loans outstanding at St. Louis banks have
increased substantially, and business loans have risen
even more sharply since December. In contrast to the
national pattern of decline in recent months, invest­
ments at St. Louis banks have expanded.
Total deposits have increased at an 8 per cent an­
nual rate this year. Demand deposits declined from
December to July, while time deposits increased sub­
stantially.

Louisville
Economic activity in the Louisville metropolitan
area rose markedly early in 1965 and has remained on
a high plateau since February. Payroll employment
has risen at an average 2.7 per cent annual rate in the
last seven months, compared with a 3.7 per cent rate
from early 1961 to late 1964. All of the nonmanufac­
turing categories of employment have shared in the
recent growth, but gains have been most significant
in government. Manufacturing employment has risen
slightly since December. Employment in durable
goods industries, particularly transportation equip­
ment, has increased, while employment in nondurable
industries has declined.
Production in Louisville, as measured by industrial
use of electric power, has risen more slowly in recent
months than in the period from 1961 to late 1964.
Manufacturing output has risen at a 6 per cent annual
rate since December, about half the rate in the earlier
period. The pace of spending, on the other hand, has
accelerated in 1965. Check payments have risen at a
17 per cent annual rate since December, compared
with a 10 per cent rate earlier in the expansion.
Banking activity has generally followed the national
pattern in recent months. Loans have risen signifi­
cantly in both the city and the nation, with a rise in
business loans accounting for much of the increase.
Bank investments in both Louisville and the United
States as a whole have declined since December, fol­
lowing a moderate upward trend earlier in the current
expansion.

1957-59=100

1957-59=100

im w

1957-59=100

®eP8si*s

19 57-59=100

Bank deposits have fluctuated widely since Decem­
ber. Demand deposits have risen at a 5 per cent rate,
and time deposits at a 20 per cent rate, compared
with average rates of 2 per cent and 34 per cent re­
spectively in the earlier period.




Page 13

M e m p h is

M e m p h is

Payroll Employment

1957-59=100

120

1957-59=100

120

s.jasonally Adjust>
d

116

116

112

112

108

108

104

104

100

—

"—
1961

1957-59=100
160

1962

1963

1965

MMBfatvriig Output
1

Seasonally A d ju s t*

140

120
100

1964

________ :—

1961

1962

r -

^

J

-— '

1963

S
<otonolly Adjust*d

140

1965

Check Payments

1957-59=100
190

1957-59=100
160

U ^_

1964

I

100

120
100

1957-59=100
190

170

170

150

150

130

130

110

1961

1957-59=100

1962

1963

Business Loans

1964

1965

110

1957-59=100

Economic expansion in Memphis has been espe­
cially rapid during 1965. Payroll employment has in­
creased at a 4.1 per cent annual rate since December,
compared with a 2.4 per cent rate from 1961 to late
1964. Employment in service industries and govern­
ment has risen most rapidly since December, with
the anti-poverty program partly responsible for the
increase. As in St. Louis and Louisville, employment
in manufacturing industries has increased more slow­
ly than in nonmanufacturing industries in the first
seven months of 1965.
Total employment in Memphis has advanced at a
4.8 per cent annual rate since December, but the labor
force has also risen rapidly. During the seven-month
period unemployment has fallen from 3.6 to 3.3 per
cent of the labor force.
Manufacturing output as measured by the indus­
trial use of electric power has increased at an 8 per
cent annual rate since December, with production of
nondurable goods advancing most rapidly. Check pay­
ments have risen at a 9 per cent rate in' 1965, about
the same rate as earlier in the expansion.
Trends in banking activity have been mixed. Loans
have increased at a 12 per cent rate since December.
Business loans, after adjustment for seasonal in­
fluences, have risen sharply at Memphis banks, as in
the other large Central Mississippi Valley cities. Bank
investments have declined substantially.
Total deposits in Memphis have decreased in recent
months. Demand deposits in July remained at about
the December level. In contrast to upward trends in
the rest of the nation, time deposits have declined at a
13 per cent annual rate since December, after advanc­
ing at a 33 per cent rate from 1961 to late 1964. The

Page 14




probable reason for the recent decline in time deposits
is the higher rates paid on such deposits in other areas.
A state law limits the rate of interest paid on time
deposits in Tennessee to 4 per cent.

Little Rock
1 9 5 7 -5 9 = 1 0 0

Payroll Em lo en
p ym t

1957-59=100

Little Rock
Economic activity in the Little Rock metropolitan
area has continued to advance rapidly in 1965. E m ­
ployment growth since December has exceeded the
rate for the United States as a whole, although monthto-month fluctuations in Little Rock have been great.
Payroll employment has increased at a 6 per cent rate
since December, with manufacturing employment ex­
panding most rapidly. The metals industry has been
responsible for much of the manufacturing employ­
ment growth in Little Rock this year.

1 9 5 7 -5 9 = 1 0 0

Nonmanufacturing employment has risen more rap­
idly since December than earlier. From M a y to June
there was a sharp rise in government employment
largely attributable to the Neighborhood Youth Corps
and a larger number of students than usual working
during the summer.
1 9 5 7 -5 9 = 1 0 0

M
anufacturing O tp t
uu

Check Paym ts
en

1 9 5 7 -5 9 = 1 0 0

1 9 5 7 -5 9 = 1 0 0

Manufacturing output in Little Rock has advanced
significantly in 1965, more than offsetting declines in
the second half of 1964. Check payments have in­
creased at a much slower rate in recent months than
earlier.
Loans have dominated the Little Rock banking pic­
ture recently. In periods of business expansion loans
often rise faster than deposits as banks liquidate in­
vestments. This seems to be the case at Little Rock
banks. Loans have risen at a 24 per cent rate since
December, while deposits have increased at only an
8 per cent rate. Consequently, bank investments have
declined substantially since late 1964.




1 9 5 7 -5 9 = 1 0 0

Business Lons

1 9 5 7 -5 9 = 1 0 0

T D
otal eposits

1 9 5 7 -5 9 = 1 0 0

1 9 5 7 -5 9 = 1 0 0

Page 15

Agriculture in the Central
Mississippi Valley
F a r m IN C O M E P R O S P E C T S in the Central M ississippi Valley area have improved substantially in
recent months. Cash receipts from farm marketings
have risen significantly since April, compared with
levels of a year earlier. Higher prices for livestock
products have been a major factor. Crop prospects
are favorable.
Farm commodity sales in June of this year were 7.8
per cent above the June 1964 level in the five state
area. A ll states in the area had sales above year-ear­
lier levels. Total second quarter sales were up 6.0
per cent, after having trailed 1964 sales by 6.2 per cent
in the first quarter ( see Table). Higher prices for live­
stock products were a major factor in the increases. All
major livestock products in the area except eggs were
selling above year-earlier prices by mid-year. Hogs,
however, were the leading gainer, rising to an average
of $23.10 in July, 44 per cent above July 1964 prices.

Crop income prospects are excellent for the Central
Mississippi Valley. Record yields and production are
estimated for most of the major crops in the area.
Prices for 1965 crops are not likely to change much
from the 1964 average. The level of Government price
supports has generally determined the price of most
area crops in recent years. Such supports for 1965
were not changed significantly from the 1964 rate.
SELECTED CROP PRICES
1964

1964

Support Price

H ogs ........................... ... + 4 4 %
Steers and h e if e r s ............ + 1 7
All milk, w holesale........ ... + 2

Support Price

$1.25

Soybeans ( b u . ) .......

2.25

2.66

2.25

Rice (cwt.)

4.71

4.92

4.50

............

$1.16

$1.25

Tobacco (lb.) .........

0.589

0.602

0.595

Cotton ( lb . ) ............

0.3350

0.295

0.3335

CASH RECEIPTS FROM FARM MARKETINGS
Central M ississippi Valley
Per Cent Change
_______(1965 compared with 1964)______
June

All beef c a t t le ................. + 1 7

by Farmers

Corn (bu.) ............

PERCENTAGE C H A N G E IN PRICES OF MAJOR
LIVESTOCK PRODUCTS
(July 1 9 6 4 -J u ly 1965)

1965

Av, Price Received

2nd Quarter

1st Quarter

Central M ississippi Valley
States Total
Arkansas
Illinois

...............

7.8

6.0

—

........................

5.5

1.8

...........................

15.8

12.2

..........................

15.7

8.8

—

Indiana

6.2
20.6
3.0
5.1

Chickens, all, live ........ ... + 5

Kentucky

........................

13.9

7.8

— 38.5

Egg*.......................— 1

M ississipp i ......................

7.5

5.6

21.0

Missouri

..........................

6.4

7.4

1.6

....................

10.2

6.5

— 11.5

11.1

9.1

—

The lower farm receipts for the area in the first quar­
ter compared with 1964 resulted from greatly reduced
sales of the prior years tobacco crop in Kentucky, Ten­
nessee and Indiana.




Tennessee

United S t a t e s ...................

0.5

lF iv e states: Arkansas, Kentucky, Mississippi, Missouri, and Tennessee.