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Recent discussions of the Eurodollar market have revealed considerable controversy among economists over its structure and impact. In the hope of clarifying the functioning of the market, this paper presents two models in which Eurobanks are viewed as a special type of intermediary in the financial sector of the United States. These overseas banks issue Eurodollar deposits, time deposits denominated in dollars, and acquire U.S. and foreign securities and non-deposit branch claims on U.S. commercial banks. Changes in asset yields, including the Eurodollar deposit rate, alter the size and composition of the balance sheets of Eurobanks, U.S. commercial banks, and the public. These models will be used to determine (1) how the behavior of transactors in the Eurodollar market affects the impact on U.S. interest rates of monetary disturbances in the United States; (2) how the size of the market is affected by these disturbances; (3) whether switches into Eurodollar deposits by the public are likely to lead to an induced expansion of the market; (4) whether raising Regulation Q ceilings is expansionary or contractionary; and (5) the importance of Regulation Q ceilings to the size of the market. The Gramley-Chase-Smith financial sector model is reviewed and modified in Section I and extended in Section II to include Eurodollar transactions. Section III presents an alternative model of the Eurodollar market, in which Regulation Q ceilings are imposed on U.S. time deposit rates. Section IV is a summary of the results. The major limitation of this paper is its omission of induced changes in foreign interest rates, the inclusion of which would require the addition of a foreign financial sector to the models, and in spot and forward exchange rates, which are taken to be pegged by the exchange authorities. [ABSTRACT FROM AUTHOR]

The article presents commentary from Richard S. Bower about two papers contained in the current issue, "A Programming Approach to Corporate Financial Management" by Myers and Pogue, and "Debt Management and the Form of Business Financing" by White. He is disappointed that neither paper addresses such questions as whether financial managers should incorporate speculation about interest rates into their decisions about debt financing, what the optimal level of debt is, and whether dividends make sense when external equity is available as a source of funds. He doesn't believe White's paper backs up his hypothesis about rate speculation.

The paper is a welcome contribution to comparative economic analysis. The authors conclude that (1) general credit restraint is pervasively associated with more or less severe downturns in new construction, (2) financial stringency affects residential building disproportionately compared to other major sectors of the economy such as industrial investment, and (3) cyclical declines occur "almost regardless of prevailing institutional arrangements" for the financing of housing. Thus, the contraction of new building during tight-money periods seems to be rooted in the "nature of the beast"--the particular sensitivity of housing to changes in financial conditions. We have again learned this morning how difficult it is to specify the nature of the beast more precisely and in a form that lends itself to empirical verification. The Fisher-Siegman paper points up the unresolved issue of credit availability versus cost of funds. If this problem has so far proved to be intractable in a single country--our own--, it is compounded for comparative analysis. Professor Fair's paper stresses the failure of most U.S. housing models to separate clearly demand and supply coefficients, including the financial variables operating on the demand for housing or the supply of new construction or, for that matter, on the volume and price of existing housing offered in the market. We have still some distance to travel for a fuller understanding of the interactions between the mortgage market and the housing market, and the interactions between the mortgage market and the general capital market as well. [ABSTRACT FROM AUTHOR]

There are many different systems to improve the domestic payments mechanism in operation or at advanced stages of planning. This paper is an attempt to identify and describe some of the important evolving mechanisms for effecting transactions within the American economy, with particular emphasis on how their adoption is likely to affect the implementation of monetary policy. Check clearing is a large and growing business in the United States. In 1971, the Federal Reserve has reported that the annual number of checks written in the United States is about 22 billion and that this number is likely to double during the current decade. No doubt similar growth rates have been experienced in the past. At the outset it is important to understand why banks are anxious to modify the existing payments mechanism. First, stock exchange brokerage houses have given banks a most discomforting view of what can happen to financial intermediaries which ignore growing transaction volumes. [ABSTRACT FROM AUTHOR]

Starleaf and Stephenson (S&S) have recently presented an interesting paper [8] whose central theme is similar to that of my book [2]. S&S argue that observed interest rates are strongly influenced by forces other than monetary policy actions and thus cannot be taken as a measure of the latter. I argued that the money stock, as well, is influenced by forces other than policy actions and that it, too, is thus an inappropriate indicator of policy actions. We both then advocated measures of monetary policy analogous to the full-employment surplus measure of fiscal policy; that is, measures that are independent of the business cycle except insofar as policymakers respond to the cycle. [ABSTRACT FROM AUTHOR]

This paper analyzes the role of the Federal Reserve to money markets and bank management regarding their reserves. The author outlines three goals: to test the applicability of a model that views bank borrowing from the Reserve's discount window as a buffer to short-run reserve flows; to examine how the price of Federal Funds is influenced by the eight large money market institutions; and to investigate the existence of structural changes in the market. Weekly data from 1960-1968 is used throughout the paper.

A conference paper is presented that focuses on the impact that the price of credit has on consumers and how they react to changes in the finance rates of installment loans. The author argues that some consumers will be more interested in changes to finance rates and less so to contract maturities while other consumers will be the opposite. The article concludes that more consumers are indifferent than has been thought but that the reason for this is the length of contract maturities.

The article presents a discussion of papers written by Norris Johnson and John Scanlon. These authors discuss economic forecasting from 1957 to 1967. Particular attention is given to how the demand for capital funds are crowding the supply during most of this period but not in such a manner as to give rise to major capital shortages. The author states that there is no proof positive way of assessing the reliability of the assumptions made in this paper or their implications for the adequacy of funds.

In periods of frequent realignment of foreign exchange rates, interest focuses understandably on the causes of capital movements. The difficulty with studies of such movements usually lies in obtaining data sufficiently disaggregated so as not to force too many types of motivation into one all-encompassing specification. This was the problem M. Porter as well as W. H. Branson and R. D. Hill faced when studying capital movements of OECD countries. C. F. Ou started from a much more narrowly defined asset category but failed to distinguish between demand balances held for transactions requirements and interest earning assets. Despite the attention that capital flows have received of late, their importance for the present system of international exchange rates and the conduct of monetary policy as well as the shortcomings of the studies to date may justify another inquiry. Specifically, the present paper will review briefly the theoretical underpinnings for German banks' decisions to hold short term assets abroad. The main purpose is twofold: 1) to determine which interest rates and scale variables yield the best explanation of actual changes in the stock of such assets held by German banks; 2) to obtain an estimate of changes in the short term capital account of the German balance of payments that can be attributed to banks' portfolio adjustments in the face of interest rate changes at home and abroad. [ABSTRACT FROM AUTHOR]

This article presents commentary from Lawrence Fisher about two papers in the current issue, "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates" by Merton, and "The Economic Determinants of Systematic Risk," by Robichek and Cohn. He regards Merton's work as commendable, but wishes he would augment his model with a variable to represent transaction costs. In his view Robichek and Cohn address an important question, but their work is undermined by faulty statistical methods. The author describes six such flaws and proposes remedies for each.

During the ten-year period 1961 through 1970, commercial banks actively competed for time and savings deposits which became an increasing share of total bank deposits. Time deposit growth was facilitated by a number of upward adjustments in interest ceilings. Interest paid on time deposits became an increasing share of bank costs, and the interest cost per dollar of total bank deposits grew appreciably. During the same period, banks raised their gross earnings on assets, and during the first half of this period the increase occurred while market interest rates were relatively stable; that is, portfolio adjustments tended to raise the ratio of gross earnings to bank assets. Most observers would agree that there is a close relationship between deposit costs and gross earnings on bank assets. However, there appears to be somewhat less agreement on the precise nature of this relationship during periods when interest ceilings on deposits are imposed or changed. In this paper we will attempt to develop a general framework for linking changes in bank deposit costs to portfolio policies and risk-taking (Sections II, III, and IV). In Section V aggregate bank experience in the 1960s will be related to this framework, and in Section VI we will look at individual bank data. [ABSTRACT FROM AUTHOR]

This paper presents more detailed evidence on the behavior and relationships of various interest rates in the United States since the Accord of March, 1951. Spectral analytic techniques are utilized in examining (1) how rates of return on different securities of specific maturity vary through time, and (2) how rates on securities with different terms to maturity appear to be related. Spectral analysis appears especially well suited to examination of interest rate relationships since it is a mathematical tool equipped to deal specifically with the mixture of randomness and regularity typically contained in an interest rate series. As such, it yields more insights into interest rate movements and relationships than conventional techniques of analysis which depend on specified periodicities. [ABSTRACT FROM AUTHOR]

Roll's argument is based on the theory of efficient markets. "Why," he asks, "should the price of a commodity not be bid up today if it is expected to be higher tomorrow?" The misleading aspect of this question is that it fails to distinguish between nominal and relative prices. This argument, however, only pushes the problem back a stage. Why don't the nominal prices of all storable commodities rise today to the levels expected tomorrow? This result is the one obtained in Roll's simple model. The answer is that the higher is the price level today, the lower is the level of real money balances today. Since real money balances provide a yield in production and consumption services, the holders of money balances will want to bid commodity prices up only to the point at which the cost of holding real balances--the real rate of interest plus the rate of increase of commodity prices--equals the marginal services yield on real balances. If the marginal services yield on real balances were for some reason to be zero, then the price level today would be bid up above tomorrow's expected price level so that the yield on money balances from deflation would equal the real rate of interest. [ABSTRACT FROM AUTHOR]

The article discusses financial intermediation. Essential to the work of intermediaries is the issuance of claims for funds, and the use of those funds to purchase other financial assets The current paper examines the conditions under which an intermediary will accept savings deposits and purchase mortgages. After developing a three-security model for intermediation, the author applies it to a specific instance that incorporates a mean-variance preference function. The key insight is that for both assets and liabilities, portfolios cannot be selected independent of yield parameters.

The principle objective of our paper [5] was to present the theoretical concept of the Monetary Full Employment Interest Rate (MFEIR). We argued (and still believe) that this concept should be acceptable for use as an objective indicator of monetary policy by economists who believe that the Keynesian monetary mechanism is a valid description of reality. The presentation of estimates of the MFEIR was a secondary objective. As we stated, "[o]ur empirical results are presented more as an example of how this variable might be measured and used rather than as a definitive set of estimates of the monetary full employment interest rate during the 1952-1966 period." [5, p. 638]. [ABSTRACT FROM AUTHOR]

Our paper studies empirical relationships between money demand on the one hand and income and the rate of interest on the other for the United States in the post-war period, 1947-1966. Much already has been learned about the statistical properties of money demand chiefly through the pioneering work of A. J. Brown, Tobin, Latane, Friedman and Bronfenbrenner-Mayer and the more recent important studies of Christ, Meltzer, Brunner-Meltzer, Lee, Teigen, Laidler, Chow and Zarembka. But much also remains in question. Our aim is to throw light on some of the unsettled issues. [ABSTRACT FROM AUTHOR]

My paper is basically an effort to develop for the U.S., which is assumed to be the key nation of the world economy, an economic adjustment tool other than the interest rate, to be used unilaterally to affect international and domestic economic conditions within the framework of international conventions and day to day working procedures of international business activity. The exercise is undertaken because multilateral economic adjustment procedures available to nations, and particularly to the U.S., are currently inadequate. The unilateral international economic adjustment opportunity considered becomes available to the U.S. when it adopts a value-added, or a similar tax, as a major revenue source of the Federal government. Because of the wide acceptance of the anti-indirect tax arguments in the U.S., it has been considered necessary to devote considerable space at the end of the paper to the development of the pro-indirect tax position. [ABSTRACT FROM AUTHOR]

The article reports on the application of the flow of funds accounts to interest rate forecasting. There has not been a lot of interest in techniques for forecasting interest rates because they are considered results of business activity and therefore need only business forecasts. However, there are two popular methods: correlations with the economy based on a non-statistical approach, and an outlook analysis of the uses of funds and their sources. An informal approach considers that money rates are reflective of changes in business activity which create fluctuations in interest rates that are comparable.

The article develops refined estimates of the tax revenues that would have been received by the United States Treasury if the income from municipals had been subject to full current-income taxation. It is explained that the tax-yield estimates will be divided between the investors in state and local securities and the issuers of such securities. The article examines the opposition to the taxation of municipals. The article also touches upon local debt and interest payments, and the difference in interest rates between taxable and tax-immune obligations.

The article addresses the yield differential in the corporate bond market. The author refers to a study of changing credit conditions in the bond market, as well as the relationship between bond prices and interest rates from 1900-1944. This paper seeks to address price-making in the corporate bond market since January, 1955. The author cites Moody's Investors Service index as a primary data source of new and seasoned bond yields. The author discusses the behavior of corporate bond yields, the nature, construction, and limitations of Moody's indexes of corporate bond yields, and presents an explanation of the differential between yields on newly issued and seasoned corporate bonds.

The article provides an outlook for the money market in the U.S. for 1959. The article discusses the importance of the business picture for the money market and the characteristics of the money market including the shifting of participation by lenders and borrowers, the volatility of interest rates, and the evolutionary changes of instruments. The author examines information on the volatility of interest rates and discusses federal funds. The article also takes a look at issues related to the provision of bank loans to government security dealers.

The article provides a critique on an article written by Robert P. Shay called "The Price of New Automobile Financing" that appeared in this journal. The author comments that he is impressed with the data that has been collected by Shay and the National Bureau of Economic Research and praises the method of sampling actual contracts for appropriate rates. However, the author disagrees with Shay that his method for calculating the finance rate could be used in other categories. The link between the differences between the finance rate of car dealers and that which is offered to consumers is discussed.

The article presents information on features of Bank of France policy. One of the purposes in forming the Bank of France in 1800 was to make credit generally available at low rates of interest. The Bank admitted that it rationed credit in periods of tight money but it insisted that despite accusations to the contrary, that it administered rationing impartially. The rate of 5 per cent, established in the fall of 1814, was continued until June 1, 1819, for one-month paper and until February 1, 1820, for longer paper. Periodically the suggestion was made in the Bank parlors that the discount rate be changed, but the Bank officials developed a theory to justify a stable rate. After many months of discussions on whether to reduce the Bank rate, a rise in the market rate settled the issue and according to Bank officials demonstrated the wisdom of long deliberations. It was suggested that a reduction of the Bank rate would attract more and better bills and would be advantageous to the stockholders as well as to the public.

The subject of this paper is corporate decision making under perfect capital market conditions. The question raised is: If investors act as Markowitz portfolio theory suggests, and if capital market conditions as developed by Sharpe and Lintner exist, what implications follow for the corporate manager making decisions within the firm? This question is addressed for a particular type of corporate decision: the refunding decision. The approach taken, however, is generalized and lends itself to analysis of other firm decisions, particularly those which concern the choice of allocating funds to mutually exclusive uses. [ABSTRACT FROM AUTHOR]

Recent research has established that finance companies accept poorer credit risks for personal loans where legal rate ceilings are higher. This finding suggests that the volume of personal loans extended or outstanding might also be positively associated with legal rate ceilings, but the supply of finance company personal loans has displayed positive, negative, and zero correlations with interest rate levels. There are two major reasons for this past chaos concerning supply: The credit data utilized have been faulty, and the model specifications have been inadequate. The purpose of this paper is to overcome these deficiencies. The first section below contains a brief description of the credit data that will be employed. The second section contains our model specifications. The test results are presented in section three. [ABSTRACT FROM AUTHOR]

While a number of theories and empirical studies has been published on the term structure of interest rates (item 1), there has been no systematic development of a theory for pricing bonds when there is a significant probability of default. The purpose of this paper is to present such a theory which might be called a theory of the risk structure of interest rates. The use of the term "risk" is restricted to the possible gains or losses to bondholders as a result of (unanticipated) changes in the probability of default and does not include the gains or losses inherent to all bonds caused by (unanticipated) changes in interest rates in general. Throughout most of the analysis, a given term structure is assumed and hence, the price differentials among bonds will be solely caused by differences in the probability of default. [ABSTRACT FROM AUTHOR]

One of the oldest forms of financial regulation in the United States is the usury law. At the present time there are statutes governing the maximum allowable interest rate which a lender can charge an individual on a residential home mortgage loan in all but five states. These statutory rates vary appreciably among the states ranging from a low of 7-1/2 per cent in New York, New Jersey, and Vermont to a high of 21 per cent in Rhode Island. During recent years, usury limits in many of the states have remained inflexible in the face of rising market interest rates. As shown in Table I, sixteen states and the District of Columbia had general usury limits on home mortgage loans of eight per cent or less during 1970. This was below prevailing mortgage rates for the nation as a whole. Although a number of the states, particularly those with lower ceilings, exempt FHA and VA mortgages from the statutes, there is a Federal limit imposed on such loans which is generally below prevailing mortgage rates as well. However in 1970, when the FHA-VA ceiling rate was 8-1/2 per cent, usury limits in states like New York were a full percentage point below the Federal limit. The purpose of this paper is to investigate empirically the relation between "unduly low" usury ceilings and the level of single family homebuilding. Using cross section data for a sample of 77 Standard Metropolitan Statistical Areas (SMSAs) for the year 1970, a model is constructed which relates the quantity of single family housing starts to a number of important economic and demographic determinants including real per capita income, population levels, population growth, population density, housing prices, and a dummy variable measuring the impact of low usury ceilings. The model is estimated using ordinary least squares techniques and the results indicate that in SMSAs where statutory rates lie below market rates, the level of single family home-building is, on average, approximately 28 per cent lower ... [ABSTRACT FROM AUTHOR]

This paper has developed and discussed a general model of the demand for money by household units. It resulted in demand functions for each short term asset that were functions of rates of return and transactions costs of the asset in question and its adjacent assets only. All other returns and costs are irrelevant in the determination of asset holdings. The model also integrated the existence of the two media of exchange into money demand theory. It is demonstrated that an important determinant of the fraction of money holdings held in demand deposits or currency is the fraction of transactions made using that form, the relative transactions costs using both forms, and their rates of return. Finally, commodity inventories have been integrated into a choice theoretic model of optimal behavior so as to consider this asset as a viable alternative form of short term holdings. It is demonstrated that the existence of commodities results in a reduction in the transactions demand for money at all interest rates and consumption levels. [ABSTRACT FROM AUTHOR]

Patric Hendershott has argued recently that Irwin Friend and Stephen M. Goldfeld and Dwight M. Jaffee have much exaggerated the extent to which the asset-liability structure of savings and loan associations creates for associations a serious propensity for "disintermediation" of savings deposits when money and capital market interest rates rise sharply. Friend, Goldfeld and Jaffee, and others have taken the position that because savings and loan associations emphasize long-term, relatively immarketable mortgage assets but short-term savings deposit liabilities the yields they pay on savings deposits are inflexible upward relative to yields on competing assets. Therefore, when money and capital market interest rates rise sharply, net inflows of savings deposits are likely to be severely disrupted. Total savings deposits may even decline. Friend has argued that this "asset-liability structure problem" is important enough as a source of liquidity problems for savings and loan associations and cyclical instability for the home construction industry to make substantial changes in the regulatory framework which determines savings and loan association asset-liability structure desirable. Goldfeld and Jaffee [4, p. 631] find in the problem the rationale for the role of the Federal Home Loan Banks and Board as lender of last resort to the savings and loan association industry, a point with which Hendershott takes explicit issue. While Hendershott's paper is primarily theoretical, he does offer some empirical support for his view. The purpose of this comment is to argue that this empirical support is not persuasive. [ABSTRACT FROM AUTHOR]

Three fundamental observations have been made with respect to the historic behavior of the term structure of interest rates in the United States. (1) In general, yield curves ascend in periods when the level of long-term and short-term interest rates is low and descend in periods when the level of rates for both maturities is high. Yield curves which are invariant with term are more typical of periods when the level of rates is near the mid-point of the normal range. (2) Short- and long-term interest rates tend to move together cyclically, with the more volatile short-rates rising relative to long-rates during periods of economic expansion and falling relative to long-rates during periods of contraction. (3) The year 1930 is considered a benchmark in the long history of interest rates since the Civil War in that short-rates are thought to have been generally higher than long-rates prior to that date and were consistently below them for approximately thirty years thereafter. The purpose of this paper is to ascertain whether investors' responses to maturity-related interest-rate differentials in the late nineteenth century were, in fact, essentially different from those of later decades. To do so requires the generation of yield curve estimates for the period 1884-1900. [ABSTRACT FROM AUTHOR]

In an unstable economy, expectations of changes in price level and rate of exchange play a significant role in motivating the economic behavior of both households and firms. Several econometric studies attempted to predict future expectations on the basis of past observations. Such studies, however, are crucially dependent on the assumptions (1) that there has been a relationship between past performance and expectations, and (2) that the nature of this relationship is known. Another method for the estimation of expectations is the one which derives these expectations on the basis of the price structure of future markets. However, an examination of specific commodities traded on future markets does not provide meaningful estimates, since their future prices reflect, among other things, expected changes in relative prices. This problem can be circumvented by referring to future interest rates which can be derived from the market price structure of financial assets. This paper sets out the theoretical relationship between yields on unlinked and linked bonds, showing that it reflects market expectations of future rates of change in price level and exchange rate. A model is then used to show theoretically that it is possible to derive estimations of market expectations regarding such future rates of change by comparing the yields of unlinked bonds with the yields of bonds linked to the price level and the foreign exchange rate respectively, provided these bonds are identical in all other respects. [ABSTRACT FROM AUTHOR]

The article expands upon the results derived in a paper by Patric Hendershott, "The Structure of International Interest Rates: The U.S. Treasury Bill Rate and the Eurodollar Deposit Rate," which appeared in the September, 1967 edition of the "Journal of Finance." In that paper Hendershott contended that the equilibrium Eurodollar rate is determined primarily by the three-month U.S. Treasury bill rate. The author of the current paper extends Hendershott's work by examining the impact on the Eurodollar rate of both foreign and short-term U.S. rates. His results are in agreement with Hendershott's.

The article investigates disintermediation by means of policy loans at life insurance companies. By 1969 such loans had increased six-fold over 1965 levels. Data were compiled from 1965 to the middle of 1970 for fifteen prominent life insurance firms. Regression analysis revealed several insights. Interest rates were the most important independent variable for determining the volume of policy loans, and their impact was almost immediate. In tests of joint variables, the combination of interest rates and money supply was significant.

This article presents a response to a paper by Haim Ben-Shahar, who attempted to integrate the theory of portfolio asset pricing into the theory of corporation finance. The author agrees with Ben-Shahar's initial analysis regarding the assumption of debt financing but critiques his analysis once he permits financing at variable rates of interest related to the risk characteristics of the instrument used. Ultimately, the author feels Ben-Shahar's analysis of the capital structure theorem is valid only for the limiting case of finance with riskless debt instruments.

In this paper, therefore, I propose to reconsider the entire question of an optimal supply of money, starting with what might be regarded as contemporary wisdom and ending with what I hope may be regarded as wisdom of a slightly higher order. The question of monetary optimality, like most questions in welfare economics, is important not so much for its own sake as for the stimulus it has given to monetary theorists to re-examine the foundations and strengthen the superstructure of their subject. As of the present time, the optimality question has provoked more assertion than analysis, more confusion than enlightenment, and more controversy than agreement; but that is just what has long been needed to rescue monetary theory from the arid wastes of Post-Keynesian general equilibrium analysis. Perhaps we shall never have a definitive answer to the optimality problem, but we shall certainly have many attempts at it. And in the process we shall get what is most urgently needed: an improved theoretical understanding of the actual working of the economy in which we live. [ABSTRACT FROM AUTHOR]

This paper applies an expected-change model to the problem of forecasting future interest rates. A one-to-one correspondence is established between the parameters of this model and those of the standard adaptive-expectations model that forecasts rate levels. This correspondence ensures that the level and change models will always show the same intercept and goodness-of-fit. Nevertheless, the two models place quite-different prior restrictions on the signs of the coefficient estimates, and cross-section and time-series estimates are shown to conform rather closely to the expected-change specification and to depart substantially from the requirements of the expected-level model. It is hoped that, by leading to better structural models of interest-rate forecasting, this research can help to isolate the non-expectational elements in the term structure and thereby to reduce the long-standing antagonism between term-structure scholarship and financial-market practice. [ABSTRACT FROM AUTHOR]

It is the purpose of this paper to propose an alternative linkage built around financial flows. Such flows were implicitly recognized in neoclassical expenditure models. Investment demand was assumed to be financed by borrowing, cash dishoarding, or the sale of financial assets. Given investment demand as a negative function of the interest rate, once the interest rate was given, investment and an equivalent amount of financial flow were both determined. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to develop a theoretical framework for analyzing the nature of convertible securities, and then to test it. In the first section, a graphic model is used to describe the essential features of a convertible issue. In the second section, a conceptual scheme for estimating ex ante rates of return is developed. Next, interactions between the key variables under the control of the firm--the coupon interest rate and the conversion price--are discussed in detail. Finally, the terms and conditions under which convertible bonds were sold by a sample of large, listed firms during the period 1961-1963 are described. [ABSTRACT FROM AUTHOR]

The article reports on the relation between the size of a bank, the size of a borrower, and the rate of interest for a loan with a basis on four previous studies which were conducted by the U.S. Federal Reserve System. The studies discussed in this paper stem from a hypothesis which was proposed by the economist David. A. Alhadeff which states that there is a positive multiple correlation between the size of a bank, the size of a borrower, the size of a town, and the number of banks in that town.

This article replies to comments on the article "The Determinants of Deposit-Rate Setting by Savings and Loan Associations" made by John Boyd which appeared in this issue. The authors disagree with the comments about the relationship between mortgage interest rates and interest paid to savings accounts by Savings and Loan Associations (SLAs), especially in markets with decreasing mortgage interest rates. The authors support their arguments with mathematical models and discuss the potential use of secondary mortgage markets as a way to change SLA portfolios.

This article presents a discussion of papers that examined the U.S. Commission on Financial Structure and Regulation. The author notes that the papers both dealt with similar issues including deposit interest rate controls, greater portfolio diversification, bank structure and supervision. The author discusses the role that the Commission plays in these issues and suggests that even in areas where they have no direct say their actions often have an impact. The author examines some of the banking regulations that are discussed in the papers and briefly discusses some of the unintentional impacts they have had.

The purpose of my original paper was to adduce evidence in support of two hypotheses: (1) that permission to offer higher interest rates on time deposits adversely affected the profitability of the aggregate of commercial banks, and (2) that the change in Regulation Q would tend to redistribute deposits from smaller to larger banks. Miss Scott's comments are designed to qualify acceptance of the first hypothesis and to question the validity of the second. Before assessing her arguments, it should be pointed out that Miss Scott's data are based only on member banks: since insured non-member banks comprise a significantly larger proportion of small banks her data are less than optimal. [ABSTRACT FROM AUTHOR]

The author acknowledges an error in his paper "A Note on Time Deposit Interest Rates," regarding a formulation of the credit effect, brought to his attention by George R. Morrison in his paper "A Further Note on Time Deposit Interest Rates."

The purpose of this paper is to examine the connection between the distribution of income and the distribution of education. Section I of the paper contains a brief critique of the human capital approach to income distribution, pioneered by Becker (1964). As developed so far, the human capital approach seems incomplete, since the distribution of income is made to depend on the distribution of education but the latter is not explained. In the subsequent sections, more general models are examined in which the two distributions are determined simultaneously. Essentially, these models combine the human capital approach to education with the marginal productivity theory of factor pricing. It is found that when equality of opportunity and ability is assumed, the models do not in general produce an income distribution curve which conforms to the empirically established character of such curves. The concluding section discusses how far inequality of opportunity and ability and the presence of disequilibrium may affect the theoretically derived distribution of income. [ABSTRACT FROM AUTHOR]

The article comments on a study by researcher Glenn L. Wood which dealt with life insurance policy loans and emergency fund concept. Wood limited his paper in most respects to statements about policy loans and their relationship to disposable personal income and interest rates. However, he did not draw a distinction between the relatively narrow concept of the policy loan provision as a source of emergency funds and the broader concept of the savings element of life insurance as a source of emergency funds. He then proceeded to discuss policy loans without indicating the other ways in which the savings element of a life insurance policy might be utilized. Wood suggests that the lack of inverse correlation between policy loans and disposable personal income in the period since the Second World War possibly may be explained by interest rates and the lending activities of commercial banks. No mention was made in the paper of the possibility that this lack of inverse correlation may be attributable at least in part to the widespread use of minimum-deposit plans during the past decade.

The author comments on criticism by Vernon concerning his paper "Financial Disintermediation in a Macroeconomic Framework." He states that the data used by Vernon does not correspond with his own data, and that the Treasury rate Vernon used was for a 3-month bill rate instead of the 9-12 month Treasury rate he used. He mentions that the time periods used by Vernon fail to correspond with the periods of rising interest rates the author cited. He suggests that if the closing of the gap between commercial banks and the savings and loan yields resulted in disintermediation, it would have occurred late in 1961 and early in 1962, rather than in 1966.

The article presents a reply to Kevin Clinton from L.B. Smith and J.W.L. Winder (S&W) concerning comments Clinton made about S&W's paper entitled "Price and Interest Rate Expectations and the Demand for Money in Canada," which appeared in the June, 1971 issue of the "Journal of Finance." S&W take issue with Clinton's interpretation of negative lag weights in their model. Additionally, they point out that a reservation Clinton had about a regression coefficient for interest rates was, in fact, consistent with their assumptions. Overall, they believe most of Clinton's criticisms stem from a misunderstanding of their work.

A theoretical portfolio model has been used to derive those variables which determine the level of demand for Euro-dollar borrowings by U.S. banks. Empirical estimation of the implied demand function yields wholly acceptable results. It has been shown that Regulation Q ceilings and the marginal reserve requirement on Euro-dollar borrowings are significantly related to the level of Euro-dollar borrowings by U.S. banks. The Federal Reserve System has used these policy tools to counteract trends in Euro-dollar borrowings which they deemed undesirable. The potential of these instruments as positive policy tools has not been explored. The possibility of using Regulation Q ceilings and the reserve requirement on Euro-dollar borrowings to improve the official balance of payments depends on financial outflows from the U.S. in response to changes in Regulation Q and in response to induced changes in Euro-dollar rates, as well as the relative magnitudes of induced financial flows between various domestic economies and the Euro-dollar market. This remains a pregnant topic for further research. [ABSTRACT FROM AUTHOR]

In the March 1970 issue of this journal, William E. Gibson attempted an empirical verification of the price-expectations effect on interest rates. The purpose of this note is to draw attention to some problems in the theoretical arguments made by Gibson, and to illustrate that the inferences made by Gibson are not warranted on the basis of his empirical results. [ABSTRACT FROM AUTHOR]