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FEDERAL RESERVE BANK OF RICH M ON D MONTHLY REVIEW Unemployment in Recessions Corporate Financing Distribution of Medical Personnel and Facilities Towards A Better Payments System L .j JULY 1971 UNEMPLOYMENT RATE BEHAVIOR DURING RECESSIONS The average annual growth rate of the civilian labor Since June 1969 the unemployment rate has moved upward. 1970. It reached a high of 6.2% in December force was 2.13% from 1965 to 1970, which was almost double its growth rate during the fifties. The After declining somewhat, it moved back up to that level in May. total U. S. population, by contrast, grew at only The high unemployment rate 1.26% per year during the sixties. for all civilian workers is disturbing, but the ag If the civilian labor force had grown at 2.13% gregated figure can conceal information as well as Examination of unemployment rates for per year during 1970 and that growth rate were to various labor force groups indicates that certain continue in 1971 and 1972, the economy would add reveal it. aspects of the unemployment situation may not be as 1.73 million workers in 1970, 1.76 million in 1971, acute as they seem. However, an unemployment rate and 1.80 million in 1972. of around 6 % is the highest that the U. S. economy average increase in the labor force of around 144,000 has had to contend with since 1961. The unemployment rate for all civilian workers workers per month. However, from July 1969 through December 1970, the labor force actually in declined slowly from a peak of 7.1% in May 1961, creased, on average, 175,000 persons per month. during the 1960-61 recession, to a low of 3.3% in Unfortunately, February 1969. This downward movement came about because over the same time period the U. S. celerated, the rate of increase of employed persons did not keep pace. Employment increased by only economy grew rapidly enough to more than absorb 33,000 per month. A s a result, the unemployment the sizable additions to the civilian labor force. rate began to rise. although This trend implies an labor force growth ac The U. S. economy experienced a slowing in the The civilian labor force is defined as those civilians It grew pace of economic activity in the second half of 1969 faster in the 1960’s than the population as a whole. and a noticeable slackening in labor market con- employed or actively seeking employment. A VERAGE A N N U A L GROW TH RATES FOR SELECTED LABOR FORCE GRO UPS All Civilian Workers Adult M ales (20 years and over) Adult Females (20 years and over) All Teenagers (16 to 19 years) 19 4 8 -1 9 5 8 Percent 19 5 8 -1 9 6 5 Percent 19 6 5 -1 9 7 0 Percent 19 4 8 -1 9 7 0 P ercent 1.10 0.58 2.73 -0 .4 0 1.38 0.58 2.24 4.79 2.13 1.02 3.61 4.16 1.42 0.68 2.77 2.26 NA* NA 0.52 2.20 1 .0 0 3.76 NA NA NA NA 1.09 2.47 1.79 2.62 NA NA White Adult M ales (20 years and over) Adult Females (20 years and over) Nonwhite Adult M ales (20 years and over) Adult Females (20 years and over) * N o t A v a ila b le . So u rc e : 2 D e p a r tm e n t o f L ab o r. UNEMPLOYMENT RATES (T H R E E - M O N T H M O V I N G A V E R A G E S ) A LL C IV IL IA N W O R K E R S BASE M O N T H S: J U N E 1948 J U N E 1953 MARCH 1957 MARCH 1960 JUNE 1969 M o n th s fro m B ase L O N G -T E R M U N E M P L O Y M E N T W H IT E -C O L L A R W O R K E R S (15 W e e k s a n d O v e r) A D U L T W H IT E F E M A L E S (20 Y e a rs a n d O ver) Per C ent Per C ent______________________________________________ Per C ent 4.0 A D U L T W H IT E M A L E S (20 Y e a rs a n d O v e r) Per C ent M A R R IE D M E N A D U L T N O N W H IT E F E M A L E S (20 Y e a rs a n d O ve r) Per C ent Per C ent A D U L T N O N W H IT E M A L E S (20 Y e a rs a n d O v e r) ALL T E E N A G E R S (16 to 19 Ye a rs) Per C ent Per C ent B L U E -C O L L A R W O R K E R S Per C ent_________________________ + 5 +10 +15 +20 0 4 -5 M o n t h s fro m B ase +10 4 -1 5 4 -2 0 M o n t h s fro m B ase Source: U. S. D epa rtm ent o f la b o r. 4 -2 5 4- 5 4 -1 0 4 -1 5 M o n t h s fro m Base ditions. Essentially what happened was that the economy did not produce enough goods and services to employ both the existing workers and new ad ditions to the labor force. These additions included The recent contraction also differs from other postwar recessions in its impact on various sectors of the labor force. The current plight of the aero space industry and softening of the market for pro youngsters searching for first jobs, labor force drop outs dropping back in, reductions in armed forces, fessionals and technicians is reflected in the advance etc. The main sources of labor force growth over The base unemployment rate for white-collar workers the late 1960’s were increases in the number of fe was considerably lower before its recent climb than of the unemployment rate for white-collar workers. the it was at the beginning of the 1960-61 recession. slackening labor market conditions manifested them Also, the unemployment rate for all civilian workers selves in a sustained rise in the unemployment rate from 3.4% in June 1969 to 6.2% in December 1970. has remained considerably below the peak rate during male and teenage workers. In any event, the 1960-61 downturn. Even so, the unemploy After December, the rate declined somewhat, but it ment rate for white-collar workers has moved up reached 6.2% again in June 1971. more rapidly and to a higher level than it reached The accompanying series of charts shows unem ployment rate behavior in historical perspective. The in the 1960-61 period. Nonwhite adults also showed recent unemployment charts compare unemployment rates for selected seg patterns that were different from those in past re ments of the labor force during all postwar periods cessions. designated as recessions by the National Bureau of Economic Research. They were constructed as fol white males has moved upward during the contrac tion, but at a slower rate and from a lower base lows : (1 ) The base month for each contraction was level than in other postwar recessions. chosen to be the month before the unemployment rate male unemployment in the 1960-61 recession began for all civilian workers began its upward movement. its rise from a considerably higher base level. (2 ) unemployment rate for adult nonwhite females has The charts were plotted with time period zero representing the base month. The base months do not necessarily coincide with the N B E R reference turning dates. For example, according to the N BE R , the present recession began in November 1969. The unemployment rate for adult non Nonwhite The similarly risen less severely. The measures of overall unemployment that probably are the best measures of the welfare (or The illfare) effect of an economic contraction are the unemployment rate series began to move upward in long-term (15 weeks and over) unemployment rate and the unemployment rate for married men. The behavior of these two series suggests that the recent slowdown has had relatively less adverse impact on these groups than other postwar recessions. June 1969. The chart showing the unemployment rate for all civilian workers clearly summarizes the differences between the contraction beginning in 1969 and the (1 ) The un Only one group, the teenagers, reached previous employment rate prior to the recent economic down turn was low relative to the other periods. Except for the 1953-55 recession, which followed the K o unemployment rate highs. They apparently are suf fering more serious unemployment than before. A rean W ar, the unemployment rate preceding the not cause as much human misery as a rise in the other postwar recessions. They a re : rise in the teenage unemployment rate probably does contraction beginning in 1969 was lower than in unemployment rate for married men, who are usually other comparable postwar periods. heads of households. (2 ) The rate of buildup of unemployment was not as rapid in the recent downturn as in the preceding recessions. 4 But unemployment for the teenager who wants and needs a job is still painful. William E. Cullison TWO TECHNIQUES OF CORPORATE FINANCING Sales of convertible bonds and direct or private placement of conventional debt issues are two long standing methods of corporate financing that ex perienced varying degrees of activity in the 1960’s. Convertibles were only mildly popular during the first half of the decade, while in the second half their volume attained record levels. Direct place ment, on the other hand, followed the opposite pat tern. Their volume reached new highs in the early 1960’s and in some quarters they were billed as the corporate financing tool of the future. Changing economic and financial conditions, however, dis couraged the use of direct placements, in both relative and absolute terms, in the second half of the decade. C onvertible B onds Bonds that are convertible into equity shares at the option of the bondholder have long been used by U. S. corporations. The earliest widespread use of convertibles came during the railroad boom of the nineteenth century. The convertible feature proved attractive and later was incorporated in a broad assortment of debt instru ments. It was particularly popular in the late 1920’s and has been a notable feature of corporate financing since the late 1930’s. Tw o purposes appear to underlie the use of con vertible bonds in the corporate financing plan. First, convertibility enhances the marketability of the is sue. Second, under certain conditions, the use of convertibles may produce a favorable effect on the financial structure of the firm. Although the ad vantage of increased marketability has been em phasized traditionally, some empirical evidence sug gests that improvement of the financial structure may be a more important reason for issuing con vertible securities.1 Converting an ordinary fixed income security into a common stock whose value is based on the profit potential of the firm adds a speculative attraction to the security. Thus the con vertible feature is often looked upon by the market as a “ sweetener.” Many firms, particularly those with large fluctuations in earnings, find it useful to issue convertible securities to build up their equity buffer over the long run. This technique is es pecially attractive to firms whose common stock price currently lacks the strength to withstand a direct offering of equity shares. Issuing convertibles may then serve beneficially as a deferred offering of common shares. The advantages of marketability and financial structure appear to have influenced the rapid in crease in the volume of convertibles in the late 1960’s, shown in Chart I. This period was characterized by widespread economic expansion, rapid growth in debt financing, extensive merger and expansion ac tivity, and generally firm— on occasion tight— credit market conditions. The long investment boom of that period, coupled with the increasing appetite of conglomerates for new acquisitions, generated a great demand for external financing among corporations. In the accompanying competition for funds, interest rates soared and the marketability advantage of the convertible bond proved attractive to corporate borrowers. Con vertibles offered the investor the right to a fixed income at a time when the firm’s earnings were minimal and the prospect of participating in future earnings if the merger were as successful as an ticipated. W ith the heavy borrowing of the middle and late 1960’s, the financial structure of many corporations became overloaded with debt. Moreover, in the tight money episodes of 1966 and 1969, many cor porate borrowers relied heavily on short-term funds, avoiding the more permanent high costs of bond fi nancing. Hence for many firms both the debt-equity ratio and the ratio of short-term to long-term debt took unfavorable turns. For firms in this position, the convertible bond offered an opportunity to fund short-term debt while at the same time arranging a deferred improvement in the debt-equity ratio. Convertibles were widely used in 1968 and 1969, particularly in the latter year, which was char acterized by tight credit conditions, falling stock prices, and a high merger rate. Their use declined significantly in 1970, however, as falling interest rates, rising stock prices, and a considerable em phasis on quality by the market encouraged the use of conventional debt and equity instruments. Much of the new financing in 1970 was done by public utilities and communications companies that tradi tionally have made little use of convertibles. 1 C. James Pilcher, Raising Capital w ith Convertible (A n n A rb o r: University o f Michigan Press, 195 5 ). Securities (Continued on page 8) 5 The Distribution of Medical Personnel and Facilities — A Rural-Urban Comparison The provision of health services is increasingly becoming a topic for serious discussion in the United States. Indeed, the President and others talk in terms of the “ health crisis” that America faces. The National Advisory Commission on Health Man power pointed out several indicators of the crisis: . . . long delays to see a physician for routine care; lengthy periods spent in the well-named “ waiting room,” and then hurried and sometimes impersonal attention in a limited appointment time; difficulty in obtaining care on nights and weekends, except through hospital emergency rooms; unavailability of beds in one hospital while some beds are empty in another; reductions of hospital services because of lack of nurses; needless duplication of certain sophisticated services in the same community; un even distribution of care, as indicated by the health statistics of the rural poor, urban ghetto dwellers, migrant workers, and other minority groups, which occasionally resemble the health statistics of a de veloping country; obsolete hospitals in our major cities; costs rising sharply from levels that already prohibit care for some and create major financial burdens for many more.1 1 R eport o f The National A dvisory Commission pow er, Volum e I, November 1967, p. 2. on Health One aspect of the health problem with important implications for rural residents and for rural de velopment is the uneven distribution of medical services between urban and rural areas. When the supply of health services is analyzed from a geo graphic perspective, rural residents appear to be at some disadvantage compared to people in urban areas. Various national health surveys and numerous research projects show that rural residents have ac cess to fewer specialists, dentists, nurses, and hos pital beds. Moreover, studies show that the health care needs are generally greater in rural areas. Rural residents have more disability days per per son, a greater incidence of acute conditions, more days of restricted activity because of illness, and more days of bed disability.2 The number of physicians in relation to population varies widely between localities and regions in this country. Many factors such as differences in per capita income levels and professional and cultural advantages in local areas account for this pattern of distribution. Research suggests that the lower in comes of rural residents tend to discourage the lo cation of physicians in rural areas.3 The purpose of this report is to examine the dis tribution of physician and hospital facilities in the United States and the Fifth Federal Reserve District. D istribution of Physicians T h e statistics used in this analysis of the distribution of physicians and hospital facilities relate to conditions at the end of 1967, and deal only with active patient-care physicians. Physicians engaged in administration, teaching, and research are not included. For the United States, there were 126 patient-care physicians per 100,000 population. The physician-population ratio was lower in Fifth District states where there were only 112 patient-care physicians per 100,000 population. Active physicians are unevenly dis tributed among the Fifth District states. Patient- care physicians per 100,000 population range from a low of 73 in South Carolina to a high of 310 M an 2 See, for example, Ronald Anderson and Odin W . Anderson, A Decade o f Health S ervices: Social S u rvey Trends in U se and E x penditure, (C hicago: University o f Chicago Press, 1 9 6 7 ); and Neville Doherty, Rurcdity, P overty, and H ealth: Medical Problem s in Rural A reas, Agricultural Economic Report, N o. 172, United States D epartm ent o f Agriculture, Economic Research Service, February 1970. in the District of Columbia. Maryland, with a physician-population ratio of 150, was considerably above the United States average, while Virginia, North Carolina, and W est Virginia were below average with ratios of 100, 91, and 88, respectively. Although there is considerable variation in the physician-population ratio within the Fifth District, the rural ratios are consistently lower than the urban ratios. Whereas urban areas account for approxi mately 52 percent of the total population in the Fifth District, they contain 70 percent of the active physicians. The rural-urban disparity is especially pronounced with respect to medical specialties. T w o primary factors account for this. Newly trained physicians are attracted to heavy population centers, and there is a trend away from general practice toward special ization. General practitioners made up 29 percent of all patient-care physicians in the Fifth District in 1963 compared to 23 percent in 1967. D istribution of H ospital Facilities T h e num ber of hospitals per 100,000 population in the Fifth Dis trict is higher in the rural areas than in the urban areas, but the number of hospital beds per 100,000 is higher in urban areas. (See table.) In gen eral, rural hospitals tend to be smaller and less ade quately staffed. The rural-urban disparity in the number of specialists and hospital-based physicians is especially apparent in North and South Carolina. Thomas E. Snider and Marcia M. W yatt 1Doherty, op. cit., p. 5. URBAN-RURAL DISTRIBUTION OF PlANS, HOSPITALS A N D POPULATION UNITED STATES A N D FIFlSTRICT BY STATES, 1967 M a r y la n d W est V ir g in ia V ir g in ia U rb an 1 R u ra l 173 66 26 147 U rban N o r th S o u th R u ra l U rb an U rb an R u ra l 113 82 122 146 60 24 22 31 31 17 28 42 91 51 91 129 32 74 U rb an D istrict U n ite d Fifth R ural U rb an U rb an R u ra l U rb an R ural 98 58 310 153 68 150 76 24 29 33 24 28 30 35 29 277 129 40 120 41 Physicians per 100,000 population Physicians in patient care General practice Specialists and hospital-based physicians Hospitals per 100,000 population 1.1 2.0 1.7 2.9 3.5 1.9 3.1 1.9 3.2 1.6 1.6 3.2 2.0 5.2 Hospital beds per 100,000 population 320 280 314 313 582 431 296 343 331 575 374 327 405 376 Average number of beds per hospital 296 143 187 108 164 223 93 179 105 358 228 101 210 72 48 35 12 29 11 Specialists plus hospital-based physicians per 100 beds 46 15 29 16 16 30 11 22 9 Percentage of population 79 21 57 43 25 36 64 38 62 ___ 52 48 68 32 Percentage of active physicians 92 8 64 36 33 61 39 53 47 .... 70 30 81 19 1 U rban So u rc e : a r e a s a r e d e fin e d as Stan d a rd M e t r o p o lit a n The D istr ib u tio n o f P h y s ic ia n s , H o s p ita ls , a n d S t a t is t ic a l A r e a s . A ll o th e r a r e a s a re ru ra l. H o s p it a l B e d s in th e U n ite d S ta te s, 1967, A m e r ic a n M e d ic a l A s s o c ia t io n , C h ilin o is, 1968. j TW O TECHNIQUES OF CORPORATE FINANCING (Continued from page 5) D irect Placem ents O ne o f the m ost im portant innovations in corporate financing after the early 1930’s was the direct placement of securities with large institutional investors. Direct or private place ments enable the borrower to deal directly with in stitutional purchasers such as insurance companies and pension funds. A s an increasingly popular method of marketing long-term debt, private place ments expanded until 1964 when they accounted for 64 percent of all corporate bonds issued. Several factors contributed to the rise of private placements after the early 1930’s. Changes in legal codes after 1928 allowed insurance companies for the first time to invest in unsecured loans, including corporate debentures. Equally important was the C h art tremendous increase in the resources of insurance companies, much of which took place in the 1930’s, when the total volume of corporate borrowing was at a low ebb. The reduction in time and expense involved in direct placements was a third factor. Long delays in the registration of a public issue are unavoidable. The possibility of basic changes in market conditions during such delays introduces an element of un certainty in the financial planning of corporate treasurers. By comparison, private placements can be negotiated in relatively little time. One of the most important reasons for the popu larity of direct financing, however, has been the close relationship of the issuer to the lender. Because there is only one or a limited number of bond holders, the terms of indenture are easily negotiated, and if these terms become burdensome to either party, the indenture could be renegotiated more easily if only two parties are involved. 1 CONVERTIBLE SECURITIES IN CORPORATE DEBT ISSUES I9 6 0 S o u rc e : 8 1961 1962 1963 S t a t is t ic a l Bu lle tin , S e c u ritie s a n d 19 64 1965 E x c h a n g e C o m m is s io n , M a r c h 1 9 66 1971. 1967 1968 1969 1970 holders. On the demand side, tight credit conditions discouraged many corporations from using long-term debt in favor of temporary short-term funds, thus curtailing the demand for direct placement of funds. Although the chief characteristic of the bull market in bonds after m id-1970 was the rising prices at which huge quantities of new securities were marketed, there was also considerable emphasis on the quality of issues. The Penn Central debacle caused many insurance firms, as well as other in stitutional investors, to be unusually quality-con scious in their investment planning. Most insurance companies shied away from direct placements unless the borrower had a high credit rating. A s the credit markets became characterized by less frantic conditions, direct placements may regain their earlier popularity. They offer considerable ad vantages for both large firms and large institutional investors. Philip H . Davidson and Jane N . Haws A t the same time, however, there are disad vantages associated with direct placements. The creditor assumes greater risk because of the length of his commitment and the reduced ability to di versify his portfolio. Costs of investigating the fiancial position of the borrower are relatively high. The issuer may have to borrow at somewhat higher rates of interest, be of higher credit standing than otherwise necessary, and submit to substantial fi nancial restrictions and often management control. Unlike convertible bonds, directly placed bonds became less attractive during the second half of the 1960’s. (See Chart II.) During this period life insurance companies, by far the largest suppliers of direct placement of funds, were not sufficiently liquid to continue to purchase securities as rapidly as they had in earlier years. The reduced supply of lendable funds among life insurance companies was traceable to the generally tight credit conditions and to the sharp upsurge in requests for loans by policy C h art 2 PRIVATE A N D PUBLIC PLACEMENT OF CORPORATE BO N D S $ B illio n s 30 P u b lic P la ce m e n t o f N e w n P riv a te P la ce m e n t o f N e w Issu e s Issu e s 25 20 15 10 JU_U 1940 So u rc e : 1945 1950 1955 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 F e d e ra l R eserve Bulletin. 9 TOWARDS A BETTER PAYMENTS SYSTEM The Federal Reserve Bank of Richmond shares zvith commercial banks and others in the Fifth Federal Reserve District a special interest in the progress of the nation’s payments system. In cooperation zvith area banks, the Federal Reserve Bank of Richmond pioneered the System ’s first regional check clearing center in the Washington-Baltimore metropolitan area in an effort to improve the present check-clearing system. This Bank also operates the Federal Reserve System’s new communications szvitching center at its facility in Culpeper, Virginia. This communications netzvork could be an important part of an electronic payments system of the future. These steps, and the problems and progress of the payments mechanism in general, zvere discussed in the M ay 1970 issue of this M o n t h l y R e v ie w . The Board of Governors of the Federal Reserve System on June 18, 1971, issued an official policy statement on the payments mechanism. The statement emphasised, among other things, a need for more regional clearing centers and greater use of the System’s expanded communications network. In view of its special interest to the Fifth District, this policy statement and the accompanying press release arc reproduced belozv. PRESS RELEASE Board of Governors of the Federal Reserve System June 18, 1971 The Board of Governors of the Federal Reserve System today issued a policy statement calling for basic changes in the nation’s system for handling money payments. These are, essentially, transitional steps toward replacing the use of checks with elec tronic transfer of funds. The Board’s Statement was directed to the Presi dents of the 12 Federal Reserve Banks. It said that modernization of the nation’s means of making fi nancial transactions through the banking system “ is becoming a matter of urgency.” The Board’s sense of urgency was based upon estimates that check volume will at least double in the present decade. Some 62 million checks a day — about 22 billion a year— are written in the United States, setting in motion the transfer of more than $16 trillion a year at the present time. In 1970, the Federal Reserve System cleared ap proxim ately 8 billion checks, transferring just 10FRASER Digitized for over $3 trillion from one account to another. A n average check passing through the clearing process is handled 10 times under present pro cedures. Despite the progress to date in mechaniza tion and automation, increases in productivity are limited by the fact that the processing of checks con tinues to require a substantial amount of hand labor. This, together with mounting check volumes, pre sents banks with a problem of constantly rising costs for their check handling operations. The Board’s Policy Statement addresses itself to this mounting problem. The Board’s Policy Statement placed “ high pri ority” upon providing the public with faster, more convenient and more dependable check clearing services, by increasing the speed and efficiency of check handling. In part, the Board’s plans called for this to be accomplished through establishment of new regional clearing centers throughout the country. I The Board asked for action “ to achieve as soon as possible an accelerated flow of funds along more optimal routing patterns” across the nation, in two initial w ays: 1. Structural changes in handling and settle ment of ch eck s: This would involve two alterations in the existing money payments system. First, zones of same-day settlement — in immediately available money — now operating in cities with Reserve Bank offices, would be expanded geogra phically. Second, new regional centers would be established, wherever warranted, for rapid check clearance in immediately available funds. In both cases, the Board has in mind clearing areas as large as permitted by reliable arrangements for overnight presentation and settlement of items. 2. Operational changes: These would be aimed at reducing dependence upon checks by encouraging banks and their customers to make greater use of the expanded capabilities of the Federal Reserve System’s communications network. Inducements to begin replacement of money trans fers by check with transfers via wire would be of fered by (1 ) removing charges and other restrictions upon the use of the Federal Reserve’s wire network by member banks for transfers of $1,000 or more for their customers, (2 ) increasing the number of hours the network is open for business daily, and (3 ) ex panding facilities at Reserve offices, where justified by traffic potentials, to equip them for high speed tape transmission and computer-to-computer com munications. This would permit linkups, chiefly of commercial bank computers through the use of Federal Reserve facilities, allowing virtually instantaneous payment, without charge for the wire service, from a com mercial bank in one part of the nation to a com mercial bank in any other part, where both banks are Federal Reserve members and have computerized accounting of their customers’ deposit balances. W ith respect to timing, the Policy Statement said: T h e first o b je ctiv e shou ld be expan sion o f the g e o g ra p h ic area o f existin g im m ediate paym ent zon es. T h is shou ld be accom p lish ed as soon as n ecessa ry arrangem ents can b e m ade. M eantim e, studies lo o k in g to the establishm ent o f new clearin g centers, w h erever w arranted, should be undertaken p ro m p tly b y each Federal R eserve Bank, and su b m itted to the B oa rd fo r review . E xp a n sion o f fa cilities at F ederal R eserve o ffice s fo r in creased a ccess to the R eserve S y ste m ’s w ire n etw ork shou ld be con clu d ed at the earliest practica b le time. . . . The Board’s Policy Statement was prepared in collaboration with the Federal Reserve System Steering Committee on Improving the Payments Mechanism, headed by Reserve Board Governor George W . Mitchell. Other members are Governors Sherman J. Maisel and William W . Sherrill, Reserve Bank Presidents George H. Clay of Kansas City, Aubrey N. Heflin of Richmond, and Eliot J. Swan of San Francisco, and the First V ice Presidents of the Chicago and the New Y ork Reserve Banks, Ernest T. Baughman and William F. Treiber. The Steering Committee was assisted by the Committee and Subcommittee on Collections of the Conference of First Vice Presidents of the Reserve Banks. Preparation of the statement involved extensive con sultation among Reserve Banks and with com mercial banks. The Policy Statement confirmed the Federal R e serve System’s commitment to a nationwide direct, fast, and economical system for the transfer of funds and settlement of balances. The immediate aim is a reduction, across the nation, of the volume of items now being handled, speeding settlement by minimiz ing handling of checks, and reduction of commercial bank and Federal Reserve float resulting from de lays in settlements. Expansion of areas of fast clearing and settlement in immediately available funds is appropriate, in the Board’s opinion, due to increasing urbanization and improvement of highway systems surrounding major cities, and the growing utilization, even in small banks, of centralized electronic accounting for de mand deposits. During the past year zones of immediate payment surrounding the Kansas City, the Minneapolis and the Denver Federal Reserve offices have been ex panded. The first — experimental — new regional clearing center was established for the WashingtonBaltimore area, and is now in its second year of successful operation. The second such regional clearing center will become operational in Miami, Florida, this year. Looking to the future, the Reserve System has three projects in being for further improvement of the payments mechanism: 1. Construction of a payments mechanism simu lation model for the System, to be used both to understand better the present payments system and to indicate in what ways it can and should be im proved. 2. An in-depth study of exactly how payments are effected in Florida and Georgia, being done by the Georgia Institute of Technology for the Federal Reserve Bank of Atlanta. 3. The cooperative participation, in California, of the Federal Reserve Bank of San Francisco and its Branch at Los Angeles with a Special Committee on Paperless Entry (S C O P E ) through which com mercial bank groups are attempting to reduce check 11 volume by substituting electronic means of trans ferring money. Meantime, the Reserve System’s wire network is being both expanded and converted to higher speed operation. It includes a communications center at Culpeper, Virginia, linking the Board and all R e serve offices, and is capable of extension to com mercial banks. A copy of the Board’s Policy Statement is at tached. STATEMENT OF POLICY O N THE PAYMENTS M E C H A N IS M Board of Governors of the Federal Reserve System June 18, 1971 Increasing the speed and efficiency with which the rapidly mounting volume of checks is handled is be coming a matter of urgency. Until electronic fa cilities begin to replace check transfer in substantial volume, the present system is vulnerable to serious transportation delays and manpower shortages. Structural changes in the present check clearing system can effect significant savings in manpower and unnecessary handling of checks. These changes will result in faster, more convenient, and more eco nomical banking services for the public. They will reduce the cost of operations. The Federal Reserve Board therefore states as a matter of policy that it places high priority upon efforts by the Federal R e serve System to improve the nation’s means of making payments, initially along the following lines: 1. Extending present clearing arrangements, in cities zvith Federal Reserve offices, into larger zones of immediate payment, consistent with transportation possibilities, check volumes, and the location of check processing centers. 2. Establishing other regional clearing facilities, in which settlements are made in immediately avail able funds, located wherever warranted by the need for more expeditious and economical check handling, or other operating and financial conditions. 3. 12 (a ) Encouraging banks and their customers to make greater use of the expanded capabilities of the Federal Reserve wire transfer system. (b ) Removing restrictions on third party transfers of demand deposits, and extending the time period in which the wire transfer system can be used. ( c ) Expanding facilities at R eserve Bank offices, where justified by traffic potentials, to include high speed tape transmission, and computer-to-computer communications. Plans for making these basic changes in the present money transfer system should be pursued actively, to achieve as soon as possible an accelerated flow of funds along more optimal routing patterns. These initiatives are generally intended to supplement those efficient direct check exchange programs that are now in existence. The first objective should be expansion of the geographic area of existing immediate payment zones. This should be accomplished as soon as necessary arrangements can be made. Meantime, studies looking to the establishment of new clearing centers, wherever warranted, should be undertaken promptly by each Federal Reserve Bank, and sub mitted to the Board for review. Expansion of fa cilities at Federal Reserve offices for increased access to the Reserve System’s wire network should be con cluded at the earliest practicable time, generally during the next 12 to 18 months.
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