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Growth and change in 1966 have kept the municipals
market in the financial news.

FEDERAL



R ESER VE

BANK

OF

RICHM OND

NOVEMBER

1966

S TA TE AND LOCAL
GOVERNMENT

DEBT

PART 2

For many years state and local governments have
relied on sales of bond issues to finance about one
half to three quarters of their capital expenditures.
In 1965 these governments borrowed almost $11.1
billion for such purposes as the construction of
schools, water systems, and highways. This article
will focus on the principal investment characteristics
of state and local government securities, how they
are sold, who buys them, and recent developments
affecting them as capital market instruments.
The first article on state and local government
debt, which appeared in the June 1966 Monthly Re­
view, discussed general features of these securities,
mostly related to the sources of supply. After sug­
gesting the principal reasons for the tremendous in­
crease in total state and local debt, from about $2
billion at the beginning of the century to almost $98
billion in 1965, it traced the origin and development
of the unique tax exempt feature, and analyzed
the relatively recent growth of nonguaranteed, or
“ revenue” bond financing. It concluded that the
widespread existence of constitutional and statutory
restrictions on the issuance of general obligations had
not succeeded in slowing the expansion of debt fi­
nancing, but had simply increased the quantity of
nonguaranteed financing.
Investm ent Characteristics

One of the m ost im ­

portant features of state and local government se­
curities, or “ municipals” as they are commonly called,
is the exemption of their interest from Federal in­
come taxes.

The exemption applies to interest only,

and any gain resulting from a rise in the price of

2




the bond is taxed as a capital gain. If a bond is
originally issued at a discount, that portion of a
realized gain between the discount and par is regarded
as interest, because the discount is part of the cost
which the issuing authority had to incur to sell its
bonds. As such, the gain is tax exempt.
The tax exemption becomes increasingly valuable
as the tax rate paid by an individual or corporation
rises. A n individual earning $50,000, or a couple
earning $100,000 and filing a joint return, both of
which are in a 62% bracket, would have to realize
a taxable yield of 10% to equal a yield of 3.80%
on a tax exempt municipal. A corporation in the
48% tax bracket would have to receive a taxable
equivalent yield of 7.31% to equal the 3.80% tax
exempt return.
The quality of a bond is generally of great interest
to investors. Rating agencies such as M oody’s and
Standard and P oor’s assign quality ratings to many
municipal issues, as wrell as to corporate bonds.
These ratings are based on such factors as the past
payment performance of the issuer, the amount of
debt outstanding measured per capita or as a per­
centage of assessed property valuation, appraisals
of economic prospects and, in regard to revenue
bonds, estimates of the new asset’s earning power.
These ratings range from Aaa, signifying top quality
in terms of earnings and risk, to C, the lowest quality
and most speculative. M oody’s Investors Service
rates bonds of issuers which have over $600,000 of
debt, but excludes bonds of all educational institu­
tions, projects already under construction, enter­
prises without established earning records, or where

necessary financial data are lacking. A bond may
be of superior quality although unrated. Ratings are
given for both general obligations, which are backed
by the full faith and credit of the issuing government,
and revenue or other nonguaranteed bonds. Ratings
have become important as the criteria for determining
which bonds are eligible for purchase by regulated
institutions. Banks, for example, may purchase
only bonds in the top four categories— Aaa through
Baa— or unrated bonds of equivalent quality. Ratings
are also the basis for determining which bonds are
acceptable as collateral for various types of loans
and deposits.
Most municipal bonds are “ serial,” which means
that a portion of the total offering matures each year,
starting after the issue date. Some bonds are “ term”
bonds, with the entire issue maturing on one date.
Prices of serial bonds are usually quoted in terms
of the interest which will be obtained it the bond is
held to maturity. This is known as a “ yield basis” .
Prices of some municipals, including most revenue
bonds, are quoted in dollars, and are known as “ dol­
lar bonds” .
U nderw riting and D istributing N ew issues of
municipal bonds are purchased through bidding or
negotiation from the issuer by securities dealers and
dealer banks who buy them outright and then re­
offer them to the public. This process is known as
underwriting, and the difference, or spread, between
the price the underwriter pays the issuing govern­
ment and the price at which the bonds are reoffered
to the public, is the underwriter’s profit, after de­
ducting his costs. Small offerings may be purchased,
either through bidding or negotiation, and sold to
investors by a single underwriter, but larger issues
are usually marketed by syndicates. A syndicate
consists of a number of security firms temporarily
associated for the purpose of selling a particular bond
issue. Each firm is assigned a percentage participa­
tion by the syndicate’s managing firm, but syndicate
agreements vary in regard to the extent of the mem­
ber’s liability for any losses incurred. In an un­
divided, or Eastern, account, the percentage indicates
the extent of the member firm’s liability for any
residual unsold bonds or losses regardless of how
many bonds the firm succeeded in selling. If a firm
with 15% participation suceeds in selling 15% of
all the bonds, it is still liable for 15% of the bonds
which are not sold.

In a divided, or Western, ac­

account, it is helping another firm reduce its lia­
bility. Both Eastern and Western accounts are un­
divided as to selling, that is, the bonds remain with
the syndicate manager and member firms confirm
their sales with the manager. The chief advantages
to the underwriter of retailing bonds through a
syndicate lie in being able to reach a much broader
market than would otherwise be possible, and in
sharing the liability if the issue does poorly.
Most syndicate agreements are in effect for a 30day period. During that time the bonds may not
be sold by members of the syndicate at any price, or
range of prices, other than that established by the
syndicate. When the bonds are all sold, the syndicate
dissolves. If the issue is not all sold at the end of
30 days, the syndicate may be renewed if a majority
of the members consent. If the syndicate is not re­
newed, the unsold bonds are distributed among the
syndicate members according to the terms of the
agreement, and the members are released from all
trading restrictions. Syndicate restrictions may be
lifted at any time, however, upon agreement of the
majority interests in the account, and in times of
declining prices a slowly selling issue may be re­
leased within a few days of the original offering in
order to avoid or to minimize losses to the par­
ticipating members.
T h e Secondary M arket There is no organized
exchange for trading in municipals. The secon­
dary market consists of over-the-counter transactions
arranged by dealers for other dealers, institutions,
and individual investors. Dealers advertise their
inventories in the Blue List, a daily publication which
lists the current offerings and the price the dealer
is asking that day for each particular issue.

Since

the start of 1966, the par value of issues included in
the Blue List has ranged between $260 million and
$636 million. The Blue List represents the largest
part, but not the total, of the floating supply. Dealer
banks, for instance, may sell bonds out of their port­
folios in addition to the issues listed on their offer­
ing

sheets.

Also,

dealers

may

withdraw

issues

from the Blue List if they believe that prices are
going to rise, and relist them later at higher levels.
Finally, issues which do not have a fairly wide
market are

generally

not

listed.

The

over-the-

counter market is primarily a telephone market.
Millions of dollars worth of bonds are sold every

count, the percentage signifies the amount of bonds

day over the telephone.

allotted to the member firm to sell, and the firm’s

telephone is considered absolutely firm, and, if the

liability ceases when it has sold its total allotment.

bid is accepted, a dealer will not renege under any

If a firm sells more than its allotment in a Western

circumstances.




A price quoted over the

3

Preparations for a Bond Offering O n ce a g o v ­
ernment or authority has decided to raise funds
through a bond flotation it must follow a lengthy
and complicated procedure in order to insure that
the sale meets all legal requirements and is concluded
on the most favorable terms possible. All phases of
the planning are normally supervised by an attorney
who specializes in municipal law, and the lawyer’s
opinion regarding the legality of the sale and the
tax exempt status of the bonds is usually made
available to all dealers and prospective investors.
The issuer should also prepare a prospectus con­
taining comprehensive data on its financial situation
and estimates of reputable engineers or analysts re­
garding the cost of the capital improvement and,
where appropriate, the income it will generate.
Complete information should be submitted to a rating
agency to assure the best possible rating and there­
fore the lowest possible interest cost.
Virtually all state and local governments are re­
quired by their own laws to market general obligation
bonds publicly, through the solicitation of sealed
competitive bids. Bonds which are not backed by
the full faith and credit of the issuing government,
such as toll road and industrial aid bonds, may be
sold competitively but are more often priced through
direct negotiation with the underwriter.
It is in the best interest of the issuing authority to
publicize the approaching sale by advertising in local
and perhaps national newspapers. The object of
such publicity is to receive as many bids as possible
and to sell the bonds at the lowest possible interest
cost. Sizable offerings are usually advertised with
all pertinent information in the Daily or Weekly
Bond Buyer, which is received by practically every
firm concerned with tax exempt financing. If none
of the bids received is satisfactory to the issuer, all
may be rejected and the offering postponed or
cancelled.
For most states and large municipal borrowers
the procedures involved in bond sales do not pose
significant difficulties. Large borrowers are usually
familiar with the necessary steps and also maintain
close contact with capital market developments.
Small towns, counties, school districts, and other
special districts, however, are often relatively un­
familiar with the correct procedures and market
conditions. Mistakes may cause them to pay too
high a price for borrowed funds, perhaps saddle the
community with too heavy a financial burden, or
even prevent the sale from occurring at all due to
legal complications or lack of sufficient advertising.
A t least four states, Virginia, North Carolina,
Michigan, and Louisiana, have created commissions

4




which assist and oversee the borrowing operations
of small governmental units. The Virginia Com­
mission does not offer aid or advice unless requested
by the locality, but in North Carolina localities are
required by law to receive the Commission’s approval
before soliciting bids unless the issuing unit, by a
referendum vote, decides to proceed with the issue
despite the Commission’s disapproval. The North
Carolina Commission takes an active part in many
phases of the bond flotation, including advertising,
receiving the bids, and printing and delivering the
bonds. The Commission’s supervision assures in­
vestors that the correct procedures have been fol­
lowed and that data on the community’s finances will
be readily available. The community benefits from
the wider market and lower interest costs which re­
sult from dealers’ and investors’ knowledge of the
Commission’s standards and the uniformity of the
offering procedures.
The Principal Investors Individuals have been
the largest holders of tax exempts in the postwar
period except for 1965 when commercial banks
moved into first place. From 1955 through 1960
individuals held roughly 40% of the total outstand­
ing. During the past six years, however, individuals’
holdings of municipals have declined by about 5 per­
centage points, as shown in the pie chart. A s a
result of recent developments, it seems likely that
individuals again hold the largest block of outstand­
ing tax exempts. During this same period state
and local governments have also become less im­
portant holders of tax exempts as public officials
have become increasingly aware of more profitable
alternatives, and as laws governing the investment
of public funds have been liberalized.
Commercial banks more than doubled their hold­
ings of tax exempts between 1960 and 1965, from
$16.8 billion to $36.6 billion. The latter figure rep­
resented about 37% of the total volume outstanding
in 1965. The nation’s one hundred largest com ­
mercial banks hold about one half of all municipals
owned by banks, and about 19% of the total out­
standing. Municipals averaged almost 10.5% of the
total assets of these banks in June 1966, compared
to about 6 % in June 1961. In 1962 and 1963 the
net increase in total bank holdings accounted for over
three fourths of the net increase in total state and
local securities outstanding, while in 1964 and 1965
bank acquisitions came to over 60% of the net addi­
tion to tax exempts.
The surge in commercial bank buying of municipals
can be traced in part to changes in ceilings on the
interest rates which commercial banks are permitted

to pay on time and savings deposits. The Board of
Governors of the Federal Reserve System has raised
these ceilings four times since the end of 1961, most
recently in December 1965. As banks paid pro­
gressively higher rates on their time deposits, and
attracted a large volume of new high cost deposits,
they sought higher yielding investments.
Insurance companies rank third in importance as
holders of municipals. Fire and casualty companies
are the principal holders as life insurance companies
receive little benefit from the tax exempt feature.
Nonfinancial corporations have been stepping up
their purchases, although their total holdings are
still relatively small. Other holders include mutual
savings banks, savings and loan associations, cor­
porate pension trust funds, dealers and brokers, and
foreign investors.
R ecent D evelopm ents For the past few months
the total demand for funds has exceeded the supply
of loanable funds, with the result that prices of
capital market instruments have fallen and yields

OWNERSHIP OF STATE AND LOCAL
GOVERNMENT SECURITIES
PER C EN T A G E DISTRIBUTION

nicipals.

Indeed, some banks sold large blocks of

their tax exempt holdings during August.
Individuals apparently have filled at least part of
the gap left by commercial banks.

1960

1965

During the period

1962-1964 aggressive buying by commercial banks
had depressed municipal bond yields, and Aaa-rated
bonds had traded generally in a 2.90% -3.20% range.
1965, however, yields on prime tax exempts rose 42
basis points, and the higher levels revived the interest
of individual investors.

The net increase in indi­

viduals’

of municipals more

total holdings

than

doubled between 1963 and 1965, from $1.6 billion to
$3.7 billion. Individuals continued to step up their
□
0
fp
H
■

Individuals, Partnerships, and Trusts
Com m ercial Banks
Insurance Com panies
State and Local Governm ent Funds
Other

Source:

O ffice of the Secretary of the Treasury.

purchases in 1966 as yields on Aaa-rated bonds
climbed another 64 basis points, reaching a peak,
thus far, of 4.04% near the end of August when com ­
mercial bank sales were heaviest.

During the past

two months, yields have receded and the volume of
new issues has slackened.
have risen. Although a number of tax exempt
offerings either have been cancelled or postponed due
to the high rates, the volume of financing bv state
and local governments during the three quarters of
this year, at $8.5 billion, has exceeded the volume
during the same period of each of the previous two
years by about $600 million. At the same time com ­
mercial banks, which had become the mainstay of the
municipals sector, have become increasingly strapped
for funds to satisfy the strong demand for loans, and
have moderated or halted their purchases of mu­




Another recent development has been the declining
yield spread between short- and long-term municipals,
as illustrated in the chart.

This has been due partly

to the general scarcity of short-term funds, and partly
to the switch in buying interest from commercial
banks to individuals.

Individuals are usually in­

terested mainly in long-term investments while banks
prefer one to five year maturities.

The slowdown

in bank purchases of shorter term bonds has con­
tributed to higher yields on those maturities.

5

-A* S"-*
■

The

C o lu m b ia

S ta n d a rd

a n d R ich lan d co un ties.

M etro p o lita n

S ta tistic a l

N e a rly 1 ,5 0 0 sq u a re m iles a re in clu d e d .

B ro ad a n d S a lu d a R ive rs join to form the C o n g a re e .
c a p ita l since 17 8 6 .

A r e a , ce n te rin g

on C o lu m b ia a n d W est C o lu m b ia -C a y c e ,reacjs ouj

|

The C ity o f C o lu m b ia , p ictured h ere , 's?a Sa n tly situ a te d w h e re the ^

It is n e a r the g e o g ra p h ic a l center of the state.

The state house in use to d a y w a s com p leted in 1 9 0 5 .

a irlin e s , fo u r ra ilro a d s , a n d tw e n ty -fiv e m otor fre ig h t co m p an ie s.

■

The

m etro p o litan

Columfchas been the state
a re a

is

T

state.

■

T h ere a re m ore th an 4 ,0 0 0 b u sin esse s £ in-

b y m a n u fa c tu rin g

product of these in d u strie s w a s v a lu e d

i

in d u stries in

at tw ice th at m uch .

crv

the C o lu m b ia a re a b y 14 p lan ts w h ich prod uce a v a rie ty of h o u s e h o ld ^
a n d in d u s tria l fa b ric s a n d y a rn s .
w a s v a lu e d a t $9 9 m illio n .

T h e ir a n n u a l product in 1965

■ The U n iv e rs ify o f SoTJTn

Ml *

W a g e s p a id w e re

The la rg e st in d u stry in South C a r o lin a , te xtile s, is rep resen ted in^

in a a n d fiv e

i

J

1965 w a s $ 1 5 0 m illio n , a n d

ab o u t $5 5 m illio n , a n d the n um b er e m p lo ye d in m a n u fa c tu rin g a n d tra d e w a s m ore
th an 3 4 ,0 0 0 .

jf* ..

Fiv e co m m e rcial b a n k s h a v e hom e o ffices in the a r e a , w ith b ran ch e s thro u g ho u t th e - ^ ' £ 2 k x ~

N e w in ve stm en t in the a re a

* the a n n u a l

**•* 'S

by f our

y
, , .. d u stria l p la n ts h ere .

co ver a || Qf Le xin g to n -ris*'

J.

£

4,

* ^

-

•

h

,

^ort

^

^ * r

^

other co lleg es, plus se v e ra l

J a cM on,

a

-

e

-

«r~

'

V.

%

£

b u sin ess a n d tra d e schools, a re in the
aJ e a -

* »■

~ l
- -

m ajo r

.

-

2

*

a r m y t r a in in g c e n te r,
* ^ . T is in
*

m

R ic h l a n d

rr\ r

.

C o u n ty .

.

■ f lH M iw
*

rATISTICS

WITH

RECENT

A V ER A G E

.

A N N U A L G R O W T H *B * T g S t

WL

Annual G row th Rates
Period Indicated

SM SA

Colum bia

(Most Recent Y ear) 1

(1960-65)

295,900

Civilian Labor Force (1960-65)

106,200

Unem ploym ent (1960-65)

4,900

Em ploym ent (I9 6 0 -65):
Agricult

3,400

PI

onogricultural N

82,300

M anufacturing

16,500

Trade

17,900

10,100
V a lu e of Retail Sales (1958

,3

V alue of W holesale S a ^ E(1958-63)
3s

'* * J K ,

h
J r




'A ..

i

-

S403,301,000

Total Com m ercial Bank Dep
Deposits (1960-d

"P *

$211,750,800

jte Commerc

(1960-6-4

Dem and

$107,186,900

ft-w -y t:

$ 21,975,000
Estim ated Personal Income (1959-64)*

J H

K

* 1

$ 55,324,000

1

‘ First qu arter only for Colum bia SM SA.

w - -

Sources:

*

Board of Governors of the Federal Reserve System ; Sales M anagem ent, Inc.; So
,S e c u rit| Com m ission; U. S. Departm ent of Com m erc

%
r

V1 ^
w_ *

m *

Photograph courtesy G re a te r Colum bia C ham ber of Com m erce I

^

'

T H E 1966 FARM LOAN S U R V E Y

ITS SCOPE AND ITS PROCEDURES

Agriculture is one of the most rapidly changing
sectors of the American economy. Consolidation,
mechanization, and the implementation of new tech­
nology are progressing at an impressive pace. T o
keep informed on the manner in which the nation’s
banks are meeting the ever-changing credit needs of
this vital industry, the Federal Reserve System con­
ducted farm loan surveys in 1947, 1956, and the
summer of 1966. The results from this year’s survey
are still being processed. The purpose of this article
is to describe the changing background of the demand
for farm credit, and the scope and procedures of
the survey.
Farm Numbers Decline The num ber of farms
in the United States has fallen by more than onefourth in the past ten years. The Fifth District has
experienced an even sharper decline, with the num­
ber reduced by nearly one-third. Much of the re­
duction in the number of farms has been the result
of consolidation, however, and so the average size
of farms has increased. The changes in numbers
and size of farms have no doubt had substantial
effects on the credit requirements of farmers. One
of the purposes of the loan survey was to determine
the nature and extent of those effects.
Directly associated with the decline in farm num­
bers has been a decline, though less sharp, in the
number of farm wage workers. But the increase in
output per worker has been phenomenal. Where
one farm-worker supplied enough farm products, on
the average, for 19.5 persons in 1955, it is estimated
that he supplied enough for 37 persons ten years
later. This has come about through the adoption
of extensive new technology in the form of more
productive farming methods, the use of newer, larger,
and better equipment, increased fertilization, im­
proved varieties of seeds, and expansion of the farm
production plant itself. Current farm operating ex­
penses have increased about one-third during the
period, reflecting in part the use of more skilled
labor at higher wages. Farmers' investments in
machinery and motor vehicles have expanded by
more than one-fourth as consolidation into larger
units and greater specialization has made the use of
the most modern techniques and equipment feasible.
Information on the extent to which banks have
furnished the credit needed for these changes was
sought in the survey. In addition, information was
8



obtained on whether the needs were met with short,
intermediate, or long term loans.
Farm Land Value Rises T he rise in the value
per acre of farm land and buildings has been sub­
stantially greater in the past decade than in any com ­
parable period in this century. The acreage values
of farm land in the Fifth District rose over 70%
during the most recent decade and for the nation
as a whole the rise was over 60% . M ore sig­
nificantly, farm land values have been rising at an
increasing rate. Comparisons of the asset and net
worth positions of borrowers in this survey and a
similar one conducted in 1956 will be made as a
partial means of determining the extent and the sig­
nificance of these changes. Banks lending to farm­
ers have found their task complicated by the rapid
increase in land values. Any instability tends to
create some uncertainty.
Farm Lending Increases The outstanding volume
of nonreal estate loans to farmers has increased by
139% in the past ten years and that of real estate
loans has increased by 135%. These figures would
imply that lenders have, indeed, responded to the
needs for agricultural credit, but they reveal only
limited information on the purposes for which loans
were granted or the security for them. They do not
reveal the repayment status of these loans or the
rates and terms that were granted. Nor does avail­
able information disclose the asset, income, or net
worth positions of farm borrowers. All of these
factors are important to lenders when they are
making decisions on who will receive their credit
support in these rapidly changing tim es; they are of
utmost importance to the farmer because credit
availability may determine whether or not he can
continue to farm.
Farm Income Rises A d ju stin g lending to ch a n g­
ing farm needs is, however, only one side of the coin.
The other equally important side is keeping lending
in line with farm income, from which the ability to
repay loans is derived. The index of prices received
by farmers rose only 16 points from 1956 to 1965,
hence farmers did not benefit very greatly from any
increases in the prices they received for their
products. Productivity increases, however, have
tended to offset the modest size of the increases in
prices received. Statistics reveal that realized gross

income of all farmers in 48 of the 50 states rose 31%
during the 1956-65 period. Realized gross farm in­
come is comprised of cash receipts from farm market­
ings, government payments, value of home consump­
tion, and the gross rental value of farm dwellings.
In the Fifth District farmers realized a boost in
their aggregate gross income of 16 per cent during
the above period.
Of greater significance from the standpoint of
lending has been the change in gross income per
farm. Here somewhat more support is found for
the large increase in aggregate debt because on a
per farm basis gross income of the nation’s farmers
has increased about 75 per cent. The District has
experienced a smaller, but still substantial, increase
of slightly over 67% . Questions asked in the
survey sought information which would reveal how
farms representing various commodity and income
groups have fared from the standpoint of credit
and income.
Scope of the Survey T h e 1966 farm loan survey
included data submitted by about 1,700 member and
nontnember banks in the United States. Each of
the the System’s twelve Reserve Banks was res­
ponsible for contacting the sample of commercial
banks in its district. Besides yielding a great deal
of specific information about farm credit the survey
is expected to aid monetary authorities in evaluating
the flow of capital and credit into agriculture.
The survey was designed to yield rather detailed
information on the rates, terms, and amounts of
loans to individual farm operators as well as the
major purpose and security of these loans. Various
borrower characteristics, such as age, tenure status,
income, asset and net worth positions, type of opera­
tion, and location with respect to the bank were also
obtained. These factors should give a good picture
of the type of farm borrowers now being served by
commercial banks. M ore comprehensive informa­
tion on both borrower and loan characteristics was
obtained than in similar surveys conducted in 1947
and 1956, but to some extent comparisons with the
earlier surveys will be possible to determine trends
that have developed in agricultural lending in the
post W orld W ar II period.
The Federal Reserve’s survey dealt only with com ­
mercial banks, but it was complemented by similar
studies

conducted

by

other

agricultural

lenders.

The Farm Credit Administration surveyed loans
made by Production Credit Associations and Federal
Land Banks, and the United States Department of
Agriculture is reporting on borrower characteristics
of loans made to new borrowers by the Farmers



Home Administration. M ajor life insurance com ­
panies are contributing data on their loans for com ­
parison purposes.
The banks which participated in the survey pro­
vided the individual loan characteristics and borrower
characteristics on a worksheet which was prepared
by the Federal Reserve System in cooperation with
the American Bankers Association, Farm Credit
Administration, and the United States Department
of Agriculture. The completed worksheets were
checked for accuracy and consistency in the Federal
Reserve Banks. The information was then punched
into computer cards and sent to the Board of Gov­
ernors in Washington for tabulation.
Selection of the Bank Sample In the Fifth D is­
trict, 144 banks were selected for the survey sample.
All commercial banks in each of the five District
states and the District of Columbia were arranged
into different categories (strata) depending on the
amount of farm loans that had been reported out­
standing on the June 30, 1965 Report of Condition.
The different strata and the rate of sampling in each
stratum are shown in Table I. In stratum 1, for
example, all banks which had total farm loans in
excess of $3,000,000 were included in the sample,
but in stratum 3 only about one in two were in­
cluded and in stratum 5 about one in four.
Banks from each state were arranged in categories
according to size and then were randomly selected
at the rates specified in Table I to become a part of
the sample. Due to the very limited agricultural
loan volume of banks in the District of Columbia,
banks from that area were included with those of
Maryland for selection purposes. The number of
banks selected from each of the Fifth District states
is shown in Table II.
Selection of the Borrower Sample In an effort
to avoid an unduly heavy reporting job by any one
bank, each was asked to report on a relatively small
alphabetic segment of borrowers. Based on Social
Security records for the Southeastern United States,
20 segments of approximately equal size were set
Table I
S TRA TA AND S A M P L IN G RATES OF BANKS
Fifth District
Stratum
1
2
3
4
5
6
7
8
9

Farm Loans Outstanding
($ 00 0 ), June 1965
3,000
2,000
1,400
1,000
500
200
50
1

and over
to 2,999
to 1,999
to 1,399
to
999
to
499
to
199
to
49
N one

Per Cent Banks
Sampled
100.00
71.43
48.00
42.55
23.97
11.32
05.70
03.23
02.80

9

NUMBER

OF

Table I I
S A M P L E B A N K S IN
BY STATES
June 1965

Stratum

Maryland
and D. C.

Va.

1
2
3
4
5
6
7
8
9

6
1
2
4
4
4
1
1
1

5
5
4
9
12
8
2
1
1

W . Va.

1
1
4
4
3
1
1

EACH

N. C.

of the borrower’s operations and characteristics, but
there were a few loans to borrowers in other states
and even in foreign countries. Nevertheless, the vast
majority of the loans were reported to be within a
15 to 25 mile radius of the banking office.

STRATUM,

S. C.
3
1

10
3
5
6
9
4
1
1
1

1
6
4
2
1

Total
24
10
12
21
35
24
9
5
4
144

Results of the Survey

Tabulation of Fifth D is­

trict data from the survey is nearly complete and the
results will be made available through later articles
in the Monthly Review.

Comparisons will be made

with the earlier surveys where possible to focus on
trends that are developing.

worth and asset positions of farm customers of the
District’s banks will be reviewed, not only as they
pertain to borrowers in general, but also the dif­
ferences in lending practices for various commodity
groups, such as tobacco farmers, dairy farmers, and
the like. Similar comparisons will be made on such
things as total indebtedness, loan purposes and se-

up. The breakdown is shown in Table III. The
largest banks, those in category 1, were assigned only
one segment, chosen at random, for example, CoxDoy. This resulted in the banks in stratum 1 re­
porting on approximately 5 % of their farm bor­
rowers. The letters shown were to be the first
three letters of the borrower’s last name. Banks in

ALPH ABETIC

Table I I I
SEGMENT OF B O R RO W E R S

1

2 and 3

2
3
4
5

AAA
BAS
BOZ
CAR
COX

—
—
—
—
—

BAR
BOY
CAP
COW
DOY

AAA
BOZ
COX
FOR
HEN

—
—
—
—
—

BOY
COW
FOP
HEM
K IL

6
7
8
9
10

DOZ
FOR
GRI
HEN
HUT

—
—
—
—
—

FOP
GRH
HEM
HUS
K IL

K IM
MCL
PET
SHA
TOW

—
—
—
—
—

K IM
LOT
MCL
MUR
PET

—
—
—
—
—

R ID
SH A
STE
TOW
W ET

—
—
—
—
—

8 and 9

6 and 7

LOS
MCK
MUP
PE S
R IC

16
17
18
19
20

4 and 5

MCK
PE S
SG Z
TOV
ZZZ

11
12
13
14
15

SG Z
STD
TOV
W ES
ZZZ

strata 2 and 3 were assigned two of the original
alphabetic segments, for instance, C ox-Fop (or CoxD oy and D oz-F op ), which resulted in banks in these
categories reporting on about 10% of their loans.
Banks in each of the smaller categories were re­
quested to report on progressively larger proportions
of their farm loans.
An excellent response by the sample banks yielded
information on 9,759 loans to 6,496 borrowers. For
the breakdown by states, see Table IV . In addition
to receiving replies from nearly all of the head of­
fices of banks, 313 branches reported on their loans
to farmers. Most of the loans were made to people
in the same general locality as the bank, as was
demonstrated by the intimate knowledge bankers had

10

REPORTED

Stratum

Segment
Number

1

The changes in the net




AAA
COX
HEN
M CL
SHA

—
—
—
—
—

COW
HEM
MCK
SG Z
ZZZ

AAA — DOY
D O Z — K IL
K IM — R IC
R ID — ZZZ

AAA
K IM

K IL
— ZZZ

curity, rates and terms, and such borrower charac­
teristics as age, tenure status, and whether or not
the borrower is a full or part-time farmer.
Knowledge gained from the survey will also be
made available on a national basis. The material
collected by each of the District banks will be con­
solidated and will serve as the basis for several
articles in the Federal Reserve Bulletin.
NUMBER

OF

Table I V
BORROW ERS AND
BY STATES

State
Maryland and D.
Virginia
W est Virginia
N orth Carolina
South Carolina
Total

LOANS

REPORTED

Borrowers
C.

Loans

508
1,734
305
3,361
588

701
2,798
481
4,896
883

6,496

9,759

THE FIFTH DISTRICT

J K

Business activity continues to advance in the Fifth

M anufacturing T h e index o f m anufacturing man-

District although uncertainty over future prospects

hours in August was virtually unchanged from July.

appears to be growing.

Seasonally adjusted bank

debits fell slightly in September but ran 1% ahead
of the same month last year.
of building permits issued

However, the index shows a 5%

increase over

August 1965.

The District index

According to recent reports, durable goods manu­

(seasonally adjusted)

facturers point to weakness in their sector of the

showed gains for the second consecutive month in

District economy.

September.

orders, backlogs, and hours worked per week al­

The

index

recorded

substantial

in­

They indicate declines in new

creases in the third quarter after relative stability

though employment is reported up slightly.

in the second quarter.

durable goods manufacturers (except textiles), on

The cumulative index for

N on­

the first nine months of 1966 was about 1.5% ahead

the other hand, report increased strength in recent

of the same period last year.

weeks.

Sales of retail establish­

ments have picked up, although on a national level
the latest survey conducted by the University of
Michigan Research Center indicates that consumer
optimism is waning.

Interestingly, the survey also

points out that consumer plans to make major pur­

New orders and shipments seem to be up

slightly, as are hours worked and employment.
Furniture

T he

Fall

F'urniture

M arket

which

opened October 21 in High Point, North Carolina,
has been described as “ a slow market with big at-

chases are almost unchanged from last year.
E m ploym ent

Septem ber data on total nonfarm

employment for the five states (D . C. not available)
show a slight decline from August.

The decline is

TOTAL

tions, and public utilities where there was an increase
and in finance, insurance, and real estate where no
change occurred.

Growth in nonfarm employment

in the five District states since last September,
shown in the table, compares favorably with that of
■ the nation.

Relative gains in four major employ­

ment categories were greater for the District than
for the nation.
In the week ended October 1, the rate of insured
unemployment in Maryland, North Carolina, V ir­
ginia, and the District of Columbia fell to the lowest
level since the beginning of the present expansionary
period in early 1961.

W est Virginia equalled the

record low for the period established last month,
and South Carolina was within .2% of its lowest
point.




EMPLOYMENT

D IS T R IC T ST A T E S*

(seasonally adjusted in thousands)

probably accounted for in part by the return of
students to school. Employment decreased in all
major categories except transportation, communica­

NONFARM

FIFT H

5th D istrict
September
Total Nonfarm
Employment

% Change
From Year A go
5th D istrict
U. S.

5,076.0

4.7

4.9

1,660.6
626.8
1,033.8

4.6
7.3
3.0

5.7
7.6
3.1

Nonmanufacturing
3,415.4
Mining
71.7
Contract
Construction
330.0
Transportation, Com
munications, and
314.7
Public U tilities
974.7
Trade
Finance, Insurance,
208.8
and Real Estate
Services and
642.8
M iscellaneous
872.7
Government

4.7
4.8

4.6
1.8

2.7

1.7

4.1
3.3

2.3
3.9

4.0

1.8

4.1
7.8

5.0
7.8

Manufacturing
Durables
Nondurables

^Excludes D. C. because September 1966 data are not
available.
Source: U. S. Departm ent of Labor and State Depart­
ments of Labor.

11

tendance, but poor buying” . Retailers are finding
prices up generally about 2 % to 3% from the April
show and at least 4 % to 5% higher than last October.
Trade sources report that most manufacturers expect
no adverse effect on sales as a result of higher prices,
but some retailers express concern that reduced
home-building may cause some drop in sales.
Tight labor remains the industry’s biggest problem,
and many spokesmen indicate that it is the greatest
deterrent to expansion.
developments

and

a

Coupled with technological
reported

shortage

of

good

quality hardwood lumber, manpower problems have
encouraged utilization of more wood substitutes, and
this year’s lines will include more structural and
decorative plastics than ever before.
T extiles

T h e textile industry continues to ex­

perience some soft spots and industry spokesmen are
concerned over the rapid rise in imports during the
past year and the probable adverse effect on the in­
dustry of the suspension of the 7%
credit.

Recent reports

investment

suggest that new orders,

backlogs, and prospects for profits are down, while
inventories have risen.

Prices continue under down­

ward pressure. One of the leading manufacturers of
man-made materials recently announced a 4-to-12
cent price reduction in its polyester blends; similar
action was immediately taken by others in the field.
Trade reports indicate that this action brings the
quoted price more nearly in line with the actual
trading price.

It also makes the prices of man-mades

more competitive with the recently reduced raw
cotton prices.
The unprecedented labor shortage is also one of
the most pressing problems facing the textile in­
dustry.

Not only is labor scarce, but the turnover

rate is quite high.

The scarcity of manpower has

created special interest in the Southern Textile E x­
position which opened in Greenville, S. C. on O c­
tober 17.

The latest technological innovations are

shown here.
Increasing wages are another major concern of
millmen.

A s of August 1966, the average hourly

South Carolina has made particularly notable
progress in the textile industry. In the last two
years, over $810 million has been invested in new
textile plant and machinery in the state. Between
August and December of this year, nine new textile
spinning and weaving plants will go into full pro­
duction with investment exceeding $63 million. These
new plants will provide approximately 2,250 new
jobs at an average investment of $30,000 per job.
In North Carolina, the textile industry is one of
the fastest growing industries and was the first to
reach a $1 billion payroll in 1965. It provides em­
ployment for some 247,000 people and accounts for
about two fifths of the state’s work force.
Cigarettes A m erican cigarette sm okers w h o re­
acted sharply to the Surgeon General’s report in
January 1964 seem to be ignoring the new “ caution”
label which started appearing on cigarette packs this

earnings of textile workers in the Fifth District

year.

were $1.95— a $.10 increase over the year ago level.

culture estimates, per capita consumption among

Average hourly earnings will go even higher again

persons 18 years and over is 215 packs of cigarettes

in February when the minimum wage rises to $1.40

this year, a rate second only to the record 217 packs

under the new law.

in 1963.

This is expected to set off a

According to the U. S. Department of A gri­

August cigarette shipments climbed to the

ripple effect as semi-skilled and skilled workers de­

highest monthly level in 1966, up 8.7% from the

mand proportional increases.

previous year.

12





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102