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The World Bank Group
M ortgage Terms
State and Local Borrowing in 1966
The Fifth D istrict

The W orld Bank Group comprises three institutions. A t the heart is the Bank itself, which is more
officially known as the International Bank for Reconstruction and Development (IB R D ). Founded at the
Bretton W oods conference of 1944, on the same occasion as the International M onetary Fund, the Bank
bears witness to the spirit of cooperation in which the nations of the world try to solve a major economic
problem of our time.
The aim of the Bank is to make long-term loans to member countries on more or less conventional market
terms. Immediately following World W ar II, the organisation was solely concerned with financing the
reconstruction of war-torn nations. Since 1948, however, it has focused its attention on the financing
of economic development. During its fiscal year ending June 30, 1967, it made 47 loans amounting to
almost $877 million; about 80% of this sum zvas channeled into the developing countries of Asia, Africa,
and Latin America. In the twenty-one years of its operations the Bank has lent a total of some $10 billion.
The IB R D is flanked by its two daughter organizations, the International Development Association
(I D A ) and the International Finance Corporation (IF C ). The form er provides “ soft loans’ to those
countries zvhose debt servicing problems would be critical if they had to borrow all the funds needed for
development on conventional terms. During the past fiscal year, ID A extended credit amounting to about
$350 million. The IF C , on the other hand, operates exclusively in the private sector where it can invest
in share capital or make loans to private borrowers without government guarantees.

Structure and Organization of the World Bank
The Bank has a corporate structure with, at present,
109 member governments acting as stockholders of
$22.9 billion of capital stock. Unless stated other­
wise, however, the figures used in this article will
refer to the situation as of June 30, 1967; on that
date the IB R D had 106 members and a capital stock
of $22.8 billion. According to the Bank’s charter,
the capital subscription of each member is composed
of three parts. T w o per cent of the subscription is
payable in gold or U. S. dollars while another 18%
is payable in the member’s own currency or in its
non-negotiable, noninterest-bearing demand notes.
The remaining 80% is not available to the Bank for
lending but can be called, if necessary, to meet the
obligations on its own borrowings or on the loans
that it has guaranteed. On June 30, 1967, each
nation had paid in 10% of its total subscription,
thus leaving some $20.5 billion subject to call.
The W orld Bank is an intergovernmental institu­
tion, that is, it has no supranational powers. The
top-ranking body is the Board of Governors on which
each member country is represented by one Gover­
nor, usually its finance minister. The Board meets
once a year and deals with broad issues. W ith few
exceptions, such as the admission of new members
and changes in the capital stock, it has delegated its
powers to the 19 Executive Directors who are re­
sponsible for the Bank’s general operations. The


five largest stockholders, the United States, the Unit­
ed Kingdom, Germany, France, and India, appoint
one permanent Director each, while the other Direc­
tors are elected by groups of members. For instance,
Canada, Ireland, Jamaica, and Guyana form a pool
which is at present represented by a Canadian. All
Directors serve two-year terms and meet frequently
at the Bank’s headquarters in Washington, D. C. In
voting procedures the votes of the members are
weighted as follow s: each nation has 250 votes plus
one vote for each $100,000 of subscribed capital.
Thus the U. S., with the largest ($6.35 billion) sub­
scription, has 63,750 votes or 25% of the total vot­
ing power. The five largest stockholders together
hold almost 48% of the total voting power.
The 1,450 member staff of the Bank is headed by
a President who is selected by the Executive Direc­
tors. A t present this post is held by Mr. Robert
McNamara who is in charge of the day-to-day opera­
tions of the Bank. Both the President and the mem­
bers of the staff have international servant status and
owe no responsibility to any national government.
Financial Resources of the Bank

A large part

of the Bank’s resources stems from the portion that
members have paid in on their capital subscription.
On June 30, 1967, such funds amounted to around
$2.3 billion.

The provision of loans from these re­

sources is subject to the following rules.

The 2%

W O R L D







C u m u la tiv e to ta ls o n J u n e 30, 1 9 5 7 , a n d J u n e 30 , 1 9 6 7
(Initial commitments net of cancellations and refundings, in millions of U. S. dollars)


Asia and the
Middle East













Electric Power























Agriculture, Forestry, and Fishing




1957 1967













































Water Supply



Education Projects



Engineering Loans


General Development



Postwar Reconstruction


















Parts may not add to totals due to rounding.
Annual reports of the World Bank, 1956-57 and 1966-67.

of a subscription that is paid in gold or dollars can
be used freely for all purposes. The other 18% that
is contributed in the various national currencies may
only be used with consent of the member whose cur­
rency is involved.
Another major source of the Bank’s loanable funds
is the private capital market. The marketability of
the Bank’s notes and bonds has been greatly enhanced
by the provision that its paper is guaranteed by the
callable capital. Before issuing paper in a certain
market, the organization needs the approval of the
country concerned. Thereafter, the acquired funds
are freely convertible into other currencies.
On June 30, 1967, the aggregate outstanding
funded debt of the Bank amounted to just over $3
billion, up $269 million from the previous year. Dur­
ing the last fiscal year new borrowings totaled $390
million, $250 million of which was placed in the
United States. The average cost of all issues of­
fered in 1966-1967 was 5.54%, an increase from
5.08% in 1965-1966. The highest offering yield on
any W orld Bank issue yet, 6.41%, was paid in
Canada in November 1966.
The U. S. capital market has been the scene of
more Bank borrowing operations than any other
capital market. Since the first issue was floated
here in 1947 the organization’s funded debt denomi­
nated in dollars has increased to $2.3 billion, or
about 75% of the total debt outstanding on June 30,

1967. This figure includes a minor portion of se­
curities denominated in dollars but privately placed
outside the U. S. Lately, many issues have also
been floated in Germany, Switzerland, and Canada.
The growth of the American market for the Bank’s
issues has been greatly facilitated by the gradual re­
moval of legal barriers which prevented banks and
institutional investors from purchasing these securi­
ties. Moreover, in 1949 the U. S. Congress per­
mitted national banks and state banks that are mem­
bers of the Federal Reserve System to deal in and
underwrite the IB R D ’s securities.
Besides the paid-in capital subscriptions and bor­
rowed money, the Bank gets additional funds from
its earnings, from sales of portfolio loans, and from
principal repayments. Net earnings for the fiscal
year 1966-1967 amounted to about $170 million,
increasing total reserves to just over $1 billion. The
income was derived mainly from investments and
loans whereas expenditures consisted mostly of inter­
est on borrowings and administrative outlays. Dur­
ing the same year the Bank sold $69 million worth
of assets that it had acquired in the course of its
lending activities.

These sales are another means

by which private sources of funds can be tapped to
finance economic development.
Th e L ending P o licy of the Bank

Len din g opera­

tions of the Bank can take any of three form s: (1 )


it can guarantee a loan made by a private investor;
( 2 ) it can provide funds from its own resources;
or (3 ) it can raise funds in the capital market of a
member country and in turn lend those. The total
amount of outstanding loans made or guaranteed by
the Bank can at no time exceed 100% of the total
unimpaired subscribed capital, reserves, and surplus.
The practice of Bank guarantees has never caught
on, partly because private investors have shown lit­
tle interest and partly because of technical difficulties
attached to such operations. In its lendings activities
the Bank may deal with governments, with political
subdivisions thereof, or with any private enterprise.
However, if the borrower is not a government, the
loan must be guaranteed by the government of the
party involved. The Bank, moreover, will provide the
money only if the borrower is unable to obtain a
loan on “ reasonable” terms elsewhere. Funds can
only be made available for specific development pro­
jects. The IB R D sees to it that the loan serves the
purpose that it was given for and that the money is
used efficiently. Contrary to most bilateral aid, the
Bank’s multilateral assistance does not tie the re­
cipient to a particular source of supply in using the
funds. Thus the recipient is free and indeed has to
make the purchases where he can get the best value.
The terms of each loan are negotiated individually.
However, in addition to its interest rate, the Bank
always charges a commission of around 1 % on the
outstanding principal of its loans. During the fiscal
year ended June 30, 1967, the Bank charged a rate
of interest that ranged between 6 % on new loans to
the less developed countries to 7% on new loans to
the more advanced members. Since that date the
former rate has been raised twice, bringing it to
6 */2 % . The maturities of these new loans varied
between 10 and 31 years. As a consequence of the
Bank’s practice not to finance the entire cost of any
project or program, it frequently cooperates with
private investment banks.
Although the W orld Bank may handle each loan
application in a slightly different way, a certain
standard procedure has developed. After prelimi­
nary, informal contacts, during which the IB R D
determines whether the project is eligible for its sup­
port, the loan request goes through two separate
phases. In the first phase the Bank investigates the
economic situation in the borrowing country and
evaluates the significance of the specific project in
the context of the nation’s needs and potentials. It
can also make suggestions about a change in priority
of the various components of a development program.
If the result of this investigation is favorable, a
thorough examination of the financial and technical


aspects of the project will follow. In this phase the
Bank can recommend changes in the financial and
economic policy of the member government. Usually
the survey will be completed with an on-the-spot
investigation by a team of its own or independent
experts. Upon negotiation of the terms of the loan,
the President of the Bank will then submit the re­
quest for approval to the Executive Directors. Once
the agreement is signed an extensive “ follow-up”
machinery conies into action, scrutinizing the con­
struction and operation of the project and constantly
checking on the economic and financial developments
in the country. Funds will be disbursed only as the
costs for specified goods and services are incurred.
Another important line of the organization’s activi­
ties is its technical assistance program. The IB R D
has repeatedly and upon request sent missions to
various nations to analyze their over-all economy
and to recommend a long-term development plan.
The Bank, moreover, has assisted in the founding of
several development banks.
Loan Operations A s shown in the table, the
cumulative adjusted total of loans made by the Bank
since its inception amounted to around $10.3 billion
on June 30, 1967. This is exclusive of a $100 mil­
lion loan made to the IF C during the last fiscal year.
The 1967 figure was up $777 million from the previ­
ous year and represented a 242% increase over the
cumulative total on June 30, 1957.
More than one-third of all loans has been chan­
neled into Asia and the Middle East. Since 1957
loans to this region have also grown at a faster rate
than loans to any other area. India and Japan have
been the largest recipients in this region, obtaining
respectively around $1 billion and $850 million. In­
deed, India has received more Bank funds than any
other single member. Am ong Western Hemisphere
nations, M exico takes first place with receipts of
some $625 million, while the Republic of South
Africa leads in Africa with about $242 million. The
Bank’s earliest operations took place in Europe. In
1947 the IB R D lent some $495 million to several
war-torn nations, mainly France and the Nether­
lands, in the form of reconstruction aid. After
adoption of the Marshall Plan, however, the Bank
discontinued such assistance to Europe and it has
since occupied itself with the finance of economic
Am ong the purposes for which loans have been
made, electric power projects rank first, followed
closely by transportation projects.

Loans for the im­

provement of roads and railways constituted about
85% of the total loans in the latter category.

Over the 21 years of its existence, the Bank has
received aggregate principal repayments in the
amount of $1,263 billion. In addition to this, the
Bank has sold over $2 billion of its loans to investors.
Thus, disregarding minor adjustments, the Bank held
on June 30, 1967 a total of $7,126 billion in loans.
International Development Association (ID A )
The ID A , founded in late 1960, aims at providing
funds for development on more liberal terms than the
Bank. It may also finance projects that would be
outside the Bank’s realm. Membership in ID A is
open only to Bank members and though the two
organizations have separate resources, they share the
same administration.
On June 30, 1967, ID A ’s funds, contributed by
its 97 members, amounted to $1.7 billion, of which
the U. S. had contributed one-third. Since that date
two more countries have joined the organization.
Also, a $1.2 billion supplement was recently agreed
upon. The members are divided into two grou ps:
developing nations that are potential recipients of
ID A credits, and highly developed nations that are
in principal only contributors. On June 30, 1967.
the latter group had supplied around $1.5 billion in
fully convertible currencies to ID A ’s resources.
ID A , moreover, has received $200 million in grants
from the W orld Bank.
The Association follows mostly the same operating
policy as the IB R D where selection and preparation
of projects are concerned. The terms of its credits
are, however, considerably easier. No interest is
charged except for a ^ of 1% per annum service
charge on the outstanding amount to cover its ad­
ministration costs. Furthermore, maturities run up
to 50 years and repayment, due in foreign exchange,
does not start until after 10 years.
On June 30, 1967, the cumulative total of ID A ’s
credits amounted to about $1.7 billion, up $354 mil­
lion from the previous year. Thus, almost all of its
resources have been committed. India and Pakistan
have been the leading recipients, accounting together
for almost three-fourths of all allotted funds. Around
a third of ID A ’s resources has been channeled into
transportation projects, although in recent years the
finance of industrial imports has gained much in
The International Finance Corporation The IFC
was established in 1956 to stimulate the growth of
private enterprise in the organization’s member
countries. T o this end it provides financing, in
association with private investors and without gov­
ernment guarantee, for the establishment, improve­
ment. and expansion of private enterprises in cases

where sufficient private capital is not available on
“ reasonable” terms. The terms of the investments
are determined in each individual case. The IFC
also tries to create new investment opportunities by
bringing investors and management together. The
administration of the Corporation is largely inter­
locked with the Bank's.
On June 30, 1967, the organization’s capital, con­
tributed by its 83 members, amounted to about $100
million. The U. S. contributed about a third of this
sum. During the fiscal year 1966-1967, the IFC
also received a $100 million line of credit from the
W orld Bank.
The Corporation can replenish its resources by
selling its investments to private interests, thus mobi­
lizing private capital for development purposes. Dur­
ing the first years of its operation, however, the IFC
was seriously restricted in this. Since it was not
allowed to make equity investments it had to resort
to other types of investments, such as loans in the
form of convertible debentures. These were less
marketable and therefore less attractive to private
investors. Thus the restriction hampered an easy
revolving of funds and threatened the growth of the
Corporation’s operations. In 1961 the organization’s
charter was amended to permit equity investment.
On June 30, 1967, cumulative sales of loans and
equities had yielded $41 million.
A t the end of fiscal 1967 the cumulative total of
operational investments amounted to $196 million,
of which around 40% consisted of shares. A pproxi­
mately half of the commitments has been made in
Latin America, notably in M exico and Brazil. The
vast majority of enterprises financed by the IFC
has been manufacturing industries, with chemical
and iron and steel industries alone accounting for
about 35% of total commitments. A substantial
amount, $20 million, has been devoted to another line
of the Corporation’s activities: participation in de­
velopment finance companies.
Conclusion The Wrorld Bank Group has becom e
the most important institution devoted to the financ­
ing of economic development. Over the 21 years of
its activities, the Bank has gained a wealth of ex­
perience that enables it to advise member govern­
ments as an expert on the whole range of develop­
ment problems. The policy to serve as a “ lender of
last resort,” as well as the thorough way in which it
investigates loan applications have contributed to the
organization’s prestige.

The close cooperation be­

tween the three members of the Group has resulted
in maximum efficiency in the use of available funds.
Jan H. W . Beunderman


Mortgage Terms



Federal Home Loan Bank Board.

J —L 1 _L I__I I 1 I


I^ W IO "

I I I__I__ L i__1 1 1

1 I



il Home Loan Bank Board and +he
of Governors of the Federal Reserve System.


n o " x 1 'io"

In th e fir s t q u a r te r o f th is y e a r

in te re s t ite s o n re a l e s ta te lo a n s s u rp a s s e d th e p re v io u s

h ig h s set d u r in g th e " c r e d it c ru n c h " o f 19 66 . Rates c o n tin u e d
e s ta b lis h in g

n e w re c o rd s .

In A p r il th e y ie lc >n 3 0 -y e a r

h ig h e r th a n th e p re v io u s p e a k o f 6 .8 1 % in b v e m b e r

to rise in th e second q u a r te r ,


lo a n s


re a c h e d

F o llo w in g

6 .9 4 % ,

th e

re m o v a l

s lig h t ly

th e

6% s ta tu to r y c e ilin g a n d th e e n a c tm e n t o f a >4 % a d m in is tr a tiv e c e ilin g in M a y , th e y ie ld o n
F H A -in s u re d m o rtg a g e s ju m p e d to 7 .5 2 % in jn e .
h o m es h a v e a ls o rise n a b o v e re c e n t re co rd s,

C o n v e n tio n a l fir s t m o r tg a g e ra te s o n n e w

fh e FH A series f o r such ra te s a v e r a g e d 7 .2 5 % in

J u n e , w e ll a b o v e th e 6 .7 0 % h ig h re c o rd e d ir >oth O c to b e r a n d

N ovem ber

F e d e ra l H o m e Loan B a n k B o a rd series w a s .03%

ba sis

re a c h e d

in J a n u a r y


• U n lik e

b e e n as re s tr ic tiv e as in th e



a n d e x is tin g ho m es w e re 2 5 .4 a n d 2 2 .6 y e a r
e x is tin g

ho m es.

1966, a n d


th e

th e

.v e ra g e m a tu r itie s , a f t e r to u c h in g lo w s in th e f a ll

J u n e 1 9 6 8 , th e la te s t m o n th f o r w h ic h in fo rr a tio n



p o in ts

ra te s ^ fe 'n ra te te rm s , a s re p o rte d b y th e FHLBB, h a v e n o t

1 9 6 6 p e rio d ,

o f 1 9 6 6 , rose s h a r p ly in e a r ly 1 9 6 7 a n d sine th a t tim e

a s im ila r u p w a r d p a tte r n .



h a v e tre n d e d

a v a ila b le ,

re s p e c tiv e ly .

g r a d u a lly

a v e ra g e

u p w a rd .

m a tu ritie s



L o a n -to -p ric e ra tio s h a v e fo llo w e d

The r a tio in J u n to f th is y e a r w a s 7 4 .4 % o n n e w h o m es a n d 7 3 .1 %

• D e s p ite

re la tiv e ly

h in

lo a n -to - p ric e

ra tio s ,

a v e ra g e

dow n

p a y m e n ts

h a v e ris e n b e ca u se o f in c re a s e d s e le c tiv ity tf.vard b o rr o w e rs on u p g r a d e d o r m o re e x p e n s iv e
s tru c tu re s a n d

b e ca u se o f s h a r p ly h ig h e r p r : j s f o r h o u s in g .

a n e w h o m e fin a n c e d



fro m

th e

 Federal Home Loan Bank Board.

12 .2%
sa m e

p e rio d .

th e f a ll o f


R e fle c tin g

th e

th e h ig h o f $ 7 ,6 0 0 re a c h e d d u r in g
dow n

$ 3 0 ,4 0 0

in J u n e ,

The a v e rg e p ric e o f a n e x is tin g ho use rose 15 .1% d u r in g
h ig h e r

pr:es o f h o m e s, th e a v e ra g e

n e w h o m e fin a n c e d b y a c o n v e n tio n a l fir s t 'o r tg a g e
th e a v e r a g e

The a v e r a g e p u rc h a s e p ric e o f

b y a c o n v e n tio n a L tU ^ -rn p rtg a g e , f o r e x a m p le , w a s


$ 7 ,8 0 0

th e tig h to o n e y p e rio d o f 1 9 6 6 .

p a y m e n t o n e x is tin g


dow n

p a y m e n t on a

June, s o m e w h a t a b o v e
O v e r th e sa m e tim e s p a n

hores ro se fr o m $ 6 ,4 0 0 to $ 6 ,8 0 0 .




















Federal Home Loan Bank Board.

1 - I - 1— 1




1 - 1 ..

State And Local B o r r o wi n g

The effects of tight money are felt, with varying
intensity, by all sectors of the economy. The hous­
ing sector, for example, is especially sensitive to
restrictive credit conditions, due in part to certain
statutory and institutional rigidities which channel
funds away from mortgage markets in periods of
tight money. Experience in the credit crunch of
1966 suggests that the borrowing and spending plans
of state and local governmental units might also bear
a disproportionate share of the burden of tight
T o study the effects of the 1966 tight money
episode on the financing plans of state and local units
the Federal Reserve System recently conducted a
two-stage nationwide survey of both large and small
state and local governmental units. Specifically, the
survey was aimed at determining how, if at all, the
financing and spending plans of these units were
affected by the tight money conditions that existed
in 1966. Results of the survey of large units over
the nation as a whole have been tabulated and
analyzed in an article in the July 1968 issue of the
Federal Reserve Bulletin. Detailed survey data are
now available by Federal Reserve Districts and the
results in the Fifth District are reviewed in this
Survey Participants The first stage of the sur­
vey, directed exclusively at large state and local gov­
ernmental units, embraced the following types of
units above the specified minimum size:
250,000 population
Cities or Townships
50,000 population
Special local districts
$5 million debt
Local school districts
25,000 enrollees
State agencies
All except very small
State and local institutions
of higher education
All except very small


O f the approximately 1,000 such units surveyed in
the nation as a whole, 64 were located in the Fifth
The survey attempted to record the borrowing and
spending experiences only of governmental units
which had definite intentions to borrow in 1966.
Respondents indicating no intention to borrow were
not questioned further. The criterion for judging
the definiteness of intentions to borrow was whether
the appropriate officials had actually arrived at a
decision, whether or not publicized, to go through
with a bond issue some time in 1966. Because of
its informal and somewhat subjective nature, this
admittedly imprecise criterion may be the source of
some bias in the survey results.
State and Local Financing Needs Since W orld
W ar II state and local government programs and
facilities have been growing by leaps and bounds.
T o finance increased spending for such programs,
local units have been large sellers of bonds. Between
1946 and 1966 new issues of long-term municipals
increased from $1.2 billion to $11.1 billion per year.
Between 1956 and 1966 total state and local govern­
ment securities outstanding rose from $47.4 billion
to $104.8 billion. These governments currently fi­
nance about half of their capital outlays from the
sale of bonds.
The increased demand for funds from state and
local units as well as from corporations, the Federal
Government, and others has been a major factor
raising borrowing costs over the last several years.
Over much of this period the market for municipal
securities has grown rapidly, most notably through
increasing commercial bank participation. Neverthe­
less, state and local borrowers have had to raise offer­
ing yields to attract funds. Rising capital market
rates, of course, increase the cost of financing new
projects and municipal units must either be pre­
pared to pay more for money or abandon or post­

In 1 9 6 6

pone borrowing.

In some cases statutory limitations

82% of the $7.56 billion total originally planned.


on interest rates that can be paid have kept some

the $1.36 billion shortfall, $1.29 billion represented

municipal borrowers out of the market.

abandonments, i.e., issues canceled indefinitely or

Changes in Borrowing Plans

In both the Fifth

District and the nation as a whole, most survey re­
spondents noted that their borrowing plans were
moderately curtailed in 1966.

O f the 64 Fifth Dis­

trict units, 37, or almost 58% , indicated having
had definite plans to borrow long-term (over one
year) in 1966.

O f these 37, only four cancelled or

postponed beyond 1966 all of their borrowing plans.
A t the national level, just over half of the 983 re­
porting units indicated definite plans to borrow and
11 % of these completely canceled or postponed be­
yond 1966 their intended offerings.


of the 33 District units which did borrow in 1966,
five altered their original plans in some way, in most
cases by postponing, abandoning, or reducing at least
some issues. This experience matches closely the
national figures, which show that just over 15%
of all units which borrowed altered their original
plans in some way.

Thus, of all units that expressed

a definite intention to borrow in 1966, about a fourth
indicated some change in their original plans.


fraction holds both nationally and for the Fifth
O f the 440 units across the nation which borrowed
long-term in 1966 there were 185 cities and town­
ships, 80 state institutions of higher education, 43
special districts, 39 counties, 36 school districts, 34
state agencies, and 23 states.

Borrowing units in

the District included 16 cities and townships, 5 coun­
ties, 4 states, 4 special districts, 2 school districts,
and 2 state agencies.
For the entire nation, the surveyed units completed
$6.20 billion of long-term borrowing in 1966, about




Another $0.1



sented reductions, i.e., a scaling down of the amount
originally planned.

Increases in offerings amounted

to only $34 million, thus giving the net $1.36 billion
shortfall of borrowing.

Postponements, or issues

delayed but sold later in 1966, and accelerations
amounted to $0.4 billion and $0.1 billion, respec­
tively, but did not affect annual totals.
In the Fifth District, the net change in planned
borrowing amounted to a decrease of $56 million.
This amounted to 9.5%

of the planned level of

$591 million, a notably lower level than the 18%
for the nation as a whole.

A s in the national

figures, abandonments accounted for the largest part
of the cutback, $44 million. There were $12 mil­
lion of reductions and no increases in the District.
Postponements in the District amounted to $54
million and there was no offering whose issue date
was accelerated.
The primary cause of alterations in borrowing
plans was high interest costs.

In some cases govern­

ment officials deemed the going market rates to be
excessively high and in other cases interest rate ceil­
ings established by bond referenda or statutory or
constitutional law prevented the sale of securities.
Nationally, units which abandoned offerings, by far
the largest and most frequent way in which plans
were altered, indicated that 78% of all abandon­
ments were primarily due to high interest rates. In
the Fifth District no other primary reasons were
cited. Similarly, over 75% of all postponements in
the nation were due to credit market conditions and
in the Fifth District it was the only primary reason
cited. High interest rates and expectations of higher


rates were also variously the causes of all reductions,

trict, abandonments of borrowings for education

accelerations, and increases in offerings occurring in

were largest, nearly $15 million, with utilities rank­
ing second with $13 million, and transportation next

this District.

with $9 million.
Characteristics of Offerings

For the nation as

a whole, the number of municipal offerings by large
units in 1966 totaled 741, of which 414 were general
obligation securities.

The pattern for reductions, in­

creases, accelerations, and postponements did not
show variations as significant as those just mentioned,
in part because of the small amounts involved.

In the Fifth District there

were 46 offerings, of which 37 were general obliga­

Capital Spending


The distribution of these offerings among

rowing in 1966 had a relatively small immediate im­

borrowing units showed that, on the national level,

pact on the spending plans of large municipal units

279 units had one offering, 95 units had two offer­

across the nation during 1966.

ings, 31 units had three offerings, and 35 units had

reported canceling or postponing about $120 million

four or more offerings.

of contract awards in 1966 because of borrowing

Of the 33 borrowing units

in the District, 23 had one offering, eight had two


T h e cutback of long-term b o r­

Twenty-six units

This is less than one-tenth of the total

offerings, two had three offerings, and there were no

shortfall from planned borrowing.

units with four or more offerings.

part of the cutbacks in awards was associated with

For the nation as a whole, nearly all long-term
borrowing in 1966 was effected through the private

The very large

abandonments rather than temporary postponements
or reductions of offerings.

In the Fifth District only

market. Nationally, only $271 million was sold e x ­

one unit reported a cutback of contract awards. This

clusively and directly to other governmental units,

amounted to $2.29 million.

including the Federal Government.

The remainder

Three principal reasons appear to explain large


government units’ ability to continue with their 1966

the Fifth District, only $2 million was borrowed di­

capital spending plans despite cutbacks in borrowing

rectly from other governmental units out of the total
of $535 million of long-term borrowing.

in 1966. Over half of the national total of $1.1 billion
of capital outlays which were continued despite

of the $6.2 billion total was from private sources.

O f the $6.2 billion borrowed in the United States
during 1966, almost $2.0 billion was for educational

The next largest amount, $1.7 billion,

was destined for transportation facilities.


billion dollars was intended for utilities.

The re­

mainder was divided among health and welfare pro­
jects, administrative facilities, and other purposes.
In the District, $212 million was for education facili­
ties, $173 million for transportation, and $72 million

abandonments of borrowing was apparently due to
the length of time between borrowing dates and the
letting of contracts.

be needed only in the future.

In essence, the units

were reducing their liquidity.

The substitution of

short- for long-term borrowing and the drawing
down of large liquid assets were apparently equally
responsible for most of the rest of the $1.1 bil­

for utilities.
W hile borrowing for education was larger than

Abandonments were not seen

to be affecting 1966 spending because the funds would

Approximately $240 million of spending was

maintained by each method.

for any other activity, the volume of abandonments


across the nation which had been intended originally

1966 appears to have had a definite effect on borrow­

for education, $166 million, was significantly below

ing of large municipal units during the year and a

the volume




somewhat limited effect on capital spending, gener­

$568 million, and the $231 million of abandoned

alizations about all municipal units are not in order.

borrowing intended for utilities.


W h ile the tight m oney period of

Health and wel­

Results of the survey of smaller units are being

fare projects also accounted for a disproportionately


high $107 million of abandonments.


Digitized for10

In the Dis­







Joseph C. Ramage

Cumulative Percentage Change

has been tighter, and the demand for loans greater.
Reflecting these changes in conditions, banks have
slightly reduced their holdings of Government se­
curities and added to their holdings of other securities
at a considerably slower pace.
Loan-Deposit Ratio

T h e change in the ratio of

total loans to total deposits, a measure of the bank­
ing system’s ability to meet future loan demand, is
indicative of the contrast between this year and last.
Deposits have grown less rapidly this year than in
1967, while loans have shown more strength.


sequently, District banks are in a more “ loaned-up”
condition than in 1967. Depicting these changes, the
loan-deposit ratio for such banks rose from 64.1%
in July 1967 to 64.5% in July 1968.

Per Cent

The rapid expansion that characterized total in­
vestments at Fifth District weekly reporting banks
in 1967 all but disappeared in the first seven months
of this year.

From January through July of 1967

total investments increased by 12.5%, while over the
same period in 1968 the cumulative increase was a
mere 0.7% .

The cause of this sharp contrast lies

mainly with the shift in credit conditions.

Last year

the Federal Reserve was injecting reserves into the

system at a fast pace.



coupled with slack loan demand, left banks with funds
to buy securities, and so total investments rose quick­
ly and substantially.

But this year monetary policy



$ Millions

Digitized for12

Changes in Investments A s the grow th of time
deposits slowed from 1967 and investors allowed
maturing certificates of deposits to run off in the
presence of high market rates, banks were faced with
the decision of how to accommodate loan demand. T o
increase their supply of funds, banks began to liqui­
date their holdings of U. S. Government securities.
One-to-five year Federal Government issues declined
as early as November of last year, remained practi­
cally unchanged from February to May, and then
dropped substantially in both June and July. H old­
ings of long-term Governments have fluctuated nar­
rowly for most of 1968, while remaining well below
the level of the comparable seven-month period last
year. Holdings of short-term Governments began
decreasing in February, reached a low point in
April and May, and then rose in June and July.
Treasury financing of $4 billion tax anticipation bills
in early July could have influenced this upward

W ith the beginning of 1968, banks also

began investing less heavily in tax-exempt state and
local government securities.

Municipals leveled off

at the first of the year to increase only slightly
through July.

The general movement, then, of total

investments suggests that banks have reduced their
investment portfolios to meet the changes brought
about by the rising demand for loans.
Carla W . Russell

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