Full text of Economic Review (Federal Reserve Bank of Atlanta) : November/December 1978, Volume 63, Number 6

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*■

ECONOMIC
REVIEW

Impact of 19 78 Changes
on Federal Funding
Southeastern Agriculture:
Despair Gives W ay
to Optimism
[ [ ^ e Burden of Fed
Membership for Sixth
District Banks
The New “ Money Market”
Certificates
Automatic Transfer: What
if Mi Goes Haywire?
Index for 19 78

:ederal Reserve Bank of Atlanta
: ederal Reserve Station
Atlanta, Georgia 30303
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FEATURES:
Measuring Unemployment: Impact of 19 78
Changes on Federal Funding ......................................1 1 1
Improvements in procedures for calculating unemployment
figures have significantly raised the official estimates for most
Sixth District states. The increases could bring more Federal
money to the Southeast.

Southeastern Agriculture: Despair Gives Way
to O p tim ism ...............................................................................1 1 8
Relief from 1977's crop failures required heavy emergency
lending to farmers. But this year's shift to lower cost crops,
normal yields, and stronger prices should restore the
agricultural community's financial health.

The Burden of Fed Membership for Sixth
District B a n k s ............................... .......................................... 126
High reserve requirements for members of the Federal Re­
serve System cost southeastern member banks a large portion
of their pretax earnings.

The New “ Money Market” Certificates...................... 130
Enthusiastic consumer acceptance of the new six-month cer­
tificates of deposit, whose yields are tied to Treasury bill rates,
has helped southeastern banks gain deposits in spite of
climbing interest rates on competing investments.

Automatic Transfer: What if M,
Goes Haywire?

13 2

Banks' new automatic savings-to-checking transfer services
could cause some difficulties for monetary policy, both in
measuring the money stock and in assessing its relationship
to subsequent economic activity.

Index for 1 9 7 8 .. ..................................................................... . . 1 3 4

Director of Research: H arry Brandt
Editing: Patricia Fa u lkin b erry
Editing Assistance: A d olpha Jordan
Production and G raphics:
M artha S. Moss and Eddie W . Lee, Jr.
Economic Review, Vol. LXIII, No. 6. Free subscription and additional copies available upon re­
quest to the Research Departm ent, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30303.
M aterial herein may be reprinted or abstracted, provided this Review, the Bank, and the author
are credited. Please provide this Bank's Research D epartm ent w ith a copy of any publication in
which such material is reprinted.

MEASURING UNEMPLOYMENT:
IMPACT OF THE 1978
CHANGES ON FEDERAL FUNDING
by Yvonne F. Davies and Charlie Carter

W ith some 16 b illio n Federal dollars
allocated in fiscal 1977 to states and
c o m m u n itie s largely on th e basis o f
u n e m p lo y m e n t rates, th e re is heavy pres­
sure fo r accuracy o f these statistics. A nd
ju stly so, since every te n th o f a percentage
p o in t can mean several m illio n dollars
gained o r lost u n d e r present a llo ca tio n
form ulas. The Bureau o f Labor Statistics
a n n o u n c e m e n t in January 1978 o f m ajor
changes in its m ethods o f ca lcu latin g
state and local la b or forces, e m p lo y m e n t,
and u n e m p lo y m e n t p ro vo ke d m uch
co ntro ve rsy. In an e xtrem e exam ple, the
p ro ce d u ra l change resulted in a 50p e rce n t d ro p in tne o ffic ia l u n e m p lo y m e n t
rates o f tw o co un tie s in K en tu cky w h ich
subsequently lost th e ir e lig ib ility fo r
Federal assistance program s.
To the e xte n t that tn e new m e th o d ­
o lo g y lowers u n e m p lo y m e n t estimates in
some states or areas and raises those
o f o th e r states o r areas, a re d ire c tio n o f
Federal dollars occurs. A t the tim e o f
Congress' annual a p p ro p ria tio n , funds fo r
many Federal program s are d is trib u te d




am ong local areas a cco rd in g to estab­
lished form u la s (see the box). A lth o u g h
each p ro gram has u n iq u e crite ria fo r
e lig ib ility , several use a 6 .5 -p e rce nt rate
o f u n e m p lo y m e n t as a c u to ff p o in t fo r
local fu n d in g .
The im p lica tio n s o f th e 1978 p ro ce d u ra l
changes Tor the Sixth D istrict states
m ig h t best be measured by th e vo lu m e
o f Federal m oney th a t is fu n n e le d to
o u r area u n d e r legislative acts that use
u n e m p lo y m e n t statistics as a llo ca tio n
crite ria . Since its passage in 1973, the C o m ­
prehensive E m p lo ym en t and T ra in in g
Act (CETA) has p u m p e d $28 b illio n in to
local econ o m ie s to co m b a t cyclical
u n e m p lo y m e n t n a tio n w id e . D u rin g fiscal
1977, states located in the Sixth D istrict
alone received $ 1.1 b illio n and e n ro lle d
367,000 persons in program s established
by Titles I, II, and VI o f CETA (see Table 1).
Projects fu n d e d by Titles I and II o f the
P ublic W orks E m p lo ym en t A ct (PWEA) and
T itle IV o f the P ublic W orks and E conom ic
D e ve lo p m e n t A ct (PWEDA) d re w $780
m illio n to the Sixth D istrict states. In

FEDERAL OBLIGATIONS IN FISCAL 1977 FOR
CETA, PWEDA, AND PWEA
(million $)

State
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
District States
United States

Comprehensive
Employment
and Training
Act (Titles 1,
II, and VI)

Public
Works*

Public Works
Employment
Act
(Title II)

Total

128.0
364.8
212.2
124.2
88.8
150.3

56.1
296.1
105.5
65.1
46.4
59.6

15.7
59.0
22.8
27.6
11.3
14.7

199.8
719.9
340.5
216.9
146.5
224.6

1,068.3
8,072.6

628.8
6,345.8

151.1
1,388.8

1,848.2
15,807.2

'F un ded through Title IV of the Public W orks and Econom ic Development Act (PWEDA) and Title I of the Public W orks Em ploym ent Act (PWEA)
Sources: E m ploym ent and T rain ing A d m inistra tion, Econom ic Developm ent A d m inistra tion, and O ffic e o f Revenue Sharing.

ALLOCATION FORMULAS
The level an d/or rate of unemployment play a key
role in the form ulas which allocate CETA, PWEDA, and
PWEA funds among states and among local areas. Un­
der Title I of CETA, 50 percent of an area’s current
funding is based on its previous year’s allotment, 37.5
percent on its unemployment level relative to all other
areas, and 12.5 percent on the number of adults in “ low
income fam ilies” in an area relative to all other areas.
CETA’s Title II funds are available only to areas of
“ substantial unemployment,” defined as at least a 6.5percent unemployment rate for a period of three con­
secutive months during the fiscal year. Under Title VI of
CETA, 50 percent weight is given to an area’s level of
unemployment relative to all other areas, 25 percent is
restricted to areas of substantial unemployment, and 25
percent is allocated to areas with an “ excess number of
unemployed persons” (defined by the Labor Depart­
ment as unemployment that exceeds 4.5 percent of the
labor force). Title I of PWEA places 65 percent weight on
the level of unemployment and 35 percent on the rate of
unemployment. PWEA’s Title II funding is based on a
state’s or area’s excess unemployment percentage.
Financial assistance through PWEDA is for areas of
substantial unemployment only. In addition to these
acts, preference in bidding on Federal procurement
contracts is given to companies located in labor surplus
areas. To be eligible, an area must have an unemploy­
ment rate that is at least 6 percent and equal to 1.2 times
the national rate.




fiscal 1977, the D istrict claim ed $1.8 b illio n ,
o r 12 p e rce n t, o f u n e m p lo ym e n t-b a se d
fu n d in g in the n ation.
W ill states in the Sixth D istrict c o n tin u e
to receive th e same share o f Federal
allocations? The answer depends on
h o w m uch the new e stim a ting te c h n iq u e
changes th e ir u n e m p lo y m e n t figures
relative to o th e r states' jobless statistics.
Because o f the nature o f fu n d in g a llo ca ­
tio n , an exact d e te rm in a tio n o f tne
e ffe ct on D istrict fu n d in g ca n n o t be m ade
w ith o u t a 50-state analysis. H ow ever,
by e xa m in in g h ow the new pro ced u re s
affect D istrict u n e m p lo y m e n t rates,
some inferences can be d ra w n.
Why Change Procedures? In vie w o f
the p o litic a l im p lica tio n s o f any change in
u n e m p lo y m e n t estimates, w h y was a
d iffe re n t set o f p ro cedures established?
Perhaps the main reason was to cut
d o w n year-end revisions o f statistics th a t
th e o ld m e th o d o lo g y re q u ire d . Previously,
w h e n annual averages o f state data fro m
th e Current Population Survey (CPS)
becam e available in February, th e previous
year's m o n th ly estim ates had been

CHART 1

MAGNITUDE OF THE 1977
BENCH MARK REVISIONS

State

Percent Change In
Employment Unemployment
Level
Level

A major drawback of the old procedure was the
size of year-end revisions required to assure ac­
curacy and comparability of data. Significant
upward revisions were made in four District states
in 1977.
UNEMPLOYMENT
RATE *(% )

Ala.
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
District States
United States

0.0
-1 .4
0.0
+5.0
- 2 .6
0.0
+ 0.2
0.0

+25.9
+ 16.4
+ 9.8
+ 1.0
+21.6
+22.8
+ 15.4
+ 11.5

Revised
Estimate

Original State
Estimate

Source: Departm ent of Labor, Bureau of Labor Statistics.

revised to c o n fo rm w ith the new in fo r­
m a tio n. This a d ju stm e n t was called “ bench
m a rk in g ." Table 2 shows the m a g nitu d e
o f the 1977 bench m ark revisions. The
revised u n e m p lo y m e n t figures fo r the
natio n averaged 11.5 p erce n t above those
o rig in a lly re p o rte d . Revisions o f state
u n e m p lo y m e n t estimates varied c o n ­
siderably, ranging fro m none in O h io and
N ew M e x ic o to 43 p e rce n t in Nebraska.
Alabam a, Tennessee, and M ississippi
statistics re q u ire d revisions in excess
o f 20 p ercen t. O n average, u n e m p lo y m e n t
num bers fo r the six D istrict states w ere
revised u pw ard by 15.4 p ercen t, raising
the D istrict's 1977 jobless rate fro m 6.4
to 7.3 p ercent. C hart 1 illustrates h o w the
o rig in a lly p u b lish e d u n e m p lo y m e n t rates
o f D istrict states w e re affectea by 1977
year-end bench m ark revisions.
A lth o u g h these bench m ark revisions
w ere necessary to make the estimates
m ore accurate and co m p arab le am ong
states, the tim e lag and th e size o f the
revisions generated co nce rn am ong state
and local o fficials w h o keep a w a tch fu l
eye on u n e m p lo y m e n t statistics. Revisions
proved very u n p o p u la r, especially if
they o c c u rre d a fter fun d s had already been
allocated fo r the year.
Besides re d u c in g the size o f year-end
revisions, the 1978 p ro ce d u ra l changes
w ere designed to o vercom e tw o o tn e r




Tenn

'Not seasonally adjusted.

basic p ro ble m s in h e re n t in the o ld
procedures, w h ich re q u ire d all states
to d e rive estimates fro m a variety o f
in p u t data * O ne was that m uch o f the
in p u t data was o u td a te d . The p ro b le m was
c o m p o u n d e d in the calcu latio n o f
u n e m p lo y m e n t statistics fo r substate
areas, w h ic h w e re estim ated by using
statistical relationships fro m the 1970
Census of Population. N ow , a few large
states take th e ir figures d ire c tly fro m
the m o n th ly CPS and avoid the d etailed
ca lcu latio n s e n tire ly . Smaller states and
local estim ates d e ve lo p ed by th e new
m e th o d o lo g y should now be m ore
accurate, since they in c o rp o ra te m ore
recent in fo rm a tio n . A second draw back
o f the o ld m e th o d was that because o f
the d iffe re n ce s in state laws, th e re was
a lack o f u n ifo rm ity in the co d in g ,
c o lle c tio n , and ta b u la tio n o f th e u n e m ­
p lo y m e n t insurance claims data that fed
in to the calculations. U n d er the new
p ro c e d u re , the q u a lity of th e claims data
has been im p ro v e d , as states revam ped
th e ir d a ta -g a th e rin g processes. The
changes sh ou ld help make u n e m p lo y m e n t
estimates co m p arab le fro m state to
state and b rin g state and area estimates
m ore closely in lin e w ith n ational statis­
tics. (See the box fo r a sum m ary o f the
m a jo r changes that w e n t in to e ffe ct in
January 1978.)
Impact on District Estimates. A m o n g
the D istrict states, Florida w ill be the o n ly
state to make d ire c t use o f CPS la b or
force data. The o th e r five states w ill c o n ­
tin u e to use the H a n db o ok M e th o d ,
adjust th e ir estimates annually to c o n fo rm
to CPS annual averages, and e xtrap o la te
a djustm ents in to the c u rre n t year using
a s ix-m o n th m o vin g average ratio.
D e te rm in in g th e effects o f these
p ro ce d u ra l changes on e m p lo y m e n t,
u n e m p lo y m e n t, and u n e m p lo y m e n t rates
was ham pered by a break in the series
at year-end 1977. The o ld p ro ce d u re
ended w ith the D ecem ber 1977 estimates,
and the January 1978 estimates w ere made
using the new procedures. Because o f the
lack o f an o verlap p e rio d , we co nstru cte d

‘ Each state follow ed a technique consisting of a series of com putational
steps. Described in a 1960 publication called the Handbook on Estimating
Employment, it became know n as the Handbook M ethod.




1978 CHANGES IN PROCEDURE
The 10 most populous states (California, Florida,
Illinois, Massachusetts, Michigan, New Jersey, New York,
O hio, P en nsylvania, and Texas) and tw o la rge
metropolitan areas (Los Angeles-Long Beach and New
York City) now make direct use of monthly data from the
Current Population Survey (CPS), since their samples
are large enough to generate reliable monthly es­
timates. Prior to 1978, 30 metropolitan areas were in­
dependently adjusted to CPS bench marks; now, except
for Los Angeles-Long Beach and New York City, they
will be linked to state CPS estimates. The remaining 40
states and the District of Columbia continue to use the
old procedure (the 70-Step Handbook Method of es­
timating monthly unemployment) and annually bench
marking to the state average CPS level. However, a
change has been made in the way that state Handbook
estimates are linked to the CPS for extrapolation into
the current year—the Handbook estimates of employ­
ment and unemployment are adjusted using a sixmonth moving average ratio. This ratio, which changes
monthly, replaces the previous fixed factor which
related the December CPS estimate to the December
Handbook estimate.
The quality of claims data from state unemployment
insurance programs has been improved. Claimants are
now counted by county of residence and not by county
where claims are filed; duplicate counting of claims has
been eliminated; and only claimants without earnings
during the survey week are counted.
A more current “ employment residency” ratio is now
used to adjust nonfarm wage and salary employment
from “ place of work” to “ place of residence.” Eligibility
for Federal funding is determined by the resident unem­
ployment rate. The new residency-adjustment factors,
which will be prepared annually for all counties, replace
the previous fixed factors based on the 1970 Census.
To make county estimates, states now use the claims
data and current population data rather than the eightyear old Census relationships. The new method of dis­
aggregating to the county level, mandatory if states
process claims data by county of residence, requires a
population-based disaggregation of employment and a
claims-based disaggregation of unemployment.

a parallel series by re ca lcu la tin g 1977
e m p lo y m e n t and u n e m p lo y m e n t data
using the new six-m o n tn m o vin g average
approach. The co n stru cte d series (see
Table 3) shows w hat e m p lo y m e n t, u n e m ­
p lo ym e n t, and u n e m p lo y m e n t rates w o u ld
nave been had the new p ro c e d u re been
in e ffe ct in 1977. O th e r changes e ffe ctive
in January such as th e new u n e m p lo y m e n t
insurance data c o u ld n o t be in c lu d e d ,
since the re w ere no data c o lle cte d u n d e r
the new system p rio r to 1978.
The co nstru cte d series ve rifie d th a t the
six-m o n th m o vin g average approach
p ro vid e d a closer a p p ro x im a tio n o f the

COMPARISON OF VARIOUS UNEMPLOYMENT STATISTICS
FOR THE SIXTH DISTRICT STATES, 1977 ANNUAL AVERAGES
Series

Alabama

Florida

Georgia

Louisiana

Mississippi

Tennesse<

(thousands)
Labor Force:
Originally Published Series
Constructed Series*
1977 Bench Mark Series

1,516.3
1,521.9
1,534.0

Employment:
Originally Published Series
Constructed Series*
1977 Bench Mark Series

1,425.7
1,410.1
1,420.0

Unemployment:
Originally Published Series
Constructed Series*
1977 Bench Mark Series

90.6
111.9
114.0

Unemployment Rate:
Originally Published Series
Constructed Series*
1977 Bench Mark Series

6.0
7.4
7.4

3,524.3
**
3,520.0

3,276.1
**
3,231.0

248.3
★*
289.0

7.0
★★
8.2

2,232.5
2,269.2
2,259.0

1,497.5
1,527.6
1,568.0

975.5
968.6
964.0

1,870.3
1,910.0
1,906.0

2,090.7
2,105.9
2,103.0

1,389.6
1,421.8
1,459.0

917.1
899.8
893.0

1,772.7
1,796.0
1,786.0

141.8
163.3
156.0

107.9
105.8
109.0

58.4
68.7
71.0

97.6
114.0
120.0

7.2
6.9
7.0

6.0
7.1
7.4

5.2
6.0
6.3

(percent)
6.4
7.2
6.9

* Calculated from unpublished data using the six-m onth moving average procedure.
** Not applicable to state of Florida, since this state uses CPS data directly.
Sources: State Em ploym ent Security Agencies and Bureau of Labor Statistics.

fin a l bench m ark revisions than d id the
constant fa c to r m e th o d used in the
o rig in a lly p ub lish e d series (see C hart 2).
The co n stru cte d series closely fo llo w e d
th e CPS bench m arked figures; th e re fo re ,
had the new m e th o d been used in 1977,
it w o u ld have v irtu a lly e lim in a te d the
year-end revisions.
The m a jo r e ffe ct o f the six-m on th
m o vin g average approach was a substantial
increase in u n e m p lo y m e n t levels over
those o rig in a lly p ub lish e d fo r all states
e xcept Louisiana (see C hart 3). Since
la b o r fo rce estimates increased o n ly
slig h tly, the " n e w " u n e m p lo y m e n t rates
w ere h ig h e r in all states except Louisiana.
The rise in u n e m p lo y m e n t rates ranged
fro m e ig h t-te n th s o f one p e rce n t in
G eorgia and Tennessee to one and fo u rtenths o f one p e rc e n t in Alabam a. Since
u n e m p lo y m e n t rates appear to be
h ig h e r u n d e r the new procedures in




fo u r o f five states, the D istrict states
sh ou ld be in a b e tte r p o sitio n to draw
CETA, PWEA, and PWEDA funds.
More Changes to Come. The 1978
changes are o n ly the first phase o f a five year p ro gram designed to im p ro ve state
and area la b or fo rce data. The Labor
D e p a rtm e n t had planned u ltim a te ly fo r
all states to use m o n th ly CPS data d ire c tly
w ith o u t fu rth e r a djustm e n t, b ut the
President's O ffic e o f M a n a g e m e n t and
Budget d e clin e d to re co m m e n d funds
fo r a m o n th ly p ro gram . In the m e antim e,
the system o f e stim a ting state labor
fo rce and u n e m p lo y m e n t data w ill be a
h y b rid , w ith some states using m o n th ly
CPS data d ire c tly w h ile o th e rs use CPS
data as bench marks and e xtrap o la te
in to the c u rre n t year.
The present system o f m easuring
e m p lo y m e n t and u n e m p lo y m e n t is being
evaluated by the N ational C om m ission

■\

CHART 3

CHART 2
The constructed series for the 5-state District
followed closely the CPS bench marked figures.
UNEMPLOYMENT
RATE * (%)

With the exception of Louisiana, unemployment
rates in these District states would have been
significantly higher if the new procedure had been
in effect in 1977.
UNEMPLOYMENT
RATE *(% )

mmm Constructed Series

(New Procedures)

Constructed Series
(New Procedures)

O riginally Published Series
(Old Procedure)
■

1977 Bench M ark Revisions

5-State Total

Originally Published Series
(Old Procedure)

.......

J

I I I I 1 I I I 1 I
F M A M J

J

A

S

O

N

■

D

1977
*Not seasonally adjusted.

on E m ploym ent and U n e m p lo y m e n t
Statistics. P ublic hearings have been held
in each re g ion o f the co u n try. From
th e ir fin d in g s , C om m ission m em bers
w ill make re co m m e n d a tio n s fo r changes
to the President and the Congress.
The c h ie f c riticism o f the present
system is th a t th e u n e m p lo y m e n t sta­
tistics it p roduces are n ot an adequate
measure o f e c o n o m ic h ardsh ip — the role
th e y 're n o w playing in the a llo ca tio n
o f Federal dollars. The significance o f the
u n e m p lo y m e n t rate as a measure o f
e c o n o m ic s u ffe rin g has been reduced
over tim e . The adverse im pact o f being
o u t o f w o rk has been cushioned by the
presence o f tw o wage earners in the
m a jo rity o f fam ilies and by fin an cia l
assistance th ro u g h social program s, i.e.,
u n e m p lo y m e n t insurance, fo o d stamps,
and w e lfa re. In vie w o f th e sh ortco m ing s,
the C o m m itte e may re co m m e nd s ig n ifi­
cant changes in the way u n e m p lo y m e n t
is d e fin e d and estim ated. hlow ever, the
u ltim a te decision rem ains w ith the
Congress.




Tenn.

'Not seasonally adjusted.

Summary. The new pro ced u re s used
to estim ate e m p lo y m e n t and u n e m p lo y ­
m ent fo r states and areas have farreaching im p lica tio n s. By m aking use
o f m ore c u rre n t in p u t data, im p ro v in g
the q u a lity o f u n e m p lo y m e n t insurance
claim s data, and re d u cin g year-end
revisions, the new m e th o d o lo g y should
make la b or fo rc e estimates m ore accurate
and, th e re fo re , must be view ed as
favorable. O n th e o th e r hand, it w ill
mean h ig h e r u n e m p lo y m e n t rate e sti­
mates fo r some areas and re d uctio n s
fo r others, re d ire c tin g the d is trib u tio n
o f Federal dollars fo r jo b cre a tion p ro ­
grams to states and local areas. In the
Sixth D istrict, the new procedures
g enerate h ig h e r c u rre n t estimates of
u n e m p lo y m e n t. This may mean a larger
c h u n k o f Federal funds fo r th e D istrict,
b u t its la b o r m arkets and e co n o m y lo o k
w orse. Because o f the p ro ble m s e n c o u n ­
te re d in using u n e m p lo y m e n t statistics




to in d ica te e c o n o m ic hardship, the fu tu re
may b rin g m o re re le van t crite ria fo r
a llo ca tio n o f funds am ong local areas. ■

References Used in Preparation of This Analysis
M eadows, Edward, "W h y the Unem ploym ent Rate Is O u t o f Touch w ith
the Real W o rld " (Fortune, M ay 8, 1978).
Norw ood, Janet L., "Congressional Priorities and Statistical Programs:
The BIS Labor Force Statistics Program ." (Annual C onference of the
Am erican Statistical Association, Chicago, Illinois, August 15-18, 1977),
N o rw ood, Janet I., "Reshaping a Statistical Program to M eet Legislative
Priorities" (Monthly Labor Review, N ovem ber 1977).
N orw ood, Janet L., "Statem ent Before the Subcom m ittee on Census
and Population, U. S. House o f Representatives" (February 23, 1978).
Shiskin, Julius, " A New Role fo r Economic Indicators" (Monthly Labor
Review, November 1977).
Thompson, M arvin, and Gary Shapiro, "The Current Population Survey:
An O v e rv ie w " (Annals of Economic and Social Measurement, A p ril 1973).
U.S. Bureau of Labor Statistics, "H o w the G overnm ent Measures U nem ­
p lo y m e n t" (Report 505, 1977).
U.S. Bureau of Labor Statistics, "M easurem ent of U nem ploym ent in
State and Local Areas" (Chapter 8, Handbook of Methoids, 1976).
U.S. Bur eau of Labor Statistics, "Technical Instructions fo r a Revised
State and Area Unem ploym ent Estimating System" (Program M em ­
orandum No. SP-77-35, Novem ber 11, 1977).
Ziegler, M artin , "Efforts to Im prove Estimates of State and Local
U n em p loym ent" (Monthly Labor Review, Novem ber 1977).

SOUTHEASTERN AGRICULTURE:
DESPAIR GIVES WAY
TO OPTIMISM
by Gene D. Sullivan

The fin an cia l situ atio n of southeastern
farm ers has im p ro ve d greatly in 1978. Fol­
lo w in g a w idespread d ro u g h t disaster
th a t d re w large am ounts o f em e rg en cy
c re d it to the Southeast in 1977, a tu rn a b o u t
in p ro d u c tio n and prices has b rig h te n e d
the farm in co m e p ictu re on nearly all
fro nts. Farmers' loan re p aym en t p ro ble m s
sh ou ld have d im in ish e d s ig n ifica n tly
by the tim e the farm gate closes on
1978's fin a n cia l operations.
The 1977 Disaster. The contrast is stark
b etw een farm e rs' experiences in 1978
and 1977. Southeastern farm ers end e d tha t
year w ith a substantial re d u c tio n in
in co m e fro m 1976's level. A c o m b in a tio n
o f a severe early sum m er d ro u g h t and
a p lu n g e in c ro p prices d ro p p e d tota l cash
receipts fro m crops by $320 m illio n , or
5 p e rce n t, in the co m b in e d states of
the Sixth Federal Reserve D istrict. The
d e clin e was nearly 12 p e rce n t in G eorgia
and Alabam a, w h e re the dry w e ather's
im p a ct was most devastating. Receipts
fro m livestock w e re boosted by an
unusually heavy rate o f cattle m arketings




as herds w ere liq u id a te d d u rin g th e
year, b u t the gain was less than 3 p ercen t.
The fin an cia l b in d o f cro p farm ers
was m o re severe than the d o w n tu rn in
cash receipts in d ica te d because farm ers
had in te n d e d to expand p ro d u c tio n
o f most crops in 1977. They had increased
plantings and p ro d u c tio n e xp e n d itu re s
substantially to accom plish tha t o b je c ­
tive. Final cro p revenue was a p p ro xim a te ly
o n e -fo u rth less than farm ers had a n tic i­
pated at p la n tin g tim e , based on an
e xpe ctatio n o f n orm a l yields and th e p rice
levels existing in th e spring o f 1977.
Returns to co rn p ro du ce rs w e re cu t by
fo u r-fifth s fro m early season e xpe ctatio n s.
As a result, earnings on crops w ere n ot
s u ffic ie n t to p e rm it fu ll re p a ym e n t o f
many p ro d u c tio n loans.
Emergency Credit Relief. As the
d im e nsion s o f the southeastern farm e r's
p lig h t becam e a pp a re nt and th e o p p o r­
tu n ity fo r securing c re d it fo r disaster
re lie f fro m the Small Business A d m in ­
istra tio n becam e k n o w n , large num bers
o f a p p lica tio n s p o u re d in to state SBA

SMALL BUSINESS ADMINISTRATION
DROUGHT DISASTER LOAN ACTIVITY, REGION IV

Applications Accepted
No.

($000)

Applications Approved
No.

($000)

Loans Disbursed
No.

($000)

Cumulative July 22-December 30,1977
8,733
1,409
4,817

$823,737
104,569
314,866

7,573
723
3,247

$351,687
29,970
175,273

4,642
262
1,438

$129,874
4,690
54,085

14,959

$1,243,172

11,543

$556,930

6,342

$188,649

Georgia
Alabama
Other States*

10,349
2,900
10,426

$898,027
256,173
639,102

9,634
2,298
8,973

$432,397
116,984
451,356

9,126
2,242
7,687

$412,416
110,195
364,111

Regional Totals

23,675

$1,793,302

20,905

$1,000,737

19,055

$886,722

Georgia
Alabama
Other States*
Regional Totals
Cumulative July 2 2 ,1977-July 5,1978

N orth C arolina, South C arolina, M ississippi, Florida, and Tennessee.
Source: U.S. Small Business A d m inistration, Regional O ffice, Atlanta, G eorgia.

offices. From the first disaster d e clara tio n
on July 22, 1977, th ro u g h July 5, 1978,
the seven states in A dm inistrative Region IV
(id e n tifie d in Table 1) accepted 23,675
loan a pp lica tio ns fo r $1,793,302,000.
E videncing the d ro u g h t's unusual severity
in G eorgia, farm ers in tha t state made
10,349, or 44 p ercen t, o f the to ta l n u m b e r
o f a p p lica tio n s and asked fo r $898
m illio n , o r 50 p ercen t, o f the d o lla r vo lu m e
o f loan requests (see Table 1).
The SBA e n c o u n te re d d iffic u ltie s in
h a n d lin g the sudden d eluge o f a g ri­
c u ltu ra l loan requests. By D ecem ber 30,
1977, a b o u t $189 m illio n had been
disbursed in R egion IV — less than half
o f th e $557 m illio n app ro ve d and o n ly
a b o u t 15 p e rce n t o f the loan fun d s that
had been requested. G eorgia farm ers
received m ore than tw o -th ird s o f those
disbursem ents.
By July 5, 1978, six m onths later, 55
p e rce n t o f the to ta l em e rg en cy c re d it
a pp lie d fo r in Region IV had been
app ro ve d and $887 m illio n had been




disbursed. G eorgia's share o f d isb urse ­
ments had d ro p p e d b e lo w 50 p ercen t,
closer to its share o f to ta l a p p lica tio n s and
approvals. Alabam a ra n ked second to
G eorgia in the re g ion 's disaster loan
a ctivity, b ut its a p p lica tio n s, approvals,
and disbursem ents w e re o n ly o n e -fo u rth
as large as G eorgia's. A c tiv ity in the
o th e r five states co m b in e d a id n o t equal
G eorgia's.
The Farmers H om e A d m in is tra tio n ,
the tra d itio n a l source o f e m ergency
c re d it fo r farm ers, also e xte n de d a heavy
vo lu m e o f em e rg en cy loans, starting
in July o f 1977. From O c to b e r 1 th ro u g h
D e ce m be r 31, 1977, FmFIA em e rg en cy
loans in G eorgia, w h e re the vo lu m e was
greatest, a m o u n te d to $158 m illio n .
By July 31,1978, the v o lu m e o f these loans
o u tsta n d in g reached $315 m illio n ,
a b o u t th re e -fo u rth s o f the SBA's loan
vo lu m e in G eorgia.
The im p a ct o f e m e rg en cy c re d it seems
readily a pp a re nt in the late 1977 p attern
o f a g ricu ltu ra l c re d it fro m o th e r sources.

FARM LOANS OUTSTANDING AT COMMERCIAL BANKS,
SIXTH FEDERAL RESERVE DISTRICT1
(million $)

Date

Ala.

Fla.

Ga.

La.

Miss.

Tenn.

District
States

Nonreal Estate Loans3
3/30/76
6/30/76
9/30/76
12/30/76

220
247
250
232

141
138
145
161

265
296
282
273

188
210
226
188

227
246
279
245

236
247
268
246

1,276
1,384
1,450
1,344

3/30/77
6/30/77
9/30/77
12/30/77

249
292
307
276

154
157
155
168

317
348
349
303

208
253
282
233

249
281
327
285

259
296
319
296

1,434
1,627
1,738
1,561

3/30/78
6/30/78

266
280

166
155

282
310

244
280

268
291

298
313

1,524
1,628

Total Farm Loans3
3/30/76
6/30/76
9/30/76
12/30/76

377
404
412
393

266
257
267
282

568
612
592
588

304
340
356
323

409
433
479
444

511
529
555
547

2,435
2,574
2,660
2,576

3/30/77
6/30/77
9/30/77
12/30/77

418
474
493
468

283
295
295
316

636
692
696
636

347
399
433
389

456
494
549
511

568
622
658
630

2,708
2,974
3,124
2,950

3/30/78
6/30/78

462
482

316
306

613
649

417
462

488
513

641
667

2,938
3,078

'D ata (or Louisiana, M ississippi, and Tennessee and the D istrict totals include both in - and o u t-o f-D is tric t portions o f these states
2Listed as "Loans to Farm ers," Item A4, on the Report of C ondition.
3Total farm loans are the sum o f nonreal estate loans and loans secured by farm land, Item A1b, on the Report of C o nditio n. Bank finan cing of a g ricu ltura l
productio n thro ugh direct lines of credit to vertically in tegrated operations is usually not id entified as farm credit. A substantial p ortion of the a g ricu ltura l
loan volum e o f banks may be undetected in areas where p roductio n of broilers, eggs, fruits, and vegetables are concentrated, i.e., the Southeast.
Source: F.D.I.C.

Total farm loans o utsta n d in g at c o m ­
m ercial banks in th e Sixth D istrict states
reached a peak on September 30, 1977, and
d e c lin e d substantially by D e ce m be r 30,
1977, due to a re d u c tio n in non re a l
estate loans (see Table 2). G eorgia,




w h e re most o f the e m e rg en cy c re d it had
been disbursed by D e ce m be r 30, ac­
co u n te d fo r m ore o f the decrease in
bank loan outsta nd in gs than any o th e r
state. D u rin g the co m p arab le p e rio d
o f 1976, o u tsta n d in g a g ric u ltu ra l loans at

D istrict banks had fallen m uch less and
h ardly at all in G eorgia. Despite the
larger p ay-do w n d u rin g 1977, year-end
loan outstandings stood sig n ifica n tly
h ig h e r than 1976's e n d in g level.
The p attern o f loan repaym ents at banks
was also e xpe rie n ced by o th e r lenders.
Loan outstandings d e clin e d substantially
fro m S eptem ber to D ece m be r o f 1977
at p ro d u c tio n c re d it associations (PCAs)
in Doth the T hird and Fifth Farm C re d it
Districts, w h ich o verlap the Sixth Federal
Reserve D istrict (see Table 3). Again,
liq u id a tio n s at PCAs w e re most p ro m in e n t
in G eorgia. D u rin g 1976, by co m p arison ,
PCA loans o u tsta n d in g had been nearly
u nchanged fro m S eptem ber to D ecem ber.
U n d o u b te d ly , e m e rg en cy c re d it helped
southeastern farm ers repay a greater
p ro p o rtio n o f th e ir loans in 1977. H ow ever,
it is d o u b tfu l if the v o lu m e o f loans
that had been disbursed by D e ce m be r 31
was s u ffic ie n t to a ccou n t fo r all o f the
loan pay-dow ns that o ccu rre d .
Since the m a jo rity o f the e m ergency
loan funds w ere disbursed after January 1,
1978, the m ajor im pact on b o rro w in g s
and c re d it o u tsta n d in g came in early 1978.
In the Sixth Federal Reserve D istrict,
a g ric u ltu ra l loan g ro w th at banks in the
first half o f this year was less rapid
than d u rin g the early 1977 p e rio d . G eorgia
was the o n ly D istrict state in w h ich the
M a rch 30 v o lu m e o f loans o utsta nd in g
show ed an actual d o w n tu rn fro m the
year-ago level. O n July 1, 1978, loans
at p ro d u c tio n c re d it associations in
G eorgia, as w e ll as in th e T hird Farm
C re d it D istrict, w ere also lo w e r than
on the same date last year (see Table 3).
A lth o u g h c o n firm in g data are n o t avail­
able, em e rg en cy loans may also have
replaced a substantial vo lu m e o f d ire c t
c re d it fro m m erchants and dealers
d u rin g the early m o nths o f 1978.
Changes in farm e rs' p la n tin g decisions
u n d o u b te d ly w ere an a d d itio n a l m ajor
in flu e n c e on c re d it dem and in 1978. T heir
p o o r experiences w ith c o tto n , co rn , and
most o th e r grain crops in 1977 gave
farm ers reason to reduce plantings o f
those crops in 1978 w h ile they expanded
soybean acreage sharply. M any farm ers
view ed soybean p ro d u c tio n as the
brig hte st p o ssib ility fo r increasing inco m e
this year.




FARM LOANS OUTSTANDING
AT PRODUCTION CREDIT ASSOCIATIONS
(million $)

Georgia

Third Farm
Credit
District1

Fifth Farm
Credit
District2

1976
January
July
September
December

416
499
466
466

1,346
1,557
1,483
1,478

524
615
634
481

1977
January
March
June
July
September
December

488
528
597
619
605
538

1,516
1,625
1,807
1,844
1,750
1,661

468
497
621
652
693
552

1978
January
February
March
April
May
June
July
August
September

537
523
510
513
526
541
547
548
527

1,681
1,669
1,667
1,685
1,714
1,784
1,810
1,789
1.736

535
542
549
573
594
626
659
685
701

'Includes North Carolina, South Carolina, Georgia, and Florida
in c lu d e s Alabama, M ississippi, and Louisiana.
Source: Farm C redit A d m inistra tion. W ashington, D. C.

R eductions in co rn and c o tto n acreage
w ere ta n ta m o u n t to a substantial d e clin e
in p ro d u c tio n e xp e n d itu re s in affected
areas. C orn is nearly tw ic e as costly
per acre to p ro d u ce as are soybeans, and
c o tto n is a b o u t th re e tim es as expensive.
The d o w n tu rn in a g ric u ltu ra l loan
vo lu m e at banks and PCAs in G eorgia
co u ld re fle ct the cu tb a ck in e xp e n d itu re s
re su ltin g fro m farm e rs' sh ift to soybeans
fro m co rn and c o tto n as w e ll as th e substi­
tu tio n o f em e rg en cy loans fo r cre d it
fro m co n ve n tio n a l sources.
Crop Progress in 1978. G oing in to the
harvest season, in co m e prospects w ere
m uch b e tte r this year than in 1977.
In spite of a n o th e r siege o f dry w e a th e r

ESTIMATED PRODUCTION, COSTS, AND PROJECTED RETURNS,
SELECTED CROPS, SIXTH FEDERAL RESERVE DISTRICT STATES,
1977 AND 1978

Acreage1

Estimated Total
Variable Cost2

Total
Production1

Total
Return4

(000)

(million $)

(1,000 bales)

(million $;

2,930
2,304

$693.4
619.3

C O TTO N
1977
1978

2,771
2,404

Change
(Percent)

-367
(-13.2)

$496.0
480.8
-15.2
(-3.1)

-626
(-21.4)

-74.1
(-10.7)

SOYBEANS
1977
1978
Change
(Percent)

11,547
13,320

$774.8
887.2

1,773
(15.4)

112.4
(14.5)

(mil. bu.)
251.7
295.7
44.0
(17.5)

$1,497.6
1,883.6
386.0
(25.8)

CORN
1977
1978
Change
(Percent)

4,939
3,825

$520.9
422.4

-1,114
(-22.6)

-98.5
(-18.9)

(mil. bu.)
101.9
175.9
74.0
(72.6)

$198.8
394.0
195.2
(98.2)

PEANUTS
1977
1978
Change
(Percent)

803
801
-2
(-0.2)

in June and early July of this year and
again d u rin g Septem ber, sporadic rainfall
kept c ro p d e te rio ra tio n fro m p ro c e e d in g
as far as it did last year. A lth o u g h sig­
n ific a n tly h ig h e r than in 1977, corn
p ro d u c tio n has been severely lim ite d
again. M o st o th e r crops are re p o rte d to
have made re la tively good progress.
Because of the in ten sity o f last year's
d ro u g h t, p ro d u c tio n o f most crops was




$198.5
198.6
.1
(0.1)

(mil. lbs.)
2,257.9
2,501.7
243.8
(10.8)

$485.4
532.9
47.5
(9.8)

cut so sharply tha t 1978's cro p o u tp u t
should be greater despite some large
re d u ctio n s in plantings. For the D istrict
as a w h o le , the most n ota ble changes
in cro p acreages in 1978 w ere a d e clin e o f
1.1 m illio n acres, o r 23 p ercen t, in corn
plantings and an increase o f 1.8 m illio n
acres (15 p ercent) in soybeans (see
Table 4). Both c o tto n and w heat acreages
w ere pared by 13 p ercen t, b u t th e n u m b e r

Acreage1
(

000 )

Estimated Total
Variable Cost2

Total
Production3

Total
Return*

(m illion$)

(mil. lbs.)

(million $)

TO B A C C O
1977
1978
Change
(Percent)

146
140

$150.4
144.2

-6
(-4.2)

304.9
304.4

-6.2
(-4.1)

-0.5
(-0.2)

$352.2
406.7
54.5
(15.5)

RICE
(000 cwt.)
1977
1978
Change
(Percent)

586
798

212
(36.2)

$130.9
189.5

21,885
30,601

58.6
(44.8)

8,716
(39.8)

$206.4
259.8
53.4
(25.9)

ORANGES
(mil. boxes)
1977
1978

n.a.
n.a.

Change
(Percent)

n.a.
n.a.

186.8
168.3
-18.5
(-9.9)

$576.4
958.4
382.0
(66.3)

n.a.—not available.
’Acreage harvested in 1977 and acreage intended fo r harvest in 1978, except that acreage planted is show n to r corn, since drough t in 1977 distorted the
acreage harvested.
2The product of the acreage for each crop m ultiplied by variable costs per acre as estim ated by the U.S. D epartm ent of A g ric u ltu re or various state
experim ent stations
'A c tu a l p ro d u c tio n fo r 1977 a n d U S D A 's in d ic a tio n s fo r 1978.

4The season average price m u ltiplied by production in 1977; the average price received by farm ers in July, August, and Septem ber (A pril, May, and June
fo r citrus crops) m ultiplied by indicated production in 1978.

o f acres in vo lve d is small co m p ared
w ith the huge changes in corn and soybean
plantings.
The c o m b in e d in c o m e fro m 12 m ajor
regional crops is e xpected to increase
by nearly $1.2 b illio n in 1976. The m ajor
gainers, based on re ce nt p rice and
p ro d u c tio n in d ica tio n s, w ill be soybeans,
oranges, co rn , tob a cco, rice, and peanuts.
H ow ever, in co m e is p ro je cte d to rise




above 1977 levels fo r all crops except
c o tto n . Yields sh ou ld be greatly im p ro ve d
fro m the d ro u g h t-s h riv e le d levels last
year. In a d d itio n , a c o m b in a tio n o f
g o ve rn m e n t program s and stro ng e r d e ­
mand has lifte d prices o f crops a b o u t
25 p ercen t this year. W heat, co rn , and
tob a cco prices have averaged a ro un d
o n e -th ira above th e co m p arab le level in
1977.

JULY 1 CATTLE INVENTORIES
(thousand head)

1976

1977

1978

1978 as
Percent of 1977

Replacement Beef Heifers 500 Lbs. and Over
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
District States
United States

164
204
135
150
246
218

143
191
102
112
182
196

112
186
109
91
151
141

79
97
107
81
83
72

1,117
6,527

926
5,839

790
5,362

84
92

Calf Crop
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
District States
United States
.

1,050
1,170
910
810
1,230
1,238

1,020
1,135
850
730
1,150
1,230

920
1,090
800
740
1,080
1,210

89
96
94
101
94
98

6,408
47,440

6,115
46,057

5,840
44,138

96
96

Sources: USDA, Cattle, C rop R eporting Board, and ESCS, J u ly 1978.

Strong Prices in the Livestock Sector.
Inco m e to livestock p roducers was also
rising b riskly th ro u g h m idyear. Sharp
p rice increases fo r cattle and b ro ile rs w ere
the p rim a ry sources o f gain. The m idyear
cattle in v e n to ry show ed tha t heavy
m arketings o f b re e d in g stock c o n tin u e d
d u rin g 1978. C attle num bers on July 1
w ere 11 p e rce n t less than the m id-1977
c o u n t and 17 p erce n t b e lo w 1976's
in v e n to ry . The sm aller calf cro p (see
Table 5) has c o n trib u te d to ra p id ly rising
prices o f fe e d e r calves, and the supply
w ill a p p a re n tly be restricted fu rth e r
in c o m in g m onths, fo re sh a d o w in g c o n ­
tin u a lly im p ro v in g incom es fo r the
re m a in in g c o w -ca lf operators.
G eorgia was the o n ly D istrict state
to show an increase in re p lace m e n t beef
heifers fro m 1977's n u m b e r, a sign that
some herd re b u ild in g may be in the




J
o ffin g . The reason th a t herd replacem ents
have risen in G eorgia and n ot in o th e r
southeastern states is n ot e n tire ly clear.
G eorgia's re ce ip t o f th e lio n 's share
o f e m e rg en cy c re d it fro m g o ve rn m e n t
agencies may be one e xp la n a tio n . That
c re d it m ig h t have p ro v id e d a sig n ifica n t
n u m b e r o f G eorgia farm ers w ith the
means to e ith e r purchase heifers o r w ith ­
h o ld calves th e y've raised fro m the
m arket w h ile fin a n cia l pressure p re clu d e d
sim ilar actions by farm ers in o th e r states.
In m uch o f the Southeast, it is d o u b tfu l
tha t cattle prices have yet advanced
e n o u g h fo r the beef cattle e n te rp rise
to co m p are favo ra b ly w ith the a lte rn a tive
o f using land to p ro d u ce soybeans. W ith
the persistent strength in prices o f
soybeans, in spite o f re co rd high p ro ­
d u c tio n , it is n ot su rp risin g tha t many
farm ers are still o p tin g to re d uce beef

cattle herds, p lo w up th e ir pastures,
and p lant the land in soybeans. The tre n d
is lik e ly to c o n tin u e u n til soybean prices
d e c lin e o r cattle prices reacn co n sid ­
erably h ig h e r levels.
Pork p ro du ce rs have been slow to
respond to prices averaging 15 to 20
p e rc e n t above the ye ar-e arlie r level since
th e second half o f 1977. An expansion
fin a lly appeared to be g e ttin g u n d e r
way at m idyear. The June 1 in v e n to ry
show ed an 8-p e rc e n t increase fro m 1977's
level in G eorgia's to ta l hog num bers,
in c lu d in g b oth b re e d in g stock and pigs
fo r m arket. (G eorgia is the o n ly D istrict
state in c lu d e d in tn e q u a rte rly survey
o f hog num bers.) O n S eptem ber 1, the
in v e n to ry was slig h tly larger than in June,
b ut th e re was n ot m uch gain fro m the
p revious fall's tally. Producers in d ica te d
th a t the y p la n n e d to expand o u tp u t
fu rth e r d u rin g th e fo u rth q u a rte r.
By year-ena, a 5 -p e rce n t increase in
hog m arketings, c o m b in e d w ith the 15to 20-p e rc e n t price increase, should
lift in co m e to nog pro du ce rs by 20 to 25
p ercen t. C o n sid e rin g th e prospects fo r
fu rth e r re d u ctio n s in the n atio n 's beef
o u tp u t, hog prices have a good chance o f
re m a in in g strong d u rin g tne m onths
ahead.




B ro ile r p ro d u c tio n g re w at a rate o f 10
p e rce n t or m ore d u rin g m ost o f the
first half o f the year, and prices fo llo w e d
the u p tre n d in beef and p o rk prices. A
sharp advance in b ro ile r in co m e c o n ­
trib u te d a goo d share o f the $40 0 -m illio n
rise in the re g io n 's livestock receipts
th ro u g h June o f 1978. Egg p ro du ce rs
ran a fo u l o f a sensitive m a rke t that
responds to slight increases in o u tp u t
w itn price declines. Prices have show n
re n ew e d strength re ce n tly, b u t all in all,
th e re has been little gain fro m the yeare a rlie r level fo r egg producers.
T h ro u g h o u t the Southeast, farm in co m e
prospects fo r 1978 are b rig h te r than
the y have been d u rin g the past several
years. Total g ro w th in cash receipts fro m
livestock co u ld easily a m o u n t to $ 1.0
b illio n by the end o f the year. W h e n
th e final returns are c o u n te d , c ro p and
livestock incom es co m b in e d c o u ld rise
by m ore than $ 2.0 b illio n , o r 20 p ercent,
in 1978. H ig h er prices, especially in
th e livestock sector, and the expected
increase in cro p p ro d u c tio n , most n o ta b ly
soybeans, co rn , and rice, are th e m a jo r
c o n trib u to rs to th e im p ro v e d o u tlo o k . ■

THE BURDEN OF FED
MEMBERSHIP FOR
SIXTH DISTRICT BANKS
by Stuart G . Hoffman
It is w id e ly re co gn ize d that Federal
Reserve System m e m b e rship entails a
b u rd e n to m e m b e r banks because System
reserve re q u ire m e n ts are g en e ra lly m ore
s trin g e n t tha n th e state reserve re q u ire ­
m ents levied against n o n m e m b e r banks .1
This is c e rta in ly tru e o f the six states in th e
Sixth Federal Reserve D istrict, as show n
in Table 1. Each state has lo w e r re q u ire d
reserve ratios than the System a n d /o r
allow s some part o f the re q u ire m e n t to
be satisfied by in te re st-e a rn in g assets as
w e ll as cash. For exam ple, M ississippi
im poses reserve re q u ire m e n t ratios on
its n o n m e m b e r banks id e ntica l to
th e System's, b u t the Mississippi
n o n m e m b e rs can h o ld up to 30 p e rce n t
of th e ir required reserves in interest-bearing,
s h o rt-te rm securities. Florida has m uch
h ig h e r reserve re q u ire m e n ts than the
System b u t p erm its its n o n m e m b e r banks
to satisfy p o te n tia lly all o f th e ir reserve
re q u ire m e n ts w ith u n p le d g e d in tereste arn in g securities. Thus, relative to a c o m ­
parably sized n o n m e m b e r bank, a
m e m b e r bank incurs an o p p o rtu n ity cost
fro m h o ld in g larger re q u ire d reserves
in th e fo rm o f n o n in te re st-e a rn in g vault
cash or deposits at its D istrict Reserve
Bank o r Branch. The fo re g o n e earnings on
th e re q u ire d reserves held by m e m b e r
banks in excess o f the a m o u n t th a t the y
w o u ld h o ld in cash as n o n m e m b e rs

1 Proposals to reduce significantly System reserve requirem ents,
especially fo r smaller banks, and impose reserve requirem ents on the
largest nonm em ber banks are now being discussed by Congress. If
legislation along these lines is enacted, it w ould likely elim inate the burden
of m embership fo r most banks.




re present the b u rd e n o f System
m e m b e rship.
In several recent analyses, th e staff of
the Board o f G ove rn o rs has investigated
th e m e m b e rship b u rd e n fo r all m e m b e r
banks .2 The most re ce nt estim ate o f
th e n a tio n w id e b u rd e n is a re d u c tio n in
pretax earnings o f ro u g h ly $650 m illio n ,
o r 7.4 p ercen t, in 1977.3 The Board staff
a rriv e d at those fig ures by co m p a rin g the
n o n in te re s t-e a rn in g assets o f m e m b e r
banks w ith those o f com parably sized n on ­
m e m b e r banks and ca lcu la tin g the interest
fo re g o n e on the d iffe re n c e . From th a t
a m o u n t, ce rtain ta n g ib le b en e fits o f
m e m b e rsh ip w ere subtracted to d erive a
net b u rd e n e stim a te .4
In this study, the same m e th o d is used
to estim ate the 1977 b u rd e n o f m e m b e r­
ship fo r Sixth D istrict m e m b e r banks .5
This m e th o d o lo g ic a l consistency allows
a direct estimate of District m em ber banks'
share o f the estim ated natio n al b u rd e n

2 "The Burden of Federal Reserve M em bership, NO W Accounts, and the
Payment of Interest on Reserves," Staff Study, Board of Governors, June
1977; "Revised Estimate of the Burden of Federal Reserve M em b ersh ip,"
Perry Q uick and James Brundy, Board of Governors, unpublished cor­
respondence, May 22, 1978; and "The Burden of Federal Reserve M em b er­
ship," James Brundy and Perry Q uick, Board of Governors, September 29,
1978.
3 Excluding estimated foreign earnings of large banks, the burden represents
roughly 9.5 percent of all m ember bank dom estic pretax earnings in 1977.
4 Some tangible System services such as functional cost analysis, along
w ith certain intangible benefits of m embership such as "status" or
regulatory preference, are not accounted fo r in the net burden calculation.
Thus, it's quite possible that the actual burden is lower than estim ated, at
least for some m ember banks.
5 A criticism of this m ethodology is that w hile it may provide a reasonable
total burden estimate, it grossly underestimates the foregone earnings of
the nation's largest banks (over $2 billio n in deposits). However, since
there was only one bank in the District w ith total deposits of over
$2 billio n at year-end 1977, the m ethodology applied to the Sixth District
seems appropriate and less sensitive to the large bank bias criticism.

STATE RESERVE REQUIREMENTS IN THE SIXTH DISTRICT
Reserve Assets Eligible to Meet Reserve Requirements
Deposits Subject to
Reserve Requirements

State
Alabama

Reserve Requirement
_______ Ratios_______

Georgia

X

X

Series E bonds

3%

X

X

Series E bonds

Total deposits minus
secured public deposits

20%

X

Total demand minus
secured public demand

15%

X

Total time and savings
minus secured public
time and savings
Louisiana

Total demand minus
cash items in process
of collection and
demand balances due
from banks
Time and savings

Mississippi

Tennessee

to
to
to
to
to
to

5%

X

7.5% on first $2 mil.,
x
10.0% on $2-$10 mil.,
12.0% on $10-$100 mil.,
13.0% on $100-$400 mil., and
14.0% on over $400 mil.
3%

X2

Unpledged CDs

X

X

X3

X4

Unpledged CDs

X

Total demand

Same as Federal Reserve

X

Time and savings

Same as Federal Reserve

X

10%

X

Local Cl PC

3%

X

Local Cl PC

Total demand
Time and savings

' Up
? Up
3 Up
* Up
■>Up
Up

Other

10%

Total demand
Time and savings

Florida

Securities
All
Vault Demand Balances U.S.
Cash
Due From Banks Gov’t Others

X6
X6

100 percent of required reserves may be held in unpledged U.S. Government or direct agency securities
50 percent of required reserves may be held in unpledged U.S. Government or agency obligations m aturing within one year.
50 percent of required reserves may be held in U.S. G overnment securities m aturing within one year
25 percent of required reserves may be held in State of Louisiana securities m aturing within two years.
30 percent of required reserves can be held in U.S. G overnment or agency securities m aturing within one year
15 percent of required reserves can be held in CDs m aturing within one year issued by banks in Mississippi

fo r 1977. Table 2 sum m arizes th e b urde n
calculated fo r various bank size classes.
The net b u rd e n fo r all Sixth D istrict
m em bers last year was an estim ated $48.9
m illio n , or 7Vi p e rc e n t o f the national
burden. These foregone earnings represent
nearly 11 percent o f District m em ber banks'
b e fo re -ta x in co m e in 1977. In o th e r w ords,
D istrict m e m b e r banks' earnings befo re
taxes w o u ld have averaged 11 p e r­
cent h ig h e r in 1977 had those banks been
n on m em bers. The next section describes
the steps fo llo w e d in the calculations o f
the b u rd e n , as show n in Table 2.
Cash Assets. Row one lists the average
n o n in te re s t-e a rn in g reserves held at the
Atlanta Federal Reserve Bank and Branches




by Sixth D istrict m e m b e r banks in 1977.
Tnis item is the largest b u t n ot the o n ly
c o n trib u to r to th e b u rd e n o f Fed m e m b e r­
ship. An analysis has show n that to help
satisfy System reserve re q u ire m e n ts,
D istrict m e m b e r banks in most dep o sit
size categories h o ld m o re vault cash
relative to liabilities than th e ir nonm em ber
c o u n te rp a rts .6 The va ult cash o f m e m b e r
banks in excess of that held by com parable
non m e m b e rs fo r n orm a l o p e ra tin g p u r­
poses is listed in ro w tw o . It involves
an o p p o rtu n ity cost to th e m e m b e r bank

6 Liabilities are defined to include total deposits, Fed funds purchased,
and other liabilities for borrow ed funds.

ESTIMATED MEMBERSHIP BURDEN IN 1977 FOR
SIXTH DISTRICT MEMBER BANKS
{million $)

Bank Size Classes (Net Demand Deposits)

$ ;::
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Reserves at Fed
( + ) Vault Cash Adj.
(-) “ Due from " Adj.
(-) Float Adj.
( = ) Excess Balances
(-) Correspondent
Earnings Adj.
( = ) Unproductive Bal.
Earnings Loss at 61/2%
(-) Value of Discount Window
( = ) NET BURDEN
Income Before Taxes (1977)
No. of Banks

0-10

10-100

100-200

200-400

400+

Total*

183.5
16.1
79.1
7.0
113.5

741.2
61.8
379.5
29.0
394.5

227.2
24.7
106.5
19.3
126.1

377.3
0
89.6
27.5
260.2

318.7
0
113.0
34.5
171.2

1,847.9
102.6
767.7
117.3
1,065.5

(7%)
(10%)
(7V2%)
(4%)
(7%%)

2.3
111.2
7.2
0.9
6.3
61.7
364

16.0
378.5
24.6
4.1
20.5
209.1
255

28.2
97.9
6.4
1.7
4.7
46.2
14

44.5
215.7
14.0
2.7
11.3
91.0
10

37.1
134.1
8.7
2.6
6.1
40.4
4

128.1
937.4
60.9
12.0
48.9
448.4
647

(7%%)
(7%%)
(8%)
(7Vz%)
(5%)
(1T/»%)

( 5 ’/4 % )

* Figures in parentheses are the D istrict's percentage of the national total.

and, thus, adds to the b u rd e n o f
m e m bership.
As m em bers o f the Federal Reserve
System, banks c u rre n tly receive a n u m b e r
o f services w ith o u t e x p lic it charges.
N o n m e m b e r banks usually o b ta in sim ilar
services fro m larger co rre s p o n d e n t banks,
com pensating them by leaving nonintereste a rn in g fun d s on dep o sit ("d u e fr o m "
deposits) w ith the m . C on seq u en tly, the
ra tio o f "d u e fr o m " balances to lia b ilitie s
is lo w e r fo r m e m b e r banks than fo r
co m p arab ly sized n o n m e m b e r banks. Row
th re e shows th e estim ated b e n e fit to
m e m b e r banks o f h o ld in g re la tively lo w e r
am ounts o f n o n in te re s t-e a rn in g , "d u e
fr o m " dep o sits .7
Float. Float arises in the process o f c o l­
le ctin g checks w hen the Federal Reserve
credits the accou n t o f a m e m b e r bank
before d eb iting the account of the m em ber
bank u po n w h ic h the check is w ritte n .
This te m p o ra ry " lo a n " of fun d s to m e m b e r
banks d u rin g the c o lle c tio n process re­
duces th e b u rd e n o f m em bership. In the

It is assumed that 56 percent of "d u e fro m " balances are collected, that
is, potentially available for investment purposes.




Board staff's recent study, the flo a t ad­
ju stm e n t n a tio n a lly was slig h tly o ver $3
b illio n in 1977. A b o u t $1.9 b illio n o f the
tota l accrued to banks w ith to ta l deposits
in excess o f $2 b illio n . An analysis of
flo a t since 1970 suggests that, on average,
a b o u t 101/2 p e rce n t o f flo a t n a tio n a lly is
on the books o f th e A tlan ta Fed, a lth o u g h
that percentage has been slig h tly h ig h e r
in the past few years. Since th e re is o n ly
o ne bank in the Sixth D istrict w ith to ta l d e ­
posits just over $2 b illio n , th e total
b e n e fit o f flo a t to D istrict m em bers has
been estim ated at $117.3 m illio n — IOV 2
p erce n t o f the a p p ro xim a te ly $ 1.1 b illio n
flo a t e n jo ye d by banks w ith less than
$2 b illio n in deposits. In ro w fo u r o f
Table 2, the to ta l flo a t b e n e fit has been
d is trib u te d across bank size classes a cco rd ­
ing to the p ro p o rtio n o f cash item s in
the process o f c o lle c tio n held by each
size class.
Correspondent Earnings. The "excess
balances" listed in ro w five are th e sums
o f rows one and tw o m inus rows th re e and
fo u r. O ne fu rth e r a d ju stm e n t needs to
be made to get an accurate estim ate o f
Fed m e m bers' u n p ro d u c tiv e balances.
Large m em bers can o ffe r co rre s p o n d e n t

services to n o n m e m b e r banks because o f
the fo rm e rs ' access to Federal Reserve
services (i.e., check c o lle c tio n , cu rre n cy
shipm ents, w ire transfers, etc.). An
analysis has show n th a t D istrict m e m b e r
banks hold much higher balances "d u e to "
respondents (co m pensating balances)
relative to tota l lia b ilitie s tnan those held
by co m p arab ly sized n o n m e m b e r banks.
Since c o rre s p o n d e n t banks pay no ex­
plicit interest on compensating balances and
since they can invest the co lle cte d p o rtio n
o f "d u e to 's " in e arn in g assets, these
fun d s are p ro fita b le to the m . The p ro f­
ita ble p o rtio n o f com p en sa ting balances
attributed to the correspondent's m em ber­
ship in the Federal Reserve System are
listed in ro w six .8 These balances have
been subtracted fro m th e excess balances
to arrive at the estimates of District m em ber
banks' u n p ro d u c tiv e balances given in ro w
seven. These are the " e x tra " n o n in te re s te arn in g balances held by m e m b e r banks
relative to co m p a ra b ly sized n o n m e m b e r
banks. A t an o p p o rtu n ity cost o f 6 V2 p e r­
cent, these u n p ro d u c tiv e balances
re present the b e fo re -ta x earnings loss, as
given in ro w e ig h t .9
Discount Window. The value o f m e m b e r
banks' access to the Fed's discount w in d ow
n a tio n a lly in 1977 has been estim ated at
$150 m illio n . This is the cost to m e m b e r
banks o f a c q u irin g sim ila r lines o f c re d it
in the private m arket. A study o f d isco un t
o p e ra tio n s over the past several years
suggests tha t Sixth D istrict m e m b e r bank
b o rro w in g s average a b o u t 8 p erce n t o f
to ta l System b o rro w in g s, o r $12 m illio n
o f the $ 15 0-m illion b e n e fit to all m e m b e r
banks. Row nine shows the D istrict's total
b e n e fit d is trib u te d across bank size classes
a cco rd in g to th e ir shares o f d isco u n t
w in d o w b o rro w in g s last year. Finally,
su b tra ctin g th e value o f th e b o rro w in g
p riv ile g e fro m the pretax e arnin g losses

8 It has been assumed that 58 percent of "d u e to " balances are collected
(57 percent fo r banks over $1 billio n in deposits) and one -fifth of collected
"d u e to 's" represent p ro fit on correspondent business.
9 An opp o rtu n ity cost rate of 6V2 percent (same figure used in the Board
staff studies) should be interpreted as an expected average cost over a
long period of time. W hile interest rates are currently above 6V2 percent,
it is not likely that a bank w ould continually w ithdraw from and then re­
jo in the System as interest rates rose above and then fell below 6V2
percent, respectively.




gives th e estim ated b e fo re -ta x net b urde n
o f m e m b e rship fo r D istrict m em bers in
1977, w h ich totals $48.9 m illio n , o r IV .2
p e rce n t o f the estim ated national b u rd e n .
The net b u rd e n fo r each bank size class
is given in ro w ten.
Burden Relative to Income. Row eleven
gives 1977 in co m e b e fo re taxes and se­
c u rity gains or losses fo r each size class,
w h icn to ta le d $448.4 m illio n fo r all D istrict
m em bers, o r 5 p e rce n t o f b e fo re -ta x in ­
com e earned by all m e m b e r banks. The
net b u rd e n estim ate o f $48.9 m illio n fo r
D istrict m e m b e r banks equaled nearly 11
p e rce n t o f th e ir to ta l in co m e b e fo re taxes
last year. For each o f the th re e smallest
bank size classes in Table 2, the net b u rd e n
averaged a b o u t 10 p e rce n t o f b e fo re -ta x
earnings. That is, fo r banks w ith $200
m illio n or less in net dem and deposits,
System m e m b e rship re d uce d b e fo re ­
tax earnings by 10 p ercen t, on average.
For banks w ith m ore than $200 m illio n
in net dem and deposits, th e earnings re­
d u c tio n was larger. The estim ated net
b u rd e n fo r banks in th e $200-$400-m illion
size class a m o u n te d to nearly 121/2 p e rce n t
o f b e fo re -ta x earnings in 1977. For the
D istrict's fo u r large banks w ith o ver $400
m illio n in net d em and deposits, the
estim ated net b u rd e n was 15 p e rce n t o f
th e ir c o m b in e d in co m e b e fo re taxes last
year. Flowever, an unusual o p e ra tin g loss
at one o f these banks p u lle d d o w n net
in co m e fo r the g ro u p . E xcluding tha t
bank's loss, the net b u rd e n fo r banks in
the largest size category was a b o u t 12 V2
p e rce n t o f 1977 b e fo re -ta x in co m e, the
same as fo r banks in th e $200-$400-m illion
category. Thus, th e D istrict's sm aller banks
bore a slightly low er burden fro m m em ber­
ship, m easured in term s o f fo re g o n e
earnings as a p e rce n t o f actual earnings,
than the re la tively fe w larger banks. ■

SIXTH DISTRICT BANKING NOTES
THE NEW “MONEY M ARKET ”
C ER T IFIC A TES
"M o n e y m a rk e t" certificates o f d ep o sit
w ere b eing aggressively p ro m o te d b y Dis­
tric t banks and enthusiastically accepted
by d ep o sitors. In just fo u r m onths, D istrict
m e m b e r banks issued a b o u t $800 m illio n
in these new certificates. Purchases at
banks and savings and loans th ro u g h o u t
th e c o u n try w ere also cjuite large. Judging
fro m a sam ple o f m e m b e r banks th a t
h o ld nearly 30 p erce n t o f all D istrict tim e
and savings deposits, these tim e certificates
co m p rise d a b o u t 23A p e rce n t o f in te re ste a rn in g bank deposits on S eptem ber 30.
In term s o f d o lla r g ro w th (b u t n o t in
p ro p o rtio n to to ta l tim e and savings
deposits), th e in itia l co nsu m e r response
to th e m o n e y m arket ce rtifica te s has been
g re ate r th a n to th e h ig h ly p o p u la r
in te re s t-c e ilin g -fre e , fo u r-y e a r " w ild c a r d "
ce rtifica te s th a t w e re available in th e la tte r
part o f 1973.

MONEY MARKET CERTIFICATES
%

Mil. $

Sixth District Member Banks

M

J

J

A

S

0

1978
‘ Data are estim ated from a sam ple of banks.

The New Money Market Time Certificate.
Federal bank and th r ift in d u stry re g u la to ry
a u th o ritie s a llo w e d banks and n o n b a n k
th rift institutions to begin o ffe rin g this new
s ix-m o n th tim e d e p o sit on June 1, 1978,
in o rd e r to give fin a n cia l in s titu tio n s m o re
fle x ib ility in c o m p e tin g fo r fun d s, thus
h e lp in g to assure an adeauate flo w o f
c re d it fo r h ousing and o th e r b o rro w in g
needs. Previously, the m a xim um interest
rate banks c o u la pay fo r tim e deposits o f
less than $ 100,000 was sp ecifically set by
th e Federal Reserve's R egulation Q ac­
c o rd in g to th e m a tu rity o f th e deposit.
A lth o u g h th e m in im u m d e n o m in a tio n
of the six-m onth m oney market certificates
is o n ly $ 10,000, th e m a xim um in terest rate
is n o t fixe d b u t moves w ith sp ecific m a rke t
rates. Banks may pay up to th e average
a u ctio n y ie ld (on a d isco u n t basis) on
th e s ix -m o n th Treasury b ill in th e m ost re ­
cent w e e kly a uctio n . (The rate established
at each M o n d a y's Treasury a u ctio n b e ­
comes the c e ilin g rate fo r the w eek be­
g in n in g th e fo llo w in g Thursday.) The new
dep o sit is thu s m ore p ric e -c o m p e titiv e
w ith s h o rt-te rm ope n m arket fin a n cia l in ­
strum ents, such as Treasury bills, c o m ­
m ercial paper, and m oney m a rke t m u tua l
funds. Tne size o f these in stru m e nts is
also ro u g h ly co m p a ra b le — $ 10,000 is also
the m in im u m d e n o m in a tio n fo r Treasury




bills, w h ile co m m e rcia l paper is available
in $25,000 am ounts. Shares in m o n ey
m a rke t m u tu a l fun d s are available in
a m ounts less than $10,000. For investors
seeking high returns, the m o n e y m a rke t
c e rtific a te oridges th e gap b etw e e n d e ­
posits large e n o u g h to be placed in
Treasury Dills b ut n o t large e n o u g h fo r a
$ 100,000 tim e dep o sit th a t banks may issue
w ith o u t interest rate lim ita tio n s.
Recent Experience. District banks actively
p ro m o te d th e ce rtifica te s and, excep t
fo r some sm aller and p re d o m in a n tly rural
in stitu tio n s, m ost had th e m on the m arket
in early June. By late sum m er, th e y w ere
available at nearly all banks. In the
first w eek o f June, th e ce rtifica te yie ld e d
7.160 p e rce n t and D istrict banks actively
issued an estim ated $70 m illio n w o rth .
Yields varied o n ly slig h tly th ro u g h o u t
June; by the end o f th e m o n th , a to ta l o f
a b o u t $175 m illio n had been issued. D u r­
ing the m o n th , h ow eve r, savings deposits
and s m a ll-d e n o m in a tio n tim e deposits
declined substantially. There is no question
th a t a large v o lu m e o f the funds in itia lly
flo w in g in to th e m oney m a rke t certificates
came fro m banks' lo w e r cost passbook
savings accounts and sh ort m a tu rity
tim e deposits.

D u rin g July, a m o n th in w h ich many
tim e deposits m atured and becam e avail­
able fo r re in vestm en t, banks o ffe re d
rates o f up to s lig h tly m o re tha n 7Vi
p ercen t. The v o lu m e o f m oney m a rke t
certificates issued surged nearly $300 m illion.
In contrast to a sizable d e clin e in June,
passbook savings deposits show ed little
change. A lth o u g h s m a ll-d e n o m in a tio n
tim e deposits d e c lin e d , th e re was a net
increase in co nsu m e r tim e deposits o f
nearly $100 m illio n .
The o ffe rin g rates receded th ro u g h m id A ugust b u t th e n re tu rn e d to IV i p erce n t
late in the m o n th . C o n sum e r in terest
rem ained strong, and banks issued an ad­
d itio n a l $150 m illio n in m o n ey m a rke t ce r­
tificates. There was even less sw itch in g
o u t o f existing deposits, w ith th e result
th a t consum er deposits w e re up sub­
stantially, even th o u g h A ugust is a m o n th
that banks usually experience considerable
tim e and savings dep o sit o u tflo w s.
W ith yields a p p ro a ch in g 8 p e rc e n t by
th e end o f S eptem ber, m oney m arket
c e rtific a te outstandings increased fu rth e r
to some $800 m illio n . The net gain in
tim e deposits d u rin g th e m o n th nearly
m atched m o n e y m a rke t c e rtific a te g ro w th .
Assessing the Benefits. The p u b lic has
cle a rly b e n e fite d fro m th e m oney m a rke t
certificates. Like o th e r bank deposits,
th e y are c o n v e n ie n t and insured. Yet th e y
earn in terest rates co m p arab le to th e
yields o f o pe n m arket investm ents— re ­
tu rn s m uch h ig h e r tha n any s h o rt-te rm
bank d ep o sit o f such small d e n o m in a tio n
c o u ld p ro v id e six m o n th s ago.
The certificates have been a mixed bless­
ing fo r banks. D espite th e large vo lu m e
issued since June, these deposits d id n ot
all represent a d d itio n a l fun d s fo r banks
to lend o r invest. As n o te d above, some
o f this m o n e y was d ra w n fro m existing
deposits bearing lo w e r in terest rates.
To th e e xte n t th a t such s h iftin g o ccu rre d ,
th e banks' cost o f fu n d s rose. A t late
S eptem ber in terest rates, a switch fro m
passbook savings to m o n e y m a rke t ce r­
tificates w o u ld nave raisea interest costs
by a b o u t 300 basis p o in ts on th e a m o u n t
tra nsfe rre d .
S ubtracting net gains in to ta l tim e and
savings deposits fro m th e m o n ey m arket
c e rtific a te in flo w s suggests that up to
40 percent o f the m oney market certificate




v o lu m e represents "n e w m o n e y " fo r the
banks. This is probably a m in im um estimate,
since at least part o f th e o u tflo w fro m
o th e r tim e and savings deposits w e n t in to
savings and loan association m oney market
certificates. Also, th e fact th a t th e new
in s tru m e n t e na b le d banks to c o u n te r the
n orm a l p a tte rn o f o u tflo w s o f co nsu m e r
tim e deposits d u rin g th e sum m e r m o nths
fu rth e r attests to th e ir a b ility to attract
and h o ld funds. The seasonal in flu en ce s
have been generally overlooked in previous
assessments o f th e b en e fits o f these d e ­
posits fo r banks.
H ow ever, if as m uch as o n e -h a lf o f
the inflows represented shifted funds, then
th e m arginal cost o f th e new deposits
was q u ite high fo r banks. The m arginal
cost was ro u g h ly equal to th e nom ina l
in terest rate (over 7 p ercen t) th a t banks
had to pay fo r th e n ew fu n d s plus th e
a d d itio n a l 2 o r m o re p ercentage p oints
th e y had to pay on th e deposits th a t
w ere m e re ly sh ifte d fro m passbook savings
deposits and o th e r tim e deposits. T h ere ­
fo re , the m arginal cost o f tn e net gain
in deposits th a t th e m o n ey m arket c e r­
tificates represented was close to 10 p e r­
cent, h ig h e r than m any loan in terest rates.
This sim p listic a pproach to evalua tin g th e
c e rtifica te s' b enefits leads to th e c o n ­
clusion tha t th e y have been an expensive
source o f fun d s and th a t banks w o u ld
be b e tte r o ff w ith o u t th e m . But if banks
had n o t been able to o ffe r m o n e y m a rke t
ce rtifica te s, th e y w o u ld have p ro b a b ly
lost a co nside ra ble a m o u n t o f deposits
as m arket in terest rates advanced th ro u g h
th e sum m er and fall. A n d the very fun d s
th a t m oney m a rke t certificates w e re d e ­
signed to a ttract and h o ld — deposits o f
$ 10,000 and o v e r— are those th a t are m ost
interest-sensitive. W ith o u t these funds,
banks w o u ld have had to attract fun d s
fro m a lte rn a tive and even m o re expensive
sources such as Federal fun d s and larged e n o m in a tio n CDs o r cu rta il th e ir le n d in g
activities. Since a sizable loss o f deposits
in th e absence o f th e m o n e y m arket
ce rtifica te s p ro b a b ly w o u ld nave raised
th e cost o f funds even m o re tha n o ffe rin g
th e m has, banks have b e n e fite d by having
a m o re fle x ib le d e p o sit in stru m e n t.

John M. Godfrey

AUTOMATIC TRANSFER:
WHAT IF M1GOES HAYWIRE?
by William N. Cox

Since N o v e m b e r 1, banks have been
able to o ffe r th e consum er an im p o rta n t
new service: a u to m a tic tra nsfe r ot
fun d s fro m savings to ch ecking accounts.
W h a t has been gained is co nve n ie nce .
Previously, d epositors co u ld sh ift funds
fro m savings to ch ecking , b ut each shift
re q u ire d a specific request by m ail, by
p h o n e , o ve r the co u n te r, o r w ith an
e le c tro n ic te lle r m achine. U n d e r th e new
rules, th e cu sto m e r can sim p ly te ll
his bank to transfer funds a u to m a tica lly
w h e n e v e r his c h e ckin g a ccou n t b a l­
ance falls b e lo w some agreed u po n
level. A cu sto m e r n ow fin ds it easier to
c o m b in e th e tra n sfe ra b ility o f his ch e ckin g
deposits w ith th e interest earnings o f
his savings account.
The new service offers many benefits.
Besides e x p a n d in g the range o f co nsu m e r
o p tio n s, it should stim ulate c o m p e titio n
am ong banks and o th e r fin a n cia l in s titu ­
tio ns and im p ro ve e fficie n cy o f the e n tire
paym ents system
But th e re is a fly in the o in tm e n t. Some
banks, at least, w ill even tua lly o ffe r the
new service at an attractive price. A t least
som e of th e ir custom ers w ill use it to
m in im iz e th e ir ch e ckin g a ccou n t balances,
k n o w in g the y can cover overdrafts o u t




o f th e ir savings accounts. D epending on the
stru ctu re o f transfer charges w h ich
em erge in the p o st-N o ve m b e r c o m p e ti­
tio n , some custom ers m ig h t even d e cide
to p u t all o f th e ir fun d s in to savings
ana cover all o f th e ir checks w ith transfers.
To an u n k n o w n e xte n t, th e new service
w ill reduce the level o f ch e ckin g accou n t
balances.
W h a t o f it? Isn't th a t part o f the idea?
Yes, b u t private ch e ckin g a ccount
balances, plus cu rre n cy and co in in c irc u ­
la tio n, add up to th e M-, m oney stock.
In re ce nt years, the g ro w th o f M-, has been
the p rin c ip a l in d ic a to r and target of
m o n eta ry p olicy. T e chn ica lly, Federal
Reserve p o lic y makers give "e q u a l w e ig h t"
to M ! and M 2 g ro w th . But M 2 represents
consum er tim e and savings deposits
plus M-i, so tha t th e M-, c o m p o n e n t
receives d o u b le w e ig h t. In practice, M n
attracts th e most p u b lic a tte n tio n . Its
s u ita b ility fo r tha t ro le has lo n g been
debated and is far fro m universally
accepted today. But m o n eta ry p o lic y is
n o w being described and co n d u cte d
a cco rd in g to th e n o tio n tha t M-i g ro w th
pro vide s the best measure of m o n eta ry
policy's p o te n tia l im pact on real e c o n o m ic
g ro w th , in fla tio n , and u n e m p lo y m e n t.

Thus, if the new a u to m a tic transfer
p rivile g e leads to s ig n ifica n t re d u ctio n s
o f ch e c k in g a ccou n t balances, the p rim a ry
compass o f m o n eta ry p o licy co u ld go
hayw ire.
H o w can p o lic y makers cope w ith this
p o te n tia l p roblem ? There seem to be
several possibilities.
O n e is to w a it and see if the changes
in dem and deposits are large eno u gh
to seriously in te rfe re w ith M / s usefulness
as a p o lic y guide. C onsum er response has
been lim ite d so far, b u t it's to o soon to
p ro je c t h ow m uch banks o r consum ers
w ill use the new a u th o rity as c o m p e titio n
unfolds. Reactions to a sim ilar in n o v a tio n
— the N O W accounts in New England— were
also in itia lly u ndram atic. But fo r the a u to ­
m atic transfers, many banks have been
earnestly gearing up to o ffe r the service.
P ub licity has been n a tio n w id e and the
p u b lic m ore aware. So the response may
be greater. O n the o th e r hand, savings
and loan associations w ill not be offering the
service as the y d id in the N O W case, so
banks' m a rke tin g e ffo rts may be less
aggressive. M-, may n o t go hayw ire
a fte r all.
A n o th e r a lte rn a tive is to re d e fin e M-,
to in c lu d e savings accounts subject to
transfer. This is a d m in istra tive ly feasible,
b ut it w o u ld n 't e n tire ly solve the p ro b le m .
M-j is valuable n ot o n ly because the
Fed can measure and in flu e n c e it fairly
w e ll b ut also because M-i g ro w th has
had p re d ic ta b le effects on the e con o m y.
If M q w ere b ro ad e ne d and re d e fin e d ,




it w o u ld re fle ct new and u n k n o w n
b e h a vio r patterns tha t w o u ld alter the
fa m ilia r, th o u g h still u n ce rta in , lin k
b etw een its g ro w th and the e con o m y.
W ith no one q u ite sure w hat g ro w th in
a m o d ifie d M-, w o u ld m ean, tn e change
w o u ld add u n c e rta in ty to p o licy m aking.
M-, w o u ld n o t be tru sted as m uch w ith ­
o u t cre d en tia ls establishing its v a lid ity
and m eaning as a m easure o f m o n eta ry
p o licy. The same p ro b le m w o u ld arise if
the Fed shifts fro m M-, to any u n trie d
su bstitute target.
The d raw back o f u n fa m ilia rity co u ld
be avoided by re lyin g on the M 2 d e fin i­
tio n o f m oney. The w e ll-k n o w n p ro b le m
w ith tha t m oney measure, how ever,
is that g ro w th in its in te re st-b e a rin g
d ep o sit c o m p o n e n t responds to changes
in in terest rates on c o m p e tin g investm ents.
Since these flu c tu a tio n s may offset or
exaggerate o th e r changes in the m oney
supply, M 2can be u n re lia b le as a measure
o f m o netary p olicy's e c o n o m ic effects
d u rin g periods o f ra p id ly changing
in terest rates. The M 2 compass goes
hayw ire, in e ffe ct, just w hen it's most
needed.
There are o th e r possibilities. M any
e conom ists see m e rit in keying m o n eta ry
p o licy to g ro w th in reserves o f the
Fed's m e m b e r banks, adjusted in various
ways. Some w o u ld like to rely m ore on
in terest rates. W h a te ve r th e s o lu tio n ,
th e re 's a chance tha t th e new a u to m a tic
device, w ith all its benefits, w ill te m p o ra rily
ham per the c o n d u c t o f m o n eta ry p o lic y .■

INDEX FOR 1978
January/February.......... Pages 1-16
March/April........................17-48
May/June......................... 49-64

AGRICULTURE
Farm land Price M ovem ents
G ene D. S ullivan, M a rc h /A p ril, 44
Few er Cattle= Less B eef = H igher Prices
Y vonne F. Davies, M a y/Ju n e , 62
Flu e-C u red Tob acco: O u tpu t D ow n ,

Prices U p
Y vonne F. Davies, Ju ly/A u g u st, 89

Im plications o f Farm ers' Planting
inten tions in 1978
G ene D. S ullivan, M a y/Ju n e , 57

Southeastern A g ricu ltu re : Despair
G ives Way to O ptim ism
G ene D. Sullivan,
N o v e m b e r/D e c e m b e r, 118

BANK LENDING
Bank Loans Surge in First H alf o f 1978
Stuart G. H o ffm a n ,
S e p te m b e r/O c to b e r, 99

Southeastern Loan D em and Revives—
A t Last!

July/August........................ 65- 92
September/October.......... . . .93-108
November/December............ 109-136

The B urd en o f Fed M em b ersh ip for
Sixth D istrict Banks
Stuart G. H o ffm a n ,
N o v e m b e r/D e c e m b e r, 126

Changes in the Treasury's Cash
M anagem ent Procedu res
W illia m N. Cox, Ja nuary/F ebruary, 14

C h eckin g Vs. Savings: The Lines Blur
W illia m N. Cox, M a y/Ju n e , 51

D isin term ed ia tion ?
John M . G o d fre y, M a y/Ju n e , 52

District Bank Earnings R e b o u n d
John M . G od fre y,
S e p te m b e r/O c to b e r, 102

Increasing Liquidity Pressures
John M . G o d fre y, Ju ly/A u g u st, 82

Southeastern Loan D em and R evives —
A t Last!
John M . G o d fre y, M a rc h /A p ril, 35

U sury: The R e cen t Tennessee Exp erien ce
R o b e rt E. K eleher and B. Frank King,
Ju ly/A u g u st, 69

John M . G o d fre y, M a rc h /A p ril, 35

BANKING (see also BANKING NOTES)
A utom atic Transfer: What if M 1 G oes
H ayw ire?
W illia m N. Cox,
N o v e m b e r/D e c e m b e r, 132

Banks Loans Surge in First H alf o f 1978
Stuart G. H o ffm a n ,
S e p te m b e r/O c to b e r, 99




BANKING NOTES
D istrict Bank Earnings R e b o u n d
John M . G o d fre y,
S e p te m b e r/O c to b e r, 102

Increasing Liquidity Pressures
John M . G o d fre y, Ju ly/A u g u st, 82

N ew M o n e y M arket C ertificates
John M . G o d fre y ,
N o v e m b e r/D e c e m b e r, 130

CATTLE
Few er C attle= Less B e e f = H igher Prices
Y vonne F. Davies, M a y/Ju n e , 62

Real O utpu t G row th an d U nem ploym ent ,
1947-77
W illia m N. Cox, M a rc h /A p ril, 19

CONSTRUCTION

FARMS

A Prim er on N onresidentiai C onstruction
B. Frank King, M a rc h /A p ril, 40

Farm land Price M ovem en ts

DISINTERMEDIATION
D isinterm ed ia tion?
John M . G o d fre y , M a y/Ju n e , 52

G ene D. Sullivan, M a rc h /A p ril, 44

FEDERAL EXPENDITURES
M easu ring U n em p lo ym en t: Im pact o f the
1978 Changes on Federal Fun ding
Y vonne F. Davies and C h a rlie C arter,
N o v e m b e r/D e c e m b e r, 111

ECONOMIC AND FINANCIAL CONDITIONS IN THE
SOUTHEAST

FEDEI

The B urden o f Fed M em b ersh ip for
Sixth D istrict Banks

The B urd en o f F ed M em b ersh ip for
Sixth D istrict Banks

Stuart G. H o ffm a n ,
N o v e m b e r/D e c e m b e r, 126

D isinterm ed ia tion?
John M . G o d fre y, M a y/Ju n e , 52

Farm land Price M ovem en ts
G ene D. S ullivan, M a rc h /A p ril, 44

Few er C attle= Less B e e f = H ig her Prices
Y vonne F. Davies, M a y/Ju n e , 62

Flu e-C u red T ob acco: O utpu t D ow n,
Prices Up
Y vonne F. Davies, Ju ly/A u g u st, 89

Im plications o f Farm ers' Planting
Intentions in 1978
G ene D. S ullivan, M a y/Ju n e , 57

The N ew M inim um W age: A Threat to
Southeastern Jo b s?
C h a rlie C arter, M a rc h /A p ril, 30

The Southeastern Econom y M oves A h ea d
in 1977
Charles J. H aulk, January/February, 3

Southeastern In flation : 19/1-77
W illia m N. Cox, J u ly /A u g u st, 67

Southeastern Loan D em and Revives —
A t Last!
John M . G o d fre y , M a rc h /A p ril, 35

U sury: The R ecen t Tennessee Exp erien ce
R obert E. K eleher and B. Frank King,
Ju ly /A u g u s t, 69

EMPLOYMENT
Labor Force Participation and Jo b
O p p o rtu n ities
C h a rlie C arter, J u ly /A u g u st, 84

M easu ring U n em p lo ym en t: Im pact o f the
1978 Changes on Federal Funding

MBERSHIP

Stuart G. H o ffm a n ,
N o v e m b e r/D e c e m b e r, 126

INFLATION
Southeastern In fla tion : 1971-77
W illia m N. Cox, Ju ly/A u g u st, 67

MINIMUM WAGE
The N ew M inim um W age: A Threat to
Southeastern Jo b s?
C h a rlie C arter, M a rc h /A p ril, 30

MONEY SUPPLY
A utom atic Transfer: What if M 1 G oes
H ayw ire?
W illia m N. Cox,
N o v e m b e r/D e c e m b e r, 132

NATIONAL ECONOMIC CONDITIONS
Changes in In dustry Shares o f National
O utpu t
Charles J. H aulk,
S e p te m b e r/O c to b e r, 95

Labor Force Participation and Jo b
O p p ortu n ities
C h a rlie C arter, Ju ly/A u g u st, 84

Lagging In dicators: G u id e to the F u tu re?
Charles J. H aulk, M a y/Ju n e , 55

M easu ring U n em p loym en t: Im pact o f the
1978 Changes on Federal Funding
Y vonne F. Davies and C h a rlie C arter,
N o v e m b e r/D e c e m b e r, 111

N ew D irections
G. W illia m M ille r,
S e p te m b e r/O c to b e r, 104

Y vonne F. Davies and C h a rlie C arter,
N o v e m b e r/D e c e m b e r, 111

A Prim er on N on residentiai C onstruction

The N ew M inim um W age: A Threat to
Southeastern Jo b s?

Real O utpu t G row th and U nem ploym ent
1947-77

C h a rlie C arter, M a rc h /A p ril, 30




B. Frank King, M a rc h /A p ril, 40
W illia m N. Cox, M a rc h /A p ril, 19

SOUTHEASTERN ECONOMY
D isinterm ed ia tion?
John M . G o d fre y, M a y/Ju n e , 52

Southeastern A g ricu ltu re : D espair G ives
Way to O ptim ism
Gene D. Sullivan,
N ovem ber/D ecem ber, 118

Southeastern Econom y M o ves A h ea d
in 1977
Charles J. H aulk, January/February, 3

Southeastern In fla tion : 1971-77
W illia m N. Cox, ju ly /A u g u s t, 67

Southeastern Loan D em and R e viv es —
A t Last!
John M . G o d fre y, M a rc h /A p ril, 35

TOBACCO
Flu e-C u red T ob acco: O utpu t D ow n,
Prices Up
Y vonne F. Davies, Ju ly/A u g u st, 89

Real O utpu t G row th and U nem ploym ent,
1947-77
W illia m N. Cox, M a rc h /A p ril, 19

USURY
U sury: The R ecen t Tennessee Exp erien ce
R o b ert E. K eleh e r and B. Frank King,
Ju ly/A u g u st, 69

WORKING PAPER ABSTRACTS
A n Em pirical Test o f the L in k e d O lig o p o ly
Th eo ry: A n Analysis o f Florida H old in g
C om panies
D avid D. W h ite h e a d ,
S e p te m b e r/O c to b e r, 98

O f M o n e y and Prices: Som e H istorical
Perspectives
R obert E. K eleher, J u ly /A u g u s t, 81

Southern Banks and the C o n fed era te
M o n eta ry Expansion
John M . G o d fre y, Ju ly/A u g u st, 80

UNEMPLOYMENT
M easuring U nem p loym ent: Im pact o f the
1978 Changes on Federal Funding
Y vonne F. Davies and C h a rlie C arter,
N o v e m b e r/D e c e m b e r, 111