Full text of Review (Federal Reserve Bank of Dallas) : April 1978

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

El Paso· Houston· San Antonio

April 1978
1

Changing Patterns in Check Collection

3

Texas Cities Credited with Sound Financial Management

11

Inflation Stimulates Demand for Farmland

14

Business Loan Demand Running at Record Rate at
District Banks

17

Move Toward Full Employment Portends Cyclical Decline for
Residential Construction in Texas

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Changing Patterns
in Check Collection

Excerpts from an address by
Tony J. Salvaggio, Senior Vice President
Federal Reserve Bank of Dalla8

at
Check Processing Conference
Sponsored by Bank Administration Institute
Dallas. Texas
February 28, 1978

A familiar adage is that "necessity is the mother
of invention." And I cannot think of a better example of the truth of this saying than in the race
between the constantly growing volume of checks
and the advancing technology to accommodate it.
The volume of checks cleared has increased over 7
percent a year since the end of World War II. This
large and steady increase in volume would have
overwhelmed the nation's check processing system
long ago had it not been for the constant technological improvements.
In spite of the many recent improvements, the
cost of check collection is still rather staggering.
Based on Federal Reserve Bank data, the aggregate
cost to the banking system of processing and collecting a typical transit check is estimated to be
over half a dollar. This figure consists of an aggregate banking system processing cost of 27 cents
plus the 24 cents applicable to the bank customer's
April 1979/Voice

pro rata share of account maintenance cost. With
these costs in mind, continued improvements in
check processing have become essentiaL
Electronic funds transfer (EIT] was expected to
make significant inroads into check processing by
the late seventies. Although EIT has begun to
reduce the growth of paper check volume, it has
not eliminated the need for the checks, as was
expected in the late sixties. On the contrary,
the check collection system has had to handle an
increasing volume, and it is still "alive and well."
An indication of the continued importance of check
processing is the $11 billion spent last year by
financial institutions for check handling. compared
with the roughly $100 million expended for EFT.
Nevertheless. the evidence strongly suggests that
EFT systems will continue to develop and gradually encroach on the number of paper checks although the pace of growth will be slower than
originally predicted.
The total number of automated clearinghouses
(ACH's) handling electronic funds transfers has
grown to 32 since the first one was established in
1972. About as percent of the volume now being
processed by these ACH's consists of direct payments made by the U.S. Treasury. This Government volume is expected to increase as more
Treasury payments are made by direct deposit,
moving funds via electronic messages from the
Treasury's deposit account to deposit accounts of
millions of recipients across the nation. As an
example of the Government's EIT push. President
Carter recently issued a directive to all Federal
agencies to use direct deposit where feasible.
1

As you know. the Federal Reserve has been
active in developing and improving EFT. One area
still in need of improvement is the delivery mech~
anism between banks and their ACH's. Paper list~
ings and magnetic tapes encoded for electronic
payments must still be physically transported be~
tween banks and ACH's. To increase efficiency
and accelerate transactions, the Federal Reserve
System has developed guidelines for intrazone
communication links to provide banks with direct
data communication with its ACH processing cen~
ter. The linkup enables banks and other originators
of ACH items to send and receive them over tele~
phone lines, avoiding the physical transport of
tapes between banks and ACH's. A similar system
is in effect at the New York Automated Clearing
House Association.
The plan to provide these intrazone communica~
tion links is in different stages of development in
the different Federal Reserve districts. Several
pilot tests are planned to test the feaSibility of the
linkup, and the Federal Reserve Bank of Dallas
and the SouthWestern Automated Clearing House
Association will participate in one of the tests.
In the near future. about 35 to 40 banks will be
linked directly to the ACH processing center in
the Eleventh Federal Reserve District. Whether a
a bank is linked directly to the ACH by telephone
lines will depend on its volume of electronic transfers.
Another Federal Reserve proposal to improve
EFT that has been published for comment would
link the 32 ACH's across the nation into a coordinated system. Comments on the proposal have
been overwhelmingly positive, and action on the
proposal is expected soon. Currently. clearinghouses are clearing and settling electronic payments within their respective regions. Under the
proposal, ACH transactions could be made nation~
wide. Two recent studies have found the connection of ACH facilities to be feasible. One study involved the Treasury's program of direct deposit
of social security and other recurring Federal payments. In another study, the National Automated
Clearing House Association and the Federal Reserve successfully linked nine ACH's and 24 corporations for electronic funds transfers.
The future development of EFT will depend
heavily on the outcome of legislation now pending
in Congress. The EFT bills. although different in
specifics, are generally designed to protect con~
surners. The bills provide for receipts. periodic
2

statements, liability on banks for certain errors,
full disclosure when an account is opened or its
terms changed, and restriction of government access to customers' financial records.
While EFT reduces the number of checks, another recent innovation, truncation, reduces the
amount of handling and shipping of checks. Truncation involves passing payments information in~
stead of paper. Check data are digitized at the point
where the check enters the check col1ection system
and are transmitted via telephone lines to the paying bank. The reconstructed image of the check is
then used for further processing in lieu of the
physical check.
Check truncation is now being used for all Government checks processed at the Reserve Bank in
the Eleventh District, as well as in six other Federal
Reserve districts. The truncation program for Gov~
ernment checks will be in effect nationwide by
June 1978. The major advantages of the truncation
program are a reduction in Treasury expenses and
acceleration of claims processing.
Benefits gained from truncation and EFT are
partially offset by several problem developments.
One is remote disbursement, where payors make a
concerted effort to maximize the time it takes for
a check to be presented to their bank for payment.
Another problem area is the continuing increase
in the amount of float. Average daily Federal Reserve float has risen steadily from $1.8 billion in
mid~1975 to $4.7 billion at the end of 1977.
A third problem area is the growth in volume of
return items. The Federal Reserve System alone
spends about $9 million annually to process approximately 160 million return items. The cost of
processing a returned check is about five times the
cost of processing a check that is paid when presented. Survey results indicate that some banks
tolerate the maintenance of many marignal accounts and depend heavily on income derived from
charges made for returned checks. These practices
place an unfair burden on other banks in the check
processing chain. particularly those banks that
are attempting to keep these costs in line as far
as their own depositors are concerned.
Although these problem areas are serious developments. the overall outlook for the nation's
check processing system is promising. The system
is capable of handling the increasing volume of
checks through the mid eighties, when the growth
in the volume is expected to slow as EFT starts
replacing paper checks.
Federat Relerve Bank of Dalla.

Texas Cities Credited with
Sound Financial Management
By Art Ekholm

While some cities have been receiving a bad press
for their municipal finances in recent years, Texas
cities. by and large, have been darlings of the municipals market. Texas cities' bonds for financing
the expansion and replacement of municipal facilities have been sold readily at relatively low
yields. These favorable sales reflect the fiscal
health of Texas cities during a decade when municipal finances in many areas have been described
in the bleakest terms.
Steady economic growth must receive substantial credit for the financial health of Texas cities.
But sound management has been equally important to their financial well-being, as in most other
cities. A number of older cities with declining populations and high unemployment, largely in the industrialized belt that extends from New York
westward beyond Chicago, have been experiencing
severe financial stress but have controlled it and
generally maintained satisfactory credit ratings.
The urban financial problem
Cities have ongoing financing problems. Pressure
to expand services is persistent; yet, increases in
taxes and charges to finance services meet strong
public resistance.
The problem is not unique to cities. Other governmental units, businesses, and households continually struggle with their respective budget constraints. All bemoan the tendency for their wants
to surpass their resources.
If the financial problem of cities is no more nor
less than the common circumstance of scarcity,
why has the fiscal condition of the nation's cities
received so much publicity? Certainly, a very prominent reason has been the continuing flirtation with
April 19'78/Voice

default by New York City. The unfolding of New
York's financial story in 1975 prompted an investigation into the state of finances for cities across
the country.
It may be that city finances were spotlighted at
their worst moment. In 1975 the national economy
was bottoming out of the worst recession since the
1930's. A large portion of municipal revenues are
derived from cyclically sensitive sources-sales
and income taxes-and were at low levels. At the
same time, pressure on expenditures continued
unabated.
Given the bleak economic picture in 1975 and
the continued fanfare for the urban fiscal problem,
it may seem surprising that there has not been a
wave of municipal fiscal failures or defaults. TechnicaUy, fiscal failure of a city occurs when the municipality's debt can be sold only at abnormally
high interest rates; default occurs, of course, when
current operating expenses are not paid or a scheduled interest or principal payment on outstanding
debt is not made. In fact, no major city has defaulted on its general obligation debt in the post-World
War 11 period. And the only major city tagged
with "imminent bankruptcy" is New York, the
largest of them all.
However, technical failure or default is not the
focus of concern in discussions of the fiscal health
of most cities. Rather, the focus has been on the
financial stress flowing from budget pressures on
cities adjusting to declines in population and employment. With revenue sources failing to grow
relative to the costs of maintaining city services at
existing or desired levels, these cities must reduce
spending, increase taxes and charges, or, alternatively, enter onto the failure path--continued ex-

,

cesses of current expenditures over current revenues.
The latter course of action was chosen in New
York. Deficit spending for current operations was
supported by borrowing. A persistent lack of financial discipline in New York eventually led to an
overwhelming burden of short-term debt. The city's
short-term debt increased from $896 million in 1965
to $4,884 million in 1975. That year, New York accounted for a fourth of all state and local government short-term debt in the United States.
Elsewhere, short-term borrowing by municipal
governments to cover deficits in current accounts
has generally not been an acceptable practice. It
is common that state constitutions or city charters
provide prohibitions against it.
High unemployment and declining population,
experienced by a number of older cities, principally in the Northeast and Midwest, have aggravated
municipal fiscal pressures. Studies of city problems
and finances in recent years have generally concluded that a number of cities have experienced
even more unfavorable conditions than New York
City. New York has been unique primarily in its
continued failure to balance its operating budget.'
Fiscal failure requires a continued inability or
refusal by city administrators to recognize and
acquiesce to budget constraints. Other cities with
financial stress have raised taxes and charges and/
or cut back on the level or rate of growth of services.
Surpluses and deficits of cities
The general fund accounts of cities record current
revenues and expenditures related to the provision
of general services. Cities usually tend toward a
long-run balance in their general fund. with surpluses and deficits in individual years offsetting.
The pattern of surpluses and deficits of the three
largest cities in Texas-Dallas, Houston , and San
Antonio- is representative of general fund patterns over time in Texas cities. The amount of
Such studies include George E. Peterson. "Finance."
in The Urban Predicament, ed. William Gorham and
Nathan Glazer (Washington, D.C.: Urhan Institute.
1976). pp. 35-1UI; Richard P. Nathan and Paul R.
Dommel. "Understanding the Urban Predicament,"
Brookings Bul/elin 14 (Spring-Summer 1977): 9·13; and
Edward M. Gramlich, "The New York City Fiscal
Crisis: What Happened and What is to be Done?"
American Economic Review 66, no_ 2 (May 1976):

1.

415·29.

•

general fund expenditures has increased steadily
during the 1970's in each of the three cities, but,
as illustrated by the accompanying chart, surpluses
or deficits have been transitory. These Texas cities
have not shown a persistent excess of expenditures
over revenues.
In the wake of the accounting gimmicks used to
delay expenditure recognition and inflate revenues
in New York City, a distrust of the adequacy of
general fund accounts as a diagnostic measure has
prevailed. New York had a record of "balanced"
general fund accounts, as legally required, but simultaneously it accumulated budget deficits of
almost $5 billion in short-term debt. Nevertheless,
New York was not placed under the scrutiny of
an independent auditor until March this year. Confidence in the balanced general fund accounts of
Dallas, Houston, and San Antonio is assured by the
independent audits they have undergone and the
lack of evidence of short-term debt accumulation
representative of hidden deficits.

Confidence in the balanced general fund
accounts of Dallas, Houston, and San
Antonio is assured by the independent
audits they have undergone and the lack of
evidence of shorl-tena debt accumulation
representative of hidden deficits.

In Texas, a few cities have utilized short-term
borrowing for the purpose of smoothing discrepancies in the timing of expenditures and revenues.
However, no Texas city has persistently increased
its short-term debt for this purpose, and most completely avoid short-term debt balances at fiscal
year-end. Among the five largest Texas cities, only
San Antonio normally has short-tenn debt balances
at fiscal year-end; it undertakes short-term borrowing in anticipation of property taxes due following
the end of the fiscal year. The city charter requires
that this debt be retired by the end of a tax year.
A change to a coincident tax year and fiscal year
has been approved in a charter revision for San
Antonio and is to be implemented within a few
years.
In contrast to Texas cities, some other ciUesCleveland and New York. for instance-have susFederal Reserve Bank of D.Uas

Tral\5itory general lund surpluses and deficits

aut the pattern lor three lafgest Texas citws
" ______________ DAllAS
~=CO

,. -

MUJON DOllARS

8-

.......uses

6_

4-

,U

-, -4_

-....-.
I

u

U

nn
u

OEAC'"

-, -8

~

n

0

"

'"

I

'70 '71 '72 '73 74 75 76 '77

I

I
,
I
I
I
I
,
,
'70 '71 '72 '73 '74 7S '7iS '77

I
I
,
I
,
I
,
I
I
'70 '71 '72 '73 '74 '75 '78 77

MUNiCIPAl FISCAL YEARS

_la,Of

SCiUACES: _ _ ...
o.naa.,.."..ton,.1Id 5M AAtOnIo.
Moody" ", ... /yIJc.' 0 •• ,.,"' .. 0125 l.el'dlnll' u.S. CIII••.

tained shocks to their fiscal systems in the 1970's,
But Cleveland has met the strain with fiscal discipline, For example, after its general fund expenditures grew rapidly from $62,170,000 in 1965
to $105,847,000 in 1970, Cleveland reduced spending to $94,957,000 in 1971 and to $94,143,000 in
1972, This was in response to a decrease in municipal revenues from $105 ,396,000 in 1970 to
$81 ,322,000 in 1971 and $94,145,000 in 1972. It was
1975 before revenues regained their 1970 level.
The large decrease in revenues in 1971 resulted in a
sizable deficit even though spending was reduced
by 10 percent from the preceding year. However,
in subsequent years, strong financial management
produced annual surpluses.
A recent study of large U.S. cities developed indexes of urban hardship.!! One of the indexes-the
"urban conditions index"- was based on relative
poverty, age of housing, and growth or decline in
population. The average for 489 cities was set equal
April 1978/Voice

to 100. The relative value for Cleveland was 291 ;
for New York, 180; for San Antonio, 100; for
Dallas, 39; and for Houston, 37. Another computation was designed to measure "hardship" of cities
relative to their suburbs. An index above 100 indicated a city was "worse off" than its suburbs,
and below 100 indicated a central city was "better
off" than its suburbs, in terms of six socioeconomic
factors-unemployment, dependency (persons less
than 18 or over 64 years of age as a percentage of
population), education, income, crowded hOUSing,
2. Richard P. Nathan, Paul R. Dommel, and James W.
Fossett (staff membenl of the Brookings Institution),
"Targeting Development Funds on Urban Hardship,"
in U.S. Congress, Ioint Economic CommiUee, Financing
Municipal Needs, Joint Hearing before the Subcommillee
on Economic Growth and Stabilization ond the Subcommittee on Fiscol and Intergovernmental Policy
of the JOint Economic Committee. 95th Cong., lSi
sess., 1977, pp. 54.-64.

,

and poverty. The values were 331 for Cleveland,
211 for New York, 97 for Dallas, and 93 for Hous·
ton. (This index was not computed for San An·
tonio.) A number of cities other than Cleveland
had indexes of urban hardship that were higher
than the index for New York City. Since those cities
have been able to contend with their budget can·
straints, the New York example apparently does
not serve as an inevitable precursor of a wave of
fiscal failures because of "overwhelming" city
problems.
A lack of persistent current deficits or short-term
operating debt indicates that Texas cities have had
sound financial management during the 1970's.
Moreover, this fiscal responsibility has prevailed
in spite of rapid growth in expenditures.
Expenditures of Texas cities
During the 1970's. city budgets have continued to
reflect relentless pressure from residents for more
and better services. For the 28 Texas cities with
populations over 50.000, municipal general expenditures per capita increased from $134.28 in
fiscal 1970-71 to $242.61 in fiscal 1975-76.' Sixtenths of this 81-percent increase resulted from
higher prices for the goods and services purchased
by the municipalities. Real expenditures per capita
increased about a third.
The $242.61 of per capita expenditures in Texas
cities stands in sharp contrast to the figure of
$594.11 for cities of comparable size in the rest
of the United States. However, the comparability
of expenditures of municipalities in Texas and
those in oth"e r states is quite limited. The types of
services provided by municipal governments vary
from state to state and from city to city as functions are split among the state, county, city, school
district, and special district. In addition, there are
no definitive measures of differences in quality and
quantity for most municipal services, such as police protection and parks and recreation.
A large portion of the difference between per
capita expenditures of municipalities in Texas and
3. Dala are deri ved from the U.S. Bureau of the
Census, City Government Finances in 1970·71.
Series GF71. no. 4, and City Government Finonces
in 1975-76. Series GF76, no. 4 (Washington, D.C.:
Government Printing Office. 1972. 1977). Municipal fiscal
years ended as of June 30. 1971. and Tune 30, 1976. are
included. General expenditures exclude utility
expenditures and employee·retirement or other
insurance trust expenditures.

•

those in other states is explained by the more limited scope of operations for Texas municipal governments. The nature of this specialization is
revealed by an examination of per capita expenditures for specific services performed by the 48
largest cities in the United States (Table 1). New
York City is separated because of its uniqueness
and heavy weight in a composite of cities outside
Texas.
Per capita expenditures of the 5 Texas cities
included in the 48 largest cities have been especially small in the speCific functions of public welfare. education, health and hospitals, and housing
and urban renewal. In Texas these activities are
generally undertaken by governmental units other
than municipalities. Public welfare expenditures
are administered by the state, supported by Federal
grants. Public education receives substantial aid
from state and Federal funds and is operated by
local school districts , separate and apart from city
budgets. This or a similar financing arrangement is
fairly common in other states also. Government
health and hospital expenditures are concentrated
in state, county, and special districts. And housing
and urban renewal are generally administered by
special districts.
Among the functions undertaken by cities, four
are substantially involved with the redistribution
of income. Public welfare expenditures are the
purest case. Other functions, portions of which are
clearly redistributive, include equal opportunities
in education. health care for the poor, and housing
assistance. In many states, these functions are administered by city governments. Funding is heavily
supported by intergovernmental transfers from
state and Federal governments, especially for the
welfare and education functions. For New York
City. the four functions have accounted for as much
as 62 percent of general expenditures. The five
large Texas cities have directed an average of only
4 percent to these functions. The average for the
rest of the 48 largest u.s. cities has been 26 percent.
Redistribution of income from those with high
incomes to those with low incomes may be considered a desirable social goal both nationally and
by the inhabitants of a region. But regions are relatively open, allowing flows of people and other
mobile resources across borders. Hence. migration
in response to redistributive programs can be expected unless they are carefully monitored for uniformity among regions. Whether through direct
redistribution (by transfers of cash) or through
Federal Relerve Bank of Dan••

Table 1
Texas cities relatively specialized In function

(Per capita general expenditures of 48 largest U.S. cities,
liscaI1975-76)

".

Other
~ jl i ..

0.26

$ 469.98

.25

361.47
164.98
66.14
132.75
66.45
22.41
20.47
411.87
$1,716.52

$ 28.06
61.21
36.10
16.09
105.81
54.33
36.54
29.30
169.74
$537.18

",w
F~II~tlOfl

Public welfare ......
Education
Health and hospitals . .
Housing "d urban renewal
Police and lire protection
Sewerage and sanitation
Highways and streets
Parks and recreation
Other general expenditures
TOTAL

.... ............. .

$

7.69
1.31
66.27
38.83
25.14
21.74
92.25
$253.74

1. Oa II I S, EI Puo, Fort Wort~, Houl ton, a nd San An ton!o.
NOTE: a ased on munl<;lpal fiscal yea ... that cloud within the

ended Juna 30, 1976.
SOURCE: U.S. Bureau of the Cenlus.

the pricing of services (such as housing or health
care) at prices below cost, the greater the effort to
redistribute income within a region, the greater
the incentive for in-migration of low-income people. Similarly, the heavier taxes on high-income
people and business firms to provide the revenues
for welfare and other redistributive programs will
encourage migration from an area in th eir own
self-interest even though they may in principle
suppor t the social goal of income redistribution.
It would be better if income redistribution efforts
were completely financed and administered by the
Federal Government in such a manner as to equalize the burden and benefits of income redistribution among areas. The concentrations of poverty
that are the result of differences in the benefits
and burdens of income redistribution at different
locations would be eliminated. However, other incentives for concentrations of the poor, such as
the availability of low-cost housing, would still
exist.
Texas cities concentrate on providing traditional
city services, such as police and fire protection,
sewerage and sanitation, highways and stree ts, and
parks and recreation. Expenditures for these services involve redistribution of income to a degree,
but they are more clearly directed to th e provision
of services that would not be supplied in socially
desired quantities by private markets.
April 1978/Voice

M

'pu

City

~itle s \

12

"

mont~1

Revenues of Texas cities
Municipalities have been pressed to increase revenues to keep pace with the rapidly increasing expenditures during the 1970's. From fiscal 1970-71
to fisca11975-76, Texas municipalities with populations over 50,000 obtained general revenue increases
of $111.19 per capita, reflecting a 92-percent gain.'
This was accomplished with increases of 64 percent in general revenues per capita from the municipalities' own sources-property taxes, sales
taxes, current charges, and other revenues-and
494 percent in revenues from "outside" sources,
such as grants from the state and Federal governments. The portion of total general revenues obtained from own sources decreased from 92 percent
to 78 percent in five years.
The slowest growing component of own revenues has been the property tax, the mainstay of
municipal income. Residents have demanded an
increasing flow of municipal services but have resisted paying for them by additional levies on their
property. Thus, muncipal property taxes per capita
moved up $25.84 in Texas cities with populations
4. G~neral revenues include all city revenues except
utility revenues and employee-retirement or other
insurance trust revenues. In sta tes that operate
liquor stores, revenues from that source are
excluded.

,

over 50,000, accounting for only 23 percent of the
total increase in revenues from 1970·71 to 1975·76.
The second largest component of own revenues
for Texas cities, sales and gross receipts taxes,
grew 75 percent over this period. But the most
rapid growth in own revenues has been in current
charges for specific municipal services-for exam·
pie, parking fees, sanitation charges, and sewerage
charges. These charges more than doubled from
1970-71 to 1975-76, increasing their share of own
revenues from 17 percent to 21 percent.

The slowest growing component of own
revenues has been the property tax, the
mainstay of municipal income. Residents
have demanded an increasing Bow of
municipal services but bave resisted
paying for them by additional levies on
their property.

The growth of per capita expenditures at a much
more rapid rate than per capita own revenues of
Texas municipalities was funded by the state and
Federal governments. From $7.39 in 1970-71, the
Federal per capita contribution to Texas cities over
50,000 jumped almost sixfold to $44.21 in 1975-76.
By that time, 19 cents of each dollar of general
revenues of these cities came from Federal grants.
During the same period, state per capita transfers
to these cities increased 252 percent to $4.43, a
tenth of the Federal contribution.
The availability of Federal funds for large portions of the growth in Texas municipal expenditures can be expec ted to decline in the late seventies. During th e 95th Congress, a coalition of
northeastern and midwestern legislators was able
to change the distribution formula for Federal
funds to be provided for community development
projects. A new factor in the revised formula, number of houses built prior to 1939, weights allocations more heavily in favor of the older cities of
the Northeast and Midwest. Under the revised for mula, Texas cities will expe rience only minor
increases in these funds. Similar gains in allocations to the Northeast and Midwest for public
works. welfare, and other Federal aid programs
will also constrain the growth of Federal funds
disbursed to Texas cities.
8

Efficiency of municipal bond markets
It has been conventional to consider long-term
debt financing appropriate for municipal capital
projects. The irregularity and long~term nature of
capital investments make it convenient that debt
financing be undertaken for capital projects. As
with households and businesses. debt financing
allows an efficien t use of resources over time when
the expected stream of benefits exceeds the cost
for capital projects.
A recent report on the fiscal condition of 67 of
the 75 largest cities in the United States by the
staff of the Joint Economic Committee warns of an
impending "structural crisis for many of our nation's cities." ~ This conclusion was based on the
fact that from fiscal 1976 to fiscal 1977. capital
expenditures were reduced in many large cities
while. at the same time, 50 cities reported $22.4 billion of unmet capital "needs." But the message of
this JEe report does not square with the strong
aggregate surplus in the budgets of state and local
governments or the recent boom in municipal debt
issues.
The JEC staff also reported that while 16 cities
with low unemployment and growing populations
showed an increase of 30 percent in capital ex~
penditures. 23 cities with high unemployment and
declining populations had a decrease of 13 percent.
Some participants in congressional hearings related
to the staff report argued that malfunctions in the
municipal bond market tended to limit market access of cities in the latter group and. thus, contributed to decreases in their capital expenditures. A
suggested solution was Federal support to the
municipals market through a National Urban Development Bank.
However. except for a brief disruption due to
uncertainties arising from the initial exposure of
New York City's financial situation, the municipal
bond market has shown no evidence of failure in
its allocative function in the form of interest rate
differences stemming from sources other than
differences in maturity and risk. The large and diversified pools of lenders and borrowers and the
extensive dispersion of information in the national
5. U.S. Congress. Joint Economic Committee, The
Current Fiscal CondWon of Cilies: A Survey of 67 of the
75 Largest Cities. t\ Study Prepared for the
Use 01 the Subcammiflee on Economic Growth and
Stabilization and the Subcommittee on Fiscal and
Intergovernmental Policy of the Joint Economic
Committee. 95th Cong .• 1st sess., 1977, p. 2.
Feceral Reserve Bank 01 Dallas

market for municipal bonds provide a strong base
for effective performance. The flow of information
in the municipal bond market is not perfect, but
there is no reason to believe that there would be
major reallocations of borrowing capacity among
cities if it could be made more perfect. And it is
by no means clear that Federal intermediation
would improve the quality of information.
A more plausible explanation for capital expenditure cutbacks in many major cities has been the
squeeze on budgets resulting from rapid expenditure increases and weak economic conditions. Prudent financial management has precluded commitments of additional debt in these situations.
National activity in municipal bonds increased
sharply in 1977 as interest rates on municipals stabilized at a level more than 1 percentage point
below the average in 1975 and general economic
conditions continued to improve. In Texas an especially vigorous economy and growing municipalities added further support to a surge of new bond
issues. Bonds approved by the Attorney General
of Texas for sale by cities totaled $1,122 million in

1977, an increase of about 87 percent over a relatively high level of debt issuance in 1976. There
was a substantial increase in the proportion of
bonds that represented refundings. Nevertheless,
total new money for capital expansion increased
over 70 percent.
About three-fourths of the bonds issued in Texas in 1977 were revenue bonds, which are payable
strictly from the earnings of specific enterprises.
For the most part, these bonds finance waterworks
and sewerage facilities, but they also involve transportation facilities. hospitals. and other revenueproducing facilities. The rest of the bonds issued
in 1977 were tax-supported general obligation
bonds. which are secured by the "full faith and
credit" of the issuing cities and are used for the
construction of a wide range of municipal facilities-streets. bridges. fire stations. and many
others.
The flexibility a city has in adapting its finances
to changing conditions is constrained by a heavy
debt load. A buildup of debt service charges relative to revenues may lead a city into a precarious

Tekas municipal bond issues boom
BONDS

YIELDS

,~-------------------------------------------------------------

MIUIQN DOt..l..ARS

',000

-

800

-

BONOS APPROVED BY
ATTORNEY GENERAL
FOR TEXAS CITIES

AVERAGE YIELD OF
NEW Aa MUNICIPAL BONOS

800

-

... "'0 o

,

\00..

""'

,,".,A

I-

e-

r-

r----

- """" .......

-

'0

-

8

,
- •

;-

e-

1970

"R':E'""

1971

SOlIRCES: Municipal Ad¥iso<y Counc. 0/ Tna,.,

'"2

1973

,9"

,"
9

19 7 6

1977

2

o

u.s. T~uury ~

April1918/Voice

8

Table 2
De bt se rvice of five la rgest Texas cities
Incre .... IH_ than revenuea
Oebl service
o JItIrcenl
of revenu ..'
Fiscel
Fiscal

Debl service'
per capilli
Fiscal
Fiscal
CUy

DaUas

1970·71

1975·76

11170-1 1

11175_76

$55.74

$70.95
16.71
52.39
SO.68
64.82

25.8
14.0
32,3
24.6
19.6

22.5

EI Paso .... .

16.08

Fort Worth ... ,
Houston ...... .
San Antonio .. .

45.94
34.13
43.65

10.5
22.6
18.8

14.3

Lon g·lerm debt ..Iired. shorHerm debl ""Islandi ng. and infllrel t
on debt
2. Own gene rel ..venues plus .. limy revenues.
NOTE : Baaed on municipal fiscal years thaI closed within the 12 months
end ed J une 30. 1971. end June 30. 1916 respectively.
SOURCE: U.S. Bureau of Ih e Census.

1.

Tabla 3
Control of Anancial I tren by mOil U.S. cities
reftected In credit ratin"s
(25 largest cities, June 30, 1977)

.....

Chicago ...
Col umbu s . ..
De nver
Kansas Ci ty
Me mp his
Ph oen;l(
S'" Anlo n lo
San Diego

..

City

R. llng

~"

DaliBs
Houston . .
Indianapolis
Los Angeles . .
Milwau kee
S'" Francisco

..
....
.........
.....
.......

A"
A"
A"
A"
A"
A..

..
..
A,
A,
A,
A,
A,
A,

AIOIlng

5eatUe

A,

Baltimore
J acksonville
New Orlea ns

A1
A1
A1

C leveland
Pittsburgh
51. louis.

A

Boston
Detroi t
Ph ilade lphia
New York City

A

A

."."
."
•

NOTE: Moody's reting scheme assign s lhe Au rating to bonds
ca rrying th e sm allesl degree 01 Inve.tment ri sk. Bonds rated
Au and Am are generally known as "high grade bonds."
Rallng. th en descend in grade through A, Baa. Ba. B. and
so on through C. Moody', describes Baa bond. as "medium
grade obligations. I.e. lhey are neil her highly protected nor
poorly sec...ed"; B bonds '"generally lack cha.acteristics of
Ih a desirable Inve,lment" Those bonds judged flrongest in a
cia.. have III I aller th a leller .ali ng . as in A 1.
SOURCE: Moody' , Inveslors Service.

10

financial situation. All of the five largest Texas
cities expanded debt service charges per capita
from 1970-71 to 1975-76. However, the debt service
relative to ability to pay appears to have improved.
In each of these cities, the debt service charges
were a smaller percentage of own general revenues
plus utility revenues in the later fi scal year (Table
2).
Credit ratings of cities provide an index of fa ctors affecting th eir fina ncial situation. And the
growing concern with the viability of city fi nances
has put increased pressures on the credit-rating
firm s to evaluate each city carefull y. Also, increases in the number of cities submitting to independent audits, complyin g with standardized municipal accounting procedures , and publishing
more detailed accounting data ha ve provided a
better fl ow of information to the credit-rating
firms.
Moody's credit ratings of the 25 largest cities
in the United States reflect the concen tration of
financial stress in the older cities of the Northeast
and Midwest (Table 3). Also reflected are soun d
credit ratings fo r many of the older cities and the
absence of any general breakdown in the creditworthiness of the nation's largest cities, Texas
cities have relatively high credit ratings, as illustra ted by the Aaa ratings for Dallas and Houston
and the Aa rating for San Antonio,

Summary
Administrators of Texas cities have perform ed admirably thus far in the 1970's, maintaining the
balance between revenues and expenditures necessary for a sound fina ncial status. Favorable economic conditions and limited activity in the most
explicitly redistributive functions have been conducive to this performance,
Most cities in the rest of the nation have also
received strong financial management. And. particularly in some cities of the Northeast, fi scal
discipline has usually been maintained amid distressed local economies and concent rations of
poverty. Where recurrent overextension of a city's
budget has occurred. it has not been because these
problems were overwhelming but. rather, there
was fail ure to recognize and acquiesce to budget
constraints.
Federal Reserve Bank of Dallas

Inflation Stimulates Demand for Farmland

"Buy land. They ain't making it anymore." This
observation has been attributed to Will Rogers
some 50 years ago. It is true, of course, that only
limited amounts of farmland are "made" anymore
by carrying water to deserts. pushing back forests,
or draining swamps. But the development of hybrid
seeds and animals, mechanical power, and chemical control of weeds. diseases, and plant behavior-largely within the past 50 years-have had effects comparable to tremendous increases in acreage of farm and ranch land. Absent such developments, the pressure of population growth upon
land prices undoubtedly would have been greater.
Nevertheless, it has become customary to cite
farmland as a classic example of a resource with
a fixed supply and a growing demand and to conclude, therefore, that its price inevitably must rise.
Fairly long interludes of declining farmland prices,
such as the 1920's and early 1930's have not shaken
the popular view captured in Will Roger's comment.
Farmland prices in the United States currently
average more than seven times what they were in
1949. In the Southwest. prices have shown a similar rise. Farmland in Louisiana, New Mexico, Oklahoma, and Texas is now selling for 6.9, 5.4, 7.7.
and 6.7 times, respectively. more than in 1949. A
large portion of this price rise has occurred in recent years. Between November 1971 and November
1977, U.S. farmland rose 133 percent while average
values in the four southwestern states nearly
doubled.
Aside from the impact of inflation, technology
has been the key driving force boosting the demand
for far mland. As advancing technology made it
feasible for individual farmers to work larger acreages. competition forced th em along that path in
order to earn acceptables incomes. And as existing
farmers. as weB as individuals desiring to become
newly established as farmers, bid for the land coming on the market, prices have risen. The bidding
has been sharpened also by those who desire to
own land as an investment, speculation. or inflation
April 1978/Volce

hedge. And finally, population growth and rising
aspirations have increased demand for land for
residential and recreational sites and such public
uses as roads, schools. airports, parks, and the like.
All these have had some effect on farmland prices.
Except for inflation, these have been evolutionary forces and would not be expected to cause
sharp spurts in land prices. There is strong reason,
therefore. to believe that inflation has played an
increasingly important role in the rise in land
prices. particularly since 1971. As farmland came
to be viewed as a viable hedge against inflation,
investors in both the United States and many other
countries sought farmland acquisitions in the
United States.
Returns to land have surpassed alternatives ...
In terms of current income plus actual or unrealized capital gains, fa rm real estate has produced
very impressive yields in recent years and has generally outperformed other investments. Since 1971,
returns to farmland-consisting of current income
estimated to average about 4 percent and price
rise estimated to average about 15 percent- have
been around 19 percent per year in the United
States.
In this respect, farmland has been a better performer than the broad averages of stocks or bonds.
Using Standard and Poor's index of 500 common
stocks , rates of return (dividends plus capital gains)
on common stock have averaged 5 to 6 percent
since 1971. With wide fluctuations in gains and
losses, investment returns for stocks also have not
been as stable during this period as for farmland
or bonds. Average stock values declined in three
of th e past seven years.
The average annual yield on bonds since 1971
has been about 8 percent, based on Moody's seasoned Aaa corporate issues. The average annual
mte of inflation in this period has been 6.9 percent.
Adjusting for inflation. the return since 1971 has
been about 12 percent per year for farmland. about
1 percent for bonds. and about a 2-percent loss for
stocks.
11

Capital gains in southwestern farm and ranch
land have not been as large as the national average.
Since 1971. average annual price in creases for
Louisiana. New Mexico. Oklahoma. and Texas
have been 9.0. 9.7. 13.0. and 10.7 percent. respectively. But adding income to appreciation. it is
clear that the return to land in the Southwest has
also been greater than for most stock and bond
averages.
Land purchases by foreigners have received
much publicity recently in newspapers and magazines. The latest estimate of foreign ownership of
U.S. farm and ranch land was made by the Department of Commerce in 1974. The survey revealed
that 4.9 million acres in units above 200 acres were
owned by foreigners. or less than 0.5 percent of
U.S. farmland. The proportion owned by foreigners
probably is somewhat higher now since for eign
purchases may have been fai rly numerous in recent years. But the amount of farm real estate currently owned by foreign investors. while not
known. probably is stilI relatively small.

The surge in farmland prices in recent years apparently has not been associated with any striking
change in purchases of land . Active far mers purchased about two-thirds of all tracts sold in 197677. according to data compiled by the U.S. Department of Agriculture. Nonfarmers bought about onefourth of all tracts sold. about equally divided between "in-county" and "out-of-county" residents.
Foreign investors account for an indeterminate
share of the out-oC-county buyers. Retired farmers
bought about 2 percent. and about one-tenth were
reported purchased by an "all other" category.
These proportions have not changed significantly
during recent years for which data are available.
On the selling side, active and retired farm ers
sold over one-half of all tracts sold, and about
one-fifth were estate sales. So, the farm real estate
market is predominantly a market among farm ers.
However. being a thin market-there were only 43
fa rm title transfers per 1,000 farms in 1976-77fairly small changes in offerings or demand can
have a disproportionate effect on prices.

Returns from farmland investment have exceeded
stock retl,lfns and borod yiekis in recent years

00-----------

PERCENT PEl! ANNUM

20 -

: •• "~FARM1.A ND

...~

. .:

\ ...."':

10- ······:{ i ~....

f./

)/

::

/\ "

i

j'·

'

."""" ! """

;'; /~

o

! \\~:"~..
V: . ~

; •... :

."" ....

\

I

SEASON£O Au
• •
CORPORATE BONOS : ;
(MOODY'S )

* 10 _

500 COMMON STOCKS
(STANDARD &. I'C>CfI'S)

-30

, ,
1962

,

, ,
1965

,

,,..I

i

,

,

,

,

,

,

,

l'ii71

l~n "'-r·

HOre u .... . ........... ~ ba_ on ~ In _ ' " ' " , 1 _
.
yo!_ and on 1I>e loe'aogl _""I 'tnl ' or ,9IjO.76. Sioc:k

rel",n. ;nclude eopi .. , v_
SOUI\CES;

Of ..,. .... "'''"

_.d 01 Qooemor50 F _.. R o _
Economic 1nr11ea1.....
U.s. Dopartrnenl 01 AiI,ic .........

Gio-... _

s,.......

U.s. Oo;>o<lm,.' 01 (;omme,el.

12

Federal Reserve Bank of Dallal

Rete. 01 cheng. in 'erml.nd veluft
"ow down In the Southw••t
Ve.,-to-yea, PorCOII! changes In Indox..
oIlarmland valulIR U 01 Nowmber 1
Vea,

N• •

louisi a na

Mllxlco

OItl ahom a

Tax..

1963
1964

11.4
2.6

11.1
7.5

5.5
6.5

9.5
8.6

1965

6.1

1967
1968
1969

7.5
4.7
16.7
2.9
4.6

6.1
5.6
7.3

13.4
5.4
7.1
4.8
4.6

5.7
6.5
4.0
9.7
4.4

1970
1971
1972
1973
1974

8.0
9.0
9.6
10.3
17.4

5.9
5.6
8.3
25.9
6.7

.0
11.3
7.8
22.5
23.7

3.4
5.7
14.0
21.4
17.1

1975
1976
1977p

3.2
8.2
5.2

5.2
7.9
8.3

7.2
9.8
8.9

3.0
10.7
3.1

1966

5A

p--P l'flll mina ry.
SOURCE: U.S. Dopartmont of Agrlculiu ra.

. , , but immediate pro8pect8 are le88 attractive
Barring a world crop shortage, farm income prospects for the next two or three years are not particularly bright. It appears that prices for major
crops-corn, wheat, grain sorghum, cotton, and
soybeans-will be constrained by the large supplies on hand and in prospect, and production costs
will likely continue to rise. Net farm income per
acre and-over a longer period-capital gains will
be affected. Government income- and price-support programs may prevent any further reduction
in total farm income.
Inflation may be the greatest source of uncertainty in the outlook for fannland prices. Presumably, it will be lower than the record pace of late
1972 through early 1974, but it may well be higher
than in the 1960's for some years to come. And
since the pace of inflation appears to strongly influence the trend of land prices, capital gains in
u.s. farmland may range nearer the average of 5
to 6 percent that prevailed in the 1950's and 1960's,
a period when net farm income was also being supported extensively under Government programs
and inflation averaged 2 to ::I percent per year.
Alan M. Young

Officer Credit-Card
Limit Increased
The limit on lines of credit on credit cards for executive officers of member banks has been increased from $1,000 to $5,000. This amendment to
Regulation 0 was effective March 24, 1978.
The change was made in response to increased
consumer prices (prices have almost doubled)
since the $1,000 limit was adopted in 1967 and in
response to the expanded use and acceptability of
bank credit cards since that time.

April 1978/Voice

18

Business Loan Demand Running
at Record Rate at District Banks

Business borrowings from large commercial banks
in the Eleventh District increased sharply last year.
At year-end, business loans totaled $6.8 billion,
up 14 percent from the year-earlier level. The
record growth was 15 percent, in 1972. Moreover,
the rapid growth has continued in 1978; commercial and industrial loans rose almost 6 percent in
January and February, a record for those months.
The previous record for the two months was 4 percent in both 1969 and 1973,
The current sharp rise in business loans began
in the second quarter of 1977, when businesses
found that internally generated funds could not
meet the fast-rising demand for capital expenditures and inventories. In contrast to the first two
years of the recovery, when businesses relied
heavily on 10n~Herm bond and equity markets,
many corporations returned to short-term markets
for a larger share of their external financing needs
last year.
As businesses returned to short-term markets,
they turned increaSingly to commercial banks for
their financing needs because bank loans became
more competitive. Banks raised the interest rate
charged on short-term loans to prime commercial
and industrial customers from 61 /e percent at the
beginning of 1977 to 73/ 4 percent at year-end. However, because other short-term rates rose more
rapidly, the spread between the prime lending rate
and commercial paper narrowed by 45 basis points.
The expansion in business loans in the District
since the first quarter of last year has heen broad
based. Record loan demands were evident for the
fabricated metal, chemicals and rubber, and transportation industries. Many other types of commercial and industrial borrowers- such as manufacturers of transportation equipment, textiles, and
apparel and the mining, wholesal e trade, construction, and public utilities industries- also increased
their demands for bank funds more than usual.

"

Sharp rise of business loans contiroues
al large banks in the Eleventh Oistrict

,,-----------------------------,, ..CUMUli< TIVE PERCENT CHANGE

11;177 •

;'

/
../

,6 -

.........

/ , 1;116

,,1,____42-

/
./

11187.76

AVERAGE
....

, "f.!~:::,L!/~------------------.....l
C .......

-2

' J 'F'M' A 'M' J ' J ' A ' S ' O 'N' O '

Federal Re.erve Bank of Dalla.

Despite the sharp overall growth, there were
some sectors of sluggish business loan demand
last year. For example, loan demand by firms in
the primary metal, petroleum refining, retail, communications, and food, liquor, and tobacco industries was weak. Demand for bankers' acceptances
was also weak.
Loan demand by manufacturers of primary metals and producers of food. liquor, and tobacco have
rebounded sharply this year. however. The sharp
growth in demand for bank loans by primary metal
firms reflects the increased demand for steel and
aluminum by a wide range of machinery and fabricated metal producers. And the recent "trigger
price" system for reducing imports of steel is helping further to increase orders to domestic steel
plants. With the strengthening business outlook,
firms in these industries have begun to raise production levels, and a large portion of their increased financing needs is being met through the
use of credit lines at commercial banks.
Retailers also have stepped up their borrowings
in recent weeks, as evidenced by the near-record
rate of growth in loans to retail firms in February.
Following a better than expected volume of Christmas sales last year, inventories at many retail
establishments-particularly department storeswere drawn down to low levels at year-end. Many
retailers are now in the process of replenishing
stocks, and their financing needs are rising. On the
other hand, some automobile dealers are finding it
necessary to carry-and, thus, finance-larger than
desired inventories of some slow-selling models.
As the economy continues to grow, rising prices
of goods in inventory and perhaps an increase in
the amount held will raise the need for external
financing.
Increased expenditures for plants and equipment in the Southwest will also boost business
needs for external financing. The latest survey of the U.S. Department of Comm erc e indicates
that businesses, overall, plan to boost their expenditures for new plants and equipment by 11
percent in 1978, compared with an increase of almost 13 percent in 1977. With growth in the DisApril1978/Voic8

trict's economy continuing to outpace that of the
nation, a disproportionate share of those expenditures will be in the Southwest.
Comparatively stronger outlays for plants and
equipment in the District this year are evidenced
in spending plans of individual industries. The
Commerce survey indicates that capital expenditures by the mining industry are expected to increase about 14 percent this year, compared with a
rise of about 12 percent in 1977. And because
mining-which includes drilling and the production of oil and gas-is heavily concentrated in the
District, an outsized gain in spending should be
forthcoming. In Texas alone, mining accounts for
almost 30 percent of total industrial production,
compared with less than 7 percent in the nation.
The Commerce survey indicates that manufacturing businesses also plan to increase their capital outlays at a slightly slower rate this year than
last. However, some industries plan to speed up
plant and equipment expenditures. Nonelectrical
machinery, for example, is one industry where capital outlays are indicated to rise rapidly this year.
In Texas. nearly half the output of the nonelectrical machinery industry is oil field equipment.
The aircraft and chemical industries also plan
sharp increases in capital outlays this year. And
because both are major industries in the Southwest, the District economy should benefit greatly.
If expectations for capital expenditures materialize (actually, expenditures may well exceed the
survey indications), commercial and industrial
loans at large District banks probably would increase at a record rate in 1978. Although the prime
lending rate will likely rise somewhat as credit
demand continues to strengthen, interest rates on
alternative sources of short-term funds would be
expected to rise also. In light of the current rising
cost of bond and equity financing, businesses probably will continue to rely more heavily on commercial banks for much of their external financing needs this year. And District banks generally
have sufficient liquidity to meet additional credit
demands.
Mary G. Grandstaff
1S

Oespite the record of strong economic growth in Texas, the growth
of savings deposits usually slows when money market rates rise . . .
NET SAVINGS

BILL RATE

280
M1LUON OOUARS

"

(QUARTERLY DATA)

PERCENT

NET SAVINGS RECEIVED-ttXAS S&L'S :
(SEASONAllY ADJUSTED)
[:

240-

-12

.'

.: :,

....

200-

:

-10

..'.
.'

\!

100-

....

. .'

. ".

-8

-6

120 -

\:

80-

RATE ON NEW ISSUES
OF 3-MONTH TREASURY BUS

....:
40-

-.
-2

..........•..'...........

0 -'-CI0968
;;-'--:I"~9~'le"'~I'~7;'Oo-r-CI09;7Io-'--1:9C7"2~r-:19;7;'3C-r-CI09;7;.~-CI"9;7;5-'r-:I';'7"6C-r-CI;9;77o-r-CI09;7;8-'r O
.. . which leads to tighter mortgage terms and declines in new housing starts in the stateMORTGAGE RATE

HOUSING STARTS

I.

I.
THOUSAND

PERCENT

(SEASONALLY ADJUSTED MONTHLY DATA)

..' .' .'.

12-

.....

10-

8 -

6-

.

:

.

'

.........:'''./ .

.... j:'- - "

EFFECTIVE MORTGAGE RATE-DALLAS
AND HOUSTON S&l'S

,'

'." .

."

.'

.:...J"

"'/HOUSING STARTS IN TEXAS
(3-MONTH MOVING AVERAGE)

-

...,

..

'

-10

.

.:""

........'" " .' .......

.

-12

-8

.'

.

-6

-

-2

o -~~~~~-,-~~~~~~~-,-~~~~~~~~~~~~~~~~
o
1968
1969
197""
1971
1972
1973
1974
1975
1978
1977
1978
19 78 quart ... u timato-d for ne t uyo.g..
SOURCES: Bu.n u of Business Ru.• • rch. Uniyel'$i!y of T.,..• .
Fede •• 1 Horn. Loa n Bank of Lint. Roc:k .
U.S. o.""rtmenl 01 Comme, c •.
Ff>~ •• 1 R40M ..... Bank of !)Ollu.

18

Federal Re.erve Bank of Dalla.

Move Toward Full Employment Portends
Cyclical Decline for Residential
Construction in Texas

Residential construction in Texas faces increasing
competition for labor, materials, and credit as the
economy approaches full employment of its resources. The higher degree of capacity utilization
as the economy approaches fun employment creates increased demands for plant expansion on the
part of businessmen, which. in turn, generate larger demands for credit. As the demand for credit
expands relative to the supply, interest rates rise,
and some consumption and investment expenditures financed by credit tend to be postponed.
One major category of such postponable expenditures is housing. Moreover. the effect there is
accentuated by distortions due to the interest rate
ceilings imposed on deposits at mortgage lending
institutions. When other interest rates are higher,
savings are diverted from these institutions, and
mortgage terms are tightened more severely than
they otherwise would be. The withdrawal of savings from mortgage lending institutions in this
case is commonly known as disintermediation.
During the past 16 months, money market rates
have risen sharply. The three-month Treasury bill
rate, for example, rose from a five-year low of 4.35
percent in December 1976 to nearly 6.50 percent
in early 1978. The rise in these rates. specially on
U.S. Government securities, has provided an attractive alternative to placing money in time and
savings accounts at savings and loan associations
(S&L's}, as maximum yields on these accounts are
limited by regulation.
But the mortgage market in Texas has weathered
the rise in interest rates since December 1976
April 19'78/Voice

rather well, with net gains in deposits still running
well above those evident during most of the early
seventies. Net savings inflows slowed in the past
year, and S&L's began to draw on supplementary
sources of funds to an increasing extent. A greater
number of mortgages were sold in the secondary
market, and borrowings from the Federal Home
Loan Bank rose. However, loan repayments remained strong, and, all in all, sufficient funds were
available to meet demand, with new commitments
remaining at a high level.
Texas 5&L's moved the prime rate on conventional mortgages-offered only to customers with
the highest credit ratings-to 9 1/! percent early
this year. Initial fees were also raised to bring mortgage loan demand and the supply of funds into balance. Moreover, some 5&L's restricted mortgage
lending to owner-occupied properties.
The relationship between housing starts and the
general business cycle has usually been contracyclical-that is, housing activity has entered a
period of contraction even as overall economic
activity has continued to expand, and housing begins to recover in a recession ahead of the rest of
the economy. Residential construction declined approximately one year before the peak in economic
activity in both 1966 and 1972. Similarly, housing
activity entered a period of expansion in late 1969,
approximately one year before economic activity
picked up in late 1970.
A pickup in residential construction activity,
however, did not lead the turnaround of general
business conditions in 1975 because a large over-

"

hang of unsold new homes deterred builders from
increasing starts. Residential construction did not
get going again until that inventory of unsold
homes was drawn down.
Although money market rates have fallen back
somewhat from their January peaks, there is good
reason to expect they will begin climbing again.
Business borrowing at Eleventh District banks is
growing at a record rate. Government expenditures
have been well below budgeted levels recently but
should pick up sharply in coming months, specially
since large budget deficits are forecast for both
fiscal 1978 and 1979. Therefore, as the demands
for funds grow outside the housing industry, interest rates should move up, diminishing the flow
of funds to residential construction.
However, unlike earlier periods of such disintermediation, S&L's currently have a larger share of
their total deposits in certificates of deposit (CD's).
CD's are of longer term and offer higher yields than

regular savings accounts. And because penalties
for early withdrawal of CD's have been stiffened
in recent years, there should be fewer customers
cashing in these types of deposits for reinvestment
in such securities as Treasury bills if interest rates
rise further.
Despite the fact that Texas faces another round
of disintermediation that could cause residential
construction activity to turn down, history suggests
that a recovery is inevitable as soon as mortgage
funds again become plentiful. And unlike the last
downturn, there are few signs of overbuilding that
would lead to a prolonged weakness in activity.
The growth of the state's economy continues to
outpace growth in the nation. And a steady Dow of
new jobs and income should supply both the funds
and demand for a renewed expansion in the stock
of new housing.
Charles N. Walush

Fed Proposes Additional
Activities for Bank Holding
Companies
The Federal Reserve Board has proposed allowing
bank holding companies and their nonbank subsidiaries to sell money orders, travelers' checks,
U.S. savings bonds. and financial management
courses for consumers.
Currently, many bank holding companies sell
these items, but the Fed has approved such requests on a case-by-case basis. The proposal, an
amendment to Regulation y, would allow all bank
holding companies to engage in these activities.
The proposal was made in connection with an application by Citicorp to sell the items through its
eight Person-to-Person Financial Centers in Utah.

18

Federal Reterve Bank of naUas

Purchase and Sale of
Securities Available to
Member Banks
One of the services available to member banks
from Federal Reserve offices in the Eleventh District is the purchase and sale of securities. The
Federal Reserve will purchase or sell any Treasury
or agency security for a member bank.
Sales proceeds are credited to the member
bank's reserve account or transferred in accordance with instructions. Purchases are charged to
its reserve account. and the securities may he held
in safekeeping or pledged 8S collateral for loans,
Treasury tax and loan accounts, or other public
funds. Securities already held in safekeeping are
readily available for sale upon request.
A purchase or sale can be initiated by a telephone call to a Federal Reserve office. The Fed
contacts up to four brokers, the number depending
on the dollar amount of the transaction, and the
most favorable price is executed.
For further information, contact J. A. Clymer,
(214) 651-6340.

April 197'!Volce

,.

Seminars Scheduled to Explain
New TT&L Investment Program

Legislation enacted in 1977 authorizes the U.S.
Treasury to collect interest on its tax and loan accounts at financial institutions and requires the
Treasury to pay fees for certain services performed
by the institutions, such as handling tax and loan
accounts, accepting tax deposits, and issuing savings bonds.
To aid hanks in the Eleventh District in understanding the new Treasury Tax and Loan Investment Program, the Federal Reserve Bank of Danas
and its branches have tentatively scheduled several
seminars to be held as follows:

Head Office territory
April
April
April
April

24 ... .
25 .. .
26 ..
27

April 28 . . ... . .
May 2
May 3
May 4

Wichita Falls
Amarillo
Lubbock
San Angelo
Texarkana
Abilene

Sherman
Monroe, Louisiana
Dallas (two meetings)
Shreveport, Louisiana
Dallas {two meetings}
Tyler
Waco (two meetings)

El Paso territory
Week of May 1.

El Paso (one meeting)
Midland (one meeting)

Houston territory
April 24 . ..... .
April 25
April 26 ...... .
April 27 . .... .
May 1 ....... .
May 2 ... .... .
May 3 ....... .
May 4 . ....•..
May 5 . ...... .

Houston
Houston (two meetings)
Houston (two meetings)
Houston (two meetings)
Bryan
Palestine
Lufkin
Beaumont (two meetings]
Victoria

San Antonio territory
April 24 ...... .
April 25 ...... .
April 27 ...... .
May 2 ....... .
May 3 ....... .
May 4 ....... .
May 16 ...... .

San Antonio (two meetings)
San Antonio
Austin (two meetings)
Corpus Christi
Harlingen
McAllen
Del Rio

Prior to the seminars, letters will he sent to invite bankers to attend a meeting in their area.
For further information, contact J. A. Clymer,
(214) 651-6340, at the Head Office; Joel L. Koonce,
(915) 544-4730, Ext. 41 , at the EI Paso Branch;
Sammie C. Clay, (713) 659·4433, Ext. 42, at the
Houston Branch; or Thomas C. Cole, (512) 224-2141,
Ext. 13, at the San Antonio Branch.