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EI Paso· Houston' San Antonio
December 1979
1
Since You Asked:
"In Order to Stop Inflation, Why Don't You Just Stop the
Growth of Money and Credit Instead of Raising Interest
Rates? Wouldn't That Be Better for Everyone?"
2
Increasing Water Scarcity: Some Problems and Solutions
12
Board Broadens Regulation Q Interpretation
14
Agricultural Outlook Conference Highlights
16
"Fed Quotes"
19
Board to Revoke Regulation Z Amendment
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL
A fringe benefit of working at a Federal Reserve Bank
is the frequent invitation to speak before various
groups. And speeches inevitably generate questions.
This is a brief response to the question asked most
frequently following speeches during the past month.
Question: In order to stop inflation, why don't you just
stop the growth of money and credit instead of
raising interest rates? Wouldn't that be better
for everyone?
Answer: It is not possible to slow the growth of money
and credit without causing interest rates to rise,
for a while at least.
Interest rates, money, credit, inflation, and
economic activity are all linked together. So it is
not possible to influence one of them without
influencing the others also.
Interest rates, of course, are the price of credit
and are determined, therefore, by the supply of
credit and the demand for credit. The Federal
Reserve can directly influence supplies of credit,
but its influence on demand is indirect. There is
a direct link between credit and money. Bank
credit, for example, represents the asset side of
the banks' balance sheets, and money consists
largely of demand and time deposits, on the
liability side of their balance sheets. In any
conventional accounting system, assets must equal
liabilities.
People and businesses borrow money to spend
it- that is, the demand for credit. But higher
expenditures require larger cash balances. Thus,
When credit demand strengthens and credit grows
tnore rapidly, so does money- that is, both sides
of the banks' balance sheets.
The Federal Reserve can influence the supply
of credit by changing the supply of bank reserves
or by changing required reserve ratios. Slowing
the growth of bank reserves or raising reserve
requirements constrains the supply of lendable
funds at banks and limits the growth of both credit
December 1979/Voice
and money. With the supply of credit restricted,
interest rates rise. The higher price of credit slows
borrowing, spending, the growth of money, and
economic activity. So money, credit, interest rates,
spending, and economic activity are all inextricably
related.
The goal of reducing the growth of money and
credit, however, is to slow the rate of inflation;
and to the extent this can be done, interest rates
will decline. Interest rates track the inflation rather
closely. That is, the higher the rate of inflation
and the greater are anticipations that the inflation
will persist or strengthen, the higher will be
interest rates.
So, in order to get interest rates down, we must
reduce the rate of inflation. The Federal Reserve's
role is to slow the growth of money and credit.
While this results initially in an increase in
interest rates, it is expected eventually to reduce
both inflation and interest rates. With any given
level of demand for credit, the initial slowing of
the growth rates of credit and money will cause
interest rates to rise until the demand for credit
declines.
- Ernest T. Baughman
President, Federal Reserve Bank of Dallas
1
Increasing Water Scarcity:
Some Problems and Solutions
By Larry D. Hauschen
The reapp earance of gasoline lines and skyrocketing petrol eum prices this past summer once again
reminded Americans of the exhaustibility and increasing scarcity of petroleum. Yet, a problem that
is unknown to many and at the same time is critically important to others lies in the threat of a
shortage of a resource even more basic than oil.
That resource is water.
The problems and the issues surrounding water
have been receiving attention recently, especially
in the arid and semiarid western half of the nation,
where rapidly increasing demand threatens to surpass available supplies. A recent issue of The
Economist states, "Of the shortages that face
Americans, petrol may be the most alarming at
present but water may be the most serious in the
long run."1
The threat of a serious shortage of water is differe nt from oil shortages in at least two respects.
One, water is absolutely essential to life itself and
is required at some point, in one form or another,
to produce nearly everything. Unlike petroleum,
water has no substitutes, and, thus, development
of alternatives does not have potential. Second and
somewhat ironic is that water, unlike petroleum,
is not an exhaustible resource. Precipitation is the
ultimate source of all freshwater supplies, and in
an absolute sense, this country has as much water
1. "Water: It's Finite, Too," August 18, 1979, p. 34.
2
· an Y drasnow as it did a century ago. And b arrmg
tic changes in weather patterns, it will have as
much a century from now as it has today.
.
n
.
The threat arises,
of course, b ecause PopulahO
d h
and economic activity have grown rapidly, an t ~
demand for water for an increasing number 0
h'
uses now threatens to surpass the natura 11 Y renewable supply. An important implication lies in t 1~
contrast. In the case of oil, no realistic level 0
but
·
conservation can prevent eventual dep 1et1On,
conservation and efficient use of water can e.n~urf~
continued supplies of usable-quality water 1n e
initely. Indeed, since available supply can be. ~Ug;
men ted only to a point, conservation and effic1enf
use will prove essential to avoiding shortages a
water in the future.
t
f a 'er
The importance of water and the threat a w d
shortages are not unfamiliar to the Eleventh Fe ~
eral Reserve District. The rapid economic gro wt
. reglOn,
.
f the
that thls
as well as other parts' o
d Sun
d
Belt, has experienced in recent years has depen e 1
to a significant extent on the development an(t
maintenance of adequate water supplies to ~ee 1
na
agricultural, industrial, municipal, and recreat10
. preneeds. As can be seen from the accompanymg .
cipitation map, only the eastern edge can be class!;
fied as having a humid climate, and a major p~r
of the District is either arid or semiarid. ThUS, t 18
solution of current and potential problems ~urf
rounding water use is vital to continued growt a
Federal Reserve Bank 0
f Dallas
the region. Suggestions for alleviating water shortage fall, naturally enough, in two categories: ways
to increase the supply of water and methods of
reducing the demand for water.
Supply augmentation
A number of possibilities for augmenting the supply of water have been suggested. Three important
ones are interbasin transfers, precipitation enhancement, and desalinization.
Interbasin transfers. Interbasin transfers of
water--importa tion from water-surplus areas by
water-deficient areas- at first glance have thp.
greatest potential, at least in the short run, and
certainly have received the widest public attention.
The concept of interbasin transfers is not new.
Such transfers are common in the eastern ha1f of
the nation to meet municipal water needs of large
cities, and a significant number take place in the
West as well. Importation of water to the Texas
and New Mexico High Plains is currently receiving
a considerable amount of attention. An import
authority has been established in Texas and is
charged with determining potential sources of
Water and establishing guidelines for importation.
Unfortunately, the opportunity costs of exporting
Water may be very high, and residents of potential
eXporting regions tend to be extremely skeptical
about agreeing to give water to other regions.
December 1979/Voice
Precipitation enhancement. Research into methods of increasing the proportion of moisture in the
atmosphere that reaches the earth has been going
on at least 30 years. However, past research has
not been very successful in developing a solid
understanding of the processes of increasing precipitation. A paper presented at a recent symposium on western water resources noted that research is fairly advanced in the technique of
seeding winter clouds as they move upward over
mountains. The technique increases snowfall and,
in turn, runoff in the spring. 2 This process would
raise costs of maintaining highways and might
increase dangers arising from avalanches.
Progress has been much slower in developing
successful methods of seeding clouds in the summer. Even if improved techniques are developed ,
two significant problems will be encountered. One,
the environmental impact of increasing summer
rainfall could be severe; and second, there exists
a tremendous potential for conflict over whether
artificially induced rainfall in one area may deprive another area of precipitation that would have
fallen naturally.
2. Theodore M. Schad, "Western Wa ter Resources-Means
10 Augmenllhe Supply," paper presented at Western
Wal eI' Resources Symp osium sponsored by Federal
Reserve Bank of Kansas City, Denver, Colo.,
Seplemb er 27,1979.
3
Precipitation in the Eleventh
Federal Reserve District
o MEAN ANNUAL
PRECIPITATION
(INCHES)
SOURCE: U.S. Department of the Interior.
4
DaUas
Federal Reserve Ban k 0 f
In short, the potential for precipitation enhancetnent in the long run cannot be ascertained. But
this method of augmenting water supplies clearly
will not be an important solution in the near future.
Desalinization. Nearly 30 years of research on
desalinization technology have not brought success
in developing a technique that can compete, from
a cost standpoint, with other methods of developing water. Most existing plants rely on distillation,
a process that is extremely sensitive to changes
in energy prices.
Since the promise for augmenting water
supply sufficiently to solve potential shortages appea,rs limited at best, the search for
solutions to the water problems of the West
must tum to factors that affect the demand
for water.
A relatively new process, reverse osmosis, may
improve the economic feasibility of desalinization
projects. However, while desalinization may have
immediate potential for very high value economic
Uses, such as manufacturing, and may indeed have
potential in the long run for other uses, it also
is unlikely to solve any near-term water problems.
Since the promise for augmenting water supply
sufficiently to solve potential shortages appears
limited at best, the search for solutions to the
Water problems of the West must turn to factors
that affect the demand for water. Generally, these
solutions involve pricing, structural changes, and
conservation. Emphasis will be placed on solutions
that would reduce the demand for water in agricultural irrigation, which accounts for 90 percent of
the consumptive use of water in the West.
Pricing
Past policy has led to prIcmg water far more
cheaply than would be the case in a market enVironment where all alternative uses and costs are
reflected . The Reclamation Act of 1902, which proVided for the sale of public lands to construct irrigation projects for family farms, intended for the
capital costs of irrigation, as well as operatio)'
and maintenance costs, to be repaid by the ben eficiaries of the irrigation water. And until 1939,
irrigators did pay all project costs but without
hecember 1979/Voice
interest. That year, the Reclamation Project Act
allowed a ten-year development period before
repayment was to begin. The act also set the stage
for "basin account" transactions by allowing other
beneficiaries, such as power customers, to be required to pay part of the irrigation costs.
Today, hydroelectric customers pay as much as
80 percent of project costs, and the debt farmers
repay is spread over a 50-year period, with no repayment due in the 10-year development period
and the debt repaid over the remaining 40 years
without interest. At current interest rates, the interest subsidy alone represents a significant transfer payment from general taxpayers to irrigating
farmers.
While there is a significant difference of opinion
regarding the extent of the subsidy, a study thn!
examined some 5,000 water projects and progral1"S
has indicated that agricultural water supply projects repay only 19 percent of project costs. s The
subsidy from reclamation water provided to farms
in the Westlands Water District of Central California has been estimated to run as high as $1.4
million per 640-acre farm per year. The General
Accounting Office estimates the subsidy in the
Westlands district ranges from $20,000 to $100,000
per year for a 640-acre farm, compared with an
average of $500 per year for farms of the same
size in the rest of the nation. 4
Past policy has led to pricing water far
more cheaply than would be the case in a
market environment where all alternative
uses and costs are reflected.
Full-cost prIcmg. Whatever the extent of the
Federal subsidy, it has serious implications for the
problem of impending water shortages. It is an
accepted economic principle that a good priced
below cost will not be used efficiently. Artificially
low prices necessarily lead to waste, in that more
3. Ronald M. North and Walter P. Neely, "A Model for
Achieving Consistency for Cost Sharing in Water
Resource Programs," Water Resources Bulletin 13
(October 1977): 1004.
4. "Senate Water-Use Bill Pits Big Firms Against Small
Farms," Cangressional Quarterly Wo ekly Report,
September 29, 1979, pp. 2121, 2123.
5
Allocation of a Scarce Resource
The basic problem involving water is the
essence of economics: how best to allocate a
scarce resource among competing uses.
In a market economy, prices perform the
allocation process. The scarce resource is
allocated to the buyers that are willing
and able to pay at least the equilibrium
price-the price at which the last unit of supply will be offered. Given any supply, as the
demand increases, the price is forced higher.
At the higher price, only the users that, given
the economic activity for which the resource
is used, can still profit will obtain the
resource. Those that cannot or will not pay
the higher price are forced out of the market.
In this manner, the resource is always
allocated to its "highest and best" uses, as
measured by the resource's contribution to
the total value of output.
Water has not been allocated through the
market system for several reasons. First, for
a market to allocate a commodity efficiently,
there must exist the opportunity for property
rights to be established. Only if a party can
claim ownership can something be offered for
sale. Water, unlike land, often is not fixed or
clearly definable as to the area and location
for which property rights can be established.
Rather, it is a fugitive resource, and specific
property rights are extremely difficult to
establish in the absence of nonmarket institutions.
Second, for a market to allocate a resource
efficiently, there can be no significant externalities-that is, spillover costs or benefits. If
benefits accrue that are not accounted for by
the measurable demand, then, given any supply, the market price will be too low and
·
at
resources underallocated to that use Slllce,
the going price, society wants more of the
good. On the other hand, if spillover costs
prevail-that is , persons who neither buy nor
sell the output incur some of the costs-then
resources are being over allocated to that use.
In our economic system, externalities are
partly responsible for government construction of highway systems, national defense,
space research, and pollution controls. Water
projects constructed for any given use
typically benefit a large number of users that
would not be evident in the marketplace.
Thus, there are significant benefits from
water resource development that are collective in nature and, therefore, difficult. to incorporate into a market.
Third, the initial costs of projects at times
can be prohibitive to even the largest of
private enterprises. The benefits accruing to
anyone user would usually be insufficient to
warrant the project, and the construction
costs of many water projects tend to be prohibitive to all but governmental institutions.
Even if the private sector were capable of
financing the projects, the collective nature of
the benefits provided would, in many instances, make collecting the financial
resources difficult.
The last factor that often induces governmental involvement rather than strict
reliance on the marketplace is that while the
price system promotes economic efficiency, it
contains no provision for equity. Thus, in the
opinion of society, natural adjustments in the
marketplace in the continued allocation and
reallocation of resources may be unduly
burdensome on particular elements of the
economy. Political concerns regarding the
transfer of water from agriculture to other
uses reflect this phenomenon.
-
6
Federal Reserve Banle 0 f DaJlas
of the resource is used relative to the optimum
amount, given the true cost of the resource.
It follows that an obvious way to reduce the
demand for water and to cause water to be used
efficiently is to impose full costs on users and
allow high-value users to take water away from
low-value users. That is what would occur if the
resource were allocated by an efficient market.
There is no question that the implementation of
this approach would cause serious conflicts. Pricing water at its market value would have an immediate detrimental impact on longtime recipients
of subsidies. A wealth loss would be imposed on
farmers who have already paid for the subsidy in
the form of higher land prices. Considerable conflict could arise between efficiency and equity
considerations if direct beneficiaries are forced to
pay all costs, ignoring the indirect benefits generated. Additionally, the issue will be further complicated by the fact that the general taxpayer does
receive some return benefits from the subsidy in
the form of oheaper food prices. For example, 30
percent of the nation's fruits and vegetables are
produced on land supplied with federally developed water.
"Water bank." Water in the West is generally
allocated by a system of water law known as the
prior appropriation doctrine (see the accompanying Appendix). Under this doctrine, a party acquires a right to use water by making a claim to
divert a specified quantity of water from a particular source for a given purpose. The applicant has
priority over later claimants but may lose the appropriation through nonuse of the water. In other
words, conservation may lead to loss of rights.
Clearly, then, the appropriation doctrine not only
fails to encourage efficient use but encourages inefficient use. Some institutions have been developed to alleviate this problem, but one rather obvious solution has largely been ignored. That
solution is the creation of a water "brokerage" or
"bank."
Water administrators could significantly increase
the efficiency of water use by establishing an institution to which an appropriator could sell unneeded water. This institution, the water bank,
could, in turn, sell the water to other users . The
price could reflect supply and demand conditions
and could serve to reallocate water to high-value
users by allowing low-value appropriators to sell
water. on a nonrecurring basis. for more than the
water could earn if applied to their enterprises.
December 1979/ Voice
The water bank transaction would entail no conflict, in the same manner a true marketplace entails
no conflict. since all parties involved would be at
least as well off as they would have been without
the transactions . The incentive for conservation
would be considerable, as users would be rewarded
for consuming less water at any particular time
without sacrificing the right to their full appropriation at any time in the future. Water banking has
been successfully implemented in some instances
in California and is worthy of serious consideration elsewhere.
Structural changes
Even if steps are taken to increase the role of
market-type forces in increasing efficiency of water
use. the fact remains that water will continue to
be allocated for the most part by government
policy.
One of the major problems lies in the complexity
and diversity of water rights in the different states.
Courts continually make decisions, case by case,
that add new elements to a state's water law.
Under the present system, resolution of conflicts
is possible primarily through adjudication of specific cases. For major issues pending in Texas, it
is anticipated that the adjudication process will
not be completed for another decade.
To the extent that Federal involvement in
front-end financing of water projects continues, continuation of the substantial
subsidy provided in the past must be
reconsidered.
Several suggestions seem appropriate. To the
extent that the Federal Government involves itself
in water policy. it should coordinate the basic
elements of that policy. rather than allow institutions responsible to different congressional committees to act individually. Careful attention must
be paid to the fiscal responsibility for projects. For
example. some have suggested the manner in
which benefit-cost analysis has been used in the
past should be evaluated. To the extent that Federal involvement in front-end financing of water
projects continues, continuation of the substantial
subsidy provided in the past must be reconsidered.
7
States can attempt to improve the allocation of
water by making the laws governing water use in
the state uniform across the state and by trying
to eliminate the tremendous divergence of state
laws. States should pay increased attention to the
criteria for efficiency of use . The permit system
can be used to increase the efficiency of allocation
by restricting permits to a specific time span and
by including a condition that reevaluation of water
use take place periodically. Such a system could
enable the state to reallocate water to higher-value
uses as economic conditions change.
Conservation of water on the farm
Whatever the changes implemented in the water
allocation process in the West, it is certain that
the largest consumer of water, the irrigating farmer,
will be affected. Any reallocation of water will
almost certainly involve a transfer out of agriculture. Water has been priced below its market
cost in the past, and farmers have had inadequate
incentive to use it efficiently.
The ability of the irrigating farmer to adapt to
changes will depend largely on the ability to reduce water use and increase water use efficiency.
It is interesting to note that particular attention
has been, and continues to be, given to many of
these methods in the High Plains of West Texas,
where farmers irrigate by pumping from the continually declining Ogallala aquifer. Energy costs
to pump water in this area are five times the total
cost of water in some federally subsidized projects.
The following are a few methods of reducing water
use that are available to the irrigator.
Changing the irrigation method. For years the
primary method of irrigation was furrow, or gravity, flow, in which water is released from an impoundment and allowed to flow down the furrows
of the field. This irrigation method is extremely
wasteful of water and is gradually being replaced
by far more water-efficient sprinkler systems. Today, attention is being directed toward the adoption
of low-pressure sprinkler systems, which have significantly lower energy requirements and evaporation loss than the high-pressure systems. Trickle,
or drip, systems, which apply small amounts of
water near plant roots at frequent intervals, use
50 percent less water than other sprinkler systems.
Currently, these systems require substantial initial
investment and have been limited primarily to
high-value crops, such as fruits. However, increas8
ing water costs and energy prices, coupled with
additional research, may make the low-pressure
systems more attractive in the future.
"f
Pumping plant efficiency. Farmers can slgn.l1cantly reduce energy and water consumptlO?
by carefully monitoring the efficiency of t~elr
pumping plant, both the pump and power statlO~~
In the past, when both energy and water .w~l
abundant and relatively cheap, farmers typIC y
did not pay particular attention ~o the efficien~fr
of the plant. As prices for water 1'1se, farmers ~
increasingly find it profitable to keep the pumpmg
plant in efficient working condition.
h t
Irrigation scheduling. Research has shown t a
timing of irrigation is extremely important to c~op
yields. In the past, farmers generally have appl~ed
a larger than optimum quantity of water. ExceSSIve
irrigation not only costs the farmer more for water
and energy but also increases soil er?si~n and ~~:
trient loss in the plant root zone. IrrlgatlOn sch
uling entails the farmer utilizing detailed information on such factors as soil moisture capacity and
levels, infiltration and evaporation rates, and t~e
timing of individual-crop water requireme~ts. In
order to determine the optimal amount and tlmmg
of irrigation. Computer programs that have been
developed in Nebraska are able to analyze vast
amounts of relevant information and predict wa.ter
needs. There is a tremendous potential for savmg
water through adoption of this management technique. Some studies have estimated water ~se
. . tlOn
can be reduced 25 percent by using 11'1'1ga
scheduling.
. d
Tailwater recovery. Anytime water is apphe
at a faster rate than a soil's infiltration rate or the
amount of water applied exceeds a soil's capacityci
runoff results. A study of High Plains Underg roun
Water Conservation District No.1, which encompasses nearly half the irrigated acres in the T~x~S
High Plains, has estimated that 20 percent of lr~r
5
gation water leaves the farm as tailwater. Tal
water recovery systems that have been develope
can capture, store, and return the lost water cheaper than the original water can be pumped.
Tillage practices. Limited-till or no-till production techniques are usually recognized as energysaving devices. However, water loss from the
seedbed is reduced significantly in some soil types .
d
5. High Plains Underground Water Conservation District
No.1, Guide to Irrigation Tailwat er Recovery, Report
77-01 (Lubbock, Tex., 1977), p. 4.
Federal Reserve Bank of DaUas
By one report, preplant irrigation for grain sorghum following a wheat crop can be eliminated,
thereby saving about 20 percent of total irrigation
water. a
Basin tillage. Basin tillage amounts to nothing
more than shaping mounds of soil in the furrows
to form water-impounding basins. The basins reduce runoff from precipitation by holding the water
in place longer for infiltration into the soil. Basin
tillage can also be utilized to increase the infiltration of sprinkler irrigation. The practice can he
adopted with minimal investment, requiring only
a modification of planting or cultivating equipment, and has been shown to increase dryland
yields of cotton 25 percent in the Lubbock, Texas,
area.7
Water scarcity promises to be a major
source of conflict in upcoming decades j and
traditional methods of augmenting the
water supply, primarily the construction of
dams, are becoming increasingly unproductive and expensive.
Water conveyance. Significant water loss occurs
through infiltration and evaporation as water is
transported through irrigation ditches. The use of
underground pipeline to convey water can greatly
reduce this loss. Again pointing to the Texas High
Plains, some 10,500 miles of underground pipeline
in High Plains Underground Water Conservation
District No. 1 are estimated to save 700,000 acrefeet of water per season, or 21.8 million gallons
6. High Plains Underground Water Conservation District
No.1 and Texas Department of Water Resources, A
SummCll'Y of Techniques and Management Pl1actices for
PI'ofjtable Water Consel'va1ion on the Texas High Plains,
Report 79-01 (Lubbock: High Plains Underground Water
Conservation District No.1, 1979), p. I-1.
7. Ibid.
December 1979/Voice
of water each year per irrigated farm in that district. 8 One experiment showed the amount of
water pumped could be reduced about 16 percent
by using underground pipe.
These are only a few of the actions farmers can
take to reduce water consumption. The extent to
which any particular method reduces water use in
any particular area will depend on the characteristics of that area, such as soil types, topography,
and weather.
Technological developments reflect relative
prices of inputs. In the past, water has been relatively cheap, and, hence, motivation to save it was
not strong. That will change in the future, and as
the cost of water rises, farmers and others will develop ways to use the resource more efficiently.
Water scarcity promises to be a major source of
conflict in upcoming decades, especially in the
western half of the nation. Increased demand resulting from rapid economic growth and the need
for alternative energy sources threatens to surpass
the available supply; and traditional methods of
augmenting that supply, primarily the construction
of dams, are becoming increasingly unproductive
and expensive.
While alternative methods of developing water
supply have potential, any solution to water shortages for several years must involve demand reduction. Economic incentives to conserve this resource
have been inadequate, and, hence, significant potential for more efficient use of water exists. It is
particularly important that irrigating agriculture,
the largest user of water in the West, adopt more
efficient techniques of water use. Cooperation and
coordination of all involved in promoting efficient
management and use of water resources are essential to the prevention of serious water shortages
in the future.
8. Jack W. Richards, "High Plains Irrigators Conserve
Water," The Cross Section, High Plains Underground
Water Con serva tion District No.1, August 1978, p. 4.
9
Appendix
Laws Governing Water Use
Water resources are typically classified as
either surface water or groundwater. Precipitation is considered diffused surface
water until it reaches a lake, river, or other
watercourse. Once the water reaches a
defined watercourse, it becomes surface
water. Thus, surface water consists of all
natural streams, lakes, and ponds as well as
man-made reservoirs and impoundments.
Groundwater can take the form of an underground stream flowing along some defined
channel, an underground reservoir of water
formed through hundreds of years of percolation and contained within layers of sand
and gravel or between layers of rock, or' .
percolating waters not confined to any
channel whatsoever.
Surface water law
The laws and regulations governing the use of
surface water in the United States vary considerably from state to state. However, all
fall under two general doctrines of water
rights: riparian doctrine and prior appropriation doctrine.
Riparian doctrine. Under the riparian, or
common law, doctrine, the owner of land
bounded or crossed by a river, stream, spring,
or other natural body of water has certain
riparian rights regarding use of the water.
Riparian owners have the right to use the
water for a number of purposes deemed
"natural" uses, including domestic and
household needs, livestock watering, fishing
and recreation, even the generation of power.
In the strictest sense, riparian law gives the
landowner a right to have the water undiminished in quantity and quality and uninterrupted in the duration of flow. This right is
qualified only by the right of upstream
riparian owners to use the water for domestic
needs and livestock watering. The riparian
owner does not have a property right in the
water, in that except for domestic uses and
livestock watering, no more water can be
taken or diverted from the watercourse than
will be returned to it.
Most states adhering to the riparian doctrine have modified it. A common variation
10
is the "reasonable use" doctrine, which permits riparian owners to take water for
"extraordinary and artificial" uses so long
as those uses do not interfere with the
natural rights of riparian owners downstream.
Under this modification, municipalities, industry, and irrigating farmers, for instance, ca~
divert water as long as enough water is avaIlable to downstream riparian owners for
"natural" uses. Riparian rights are not
restricted in time; they cannot be lost
through misuse or nonuse.
Some states permit riparian owners to
obtain "prescriptive" rights, which grant
them the authority to use water for some
extraordinary use even if the rights of lower
riparian owners are infringed upon. For
example, a city might obtain a prescriptive
right for municipal water needs. It should be
emphasized, however, that the prescriptive
right applies only to downstream riparian
owners. For example, while a city may deprive a downstream riparian owner of some
water, a riparian owner upstream could deprive the city of any water required for
natural uses, such as livestock watering.
Prior appropriation doctrine. While the
water laws in the eastern states adhere to
the riparian concept, the usefulness of the
doctrine in allocating the limited supply of
water among a growing number of competing
uses was exhausted early in the settlement
of the arid West. The Mormons appropriated
surface waters 130 years ago without regard
for riparian rights when they began irrigating the Salt Lake valley in Utah. Gold miners
in California began practicing the doctrine,
and by 1900 nearly all the w estern states had
adopted the prior appropriation doctrine of
water law.
Under the prior appropriation doctrine, a
party acquires a right to use water by making
a claim to divert and use a specified quantity
of water from a particular source for a given
purpose. When the claim is made and water
is diverted, a priority is established, with
first claimants receiving priority over later
claimants. This is appropriately referred to
as a "first in time, first in right" doctrine.
The claimant must apply the water to a
beneficial use, and riparian and nonriparian
owners have an equal right to make a claim.
Federal Reserve Ban k
0
f Dallas
SELECTED ASPECTS OF WESTERN WATER LAW
Preference
of use
(Order)'
Water taw doctrines
Surface wa te r
St ate
Arizona . ...... .
California .. .. . .
Colorado . . .. . .
Idaho .. . ..... .
Kansas ..... . . .
Montana . .. . .. .
Nebraska . ... . .
Nevada .. . . .. . .
New Mexico .. . .
North Dakota .. .
Oklahoma ... . .
Oregon . ... . .. .
South Dakota .. .
Texas . ... ... . .
Utah . . . . ... . . .
Wash ington .. . .
Wyoming .. . .. .
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
Prior
appropriation
appropriation,
appropriation
appropriation
appropriation,
appropriation
appropriation,
appropriation
appropriation
appropriation
appropriation,
appropriation,
appropriation,
appropriation,
appropriation
appropriation ,
appropriation
Ground wa ter
riparian
riparian '
riparian '
riparian '
riparian '
riparian '
riparian '
riparian '
Reasonable use'
Correlative rights
Prior appropriation
Prior appropriation
Prior appropriation
Prior appropriation
Reasonable use'
Prior appropriation
Prior appropriation
Prior appropriation
Prior appropriation
Prior appropriation
Prior appropriation
Absolute ownership
Prior appropriation
Prior appropriation
Prior appropriation
1·2·3·4·5
1·21·2 over 5
1·2'
1·2·5·6·3
None
1·2 over 5
None
None
1·2,5·6
None
1·2·4 1-
1·5·2·4·3·7·6
1·2
None
1·5
1. 1 represents domes ti c and mun icipal; 2, agricultural (Irrigatio n); 3, power; 4, min ing; 5, manufacturing and Indu stria l;
6, rec reation; 7, navlg alion.
2. Lacks comprehensive groundwater laws.
3. In mining distr icts, 4 over 2 and 5.
4. All naw wa ter by prio r appropria tion .
SOURCE: George E. Radosevich (" Belter Use of Water Managemenl Tools," paper presented at Western Water
Resources Symposi um spon sored by Federal Reserve Bank of Kansas City, Denver, Co lo., Septem·
ber 28, 1979).
Thus, a nonriparian landowner with a prior
claim to water from a given source has the
right to use the quantity of water established
in the claim to the exclusion of a riparian
landowner with a later claim or no claim at
alL The right to use water is subject to the
needs of prior appropriators and, thus, is not
a guaranteed right per se, A claimant may
divert the specified amount of water only if
its intended use will not infringe upon the
supply of water to prior claimants, However,
once that condition is met, a claimant can
divert the specified quantity of water even if
doing so exhausts the water supply,
Unlike the riparian right, the appropriation
right can be lost through misuse or nonuse.
Also , unlike the riparian right, the appropriation right is a property right and, as such, has
value and can be exchanged,
The prior appropriation doctrine implicitly
requires a system of administration to effect
its rule. In the absence of any Federal water
laws, the individual states have established
a wide variety of rules, modifications, and
December 1979/Voice
guidelines that are administered by various
agencies and organizations, Such a collection
forms a state's water law, In the administration of the prior appropriation doctrine, most
western states have adopted a permit system,
in which a claimant must request permission
from a state agency to divert and use a certain
quantity of water under a certain set of
conditions. The agency has the authority to
grant the permit as requested, grant it in a
modified form (such as for a restricted time
period) , or reject it altogether,
The permit system allows some states to
allocate water among the competing uses not
only by priority in time of filing but also by
priority as to proposed uses of the water. The
priorities assigned to various uses differ
among states, however, and several states
assign no priorities at all.
Some states have modified the appropriation doctrine as it applies to agriculture by
imposing a "statutory duty" on water. This
criterion restricts the amount of water that
can be applied to an acre of farmland. The
11
purpose, of course, is to prevent waste
through excessive use.
Groundwater law
Most western states have adopted the prior
appropriation doctrine for groundwater as
well as surface water. However, three other
groundwater doctrines exist: absolute ownership, reasonable use, and correlative rights.
Under the doctrine of absolute ownership, a
landowner has a right to use any amount
desired of the water lying below his land.
Texas is the only western state that abides
by this doctrine.
Under the reasonable use doctrine, each
landowner must use the underlying water in
a reasonable manner, showing regard for the
rights of the other landowners using the
water. Under the correlative rights doctrine,
landowners are required to put the water to
a reasonable use so long as the supply is
adequate but to use only a quantity of water
proportionate to the percentage of an owner's
land overlying the particular underground
water source when supply becomes inadequate. California has adopted the correlative
rights doctrine.
Board Broadens
Regulation Q
Interpretation
The Board of Governors of the Federal Reserve
System has determined that credit unions should
be included within the category of institutions from
whioh member banks may borrow Federal funds.
As a result, the existing interpretation of Section
217.137 of Regulation Q was modified, effective
October 6.
With this new category expansion, a member
bank may now borrow Federal funds from another
member bank, a nonmember commercial bank, a
savings bank (mutual or stock), a building or savings and loan association or cooperative bank, the
Export-Import Bank of the United States, Minbanc
Capital Corporation, a foreign bank, or a credit
union. Member bank borrowings from credit unions
in the form of Federal funds are managed liabilities that may be subject to marginal reserve
requirements.
12
Federal Reserve Bank of Dallas
Amendments Proposed
for Regulation Z
Enforcement Guidelines
The five regulatory agencies represented on the
Federal Financial Institutions Examination Council
are proposing three amendments to the Truth in
Lending enforcement guidelines. The proposed
amendments to the guidelines for enforcement of
the Truth in Lending Act and its implementing
Regulation Z are:
1. Increase the tolerance for minor errors in
disclosure of the annual percentage rate to a borrower, from the present one-eighth of a percentage
point to one-quarter of a point.
2. Amend the prescribed period of retroactive
application of the guidelines- including reimbursement- from October 28, 1974, or two years prior
to the date of the examination to:
a. The date of the previous examination, if
violations are found in a current examination.
b. And where an agency determines that a
creditor has persisted in a violation cited in a previous examination, corrective action would be required for all affected loans consummated after
the date when the creditor was first notified of the
violation.
3. Add a section to the guidelines permitting
December 1979/Voice
the agencies to use discretion in applying enforcement policy where a violation presents a unique or
significant problem.
These amendments are being considered because
they would promote equitable enforcement of the
Truth in Lending Act and allow greater flexibility
in implementing effective corrective action for the
different types of institutions to which the act
applies.
In August the Board of Governors of the Federal
Reserve System authorized a temporary suspension
of the requirement of the guidelines for reimbursement of overcharged customers, pending resolution
of certain policy issues. In proposing the amendments to the guidelines, the Board said in October
that the recommendations were based on experiences of the agencies (the Federal Reserve Board,
Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Home Loan Bank
Board, and National Credit Union Administration)
in implementing the guidelines over the previous
nine months. The proposed amendments should
alleviate the major problems raised by the original
guidelines.
13
PRICES RECEIVED BY FARMERS
PRICES
DOLLARS PER BUSHEL
CENTS PER POUND
7
80
I
6
I
5
I
4
I
3
I
I
I
o
....
•••••• WHEAT
•
+.
:
I
.• •
+.
••
..........
.'
,...
........, ..-
••
: '",....
:
.,
2
1
.
e•• e.
:,
••~
•....
CORN
~=:;~
I
60
I
40
I
20
I
o
PRODUCTION
MILLION POUNDS
~
25
20
J •••••••••.• •••••
PORK
I BROILERS
.,._ .........
!-,-~-~"'--~"-r--'-r--'-~--r-,-~--r-
10
7
70
74
72
6
1
WHEAT
••••••••••
..•.•
76
78
80
Calendar years
With beef supplies low and retail prices
high, demand for pork and poultry has been
particularly strong. Hog and broiler pro·
ducers have apparently overexpanded and
will face a difficult year as the prices they
receive drop below rising production costs.
Beef production will not likely Increase un·
til 1981.
..-•••
~
•••••••••••••••
•••••••
••....••
......
•
fIIIII····
..
BILLION BUSHELS
8
2
, ....
I~
PRODUCTION
I
I
I
5
I
4
I
3
I
I
I
....
CHOICE STEERS, OMAHA
•
SOYBEANS
O-'--r-~-r~--~~-r~--~~
69/70 71/72 73/74 75/76 77178 79/80
Crop years
Domestic production of major crops will
be up sh;:rply in 1979·80, but foreign de·
mand is strong and is helping to maintain
favorable farm prices. For corn and soy·
beans, production is at record·high levels.
Cotton production, projected to be about
14.5 million bales, will likely be about 34
percent greater than in 1978·79.
PRICES RECEIVED BY FARMERS
CENTS PER POUND
80
I
I
40
I
20
I
o
60
PRODUCTION
MILLION BALES
15
I
I
5
I
10
o
I
I
I
I
I
I
I
I
I
I
I
69/70 71/72 73/74 75/76 77/78 79/80
Crop years
14
Federal Reserve Bank of Dallas
U.S. AGRICULTURAL TRADE
BILLION DOLLARS
40
..
.
I
Agricultural Outlook
£onfereoce Highlights
The U.S. Department of Agriculture's 56th
annual outlook conference was held recently in
Washington, D.C. Participants from government, private industry, universities, and
foreign countries gave their assessments of the
outlook for agriculture in 1980.
35
I
I
25
I
20
I
15
I
10
I
AGRICULTURAL EXPORTS
30
5
I
o
•... .'
••
•••••
••
••
••••••••••
••••
••••••••••
AGRICULTURAL IMPORTS
I
70
I
72
74
76
78
80
Fiscal years
Exports are a bright spot in the
agricultural outlook. Agricultural exports
are expected to reach a record $38 billion in
fiscal year 1980 and to increase more than
agricultural imports.
BALANCE SHEET
OF THE FARM SECTOR
BILLION DOLLARS
1,000
I
900
I
800
I
700
I
600
I
500
I
400
I
300
I
200
I
100
I
:.-.'
..
.
.
........ .'
.'
••
••
.~
••••
••
••••
••••• TOTAL REAL
••••
ESTATE ASSETS*
••
••••••••
- - _... ...
---
... '" '"
...
,....
..'
'
TOTAL LIABILITIES *
O-T-T~~-'~r-r-r-~~~
71
73
75
77
79
81
* As of January 1
Total assets of the farm sector are ex·
pected to reach $820 billion by the end of
1979. The largest component of total
assets, real estate, is expected to register a
16·percent increase for the year. However,
the value of real estate is projected to in·
crease only 5 percent in 1980, primarily
because of reduced net farm income.
December 1979/Voice
FARM INCOME
BILLION DOLLARS
150
I
125
I
100
I
75
I
50
I
25
I
....
....
.'
••••
••
••••••••
•••••••••
•••• PRODUCTION EXPENSES
•••••••••
-70
... ' ,-....-... .... _-,,_......
NET FARM INCOME
72
74
76
78
80
Calendar years
Net farm income for 1979 is expected to
be the second highest on record at close to
$31 billion. And although total cash
receipts may reach a record high in 1980,
fuel , fertilizer, and interest costs will cause
production expenditures to rise even more
rapidly. The result will probably be a decline
in 1980 net farm income of al;>out 20 percent.
15
•• Ped Quotes ~~
Brief Excerpts [['am Recent Federal Reserve Speeches, Statements, Publications, Etc.
"I would point out that productivity growth in this country is actually negative
in a recent period, and we have had higher oil prices. And, of course, we import 50
percent of our oil, so that the higher revenues going abroad do not go to American
citizens. Under those conditions, the standard of living of the average American has
declined. I don't think we can escape that when we're producing less with the same
amount of effort, according to statistics, and we're paying high prices abroad.
"Now, if we fail to recognize that and people try to catch up with the existing
standard of living or try to increase their standard of living, you get a process going
that only feeds the inflationary process, because wages move ahead of prices and then
push up costs further, and up go the price levels some more."
Paul A. Volcker, Chairman, Board of
Governors of the Federal Reserve System
(Before the Joint Economic Committee of
the U.S. Congress, October 17, 1979)
"There was a day when our problems seemed to fall into ... convenient analytic
compartments. Most economists of my generation have made a career of analyzing
so-called 'tradeoffs' between inflation and employment, between external and
domestic stability, between the long and short run. But that theorizing has been
rooted in certain assumptions- assumptions that are now suspect- about the
stability of expectations. When expectations of future inflation are so strong and
potentially volatile as they have become, the 'tradeoffs' disappear, or they appear in
a much different light.
"The lesson of the 1970's- here and abroad- simply does not bear out the
'either/ or' approach.
"-More inflation has been accompanied not by less, but by more unemployment
and lower growth. We have not 'traded off' one for the other.
"-A weak dollar externally aggravates inflation at home, and a weak dollar at
home undermines the dollar abroad. Fundamentally, what disturbes Peoria
disturbs Zurich.
"- After years of inflation, the long run has caught up with us. We can no longer
blithely assume we can 'buy' prosperity with a little more inflation, because
the inflation itself is the greater threat to economic stability."
Paul A. Volcker, Chairman, Board of
Governors of the Federal Reserve System
(In New Orleans, Louisiana, October 9, 1979)
16
Federal Reserve Bank of Dallss
"I have been in favor of greater restraint for more than a year and so I clearly
favored the Board's action on October 6. However, I am still skeptical about targeting
our policy actions on the monetary aggregates even through a surrogate. Over the past
nine years we have moved steadily toward greater use of monetary aggregates as a
guideline to policy. I submit that the problems of measurement, interpretation, forecasting, revisions, and tracking these guides on weekly, monthly, and quarterly bases
have cast a significant cloud on their usefulness. Personally I would pay attention
to such data only on a semi-annual time period and use our traditional measures of
reserves, bank credit, and interest rates to provide the guidance as to the need for
Federal Reserve action. I am particularly disturbed by the attention given to weekly
money supply data recognizing all of its frailties of composition and estimation."
Philip E. Coldwell, Member, Board of
Governors of the Federal Reserve System
(At Washington, D.C., October 25 , 1979)
"Monetary policy has never been easy. There was a time, nevertheless, when it
was relatively simple. The standard prescription was to smooth out the business
cycle. When the economy began to turn down, monetary policy was eased. The
criterion usually applied to a central bank's performance was how well it 'caught'
the top and how quickly it shifted from restraint to ease. Once the low point of the
cycle had been passed, a lessening of ease was in order. The general principle was
that of leaning against the wind.
"Even with this simple prescription, mistakes occurred. The most serious mistake,
incurred repeatedly, was to start restraint too late. Waiting to tighten until you saw
'the whites of their eyes' meant that some inflation was allowed to occur that was not
wrung out in the subsequent downturn. Excessive stimulative fiscal policies
contributed to building in a mounting rate of inflation. In successively leaning against
the winds of unemployment, inflation, and again unemployment, we kept switching
targets until we had ratchetted ourselves up to very high levels of both inflation and
unemployment.
"Today the problems of monetary policy are more complex. I can enumerate only
a few. We now must contemplate the possibility of rising unemployment and high
inflation occurring simultaneously. We may find ourselves moving into that situation
from a cyclical peak now. Fiscal policy has remained stimulative, with an effective
deficit- when in reality we are at full employment- of the order of $40 billion, even
though the Administration and Congress have made commendable efforts to bring
that deficit down from much higher earlier levels. More near-term but nevertheless
important considerations are that the monetary aggregates have been very strong
for some months and that interest rates have been at best barely positive in real terms.
These are some of the factors that must be taken into account in assessing the thrust
of monetary policy. I shall revert to this aspect presently.
"More generally, the traditional policy of leaning against whatever wind blows is
no longer appropriate to problems of our day. The wind now seems to be blowing
from all sides. Greater steadiness is needed. In particular, we need steadiness in
reducing the growth of the monetary aggregates in order to wind down the inflation."
Henry C. Wallich, Member, Board of
Governors of the Federal Reserve System
(In New York, New York, October 11, 1979)
December 1979/ Voice
17
District Banks Elect
Two New Fed Directors
Robert D. Rogers and John P. Gilliam are the new
members of the Board of Directors of the Federal
Reserve Bank of Dallas that member banks have
elected to succeed Stewart Orton and Gene D.
Adams, whose terms expire December 31.
Elected as a Class B director by banks in Group
1 , Robert D. Rogers is president and Chief Executive officer of Texas Industries, Inc., Dallas. In addition to being a director of the parent company,
he is Chairman of the Board of Texas Industries'
real estate subsidiary, Brookhollow Corporation,
and Chairman of the Board of Texas Industries'
affiliate, Chaparral Steel Company.
Born in Hartford, Connecticut, Rogers attended
public schools in New York and Massachusetts.
He attended St. Mark's School of Texas and then
graduated from St. Mark's of Southborough, Massachusetts. He received a B.A. degree from Yale
18
University and an M.B.A. degree from Harvard.
Elected as a Class A director by banks in Gr~up
3, John P. Gilliam is President and Chief Execu~lve
Officer of the First National Bank, Valley MIlls,
Texas. His banking career began in 1956 ,;,hen,
following graduation from public schools in Chfto~,
Texas, he was selected as recipient of a scholarshIP
from the Citizens National Bank of Waco to study
banking at Baylor University. His postgraduate
work was done at the Wharton School of Fin~nc~
at the University of Pennsylvania, and he receIve
an M.B.A. degree from Baylor.
f
Gilliam joined the Citizens National Bank 0
Waco in 1961 and became an officer in 196~. I~
1968, he became President of the First NatlOna
Bank in Valley Mills .
d
Both Mr. Rogers and Mr. Gilliam were electe
for three-year terms to begin January 1, 1980.
Federal Reserve Bank of Dallas
Board to Revoke
Regulation Z
Amendment
The Board of Governors of the Federal Reserve
System. after careful consideration. has decided to
revoke an amendment to Regulation Z. Truth in
Lending. The amendment to be revoked provided
for an exemption from the rescission notice requirement for certain advances under open-end
credit plans secured by customers' residences.
Under the amendment the right-of-rescission notice has been required only when the plan is initially opened. when the credit limit is increased
or the terms of the account are changed. when a
new security interest in a home is added to an
existing open-end credit plan. and once annually.
After the withdrawal of the amendment. the
rescission notice must be given every time there
is a credit advance under an open-end credit plan
that is secured by the customer's principal residence. The revocation will be effective March 31,
1980, and leeway has been provided for the orderly
modification or termination of the few open-end
credit plans now making use of the amendment.
New nonmember banks
The Colony Bank, The Colony, Texas, a newly organized insured nonmember bank located in the territory served by the Head Office of lh e
Federal Reserve Bank of Dallas , opened for business November 19. 1979.
Bank of Johnston County, Tishomingo, Oklahoma, a newly organized insured nonmember bank located in the territory served by the Head Office of
the Federal Reserve Bank of Dallas, opened for business December 3. 1979.
Community Bank and Trust, Rockdale, Texas. a newly organized insured
nonmember bank located in the territory served by the Head Office of
the Federal Reserve Bank of Dallas , opened for business Decemb er 3. 1979,
December 1979/Voice
19
@FedFRASER