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El Paso· Houston· San Antonio

January 1978

Policies for Better Business in the u.s.


Interest Authorized on U.S. Treasury Demand Deposits
at Commercial Banks


Farm Exports Conditioned by World Supplies and
U.S. Government Policy


Treasury Checks to Be "Truncated"


State and Local Tax Collections Rise Sharply in Eleventh District


A Bank Management Tool: Income, Expenses, and
Profits Analyzed

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

Dear Reader:
"Voice" is the successor to the monthly business review that has been
issued under various titles by the Federal Reserve Bank of Dallas since 1916.
The main purpose of the change in title is to highlight the broader Bank-wide
scope of the new publication.
In addition to reports of research being done at the Federal Reserve Bank,
"Voice" will include brief articles on current developments in agriculture,
banking, and business in the Southwest.
Also, recent regulatory and operational changes will be reported in "laymen's" language. While this should be of assistance to banks utilizing Federal Reserve services, the new publication is not intended, and should not be
used, to supplant the technical regulations and operating circulars.
And we will be commenting from time to time on current economic prob·
lems and issues. Our comments will be designed to provide background, perspective, and objective economic analysis, not to promote any particular
point of view.
Finally, announcements and analyses of operational developments of inter·
est to member bankers will also be included in this monthly publication.

Ernest T. Baughman

January 1978/Voice


Policies for Better
Business in the


Excerpts from an address by
Ernest T. Baughman, President
Federal Reserve Bank of Dallas
to the
Rotary Club of Fort Worth and Annual Meeting
of Tarrant County Better Business Bureau
Fort Worth, Texas
October 28, 1977

My remarks today are directed primarily to the
nature and the requirements of the free enterprise
environment and what I perceive to be possibly
its greatest challenge yet.
I am quite aware that man has been "blessed"
with predictors of gloom and doom almost from
the beginning- those who have "foreseen" the end
of private enterprise and the end of personal freedom. Yet, we humans exist in greater numbers and
enjoy greater means for creature comfort than ever
before. And within this turbulent sea of humanity
that covers the earth, there continue to be islands
supporting large measures of personal freedom and
security. The dooms ayers have been discredited, it
would appear.

Nevertheless, there is a chorus of dissatisfaction,
if not discontent, even upon this most-favored
island of private enterprise and personal freedom.
And this, notwithstanding the fact that in the past
20 years, this country has increased total production of goods and services 89 percent; has more
than doubled its production of manufactured products; has increased real personal income after
taxes by 100 percent-57 percent on a per capita
basis, after allowing for an increase of 28 percent
in population; has increased agricultural production by one '- third while reducing the number employed in agriculture by nearly one-half; has wit~
nessed a rise in the annual number of new business
incorporations from 140,000 to 326,000; has generated the savings and made the investments needed
to add 24 million jobs; and has recorded a fourfold
increase in annual gross private savings (from $68
billion to $276 billion).
This performance appears quite satisfactory; it
seems not to provide grist for complaint. Yet, complaint there has been and, at times, even evidence
of social unrest. For no matter how much progress
is made, everyone wants more income, better jobs,
and lower prices. And people have more cause for
complaint at some times than at others. I think this
is probably one of those times. Most people feel
that after three years of recovery, we should have
an unemployment rate lower than 7 percent and a
rate of inflation lower than the 6-percent average
that has prevailed for nearly three years.
Federal Reserve ,Bank of Dallas

Turning to the current economic situation, we
see a mixed picture. If we were to measure econo .
I mle performance in absolutes, we would draw
ow grades. Sizable amounts of unused or underu.s: d resources are present, and prices have been
rISIng rapidly. However, these indicators of economic performance have been improving. Resource
utilization rates are up substantially from two years
~gO, and the pace of inflation is down substantially.
hnemployment has declined from 8.5 percent of
t e labor force in 1975 to about 7 percent in recent
~onths . Capacity utilization in manufacturing has
~~sen .from 74 percent in 1975 to around 83 percent.
. flatlOn averaged 9.3 percent in 1975 (10 percent
III 1974) and probably will average 5.5 percent in
~.977. So, we have been moving in the right direcIOn and at a fairly respectable pace.
I What can be done to help bring this economy
c oser to full employment and stable prices?
"'!e have two major economic policy tools-fiscal
polIcy and monetary policy. The first consists, of
~ourse, of the taxing and spending policies of the
I ederal Government. Most analysts a!gree that
arge, persistent deficits in the national treasury tilt
a~ economy toward inflation and restrict the flow
~ savings to private investment. There is a role
or fiscal policy, properly managed, to help keep an
:~onomy on a stable course. But this role is not
~ of large and continuous deficits.
h nly once since 1960 has the Federal budget
; OWn a surplus. The cumulative deficit over the
bast 17 years is $296 billion. Including the off~dget agencies, it is over $330 billion. We have
s OWn a marked unwillingness to tax ourselves
;p~ce with our willingness to commit to enlarged
e eral spending. Also, we have shown a strong
pro I' .
c IVlty to enact programs that commit to larger
:xpenditures in future years. If fiscal stimulus were
o ~ork the way it was believed to work in "preinfl ahon"
years, our labor force and our industrial
h Itles should be fully employed. More and more,
fi owe~er, the linkage between persistent deficit
nanclllg and inflation has moved into clearer pers?ective, and more and more the economic deciSIons of busmessmen
and households are b emg
cond 'r
1 loned by the prospects of continued deficits
':;:d .c ontinued inflation; and this further intensifies
e lllflation problem.
Monetary policy is concerned with the supply of
rnoney and credit-that they be available in
arnOunts consistent with the full utilization of resources at stable prices or in amounts that will tend
January lS7U/Voice

to move the economy toward those goals. In retrospect, monetary policy, as with fiscal policy, appears clearly to have been overly supportive of increased spending at various times as it has been
used to promote full utilization of resources. In
a noninflationary environment, it is a powerful
tool of economic policy. In an inflationary environment, it loses much of its "punch," as does
fiscal policy.
In the recent past the basic objective of monetary policy has been to help provide an environment conducive to substantial expansion in economic activity while gradually wringing inflation
out of the economy. To this end, the Federal
Reserve System has followed a policy of providing
credit conditions and growth in money substantially in excess of those that would be consistent
with full utilization of resources at stable prices
but somewhat less than those consistent with full
utilization with accelerating inflation. During the
three years 1974, 1975, and 1976, the currency in
circulation and private demand deposits in commercial banks increased 5.1, 5.4, and 5.6 percent,
respectively. A broader measure of money, including in addition to currency in circulation and private demand deposits the time deposits of commercial banks, showed increases of 7.7, 8.3, and 10.9
percent, respectively. If the deposits of the socalled thrift institutions are included also, the
increases were 7.1, 11.1, and 12.6 percent, respectively. Total bank credit-total loans and investments of all commercial banks-increased 9.2,
4.4, and 8.6 percent, respectively, in these years.
Speaking very generally, these monetary and
credit growth rates are much higher than normally
would be consistent with noninflationary growth
of the economy, and they are about half the rates
that a number of critics have urged upon the
Federal Reserve System. The results thus far, in
terms of recovery and diminishing pace of inflation, have exceeded even the most optimistic
expectations of supporters and critics alike. Much
progress has been made in moving the economy toward full employment and price stability since the
bottom the recession 21/2 years ago. But the course
is diffi'cult and there still is a long way to go.
Furthermore, the course becomes more difficult
as the goals are approached more closely.
Why are not the prospects more favorable? There
are many reasons, many of them well known. But
there is one that, if well known, is not given the
attention it deserves, and it is this matter I wish

to emphasize in the remainder of my remarks
In economists' terminology, I refer to structural elements of the economy that are incompatible with the achievement on a sustained basis of
full employment and stable prices in a competitive, free enterprise environment. These structural elements have been built into the economy
through the years as the Congress and privateinterest groups have attempted to achieve certain
goals or solve "seen" problems, all too often by
laying restrictions upon competition. An important by-product of these policies and actions is
a higher price-oriented, lower production-oriented,
more unused-resources-oriented, less flexible economy-an economy that has reduced capacity to
respond to and digest changes imposed on it from
outside (such as the OPEC petroleum price increase) or that emerge from within (such as
changes in Government policy or in business inventory or investment policy). The observed resuIts include upward drifts of prices and idle resources while the economy adjusts slowly to
imbalances instead of rapidly. And as the economy
adjusts slowly, the demand for more Government
action intensifies and the proclivity for Government to respond rises.
If there were a sound basis for believing that a
more closely regulated, more closely directed economy would perform better than a relatively free
economy directed largely by the forces of competition, there would be no call for concern. But I
know of no such evidence. I am persuaded, therefore, that it is of utmost importance for us to
recognize that many of the anticompetitive rigidities we have built into the economy should be reexamined and reevaluated and, where found to be
significantly in restraint of competition and price
flexibility, should be wiped from the statute books
and cleared from the regulatory forest.
This is not necessarily a call for less Government participation in or concern with economic
affairs, although that almost certainly would be
the outcome. It is a call for the forthright recognition that individuals and firms in competition
with each other in that very impersonal and elusive environment we call the "marketplace" will
do a better job of marshaling the available resources to enlarge the economic pie than any alternative form of economic organization. The acceptance of and adherence to this principle would not
preclude governmental actions to influence the

aUoc,a tion of the products of economic endeayor,
within some significant range, largely transferring income by utilizing the power to tax and
spend. And where regulation was found to be necessary, it would be shaped so as to minimize interference with competition and the free movement
of prices.
A few examples may serve to clarify the concept. What economic sense is there in substan-,
tially raising the legal minimum wage when the
existing level prices out of the market large numbers of the young, inexperienced, and unskilled?
The insulation of the employed against the competition from the unemployed that is provided
in this type of law causes the labor market to
work imperfectly and contributes significantly to
the upward wage-price tilt, the idle resources
tilt, and the slow adjustment characteristic Qf the
economy. The minimum wage laws may have a
small effect on total wages paid, but they probably have a significant effect on the distribution
of wages 'among members of the labor force. Income distribution can be handled more effectively
and more equitably by means other than the promotion of monopolistic pricing in the labor market.
The regulation of petroleum and natural gas
prices provides another example. The situation
calls for restriction of consumption, the direction
of supplies to the highest-order uses, and stimulation of production. These things Government is
badly equipped to do, except in a framework where
legislation and regulation are designed to promote,
not restrain, competition and price fl'exibility.
Further examples stand forth in bold relief in
the important agricultural and transportation industries. And they are not lacking in the financial sector. The list is long.
The task of reorienting public policies so as
to minimize the restraint of competition and to
promote price flexibility would be a demanding
one. But, nevertheless, it is a task we should
undertake. Absent a forthright goal to reinvigorate competition, we probably will be unable to
achieve full employment and price stability except
possibly intermittently for brief periods'. And we
probably will continue to attempt to achieve those
goals through an expanding regulation of eco110mic
activities and increased direct participation of
'I helieve that full employment and price stability are achievable and that there is available to
us a path that, if pursued, holds strong promise
Federal Reserve Bank of Dallas

o~ success. Monetary and fiscal policies, used
WIth discretion and J'udgment can make a strong
co n.trl'b ution, but they can only
' help to create an
en.vlronment conducive to full employment and
rlce stability. The market processes must perform
. the goals are to be achieved. We
e e ct'Ive1y If

should address ourselves to those structural elements that restrain competition and price flexibility and, hence, impede the effective performance
of markets. A successful attack upon structural
rigidities would do much to reestablish the punch
of monetary and fiscal policies.

Interest Authorized on u.s. Treasury
Demand Deposits at Commercial Banks
~egislation authorizing the U.S. Treasury to collect
0 't
b k
n 1 s tax and loan accounts at commerCI'al
1:~7 s was. signed by the President October 28,
, and IS tentatively scheduled to be implelll?nted on April 1, 1978. The legislation also auth~r~es savings and loan associations, credit unions,
and llllutual savings banks to hold Treasury tax
~ oan accounts, under certain circumstances.
t or lllany years, the Treasury's demand deposits
~ C~llllllercial banks have been available for the
f a~ s to Use interest-free, and the use of these
un .s has been considered compensation for the
;ervlCes the banks provide to the Treasury. This
t~actice has been criticized, however, and under
~ new legislation the Treasury will collect inter~s on funds remaining with banks more than one
~y and will directly compensate banks for serVIces rendered.
Two options are available to banks that wish to
:~rv~ as Tr?asury depositaries. Banks choosing
e ote OptlOn will credit deposits from the TreaSury
t .
• 0 ItS tax and loan account at the time of
Th e next day, funds equal to the amount
~ the previous day's Treasury deposits will be
;~nsferred. to an interest-bearing note account.
e note wIll be callable on demand without prior
Januar)' 1978/Voice

notice. In effect, the Treasury will be lending call
money to the bank.
Under the Remittance Option, banks will not
purchase funds from the Treasury but only act as
a channel in the tax collection system. Banks receiving deposits from the Treasury will credit the
funds to its tax and loan account. At the end of
each business day, an advice of credit in the
amount of the previous day's Treasury deposits is
to be sent to a Federal Reserve Bank, where, upon
receipt of the advice of credit, the funds will be
withdrawn immediately from the commercial
bank's reserve account. The advice of credit must
arrive at the Reserve Bank before the Treasuryestablished cutoff hour of noon in order to avoid
The interest rate to be used for both the Note
Option interest and the Remittance Option penalty
will be the repurchase agreement rate on U.S. Government securities. This rate will be published
monthly in the Federal Reserve Bulletin and the
Treasury Bulletin. Historically, this rate has been
lower than the Federal funds rate.
The repurchase agreement rate was chosen because it most closely approximates the rate that
the Treasury could earn if it maintained cash

balances at the Federal Reserve Bank or invested
in its own securities.
The Treasury will pay banks and other depositaries 50 cents for each Federal tax deposit card
processed. In addition, the Treasury will pay 70
cents for each savings bond sold over the counter
and 30 cents for each savings bond redeemed. The
fee for issuing bonds through payroll deduction
plans will be 30 cents for noncomputerized payroll
issues by financial institutions, 10 cents for computerized payroll issues by financial institutions,
and 10 cents for all issues by nonfinancial institutions. Also, 5 cents will be paid for reissues to distribute trusteed bonds to participants in thrift, sav-

ings, vacation, and similar plans.
Previously authorized Treasury depositaries
wishing to maintain their status should file with a
Federal Reserve Bank an "Election of Option"
form. Other eligible institutions wishing to be authorized as depositaries should file an application and
supporting documents with the Federal Reserve
The Federal Reserve Bank of Dallas will begin
holding seminars with commercial bankers
throughout the District in February 1978 to explain
the new Treasury Tax and Loan Investment Program. For further information, contact J. A. Clymer,
(214) 651-6340.

Questions on
NOW Accounts?
In response to requests from banking groups,
Federal Reserve staff members have developed a
25-minute slide presentation on negotiable order
of withdrawal accounts and are available to present it at banker meetings. The presentation provides historical data on the experience of banks
offering NOW accounts in six New England states.
Also included is an analysis of the problems encountered and the measures taken by the New
England banks to resolve them. If interested, contact the Bank and Public Information Department,
(214) 651-6370.

New nonmember bank
American State Bank, Broken Bow, 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 15, 1977.


Federal Reserve Bank of Dallas

Farm Exports Conditioned by WOFld
Supplies and U.S. GoveFnment Policy
By Carl C. Anderson,



are a substantial part of the market for
.S. agricultural products, and changes in exports
h aVe
an Important effect on U.S. farm income. In
76, for example, the products from almost 30 per~~nt of all harvested acreage were exported, and
f ese sales overseas provided about 25 percent of
armers' cash receipts. Furthermore, the export
~ector of the market for U.S. agriculture has been
. has grown
fIncreasi ng over t h e years as productIOn
aster than domestic consumption.
Despite import restrictions imposed by many
COuntries, foreign markets still offer the greatest
~~p~nsion Opportunity for U.S. agriculture. Indus. fla Ized nations will continue to provide the maor
foreign markets for U.S. agricultural exports,
.ut a fast-growing potential for expanding exports
lIes . h
WIt the less developed countries. The de~and for food in these less developed countries
d as .been rising faster than their domestic productlOn, and they have become increasingly depenent on foreign supplies.
t The volume of farm exports will be influenced
~trongly by government policies, both in the United
U.~tes and i~ other countries. Recent declines in
f . farm pnces have generated strong demands
or Government supplement of dwindling farm in~ome. The outcome has been a new Government
t a~n: program that, instead of focusing on mainaInlUg or increaSing production as the previous
market-oriented policy did, has raised price-suppo~t.levels and is moving to curtail output by reqUlrlng some cropland acreage to be set aside from
production for the first time since 1973.


January 1978/Voice

When price supports have exceeded market
levels in the past, Government-owned stocks have
been accumulated, farm exports have been curtailed, and foreign agricultural production has been
stimulated, while U.S. farmers have intensified
efforts to boost acre yields. A similar pattern of
developments can reasonably be expected again
unless production is constrained by unusually adverse weather, pests, or disease in important agricultural areas in the world. Unused or inefficiently
used agricultural resources in the United States,
at a time when this country's foreign trade is in
deep deficit, would further complicate the farm
policy picture. In 1976, net agricultural exports
were $12.1 billion, a magnitude greater than half
of the total U.S. nonagricultural trade deficit of
$21.3 billion.

Despite import restrictions imposed by
many countries, foreign markets still offer
the greatest expansion opportunity for
U.S. agriculture.

The 1977 farm program blends old and new
The 1977 farm program features a system of commodity loans and target prices that provides price
and income protection to farmers. It also provides
for acreage set-asides to curtail total harvested

A growing share of U.S. cropland acreage
devoted to exports

400 --~~------------------------___

300 -

200 -

100 -

'30 '35

'40 '45

SOURCE: U.s. Depar,t!1lent' of


'55 160 '6,5 '70 '75


acreage and, thereby, the accumulation of pricedepressing stocks'. Major objectives of the program
are higher price.s, greater prke, stability, higher
farm incomes, and a relatively large inventory of
grains that can be released into markets in the
event production is severely curtailed by adverse
circumstances at s(])me future time.
Government loans and target prices impact on
the markets in different , ways. When loan levels
exceed market prices, the carryover stocks tend to
move largely into the Government's hands. The
nonrecourse loan program of the Commodity
Credit Corporation (CCC) enables farmers, for a
specified period, to obtai'n cash shortly after harvest arid to hold their crops for later sale. However,
when loans aTe rabove market'prices, farmers may,
and typically do, forfeit the crops in full satisfaction of the loans. In these circumstances, the Government accumulates inventories of farm commodities. As inventories grow, the resulting inventory management problems call forth measures to
restrict production.
The target price program that was introduced in
the 1973 farm act impacts on markets much less
than programs thalt undertake to establish specific
"floor" prices. This program provides Government

payments to farmers to the extent that market
prices are below the authorized target prices. It
avoids the accumulation of large stocks in Government hands and provides a means for American
farmers to keep their products competitively priced
in world markets, while extending income protection to U.S. farmers. The impact on the U.S. Treasury is probably greater than that of the commodity
loan policy, and the effect on consumer prices
probably less. '
The 1977 program includes both the more market-oriented target price policy, whi9h was an important feature of the 1973 act, and the commodity
loan policy that dominated farm legislation for 40
years before the act. Refl~cting the effects of inflation on farm production costs and the decline of
commodity prices from exceptionally high levels
in 1973-74, both loan levels and target prices have
been raised considerably above those experienced
in 'priol) yeaIlS.
, There is danger that the program's commodity
loap. aspects -may .overshadow its target price features. The 1977 loan of $2.25 per bushel for wheat,
fOIl example, led growers to, place 803 million
bushels-about a year's domestic consumptionunder cce loans as of September 30, 1977. This
has caused the Secretary of Agriculture to require a
20-percent set-q,side of wheat acreage as a condition to qualify foJ,' price protection fOD the 1977-78
crpp" Similarly, the 1977: loan for corn, at $2.00 per
bushel, may lead· to 'a large accumulation of stocks
under , the l'oq,n program that will be difficult to onto the market unless the flow of new supplies is curtailed by production controls.
A stated (:lbjective of the' 1977 program is to
pla,ce primary reliance on market-oriented target
prices for the support of farm income rather than
OR nonrecourse loans. Presumably, loans are to
be used primarily to assure the desired carryover
stocks and to enable farmers to borrow on commodity inventories without risk of price declines,
While loans are at least 65 cents a bushel below
target prices for wheat, the difference is only 10
cents a bushel for corn. Hence, corn farmers may
be' strongly inclined to use the loan program.
The 1977 farm program abandons the historic
aCL'eage bases that tended to cause producers to
plant specified acreages of various crops regardless
of supply-demand levels and market prices for alternative crops. This feature should facilitate more
flexible and efficient use of cropland than the rigid
acreage allotments c!Jf predecessor programs. The

Federal Reserve Bank of Dallas

act authorizes the Secretary of Agriculture to
reduce loan rate levels for certain crops when the
commodity loan program is restricting exports.
However, the adjustment is limited to a maximum
of 10 percent per year and a lower limit of $2.00
per bushel for wheat and $1.75 per bushel for corn.
!hus, the Secretary may be precluded from lowerIng loans sufficiently to promote foreign sales.
By contrast, loans can be lowered automatically
for cotton. The nonrecourse loan level must be
~et at 85 percent of the average spot market price
In the preceding four marketing years or at 90 per?ent of the average price in Northern Europe (adJusted for transportation costs) for the first two
Weeks of October each year, whichever is lower.
And When supplies are short enough to raise the
Spot price by 30 percent or more above the average
market price during the previous 36 months, the
uota on cotton imports into the United States can
e temporarily raised.
. It is clear that the current farm program will
lllcrease net farm income over what it otherwise
Would have been in the short run, albeit at substantial expense to the U.S. Treasury. But longerterm effects are far from clear. The outcome will
depend heavily on the vagaries of weather and on
trade Policies at home and abroad. One thing
se?ms certain. If American farm products are
prIced out of the world's markets, farmers in
~ther agricultural countries, both exporting and
Importing, will benefit at the expense of the United


Trade policies also a threat to exports
~nter~ational trade in agricultural products is
eavlly laced with restrictions. Countries generally deSire to expand exports so that farm resources can be employed efficiently, but they also
choose to protect their agriculture in varying deg~ees from foreign competition. In part, this reflects
~ e gr~at variety of agricultural commodities prouced III most countries and the divergent interests
of their farmers . In their efforts to protect domestic
P~oducers from changes in world prices, many of
t e World's important trading nations use tariffs,
quantitative import restrictions variable levies,
n marketingd
agreements. '
. One of the most striking developments affecting
tternational trade in farm products has been the
ormulation of a Common Agricultural Policy by a
number of European countries. In 1962, agreement
January 1978/Voice

United States gains an increasing share
of grain exports
200 ----------------------~~~______

160 -

120 -

...::: ..........r~.~.::< .•
..... .. ).... ' , /

80 -

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


/ .......... _,

40 - __ , , - - /

' 61






' 63







' 67
' 69
' 73


' 75


' 77

SOURCE: U.S. Department of Agriculture .

among six countries-Belgium, Luxembourg, the
Netherlands, France, West Germany, and Italycreated a uniform agricultural trade policy that
allowed free movement of farm products among
the member countries and presented a common
restriction on imports from outside the area. The
United Kingdom, Denmark, and Ireland joined the
original six countries in 1973, Negotiations are
underway for Greece to become a member, and
Spain and Portugal have recently applied for membership,
The policy has primarily had the effect of encouraging production of farm commodities by the
member countries and discouraging exporters' attempts to market products in these countries. Since
formation of the Common Agricultural Policy, U.S.
commercial farm sales to the member countries
have grown at a significantly slower rate than sales
to other countries. Though U.S. commercial agricultural exports to the six member countries in 1972
were over 100 percent larger than their average

value in 1959-61, exports to other countries increased much more-by about 175 percent. And
since 1973, when the group was enlarged to nine
countries, farm exports to these countries have
continued to increase more slowly than exports to
the rest of the world. In addition, the U.S. share of
farm exports to the European Common Market
countries has declined somewhat.
Not all farm commodities are equally restricted
from entering the Common Market countries.
Grains, poultry, lard, rice, and dairy products are
subject to variable levies, while commodities that
do not compete strongly with those within the
Common Market countries-such as cotton, vegetables, oilseeds and products, and tobacco-are not
subject to such levies.
The levies imposed by the European Common
Market countries can automatically offset the
normal potential for increased exports of lowerpriced agricultural products to the area. These
levies are designed to offset the difference between
world prices of commodities and the desired price
in the Common Market. For example, in early
September the asking price for U.S. No. 2 Hard
Winter wheat was $3 .08 per bushel at Rotterdam,
$1.02 less than a year earlier. But over that span of
time, the Common Market import levy had risen
$1.67 to a total of $3.49 per bushel, more than offsetting the decline in the price of foreign supplies.
American export opportunities growing
Despite such obstacles to international trade, total
U.S . farm exports are projected to rise up to an
average of 3 percent a year over the next decade.
Not only has world trade in farm products risen in
recent years, but so also has the share of the United
States-from 11 percent in 1955 to 17 percent in
The pattern of world grain trade has changed
considerably over time. By the late 1930's, much of
the world except for Western Europe was selfsufficient in grain production, with most major
regions exporting some grain to Western European
markets. Since then, Asia, Africa, Eastern Europe,
and the Soviet Union have become importers of
grain, while North America and Australia have
become the major exporters.
The percentage of harvested acreage used for
producing farm exports is a common measure of
the importance of exports to agriculture. In 1910
the foreign market accounted for about 12 percent


of the cropland harvested in the United States. By
the end of World War II, the export share had risen
to 15 percent. Then, with fewer harvested acres
and sharply increased exports, the proportion of
cropland used to produce farm exports averaged
about 20 percent during the 1960's. The proportion
jumped to 31 percent in 1972 and, since then, has
held near 30 percent.
Without the recent expansion in farm exports,
U.S. farm production would have been below recent levels and, presumably, farm income would
have been much lower. For example, annual wheat
and coarse grain production is expected to be about
23 million metric tons higher in 1977 than in 1971;
yet, domestic consumption is estimated to be down
about 13 million tons. However, exports of these
types of grain increased around 39 million tons in
the same period.
In recent years, purchases by developed countries outside the Communist bloc have accounted
for nearly three-fifths of all U.S. agricultural exports, while those by less developed countries
have accounted for about three-tenths. The share
of exports to Russia and other Communist countries has been around a tenth. Purchases of exports
by long-standing U.S. customers- such as Western
Europe, Asia, Canada, and Latin America-have
held fairly steady. But purchases by the Soviet
Union, Eastern Europe, and the People's Republic
of China have been more sporadic. To help smooth
these exports, the United States signed a five-year
agreement with the Soviet Union in 1975 committing the Soviets to buying between 6 and 8 million metric tons of wheat and feed grains each
year. With the abundant U.S. grain supply and a
shortfall in the Soviet harvest, the upper limit has
been raised to 15 million tons for the 1977-78
marketing year.
Countries where meat production and consumption are growing- such as Western Europe, Japan,
and Russia- are leading markets for U.S. feed
grains, soybeans, and protein meal for livestock
feed. While wheat, cotton, and tobacco have long
been important export commodities, feed grains,
soybeans, and oilseeds now rank higher. Feed
grains exported in 1976 totaled nearly $6.0 billion,
up from about $3.5 billion as late as 1973.
It is clear that industrialized nations will continue to provide major markets for U.S. exports of
agricultural commodities. However, the biggest
potential for future expansion may lie with the
Federal Reserve Bank of DallaS

less developed countries. Food demand in the less
developed countries is expected to increase at a
Yearly rate of 3.5 percent until the mideighties,
while food production in these countries is expected to rise only 2.6 percent a year. By contrast,
food demand in the developed countries (including
the United States) is expected to increase 1.6 percent a year and production 2.8 percent.
Farm exports may increase even faster beyond
the 1980's. The share of the world's population in
lOW-income countries is expected to rise from 71.5
percent in 1975 to 78.3 percent in the year 2000.
And because the income elasticity of demand for
fOod is still relatively high in the low-income
COUntries, rising incomes will increase total demand faster than domestic production grows, resUlting in an increase in the demand for food
These trends would be a continuation of those
eVident Over the last decade or so. From 1963
through 1975, the developed countries increased
the volume of their agricultural imports by 34 percent, and developing countries by 71 percent.

Opportunities for exporting to developed
countries being created by relative increase
in U.S. agricultural production per capita

100 -

-, ' .......... " " "



Foreign food aid exports expand markets

After World War II, U.S. Government farm pro?rams supported commodity prices above levels
In the world market. This restricted commercial
farm exports and promoted the accumulation of
large inventories in Government hands. The Agricultural Trade Development and Assistance Act
of 1954 (PL-480) was passed to provide an outlet
for U.S. farm production exceeding normal commerCial market demands and to assist friendly
COUntries around the world that needed food and
development assistance.
PL-480 authorizes the Government to make softcurrency sales or gifts of surplus agricultural commod't'
. I les to less developed countries. The leadmg
Item shipped under the Government-financed proam
has been wheat and wheat flour. Feed grains,
rIce, vegetable oils, dairy products, tobacco, and
cotton are other important commodities. In recent
Years the major recipients of Government shipments have been Egypt, Israel, Bangladesh, Pakistan, and India.




























SOURCE: U.S. Deparlment 01 Agricullure.

Shipments under PL-480 reached a maximum of
32 percent of the dollar volume of all U.S. agricult~ral eXports in fiscal 1957 and declined to a low
o 4 percent in 1974. With the disappearance of
Surplus grain stocks and a steep rise in grain prices
January 1978/Voice


Food demand in the less developed countries is expected to increase at a yearly
rate of 3.5 percent until the mideighties,
while food production in these countries
is expected to rise only 2.6 percent a

in late 1972, shipments under the PL-480 program
fell sharply, averaging about 6 percent of the value
of farm exports in 1972-76.
The extent to which foreign food aid can successfully serve as an overflow market hinges on
the amount of Government money the American
public is willing to spend and the political acceptance of recipient countries and other exporting
countries. Foreign food aid has allowed surplus
production to be exported, but the bill for U.S. tax-

payers has been significant. Agricultural exports
shipped under specified Government programs
from mid-1954 through 1976 totaled $28.7 billion.
Currently, if Government program exports were
increased to levels similar to the average share of
annual shipments during the 1960's, the value of
commodities moved under these noncommercial
programs would be around $5.0 billion annuallycompared with the $1.4 billion of commodities
actually exported under Government programs in
However, an increase in foreign food aid would
not necessarily generate additional foreign exchange earnings, as would increases in commercial
agricultural exports. So even though greater aid
would boost total agricultural exports, it might not
help to improve the country's overall balance-ofpayments position. And to the extent that foreign
food aid displaces commercial exports instead of
simply supplementing them, the cost to the country
would include a loss of foreign exchange earnings
as well as the direct cost to the taxpayer.

Seasonal Borrowing
from the Fed
Since 1973 the Federal Reserve banks have provided "streamlined" procedures at the discount
window for member banks that have sizable seasonal swings in loans, deposits, or both. Letters
will soon be sent to member banks that appear to
qualify for the seasonal loan program in 1978. The
letters will note the amount and duration of eligibility for the seasonal borrowing program, based
on an analysis of data available at the Reserve
Bank for each member bank. Those preliminary
estimates are tentative and are subject to revision
on the basis of any additional information supplied
by member banks desiring to use the program.
Member banks that expect to need seasonal accommodations in 1978 should make arrangements with
the loan officer at their Federal Reserve Bank or


Federal Reserve Bank of DallaS

Treasury Checks to
Be "Truncated"

'\ new program for the processing of Treasury
~ ecks has been pilot-tested at the Federal Reserve
bank of Dallas since June 1976 and is scheduled to
e put into effect nationwide by June 1, 1978.
th Th: program marks one further step to contain
ch r~s1Og tide of paper. In this instance, Treasury
b ec s are "truncated" in that they will no longer
;: ;.eturned to the Treasury. Instead, check inform ~ Ion that is recorded on magnetic tape and
T lcrofilm at the Reserve banks is sent to the
n re~sury for processing, storage, and retrieval as
Tee ed. Truncation will accelerate the clearing of
it reasury checks, speed up adjustments for lost
ems, and save the Treasury money.
Long turnaround time has been' a- serious prob1em W'th
arr' 1 Treasury checks. Most Treasury checks
th IVe at Reserve banks, in the first few days of
pe~i:onth:-about 60 percent within a three-day'
ro . WIth some 700 million Treasury checks
P cessed n t'
. comme . 1
a lOnWl'd e every year and wIth
Tr rCla bank checks given priority, many of the
sh'easury ch ec k s are delayed .
m processmg
Ipment to the Treasury
are nth: meantime, inquiries about lost checks
erab~ecelVed by the Treasury, and there is considdelay before the Treasury can respond to
th eSee.10q
to . h Ulrles. The average response time is six
thee~ t weeks. Since approximately 50 percent of
recip.reasur y checks are social security payments,
whil:e~ts.. have been seriously inconvenienced
gress ha alhng for .action. Consequently, the Conissue du s ~tepped m and required the Treasury to
then c phcate checks in response to all requests,
heck the validity later.
This dupl' .
th T
lcatlOn process is very expensive for
e' . reasury b ecause ab out 90 percent of all m.
qUI rles result .
10 unnecessary double payments.
The se cost the Treasury over $1 million per month.
averaCost of redeeming the duplicate payments
ges approximately equal to the value of the
Pay ments.
January 1978/Voice

Besides the expense of duplicate payments and
the inconvenience inherent in the long turnaround
time, there are other problems with the current
Treasury check program. After the checks are processed at the Federal Reserve Bank and sent to the
Treasury, they are reprocessed there. Also, checks
have to be stored by the Treasury for almost seven
years before they can be destroyed. The Treasury
now has almost 6 billion paid Treasury checks in
The Treasury check truncation program 'is designed to alleviate these problems. In June 1976
the Federal Reserve Bank of Dallas began a "live"
test of the truncation equipment and procedures,
using the new system for a portion of its Treasury
checks. In April 1977 the Federal Reserve Bank of
Richmond also began testing the program, utilizing
different equipment.
By January 15, 1978, all Treasury checks coming
to the Federal Reserve' Bank of Dallas will be
truncated. By June 1,1978, all Treasury c'h ecks will
be truncated at all the Federal Reserve banks.
The major advantages of the truncation program
will be a reduction in Treasury expense, accelerated processing, and shorter trunaround time for
Treasury checks. Many Treasury checks are now
delayed as long as a month in processing, but
under the truncation program, 39 percent of the
checks will be processed in the first 24 hours after
delivery to a Federal Reserve Bank, 19 percent in
the next 24 hours, and 17 percent in the next 24
The program will have little direct effect on
commercial banks; it impacts primarily on the
Treasury and the Federal Reserve banks. But one
significant advantage to commerdal banks will be
the much faster response on adjustments.
Longer term, however, the program could have
important implications for commercial banks.
Truncation of commercial bank checks may be in
our future, as electronics continues to nibble away
at erupting mountains of paper.

State and Local Tax Collections
Rise Sharply in Eleventh District

Total tax collections by state and local governments in the states of the Eleventh DistrictLouisiana, New Mexico, Oklahoma, and Texasrose about 74 percent from fiscal 1971 through
fiscal 1976. (Fiscal years end on June 30 for all
states except Texas, where the fiscal year ends on
August 31.) The increase for the four states was
somewhat higher than the national average of 66
percent for all state and local governments. Despite the faster rise in total tax collections in the
District states, however, per capita state and local
tax payments in each of the four states remained
well below the national average.
State sales tax revenues received by the four
southwestern state governments increased at a
compounded annual rate of about 11 percent between 1971 and 1976, as higher levels of personal
income and consumption boosted retail sales
sharply. Each of the four southwestern states collects both general and selective sales taxes. General sales taxes are collected in 45 of the 50 states,
at rates ranging from 2 percent to 5 percent. All
states levy selective sales taxes on such items as
motor fuel, motor vehicles, tobacco products, and
alcoholic beverages.
The second biggest source (j)f state tax revenues
in the four states was severance taxes. These revenues- which include taxes on production of natural gas, oil, and motor fuel-accounted for 21
percent of total state tax collections in the southwestern states in fiscal 1976. Revenues from this
source have been sharply higher because of the

State and local tax payments per capita
remain below average in the Southwest,
despite recent increases












U.S. E

SOURCES: Tax Foundation.
U.S. Bureau of the Census.

Federal Reserve Bank of DaU8s

rapid rise
d natural gas prices since the
'1 inOlan
coHec~~ embargo in late 1973. The District states
natio our-fifths of all severance taxes paid in the
for n, so revenues from this source are negligible
most other states.
large t most st a t es, Income
taxes are the second
acco~ t~urce of state tax revenues. Income taxes
of sta~ e for almost a third of the tax collections
the f e governments in the nation as a whole. For
inco:: ur southwestern states, however, taxes on
coHee: accounted for only 7 percent of total tax
a pro Ions in fiscal 1976. Income taxes represented
enuesP:tion~t~IY smaller share of total tax revthan i th LOUl~lana, New Mexico, and Oklahoma
repre n e nahon. But a major reason income taxes
lectio~en~ed a sharply lower share of total tax colone of ~m ~he four-state area was that Texas is
state in e SIX states in the nation that do not have
come taxes.
governments, property taxes are the
and thY ~ource of tax revenues in both the nation
82 per e our southwestern states, accounting for
1976 scent and 86 percent, respectively, in fiscal
e local governments also levy sales taxes
in th'e'
second I s d'IctlOns,
and such taxes provided the
argest source of income to local governs.
. basis, state and local tax collections ba per capIta


idly in :~ween 1971 and 1976 increased more rapas a wh r~e of the District states than in the nation
Texas 6 0 e. Per capita taxes rose 69 percent in
LOUisi' 4 percent in Oklahoma, and 61 percent in
cent tna-compared with an increase of 59 per53-per or t~e nation. New Mexico lagged with a
D cent mcrease
espite th
state a d
e more rapId Increases In per capIta
states ~h local taxes in three of the southwestern
states' e per capita tax payments in the District
age Ofw$ere considerably lower than the U.S. averLOUisi 731. Per capita state and local taxes in
83 pe ana totaled $610 in fiscal 1976 and were only
30th :cent of the U.S. average. That state ranked
bia in mong the 50 states and the District of Columper capita tax collections. Per capita taxes in
January 1978/Voice

New Mexico were slightly lower at $598, and that
state ranked 32nd. Texas ranked 39th with $581,
while Oklahoma was 45th with $530.
The sharp rise in state and local taxes has been
in response to higher demands for governmental
services and their increasing costs. The sharpest
relative increase in expenditures in the four southwestern states between fiscal 1971 and 1975 occurred in health and hospital expenses. These costs
almost doubled at the state level and advanced 75
percent at the local level.
The largest governmental expense in the four
states, however, was expenditures for education.
In 1975, education accounted for about 47 percent
of total government budgets in the Southwest-or
sharply more than the 38-percent share nationwide.
Education expenditures increased about 51 percent- or at a compounded annual rate of about 11
percent- both in the District states and in the nation between 1971 and 1975.
The next largest expenditure categories of state
and local governments in the four states were highways and public welfare. Compared with health
and hospital costs and education costs, these two
categories grew slowly between 1971 and 1975.
Highway expenditures rose at a compounded annual rate of slightly over 8 percent, while public
welfare costs rose at an annual rate of 5 percent.
For the nation, highway expenditures by state and
local governments rose at an annual rate of 6 percent, while public welfare costs rose at an annual
rate of more than 10 percent.
State and local tax collections in the four-state
area are likely to continue to increase more rapidly
than those in the nation. The generally stronger
economy in the region than in the nation as a whole
has continued to attract a migration of people and
industries to the Southwest. That should help to
provide the impetus to keep the regional economy
growing at a healthy pace. At the same time, the
need for governmental services will grow, and the
increase in state and local expenditures should be
met easily by the expanded tax base.
Mary G. Grandstaff

Management Tool:
Income, Expenses, and
Profits Analyzed
Functional cost analysis is a cost accounting service available to Federal Reserve member banks.
It will be offered again in 1978, for the 13th consecutive year.
The FCA program makes available to banks a
comparative analysis of profitabiilty and costeffectiveness of 12 major bank activities, including
demand deposits, instalment loans, and time deposits. Participating banks submit detailed data on
their own activities, and the Federal Reserve banks
develop detailed comparisons with similar banks.
Each participating bank receives its individual
report containing detailed cost figures and comparisons for each bank function. In addition to

interbank comparisons using averages for banks
similar in size and type of activity, the individual
report shows changes fo r the bank from the preceding year.
The FCA program also produces a national average booklet, a district average booklet, and a booklet on the characteristics of high-earning banksall of which are available to participating member
There will be some changes in the FCA program
this year to make it easier for participating banks
to provide the necessary data. Also, some sections
of the reports will be expanded to provide additional information.
FCA analysts are available on request to help
interpret results to a participating bank's officers
and/ or directors and to assist in developing the
individual bank data input.
Official announcement of the 1978 program and
invitations to participate will be sent to member
banks in January. Banks interested in participating
should contact the Bank and Public Information
Department, (214) 651-6370.

Supervision of Bank
Holding Companies
Inspections of bank holding companies will be increased in 1978. The expanded program requires
that the Federal Reserve banks make annual inspections of most large bank holding companies
and use a standardized "Report of Bank Holding
Company Inspection" so that inspections will be
uniform in all Reserve districts.
All bank holding companies with consolidated
assets over $300 million will be reviewed annually
unless inspection is waived because a company has
an exceptionally low debt-to-equity ratio and has
subsidiaries that extend relatively little credit. Inspections of bank holding companies with under
$300 million in consolidated assets will continue
to be made no less than once in three years.
The standardized report will be used also for
bank holding companies with assets of less than
$300 million that control nonbank subsidiaries that
extend credit.


Federal Reserve Bank of DallaS