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El Paso· Houston· San Antonio  January 1978 2  Policies for Better Business in the u.s.  5  Interest Authorized on U.S. Treasury Demand Deposits at Commercial Banks  7  Farm Exports Conditioned by World Supplies and U.S. Government Policy  13  Treasury Checks to Be "Truncated"  14  State and Local Tax Collections Rise Sharply in Eleventh District  16  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 President  January 1978/Voice  1  Policies for Better Business in the  u.s.  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. 2  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" faci!" 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 3  to emphasize in the remainder of my remarks today. 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 4  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 Government. '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 Pff . 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 Interest 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 receIpt f . ~ 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 penalty. 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 5  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 Bank. 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.  6  Federal Reserve Bank of Dallas  Farm Exports Conditioned by WOFld Supplies and U.S. GoveFnment Policy By Carl C. Anderson,  ~xports  Jr.  are a substantial part of the market for .S. agricultural products, and changes in exports h aVe . 19 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.  b  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 7  A growing share of U.S. cropland acreage devoted to exports MILLION ACRES  400 --~~------------------------___  300 -  200 -  100 -  '30 '35  '40 '45  SOURCE: U.s. Depar,t!1lent' of  '50  '55 160 '6,5 '70 '75  Agrlcultu;~~  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 8  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 I  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 States.  6  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, a 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 MILLION METRIC TONS 200 ----------------------~~~______ TOTAL, INCLUBING WHEAT AND COARSE GRAINS  160 -  120 -  ...::: ..........r~.~.::< .• ..... .. ).... ' , /  80 -  REST OF WORLD ....................... .................. .....  ......  / .......... _,  40 - __ , , - - /  o ' 61  /  UNITE,o STATES  _1 ,_.-.-'-  iii  I  ' 63  '65  iii  I  I  I  iii  ' 67 ' 69 '71 ' 73 MARKETING YEARS  I  ' 75  i  ' 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 9  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 1975. 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  10  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 imports. 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 1961·65=100 120 UNITED STATES  100 -  -, ' .......... " " "  "  LESS DEVELOPED COUNTRIES  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 g.r 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.  80  i  '60  I  I  '62  i  I  '64  I  t  '66  I  I  '68  i  I  '70  I  i  '72  I  I  '74  I  I  '76  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  11  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.  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 1976. 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 Branch.  12  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 e 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 and Ipment to the Treasury I . 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 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 storage. 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 hours. 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. 13  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 DOLLARS  800  I1ElI  o  FISCAL 1971 FISCAL 1976  600-  400-  200-  o-~~L-~aL-L~2L~  LOUISIANA  NEW MEXICO  TEXAS  __~u-~~wu__ U.S. E OKLAHOMA AVERAG  SOURCES: Tax Foundation. U.S. Bureau of the Census.  Federal Reserve Bank of DaU8s  rapid rise '1 d natural gas prices since the Arab '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. For . 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. For local primar 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' lr Juri . second I s d'IctlOns, and such taxes provided the ment argest source of income to local governs. On . basis, state and local tax collections ba per capIta  0:n  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 15  ABank 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 banks. 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.  16  Federal Reserve Bank of DallaS