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El Paso· Houston' San Antonio

July 1979
1

Since You Asked

U.S.·Mexico Border Industry Back on Fast-Growth Track

"Fed Quotes"

Mortgage Lending Activity to Benefit from the New
Usury Ceiling in Texas

Energy and the Outlook for Cotton Producers

Regulatory Briefs

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

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LLLiiLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL
A fringe benefit of working at a Federal Reserve Bank
is the frequent invitation to speak before various
groups. And speeches inevitably generate questions.
This is a brief response to the question asked most
fre quently following speeches during the poSi month.

"Seriously, do you really think we can
reduce regulation and make the economy
more competitive, more flexible?"
Yes. we have to!
Answering the question thus, I am reminded of
the parent who, in teHing his child a story about a
rabbit, got the rabbit into a fix from which the only
escape was by climbing a tree. So, the rabbit
climbed a tree. To the child's protest that rabbits
can't climb trees, the parent replied. "But he
had to!"
We have to find ways to make our economy
more competitive, more flexible. in order to achieve
and maintain an efficient economy that provides
full employment without inflation, We must reduce
or eliminate anticompetitive laws and regulations
and reorient those retained so as to make them
procompetitive if we are to whip inflation, maintain full employment. and adapt successfully to
the ongoing flow of economic, political, and
technological events, domestic and foreign. The
alternative is even more comprehensive Government control and direction of the economy and of
individuals' private lives as the struggle to
rationalize full employment and price stability
continues.
July 1979/Voice

It will not be easy to make the economy more
flexible, and probably it will not be done quickly,
although it should be. If accomplished at all, it
probably will be done item by item, step by step,
The comprehensive panoply of anticompetitive
laws and regulations has been put in place item by
item, step by step. through many years, usually to
provide special benefits or protections to
identifiable groups or interests. While in some
instances the benefits have eroded through time
and the interest groups have lost identity. most
laws and regulations that restrict competition and
rheumatize the economy have active supporters
and a more or less plausible rationale,
If nearly all prices and wage rates were promptly
responsive to changes in supplies or demands,
there would be no need for widespread or extended
periods of idleness of either labor or industrial or
agricultural capacity. As unemployed resources
began to increase, wages and prices would sag,
and employment and production could be maintained, We need not face periodically. as we
presently do. the prospect of both substantial
1

unused resources-called a recession- and raging
inflation. With wage and price flexibility, monetary
and fiscal policy could achieve and maintain what
now seems only a distant vision, stable prices and
full employment at the same time.
Competition and price and wage flexibility, of
course, are popular only as abstract concepts.
That's why yeoman efforts have been made by so
many to circumscribe them and, once they are
circumscribed, to resist any moves to reinvigorate
them. The list of examples is long-agriculture,
finance, labor, oil, and trucking, just to mention
some obvious ones. And dire consequences are
widely predicted of any proposals to deregulate

them. However, evidence to date indicates both
the airlines and airline passengers are benefiting
handsomely from the increased competition and
greater flexibility now flowing from the deregulation in that industry, as are the airplane
manufacturers and their employees.
So, like the rabbit, we must do that which we're
told can't be done. But we have scaled unscalable
heights before. We should be able to do it again.

-Ernest T. Baughman
President, Federal Reserve Bank of Dallas

Carter Proposes
Legislation to Help
Small Savers
President Carter has recommended that Congress
pass legislation phasing out interest rate ceilings
currently in place under Federal Reserve Regulation Q on all consumer deposits. The President
asked for legislation that would permit an orderly
transition period, allowing rates to rise to market
levels, but he did not specify a timetable. The primary reason for proposing the elimination of the
Regulation Q ceilings was to enable small savers
to receive the same rate of return on their deposits
that is available to the large investors.
The President also called for legislation that
would• Allow all federally chartered savings institutions to offer variable-rate mortgages.
2

• Allow all federally chartered savings institutions to invest up to 10 percent of their assets in
consumer loans.
• Permit nationwide interest-bearing checking
accounts.
The White House proposals came out of a twoyear task force study under the chairmanship of
the Treasury Department. Other task force members included representatives from the Department
of Housing and Urban Development, the President's Council of Economic Advisers, the Office of
Management and Budget, the White House Domestic Policy Staff, and the President's adviser on consumer affairs. The Federal financial institution
regulators also worked closely with the task force.
Federal ReHrve BaIlk of Dall••

U.S.-Mexico Border Industry
Back on Fast-Growth Track
By Edward L. McCleJJand

Mexico's border industrialization program is expanding rapidly again after several years of decline
and uneven recovery. The border industrialization
program is known variously as in-bond plants, twin
plants, border assembly plants, the border industry, or maquiladoras. 1 It allows U.S. manufacturers
to establish assembly plants south of the border
and to pay tariff only on the value added by the
processing in Mexico. The major benent to U.S.
firms is lower labor costs; for Mexico, it is jobs.
For Mexico's fast-grow ing labor force, the program
w ill provide an estimated 110,000 to 115,000 manufacturin g jobs this year- up nearly 20 percent from
last year.
Continued growth of border industries is a major
economic goal of the Mexican government. At the
beginning of his adminstration in December 1976,
President Jose Lopez Portillo set several goals for
the maquiladora industry during his six-year term.
They were to create 175,000 new jobs, increase the
value of the program's exports by more than $1
1. For prior reports on the U.S.' Mexican border
industrial program, see Lacy H. Hunt, II, "Industrial
Development on t he Mexican Border," Business Review,
Federal Reserve Bank of Dallas, February 1970, and
Myron T. Buller, "Bonier Industrtel--lnRaUon in Mexico
and Recession in U.S. Threaten Maquiladora Accomplish.
ments," Business Review, Federal Reserve Bank of Dallas,
July 1975.
July 1919/Voice

billion, increase the proportion of Mexican materials used by border plants to 3 billion pesos for
1982, promote the manufacture in Mexico of products currently imported by twin plants, and promote increased national and foreign investment in
border industries.

It is estimated that for every manufacturing

job created at in-bond plants in Mexico,
two new employees are required at U.S.
plants. Moreover, for every dollar of income
earned by twin-plant w orkers along the
border, as much as 30 cents is spent in U.S.
border cities; by that estimate the amount
totaled about $'5 million 181t year.

Mexico's success in achieving its objectives will
have a direct impact on the u.s. economy, particularly in the Southwest. For example, it is estimated that for every manufacturing job created
at in-bond plants in Mexico, two new employees
are required at U.S. plants. Moreover, for every
dollar of income earned by twin-plant workers
along the border, as much as 30 cents is spent in
U.S. border cities; by that estimate the amount
totaled about $75 million last year.

The border industrialization program. __
Labor-intensive industries in the United States
were forced to diversify overseas in the late fifties
and early sixties because their survival was threatened by rising domestic lahar costs and low-priced
imports from Japan and Western Europe. The result
was an exodus of assembly operations to low-wage
areas in the Far East and Caribbean basin. In the
view of U.S. labor leaders, the moves were prime
examples of exporting domestic jobs. But firms
squeezed by foreign competition had little choicethey had to reduce production costs or close down
or cut cosls by moving.
While inexpensive labor was, and still is. the
primary motive for expanding overseas, other considerations play important roles in site selection.
The distance to foreign plants from the United
States adds to total costs of production because
maintaining a long "pipeline" of materials, components. and semifinished goods to and from overseas locations can more than offset any savings
gained in utilizing foreign labor. The quality and
productivity of the local labor force and political
stability of the host government are also important
factors in selecting sites for foreign operations.
And after 20 years of industrial development, the
supply of suitable labor is nearly exhausted in
some countries, and wage rates have risen to uncompetitive levels. Moreover, space is often not
available or is very expensive in heavily populated
areas.
Although Mexico is close by and has productive
workers and a stable government, legal harriers
impeded the establishment of assembly plants
south of the border during the early stages of the
foreign migration. Those obstacles were removed
by the Mexican government after the termination
of the bracero program in 1964. The bracero program had been established in 1951 to enable Mexican workers to be employed in seasonal agricultural jobs in the United States. After its termination.
185,000 jobless farm laborers returned home to
Mexico.
The Mexican government initiated the border
industrialization program to employ the growing
number of idled workers and improve economic
conditions along the northern border. The basis
of the twin-plant program with the United States
is the Tariff Classification Act of 1962; Section
806.30 applies to metal processing, and Section
807.00 applies to assembly of general components.
The act allows U.S. manufacturers to export mate4

rials and components to foreign countries for
processing or assembly and import the semifinished goods duty free except for the value added
by processing abroad. Final assembly and packaging take place in this country.
Although average labor costs in Mexico are
lower than in this country, they are significantly
higher than in Far Eastern localities and some
Caribbean countries. 2 Therefore, an important factor in firms' choosing Mexico to set up manufacturing plants is the proximity to the U,S. consumer
market, Plants located in most border cities have
easy access to all modes of domestic transportation. and deliveries to most U,S. locations take
one day, compared with two days to three weeks
from the Far East. Thus. logistical problems and
inventory and transportation costs are minimized.
The duty-free zone in which U.S. firms could
initially establish in-bond plants in Mexico was a
strip 12 miles wide along the northern border,
Most plants are still located in the horder zone,
but the restriction on location was lifted in 1967
to allow in-bond plants in the interior of Mexico.

Although average lahar costs in Mexico are
lower than in the United States, they are
significantly higher than in Far Eastern
localities and some Caribbean countries.
Therefore, an important factor in finns'
choosing Mexico to set up manufacturing
plants is the proximity to the U.S. consumer
market.

Several restrictions are still imposed on foreignowned companies operating in Mexico. The Constitution of 1917 prohibits foreign ownership of
real estate within 62 1/2 miles of the U.S. border and
31 1 / , miles of the seacoast. Therefore, most border
plants and the land they are located on are owned
by Mexican interests and are normally leased to
U.S. firms. A small proportion of firms have gained
2. Minimum wages in Mexico vary by economic zone
nnd between agricultural and nonagricultural workers.
The highest minimum wage for nonagricultural labor on
the U.S.-Mexican harder is currently 162 pesos a day
($7.13) in northern Baja California, and the lowest is 115
pesos a day ($5.06) in northeastern Chihuahua, across the
border from Presidio, Texas.
Federal Reserve Bank of Dallas

more permanent control of their plants through
trust agreements sanctioned by the Secretariat of
External Relations and entered into with a bank
of the Mexican government.
Industrial parks have developed on the Mexican
side of the border and have facilitated the growth
of the industrialization program. Tenants can rent
existing building space or have plants constructed
to their own specifications. Manufacturers are allowed to furnish plants with their own equipment.
At least 90 percent of the labor force employed
at border plants is required to be Mexican nationals.
This requirement causes no problems since the
only foreign worker at most plants is the manager .
. . . and a decade of growth
Lower wage rates spurred many labor-intensive industries to participate in the twin-plant program. 3
Electric and electronic products account for about
two-thirds of total value added at border plants.
That industry group is followed in order of relative
imporlance by shoes and apparel, nonelectrical
machinery, furniture and wood products, services,
and food products. Nearly 10 percent of total value
added is accounted for by various other industries.
By the end of 1965, 12 plants employing over
3,000 workers were operating in Mexican border
towns. Investment continued to grow rapid ly during the late sixties and early seventies, reaching a
peak of 455 plants and almost 76,000 workers in
1974. Value added totaled nearly $316 million.
After ten years of growth, participation faltered.
The deepening 1973·75 recession in the United
States caused some firms to shut down or cut back
their Mexican operations, as well as reduce output
at other foreign locations and at home. Employment in the border industries dropped by nearly
9,000 to a total of 67,000 workers in 1975, although
value added increased to $321 million.
With the recovery of the U.S. economy from
recession, total employment in the border plants
rose to more than 78,000 in 1977. The increase,
however, occurred mainly at plants that were not
affected substantially by the recession. The total
number of in-bond plants ebbed to 443.
The decline in the number of border plants from
1975 through 1977 indicated there was little incentive for new firms to enter the program and was
3. Although the concept of twin plants suggests two
facilities facing each other across the border, t he U.S.
""win" is usually a plant located o utSide the Southwest.

July 1979/Voice

Average Number of Workers Employed
in the Border Industry in Mexico
120 - - - - - - - - - - - - -

1976

1977

1978

1979

1978 and 1979 estimated.
SOURCES: Bank 01 Mnico.
Feeleral Reserve Bank 01 Dallal.

related directly to Mexico's accelerated rate of inflation. Consumer prices in Mexico rose at an annual rate of 11 percent in 1973, or double the rate
a year before. The rise in prices doubled again to
a 23-percent rate in 1974 before slowing to a 17percent rate in 1975.
The rapid rise in consumer prices prompted
commensurate increases in factory wages. For example, average gross monthly earnings in manufacturing rose from $176 {U.S. dollars) in 1973 to
$273 in 1975. That sharp increase raised average
labor costs in Mexican factories from about a
quarter of the comparable cost in U.S. manufac·
turing in 1973 to a third of the U.S. equivalent
in 1975.
As the relative cost of Mexican labor increased,
the competitive advantage tilted to other countries
with lower wage rates. Competition for U.S. investment in manufacturing facilities came chiefly from
Caribbean and Far Eastern localities-such as the
Dominican Republic, Puerto Rico, Hong Kong,
South Korea, Singapore, and Taiwan-where increases in labor costs developed less rapidly from
1972 to 1975. In addition, average wage rates in
manufacturing in many competing countries were
only about 10 percent of the U.s. equivalent. The
savings obtained in employing the much cheaper
labor more than offset the higher transportation
and inventory costs.

Rising labor costs in major industrial countries have stimulated

foreign interest in the border industrialization program.

120-------------------------------------------------------------PERCENT OF U.s. FACTORY WAGE RATE

AVERAGE MANUFACTURING
WAGE RATES

......",

•......,..0/

WEST GERMANy

80-

....... ,,, .. ,,,,.......

•••••

....

,....."
•
...
........

60-

........
40 -

" .. """ .. :."'''

20-

.....

'67

... .•. ,.. .
....,

.....

•••••••• ; '

. " " "•• ,

.--_
..
.
---..--.....
.
.
,
......... .....

. , / JAPAN

.,.'

. UNITED KINGDOM
"
~'. ,.
".... .

~
••••• ........
,
ITALY IJr'
,I' FRANCE
~':";;""""
I' "",.,- ...... ",,,,1 1
.."",
, ' -~
,.,

_ _- . .-

__- - . _.-v.

--_..
..-

-,...-'~",_",',

O~~

. 1 ,1 I

I I'

,"'"

.----

______

== MEXICO

~"_ _

__~--~--r_--r_--r_--r_--r_--r_--~--~--~---------'68

'69

'70

'71

'72

'73

'74

' 75

'76

'77

'78

SOURCES: International MonetafY Fund.
United Nation •.
Federal Rellerve Bank o' DaUa s.

Recovery of the border industry .••
By last year, economic conditions had changed
sharply again, and Mexico had regained its competitive advantage. Total employment in the border
industry was estimated at more than 90,000, and
value added was over $400 million ; but more important, the number of plants along the border
was again on the rise as two additions raised the
total to 445 last July.
The devaluation of the peso in August 1976
from 8 cents to 5 cents was a major economic
move that immediately reduced the cost of Mexican goods and services by 37.5 percent. A further
depreciation occurred in October 1976, and the
value of the peso subsequently dipped to 4 cents.
6

As a result, payroll costs were halved for U.S.
manufacturers operating twin plants. However,
workers in Mexico, led by that country's labor
unions, demanded and were granted wage increases that partially offset the sharp reduction in
payroll costs. Moreover, the value of the peso has
drifted upward since the 1976 low and is now
about 4.4 cents, but the gap between wage
rates in the United States and Mexico has continued to widen.
Average hourly earnings in U.S. manufacturing
have increased sharply in recent years. The 28percent rise in hourly rates from 1975 to 1978 partly
reflected cost-of-Iiving increases resulting from
the accelerated pace of inflation and the legislated
Federal Reserve Bank of DaDa,

rise in the minimum wage. Both the peso devaluation and the increase in U.S. factory wage rates
caused Mexican wage rates to fall from a third of
the U.S. wage equivalent in 1975 to about a quarter
last year. That was about the same relative proportion that prevailed in the first ten years of the
border industrialization program.
Another factor leadi ng U.S. firms to reconsider
setting up manufacturing plants in Mexico was the
faster rise in recent years of facto ry wage rates
in the Far East. The average factory wage rate in
South Korea last year, for example, was 17 percen t of the U.S. equivalent. But even tha t small
proportion has more than doubled since 1970.
Manufacturing wages in Taiwan were 14 percent of
the U.S. equivalent in 1978 but up sharply from
over 7 percent five years earlier. And last year
the average factory pay in Hong Kong was 15
percent of the U.S. equivalent, up from 9 percent
in 1970. It is mainly those firms that require an
extremely large share oi labor input in their production processes and do not have to supply large
volumes oi materials or components to overseas
locations. or fi rms that plan to sell their output
fairly close to where it is processed, that fin d Far
Eas tern localities profitable places to engage in
manuiacturing.

Another factor leading U.S. firms to reconsider setting up manufacturing plants in
Mexico was the faster rise in recent years
of factory wage rates in the Far East.

In contrast to the Far East. the average factory
wage in Caribbean countries has not changed much
in recent years relative to the U.S. equivalent.
Manufacturing wages in Puerto Rico in 1976, for example. were about 53 percent oi the U.S. equivalent, and that was barely changed from 52 percent
in 1969. The average iactory wage in the Dominican Republic has also held steady at about 11 percent oi that paid in the United States. But even
with relatively low wage rates, transportation costs
to the Caribbea n make that area unatt ractive to
some industries.
Relatively low wage rates also prevail in South
America. For example, iactory wage rates in Brazil
were 29 percent of the U.S. equivalent in 1976. up
from 21 percent in 1972. But locating in South
American countries stretches the length of the 10July Ut1ll/Volc:e

gistical pipeline and qUickly increases the costs of
producing goods on tha t continent for the U.S.
market.
... and increased foreign participation
Inflation and rising wage levels have also encouraged labor-intensive industries in countries
other than the United States to participate in
Mex ico's twin·plant program. Foreign companies
are moving in because lahor costs are low and
goods destined for the U.s. market are assembled
at our doorstep. But ioreign participation is not
lim ited to goods destined for the u.s. market. All
th e output at some plants is shipped back to the
man uiactu rer's home market, and production at
others is sold worldwide.

Inftation and rising wage levels have also
encouraged labor--intensive industries in
countries other than the United States to
participate in Mexico's twin-plant program.
Foreign companies are moving in because
labor costs are low aDd goods destined for
the u.s. market are assembled at our
doorstep.
After the United States, Japan is the biggest par·
ticipant in the twin·plant program, and Japanese
manufacturers have or plan to set up plants in six
of the nine larges t border towns. Japanese participation has increased because Jahor costs are ris ing
fas ter in that country than in other maj or industrial
countries. Measured in U.S. doll ars, the wage ra te
of the average Japanese fac tory worker last year,
fo r example, was five times higher than in 1970.
That sharp rise in wage rates was tempered somewhat by the fast growth in productivity there.
Nonetheless, factory pay in Japan was 95 percent
of the U.S. equivalent, but much oi the difference
was, oi course, due to the rapid appreciation in
the value of the yen relative to the dollar in recent
years.
Rising labor costs at home and the proximity to
the U.S. market have also stimulated European in·
terest in Mexico's indus trialization program. The
average manuiacturing wage rate in West Germany
in 1978, measured in dollars. was 95 percen t of the
U.S. iactory rate. That was nearly double the percentage in 1970. Similarly, wage rates in France.
Italy, and the United Kingdom were more than

, , ,while some less developed countries are looking
to the program as an easy access to the U,S, market
~-----------------------------------------------

PERCENT OF

u.s. FACTORY WAGE RATE

AVERAGE MANUFACTURING
WAGE RATES

30 --

20 --

,-------------------

"
-"

......

" ....,----

MEXICO

SOUTH KOREA
TAIWAN

10--

~~~--. . . .~~~~~--. .--. . . .~.-~"~"~"'~"~":":'''~''~''~''~..-

~OIOI."'OI'

"'''"."".,

0--.--.--.----.--,---.--,----.----.--.--.----.--------'67

'6.

'6'

'70

'71

'72

'73

'74

'7'

'76

'77

'7.

SOUflCES; COlJnc11 for Economic Planning and Development, Republic of China.
InternaUonal Monetary Fund.
United NetloM.
Federal RfteTVe B'nk of Dall,••

half the U.S. equivalent in 1978. But comparable
factory wage rates in France and Italy have trended
upward fairly steadily since 1970, while the increase in the United Kingdom was slowed in 1976
by the depreciation of the pound sterling.
A Belgian firm is running the only European
plant in the border industrialization program at
the present time. The plant. located in Ciudad
Juarez, manufactures apparel, and all the production is shipped to Belgium. Meanwhile, other Europeans that have investigated the border industrialization program and are currently negotiating to
set up plants include the British, French, Germans.
Italians. Poles, and Spaniards.
Major industrial countries are not the only
countries evaluating the possibilities of establishing manufacturing facilities on the border. Taiwan
and South Korea are also interested in prodUCing
textiles and electronics at several locations. Even
though factory wage rates in those countries are
lower than in Mexico, locating on the border facili~
tates easy access to the U.S. market.
8

Future of twin plants
The strength of the U.S. economy will continue to
be the determining factor as to how well the border
industrialization program performs. The mild economic recession that is forecast by many observers
for later this year, if it were to materialize, probably would have little effect on the growth of the
border industry. Deep recession. however. would
be expected to cause layoffs and plant closings.
as in 1975.
Increased participation by foreign firms producing goods for their home markets and worldwide
distribution should be a stabilizing influence on
the overall development of the border industry.
assuming the economies of Japan and Western
Europe do not rise and fall in synchronization with
the U.S. economy. as occurred in 1974-75. At those
times when the U.S. economy slips into recession.
an increase in output by foreign-operated plants
could offset losses in production at U.S. plants.
The reverse could occur-a recovery in the U.S.
economy and a softening in foreign economies.
Federel Reserve Bank of DeU.,

The future of the border industry will also depend on the relative rates of inflation in Mexico
and the United States. In the past three years. consumer prices in Mexico rose 15.1. 29.0. and 17.5
percent. respectively. on a year-to-year basis, or
considerably faster than comparable increases of
5.8.6.5, and 7.7 percent in the U.S. consumer price
index. A continuation of such high rates of inflation compared with those experienced in this
country could lead to higher labor costs in Mexico
as wage rates rise to reflect the increased cost of
living. again discouraging participation in the border industry by U.S. firms.
Because the border industry is a major economic
program of the Mexican government. it is not
likely the monetary authorities would allow th e
relative cost of labor to rise so far that investment
in twin plants would be discouraged, as in the
1973-75 period. When the peso was devalued in
1976, the exchange rate was moved from a fixed
rate to a floating rate. Therefore. if the rise in consumer prices in Mexico persists relative to inflation in the United Slates. Mexican authorities
would likely permit the peso to decline against the
dollar. thus maintaining the favorable cost-of-Iabor
relationship.

In a longer view, development and sale of
Mexico's large reserves of crude oil and natural
gas could put upward pressure on the value of
the peso and undermine the twin-plant program
by increasing relative wage rates. However, substantial exports of Mexican oil and gas will not
likely take place before the mideighties, and it is
not clear at this time how much effect such sales
will have on the value of the peso. Past experience
of other oil-exporting countries suggests little upward pressure has been exerted on the value of
their currencies. For example, revenues from petroleum exports in Venezuela, which is a member of
the Organization of Petroleum Exporting Countries.
have not led to a revaluation of that country's
currency.
The outlook for further growth in the border
industrialization program. therefore, appears to be
bright. The devaluation of the peso in August 1976
reduced the relative cost of Mexican labor to a
competitive level, while manufacturing wage rates
in most industrial countries and in many less developed countries have been rising faster than in
Mexico. As long as Mexico maintains her present
competitive position, the border industry is expected to prosper.

New member bank

League City National Bank, League City. Texas. a newly organized institution located in the territory served by the Houston Branch of the Federal
Reserve Bank of Dallas, opened for business July 2. 1979, as a member of
the Federal Reserve System. The new member bank opened with capital of
S625.000 and surplus of $625,000. The officers are: J. W. Lander, Jr.. Chairman
of the Board; Edwin W. Pugh. President; and Doris Weyer. Vice President
and Cashier.

New nonmember bank

First Bank & Trust, Springtown, Texas, a newly organized insured nonmember bank located in the territory served by the Head Office of the
Federal Reserve Bank of Dallas, opened for business June 25. 1979.

July 1979/Volce

•

•• Ped Quotes ~~
Brief Excerpts fro m Recent Federal Reserve Speeches, Statements, Publications, Etc.

"The Federal Reserve Board for some time has supported the principle of
interest payments on transactions balances at all depository institutions. OUf support of th is principle is based on considerations both of economic equity and
efficiency. Corporate depositors as well as some informed smaller depositors
already earn something approaching market rates of return on their transactions
balances through the implicit receipt of interest in the form of banking services
provided at little or no charge. Alternatively, sophisticated depositors are able to
minimize their holdings of non-interest hearing deposits by placing their fu nds in
overnight investments that can readily be mobilized for transactions purposes. It is
only fair that smaller. Jess sophisticated depositors have similar opportunities. In
addition, since the prohibition against explicit interest payments on transactions
balances has led banks to compete on the basis of checking and other services at
low or no cost, deposit customers are encouraged to make a greater use of such
services than would be the case if they were explicitly priced."
"The Board favors nationwide NOW accounts, authorized for all depository
institutions, but limited initially to individuals and nonprofit institutions. Such
accounts should be subject to deposit rate ceilings, equal among the institutions,
during a transitional period. And the Board strongly believes that all nationwide
NOW accounts must be subject to reserve requirements, both because of the
importance of the reserve requirement mechanism for the efficient conduct of
monetary policy and in the interests of institutional equity."

J. Charles Partee, Member. Board of
Governors of the Federal Reserve System
(Before the Subcommittee on Financial
Institutions Supervision, Regulation and
Insurance, U.S. House of Representatives,
May 15, 1979)

"The nature of fina ncial markets in this country makes credit controls both
unneeded-save fo r very exceptional circumstances-and extremely difficult to
administer. Our credit markets reflect the borrowing and lending decisions of vast
numbers of consumers and businesses, and are an important means through which
our economic resources are efficiently allocated among competing uses. The market
is so large and flu id that credit is generally available to all qualified borrowers.
though the price-that is, interest rate-will vary so as to ration the supplies
of funds."
Nancy H. Teeters, Member, Board of
Governors of the Federal Reserve System
(Before the Committee on Banking, Housing
and Urban Affairs, U.S. Senate, May 24, 1979)
10

Fedel'al ReMtve Bank of DaIl..

"In moving to modernize and strengthen our financial system, there are several
objectives which are of paramount importance.
"First, the tools for monetary management must be improved. Our present
instruments are too blunt to cope adequately with the battle against infl ation which
threatens our economic well-being. The continuing and accelerating decline in basic
deposits subject to central bank reserve requirements has made implementation of
monetary policy more uncertain and hence more difficult. It is not that we need more
reserves; indeed, less reserves, properly structured, would suffice. But we do need a
more certain fulcrum for our monetary lever so that applied action will have a
predictable result in the growth or diminution of money and credit.
"Second, there needs to be competitive equality among financial institutions. Free
and fair competition is at the heart of our private enterprise system. The present
structu re places member banks at a competitive disadvantage because of the burdens
of non-earning reserves. And there are other inequities that need to be redressed.
"Third , attention should be given to improvem ent in the mechanism for assuring
a sound payments system and appropriate financial liquidity."
"It seems to me tha t there is growing and widespread accord among the affected
constituencies in favor of a Monetary Improvemen t Program that would encompass
the following essential points:
"1. Maintaining the concept of voluntary membership in the Federal Reserve.
thus assuring a vigorous dual banking system.
"2. Reducing substantially the amount of non-earning reserves required to be
deposited by member banks with the Federal Reserve. Remaining reserve
requirements should be uniform as to type of deposit- rather than the present
graduated system- and should relate mainly to transactions accounts and
their equivalent. This will reduce the financial burden of membership while
retaining appropriate reserve levels for moneta.ry control.
"3. At the same time. providing that all fin ancial intermediaries shall maintain
reserves with the Federal Reserve with respect to their transactions accountson the same basis as member banks. Such universal reserves on deposits
related to the basic money supply will provide the fulcrum for effective
monetary control and will assure greater competitive equality among
depository institutions.
"4. Instituting a policy of explicit charges for most Federal Reserve servicesrather than the present system of providing such services without any
specific charges. Prices should be based on full costs and an appropriate
return on employed capital. with due regard to competitive factors. This
will contribute to more efficient payment and other services. more opportunities for the private sector to provide the services, yet assure that a safe
clearance system is always available.
"5. Opening up access to borrowing from the Federal Reserve discount window
and access to Federal Reserve services to all financial institutions subject
to reserve requirements- non-members as well as members. This will
provide assurance of the liquidity necessary to keep the financial system
working smoothly in time of adjustment or stress."
G. William Miller, Chairman, Board of
Governors of the Federal Reserve System
(At Columbia University, New York . New
York, May 7, 1979)

luly 1975/Volce

Mortgage Lending Activity
to Benefit from the New
Usury Ceiling in Texas
By Cha rles N. Walush

The Texas Legislature's recent substitution of a
floating ceiling for the lO-percent usury ceiling on
residential mortgage interest rates should improve
the supply of mortgage credit. Prospective home
buyers face higher mortgage rates, however, and
lending activity may not fully recover to the strong
levels of mid-1978. Lenders may face many of the
same problems with the new fl oating ceiling that
they encountered with the fixed-rate ceiling.
The lO-percent usury ceiling. in effect in Texas
since 1891, has caused problems for mortgage
lenders since the latter part of 1978, when mortgage interest rates began to rise above 10 percent
in many areas of the country. Mortgage lend ers
began diverting fun ds to alternative investments
earning higher yields. In addition, the flow of funds
to Texas from credit-surplus areas began to slow.
The supply of mortgage credit was reduced substantially as a result, and Texas borrowers faced
difficulty in obtaining conventional mortgage credit.
often getting it only by making large down payments. In the first fo ur months of 1979, the volume
of loans closed at insured savings and loan associations (S&L's) in Texas was 24.5 percent below
the level a year earlier.
12

New usury ceiling to follow markel rates ...
The new Texas usury ceiling on mortgage interest
rates on one- to four-family residences goes into
effect August 28. The new usury ceiling will float
2 percentage points above the rate on ten-year U.S.
Treasury notes and bonds, adj usted to constant
maturities, and will be rounded to the nearest
quarter of a percentage point, up to a maximum
rate of 12 percent. Based on th e bond rate that
prevails two months before the lender becomes
legally bound to make the loan. the ceiling would
be the maximum interest rate permitted for mortgages. For example. the adjusted ten-year Treasury
bond rate was 9.18 percent in April, making the
hypothetical usury rate 11.25 percent for June. The
new statute will be in effect until September 1.
1981, at which time the interest rate ceiling will
once again become 10 percent.
Fifteen other states have already adopted a floating usury rate limit on residential mortgages. Seven
of them se t the ceiling lI lt to 21/2 percentage points
above the interest rates on long-term U.S. Government bonds and notes. Four states set a ceiling
3 to 5 percentage points above the Federal Reserve
discount rate. The other states with floating usury
Federal ReselYe Bank of Dallas

ceilings use the prime rate at banks, rates on
three- to five-year u.s. Government securities, or
the Federal National Mortgage Association auction
rate on conventional mortgages as the base on
which the usury ceiling is floated.
The primary advantage of a floating ceiling is
that it follows changing market conditions. A floating ceiling set too low, however, will have the same
effect as fixe d-rate ceilings during periods when
market interest rates are above the ceilings. In
recent years, mortgage interest rates have rarely
risen over 2 percentage points above the adjusted
ten-year Treasury bond ra te. In April the average
effective interest rate on mortgage loans closed on
previously occupied homes in the United States was
10.54 percent, while the adjusted ten-year Treasury bond rate was 9.18 percent. Effective interest
rates in April averaged 10.33 percent in Dallas-Fort
Worth and 10.22 percent in Houston-Galveston. l
Mortgage rates quoted in April to prospective home
1. Many mortgage lenders in Texas have charged fees to

the seller of the house as an alternative to charging the
home buyer a mortgage rate above 10 percent. The fees
paid by the seller are included in the calculation of the
effective interest rate.

July 19'9/Volce

buyers in some areas where usury ceilings were
not binding were as high as 11.75 percent.
Problems may still arise even with the new float·
ing ceiling. During a period of rapidly rising longterm interest rates, the use of Treasury bond and
note rates from two months earlier to set the cut'rent month's usury ceiling may limit the rise of
mortgage interest rates. In addition , th e 2-percent·
age-point float above the adjusted ten-year Treasury bond rate may actually prove to be too small
in coming months. If economic activity begins to
lag, savings inflows to S&L's may slow, forcing
mortgage rates stilI higher. But a slowdown in eco·
nomic activity may ease upward pressure on
Treasury hand rates. Under these conditions, mortgage rates in Texas may then press against the
floating ceiling.

.. . improving the availability of credit ...
If the new floating ceiling permits lenders in Texas
to charge mortgage interest rates competitive with
those in other areas of the country, the availability
of mortgage credit in the state will be substantially
improved. The funds to make these mortgage loans
may come from a reduction in the growth rate of

Mortgage rates on loans closed would not have been restricted
by a usury ceiling linked to the 10-year Treasury bond rate

12-------------------------------------------------PERCENT

~'"

"" " "",, .. i

FLOATING USURY CEILING

11-

"'":
"","i
~,i ~"",i
!!'"".:

~'~

10 -

....

~"'''"'C,'

''''''''''~ .: """,,,,.=
LOU:
;,,;
n",,,~
~'''''~ ~'~ lI'e ..... "';
......
"'I: 1'"
",I: """,i n.e:
9--~
:: ::

...... -.

, ~-

r,, ~

....... --- ------

.....

_,,'

_,'

NATIONAL AVERAGE RATE

ON MORTGAGE LOANS
ON USED HOMES

ADJUSTED

lO-YEAR

u.s.

TREASURY

BONO RATE

• --lrJ,rrlr-M,r-rrM-rr-rrJ,rrlr-S,r-rrN-rr-rIJ-rrlrrM,r-rrM-rr-rrJ-rrlrrS,r-,r-N,r-rIJ-rrlrrM,rrlrM-rr-rrJ"r-rrS,rrlr-N'r-rIJ"r-rrM,rr,--1976
NOTE:

1977

1978

1979

EN.ctl.... August 28, 1919, the usury ceiling In Texas il to be 2 percentagl points abon tt••

10·y•• r bond r.te adjusted to eonstant maturitl ...

SOURCES:

Board of GovernOR, Fed.r,1 ~.erv. S,.tl m.
Feder,r Hom. loIIn Bank Board.
Fed.rl' RIMrve BINI of O,U,..

Federal Reserve Bank of D,II81

Mortgage lending activity down at saving. and loan
associations in most Eleventh District Itate.
(Dollar amounts in millions)
Po,conl ch aflllU
" month,
,t78
',om

J a n"aty_Ap,11
ACI;vhy a nd sta t.

loans closed lor purcha.es
01 slngle·lamily homes
louisiana . .
New Mexico . . .
Oklahoma
Texas ..... .
New commitment.
to originate loans
louisiana ...........
New Mexico
Oklahoma
.
Texas

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

,'77

1118

''''"

$ 168.4

$ 233.9

$ 167.9

76.3
190.7
1,096.2

103.6
207.7
1,401 .4

130.9
167.7
1,058.6

416.2
145.0
300.2
2,103.6

487.8
157.7
272.0
2,271.9

321.5
140.2
244.3
1,553.0

from
1978

38.'

-28.2
26.4
-19.3
-24.5

17.2
8.8

-34.1
-11.1
-10.2
-31.6

35.8
8.'
27.8

-9.4

8.0

p...-p,.,lm ln.,.,..
SOURCES : Fe<fera l Hom. LOi n Benk 01 LltUe Rock.

Federal Hom. LOi n Blnk of

To~k ..

cash and investment holdings as well as an increase
in sales of mortgages in the secondary market.
Savings and loan associations in Texas have
indicated that they bought short-term investments,
such as bankers acceptances and bank certificates
of deposit, as alternatives to lending the funds as
mortgages. Cash and investment holdings at Texas
S&L's grew faster during the past year than in the
preceding year, and the rate exceeded the growth
rate of total assets. Cash and investment holdings
of Texas S&L's averaged $2,401 million a month
in the first four months of 1979, or 26.1 percent
higher than in the same period in 1978. Some of
the growth in cash and investment holdings reflects
the increased need of S&L's to hold reserves
against the money market certificates they issue.
The funds that have gone into reserves against
money market certificates are not likely to be
released for additional mortgage lending activity.
The growth of the Texas economy has created
a need for credit greater than can be provided
locally. By selling locally made mortgages in the
secondary market, lenders are able to obtain funds
to make additional mortgages. But originators of
conventional mortgages in Texas have found it difficult to sell mortgages in the secondary market in
recent months. Sales of loans by Texas S&L's in
July iB79/Volce

the first four months of this year were 34.6 percent
below a year earlier. When mortgage lenders are
relieved from the lO-percent usury ceiling in late
August, Texas-originated mortgages will be more
salable in the secondary market if their yields rise
to competitive levels.
One problem that may face 8&L's is a slowdown
in savings growth. Savings and loan associations
experienced net withdrawals in April, perhaps
foreshadowing a slowdown in deposit inflows in
coming months. Some of the April loss in deposits
was caused by savers withdrawing funds to pay
taxes. But the elimination of the 1/4-percentagepoint advantage of S&L's over commercial banks
on the rate they can pay on money market certificates also appears to be taking its toll of savings
inflows at S&L's. Should savings inflows continue
weak in coming months, further upward pressure
on mortgage interest rates can be expected.
If the floating ceiling keeps mortgage rates in
Texas from rising to competitive levels, mortgage
lenders will face many of the same problems they
encountered with the 10-percent ceiling. The ceiling rate will be ahout 11 percent in September.
which is below rates in areas where mortgage lending activity has not been affected by usury ceilings.
The amount of improvement in the salability of
15

Texas mortgages in the secondary market will
largely depend on how close mortgage rates in
Texas come to those prevailing nationally.
... but prospective home buyers
face higher mortgage interest rates
Mortgage interest rates in Texas are likely to rise
following the lifting of the la-percent ceiling. In
some areas of the country where mortgage rates
have risen above 10 percent, lenders have experienced declines in mortgage lending activity.
Oklahoma currently has a usury ceiling of 18
percent on residential mortgages, and mortgage
rates are generally between 10.5 percent and 11.0
percent. Although the supply problem caused by a
binding usury ceiling has not affected Oklahoma
as it has Texas, both states have experienced similar declines in mortgage lending activity. Mortgage
loans closed at S&L's in the first four months of
this year were 19.3 percent below last year's level
in Oklahoma and down 24.5 percent in Texas.
Effective mortgage interest rates in Louisiana
are also above 10 percent, and mortgage loans
closed were 28.2 percent lower than in the first
four months of 1978. Although Louisiana statutes
place a 10-percent limit on the interest rate lenders may charge, lenders are permitted to charge
fees that raise the effective mortgage rate above
10 percent. These fees inflict a hardship on borrowers since they raise the initial payments borrowers
must meet.
Exemption from New Mexico's lO-percent usury
ceiling of loans sold to the Federal National Mortgage Association or the Federal Home Loan Mort-

gage Corporation has helped mortgage lenders in
that state avoid some of the problems of usury
ceilings. Loan sales in the first four month s of this
year totaled $86 million, 179 percent above a year
earlier, indicating that this exemption has been
used frequently. In addition, state and municipal
mortgage finance authorities have given support to
mortgage lending activity. Mortgage loans closed
in New Mexico were 26.4 percent more than in the
first four months of 1978.
The effects of the lO-percent usury ceiling on
lending activity in Texas are probably somewhat
understated by the mortgage loan closing figure.
Some of the loans closed represented takedown s of
commitments made before mortgage rates averaged above 10 percent nationally. Newcommitments
in the first four months of 1979 were 31.6 percent
below a year earlier in Texas, compared with an
ILl-percent decline in New Mexico and a 10.2-percen t decline in Oklahoma. Louisiana also had a
large decline: new commitments fell 34.1 percent
in that state.
Mortgage interest rates in Texas will be higher
with the new usury ceiling than with the 10-percent ceiling, and lending activity is likely to increase. The rise in mortgage rates will help to
improve the supply of mortgage credit by increasing the salability of Texas mortgages in the secondary market and will encourage lenders to devote
more of their own funds to mortgage lending. But
with mortgage rates approaching 11.75 percent in
some areas of the country, the new floating usury
ceiling may only prove to be somewhat less restrictive than the la-percent usury ceiling.

Federel Reserve Bank 01 Dallas

Handling of
Checldike Payment
Instruments Studied
by the Fed
Payment instruments drawn on savings accounts
at mutual savings banks are currently being processed through the Federal Reserve check collection system. This practice has been challenged by
various trade organizations. The Board of Governors of the Federal Reserve System asked on
April 23, 1979, for public comments and is now
reviewing the comments received on both this procedure and a proposal by the Federal Home Loan
Bank Board to allow savings and loan associations
to issue checklike instruments.
The checklike instruments concerned are:
• Non-interest-bearing negotiable orders of
withdrawal (known as NINOW's) that the state of
Pennsylvania has authorized to be drawn on accounts at mutual savings banks in that state.
• Other similar payment instruments, including
Payment Orders of Withdrawal proposed by the
Federal Home Loan Bank Board to be drawn on
accounts at savings and loan associations.
The NINOW's were authorized by the Pennsyl·
vania Secretary of Banking in 1977. They have
certain characteristics of checks, in that they may
be cashed, used for purchases, or endorsed to other
recipients. However, it must be stated on the face
of the instruments that the mutual savings bank
on which they are drawn reserves the right to delay
payment for at least 14 days. Because of this re·
quirement, the Pennsylvania Supreme Court ruled
that NINOW's are not payable on demand and are
not checks as defined by the Uniform Commercial
Code. The decision placed NINOW's outside the
definition of "cash item" as specified in the Board's
Regulation I. which governs the Federal Reserve's
payments system activities.
The Federal Reserve has been handling NINOW's
July 1979/Volce

as cash items since their inception. In view of the
Pennsylvania Supreme Court decision. the Board
has sought the advice and comment of the public
on whether to continue processing such instruments as though they were checks.
In November 1978 the Federal Home Loan Bank
Board asked for public comment on a proposal that
would allow savings and loan associations under
its jurisdiction to establish savings accounts against
which their customers could write checklike Payment Orders of Withdrawal. The proposed Payment Orders would be payable on demand and
would be nontransferable and nonnegotiable.
Third-party payments made with instruments that
are not transferable raise legal questions as to the
rights and liabilities of subsequent holders of such
instruments. The Board has requested comments
on possible consumer benefits of Payment Orders.
as well as on the legal questions arising from the
use of the instruments.
Comments received from Eleventh Federal Reserve District banks have generally opposed the
practice of clearing checklike instruments of nonbank institutions through the Federal Reserve
check collection system. Reasons given for the opposition included the contention that mutual savings banks and savings and loan associations are
not banks and, therefore, should not be entitled
to act as banks or use Federal Reserve services.
Other problems with these items that were often
mentioned were increased float and collection time.
Banks believed that the items could more appropriately be handled on a collection, rather than
cash, basis. Banks also believed that the cost and
delay involved in handling these checklike instruments would have to be passed on to the customer.
17

Energy and the Outlook
for Cotton Producers
By Larry D. Hauschen

Cotton is an important crop in the agricultural
economy of the Eleventh Federal Reserve District.
Texas, with $1.3 billion of cotton in 1977, is the
largest producer of upland cotton and the second
largest producer of American-Pima cotton in the
nation. Louisiana, New Mexico, and Oklahomathe other District states-rank 6th, 7th, and 11th,
respectively, among states producing upland cotton, and New Mexico is the 3rd largest producer
of American-Pima cotton. The importance of cotton gives rise to concern regarding the effects
of increasing energy prices on District cotton
producers.
Trends in cottOD production
With the exception of Louisiana, the Eleventh District states have not always been so important in
the nation's production of cotton. Rather, there has
been a steady westward shift in U.S. cotton pro·
duction. In 1839 the Deep South states of Alabama,
Georgia, Louisiana, Mississippi, North Carolina.
and South Carolina produced 94 percent of U.S.
cotton, while Arizona. California, Oklahoma. New
Mexico, and Texas produced virtually none. (See
the accompanying table.) Ten years later, Texas
produced over 2 percent of the U.S. crop, and by
1900, Texas farmers had increased their state's
share of total output to 33 percent. Oklahoma first
appeared in the cotton production statistics in 1879,
16

followed by Arizona and California around 1915
and New Mexico in 1923.
By 1940, cotton production in the six Deep
South states had fallen to 41 percent of U.S. out·
put. The shift continued until by 1977 the Deep
South states produced less than 20 percent of U.S.
cotton, with the four states of Alabama, Georgia,
North Carolina, and South Carolina producing less
than 4 percent. Texas alone produced more than
38 percent of total output that year, and Arizona,
California. New Mexico. and Texas combined pro·
duced over 66 percent of the nation's cotton.
The westward shift was apparent even within
Texas. In the 1800 'S. cotton production in Texas
was centered in the Blacklands and eastern areas
of the state. Today, partially because of the development of irrigation technology. cotton production
in the state is heavily concentrated in the Southern
High Plains of western Texas.
Farm energy use in cotton production
The shift in cotton production to states relying
heavily on irrigation, which is a heavy user of
energy. suggests that the importance of energy inputs in the production of cotton has increased.
With rapidly rising energy prices. the irrigated
areas may lose some of their advantage over other
areas. The ability of farmers in the southwestern
states to continue to earn acceptable rates of reFederal ReMrve Bank of Dallo

COTTON PRODUCTION IN 14 LEADING STATES
AS PERCENTAGE OF U.S. TOTAL

....

Eleventh Ol, tr iet It.tes
Louisiana .. .
N.w Mexico
Oklahoma .....
Texas
Other re,d lng It,'e,
Alabama
Arizona .. . . ....
Arkansas
California
Georgia
Mississippi
Missouri
No rth Carolina.
South Carolina .
Tennessee ..

...

19.3
.0
.0
.0

7.0
.0
3.'
32.9

14.B
.0
.7
.0
20.7
24.5
.1

10.1
.0
7.'
.0
12,4
10,4
.3
5.0
7.7
2.2

•••
7.8

3.5

....
3 .•
1.0

•••

25.7

6.2
1. •
11 .9
'.3
8.0

•••

3.1
5.'
77
'.1

5.1
1.3
1.'
31 .5
5.0
4 .•
10.3
11,4
29
lB.l
2.2
1.5
2.1
3.'

1'77

•••

1.1
3.1
38.3

1.'
7.5
7.3
19.5

••

11.5
1.•
.4
.8
1.8

SOURCES: u.s . eu.nu of lhe Canouo.
U.S. Oap ••"".nl of AgrlcuUu ...

turn to area resources in cotton production will
depend. in part, on the energy intensiveness of
their production relative to production in other
states.
To explore the level of energy use in cotton
production, two measures of energy intensiveness
have been calculated for each of the 14 leading
cotton-producing states; Btu (British thermal unit)
use per planted acre and Btu use per pound of
cotton. The 14 states account for virtually all the
U.S. cotton, Total energy use by the states is divided into two categories: direct-used directly in
producing cotton-and indirect-used in the manufac ture of fertilizers and pesticides th at in turn
are used in producing cotton,1
New Mex ico and Arizona use 21/ 1 times as much
energy per acre as any of the other states (Chart
1). Texas , on the other hand. uses less energy per
acre than ten states. and Oklahoma uses less than
any other state.
In terms of energy use per pound of cotton produced. New Mexico is the most energy-intensive
state (Chart 2). However. because of higher yields.
Arizona uses less than half as much energy per
,. For more inform atio n o n t h.e energy·use measures and
impli catio ns of risin g e nergy prices fo r Dis trict
agric ul tu re, sec La rry D. Ha uschen. " Energy and the
Ou t loo k for Agr icul ture In the Southwest," Voice of the
Fodcrui ll oserve Bank 01 Dallas, May 1979.
Jul y 197B / Volce

pound as New Mexico, even though the two states
use almost the same amount per acre. Texas is the
second most energy-intensive, using slightly more
than 30,000 Btu per pound. and California is the
least energy-intensive, using only 12,000 Btu per
pound. Although a substantial difference exists between California and New Mexico, the least and
most energy-intensive states. all other states use
between 20,000 and 30,200 Btu per pound of cotton.
Since the heavily irrigated western states accounting for the majority of the nation's cotton do not
use significantly larger quantities of energy than
other states, there is no reason to expect rising
energy prices to reverse the westward shift in
cotton production.
The future fo r cotlon production
Rising energy prices will make cotton a less profitable crop for farmers if energy prices increase
relative to cotton prices. The demand for cotton
and , therefore. cotton prices are strongly influenced
by prices of synthetic fibers that can be substituted
for cotton in the manufacture of clothing and other
items. Polyester, cotton's most important substitute, was first available commercially in 1953. In
1960 the quantity of polyester produced was only
2.6 percent by weight of cotton production. By
1970, that ratio had increased to 38 percent, and
in 1977, more polyester was produced than any
19

CHART 1
New Mexico and Arizona use 2\1, times more energy
per acre of cotton than any of the other states

LOUISIANA
NEW MEXICO

1111111111111

OKLAHOMA
TEXAS

•

DIRECT

11111

INDIRECT

ALABAMA

ARIZONA

111111111111111111111

ARKANSAS
CALIFORNIA

GEORGIA
MISSISSIPPI
MISSOURI

NORTH CAROLINA
SOUTH CAROLINA

TENNESSEE

MILLION BTU PER PUNTED A.CRE
SOURCE: En.rgy and U.S. Agrlcul1ure: 1974 Dal, Bes. (Feder.1 En8f1lY AdmInistratIon and U.S. Department 01 Agriculture).

other fiber (113 percent of cotton production).
However, the cost of producing synthetic fibers,
such as polyester, is also highly susceptible to increases in energy prices since these fibers are
manufactured from petroleum.
This is cited as cause for optimism among cotton producers. The National Cotton Council published a study in 1973 showing that polyester fiber
requires five times as much energy to produce as
cotton fiber. 2 This would imply that increases in
2. L. 8. Gatewood, Ir" The Energy Crisis: Can Cotton
Help Meet It? (Memphis: National Cotton Council of
America).
20

petroleum prices will raise prices of synthetic fibers
relative to cotton.
Recently, a more comprehensive study has drawn
different conclusions.' This study estimated total
energy consumption for synthetics and cottonfrom the drilling of oil in the case of synthetics and
the preparation of land in the case of cotton to the
production of the fiber, weaving of the cloth, and
manufacture of the apparel plus the washing, drying, and ironing throughout the life of the apparel.
The study chose to make this comprehensive com3. T. Leo van Winkle et aI., "Colton Versus Polyes ter,"
American Scientist 66 (May-June 1978): 280-90.
Federal ReMl'Ve Benk of Dallaa

parison between an all-cotton shirt and a 65 percent polyester-35 percent cotton blend shirt. The
polyester-cotton shirt, it was found, required 25
percent more total energy to produce than the allcotton shirt. However, given a laundering pattern
considered most closely representing U.S. practices, it was found that the blend shirt needed less
time and lower temperatures for washing and drying and, in addition, had a longer wear lifeleading to the conclusion that the all-cotton shirt
required 88 percent more energy than the 65-35
polyester-cotton shirt.

The cotton-synthetic energy question has, nevertheless, not been decisively answered. Although
question exists as to the extent of the difference.
it is clear that the production of cotton cloth and
cotton apparel requires less energy than production
of their synthetic counterparts. The Van Winkle
study found that only when laundering and wear
life were considered did the synthetic use less energy. Given that, a couple of questions seem appropriate. One. are men's dress shirts representative of textile end use and, therefore, a good choice
for the comparison? Men's shirts account for only

CHART 2
Twelve states use between 20,000 and 30,200 Btu
per pound of cotton produced

LOUISIANA
NEW MEXICO
OKLAHOMA
TEXAS

DIRECT

11111

INOIRECT

ALABAMA
ARIZONA
ARKANSAS
CALIFORNIA
GEORGIA
MISSISSIPPI
MISSOURI
NORTH CAROLINA
SOUTH CAROLINA
TENNESSEE

THOUSAND BTU PER POUND PRODUCED- Based on 1970-77 average yields per har... eSled acre and proportions of planted acres harvested of both upland and
American-Pima cotton.
SOURCE: EneflJY Itrld U.S. AlJr;clllfllre: 1974 Oala Base (Federal Energy Administration and U.S. Department 01 Agriculture).

July t979/Voice

six-tenths of 1 percent of total U.S. fiber consumption. In fact, less than half of U.S. mill fib er production is consumed by the entire apparel industry.
Almost 32 percent is used in homefurnishings, and
nearly 23 percent goes to industrial uses. In both
instances, energy in laundering is less important.
This indicates that, in fact. a man's dress shirt is
not an appropriate choice for comparison of energy
use. A better inquiry might compare energy use in
terms of some "weighted basket" of textile end
uses.
One might also question the validity of comparison throughout the life of a garment. That is,
the effective life of a shirt or other apparel as perceived by the consumer is probably quite different
from the length of time required for the garment
to be literally worn out.
In the final analysis, the need for less energy
to produce cotton fiber, the questionable importance of durability as it relates to energy use, a
possible "natural preference" for cotton by consumers, and technological developments (such as
the permanent-press cotton shirt) suggest that cot-

ton producers may well have cause for optimism.
This does not suggest that rising energy prices will
have no impact on cotton producers. An increase
in energy prices will lead to adjustments, particularly in the most energy-intensive states and by
the most energy-intensive users within a state.
Adjustments may include reduced application of
water to cotton acreage, more efficient methods of
applying water, increased monitoring of pumping
equipment, and reductions in the amount of tillage.
Overall, these adjustments may be greatest in
New Mexico, where cotton farmers use more energy than in any other state. Texas farmers, on
average, are not significantly more energy-intensive
than farmers in most other cotton-producing states
and, although some adjustments will be necessary,
should be able to continue to produce cotton
efficiently enough during a period of rising energy
prices to maintain, if not increase, the state's share
of the nation's cotton production.

Federal Relerve Bank of Dellal

cw.egulatory ~riefs
Review of Recent Actions of the Board of Governors of the Federal Reserve System

• HIGHER RETURNS ON SMALL DEPOSITS
have been permitted by recent regulatory changes
jointly announced by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, and the
Federal Home Loan Bank Board, The changes went
into effect on July 1 for all federally insured commercial banks, savings and loan associations, and
mutual savings banks.
The changes are:
1. An increase of one-quarter of 1 percent in
the maximum rate of interest that commercial
banks and thrift institutions may pay on passbook
savings accounts. This will raise the ceiling to 51 / .
percent for commercial banks and to 51/r percent
for savings and loan associations and mutual savings banks. The ceiling rate on NOW (negotiable
orders of withdrawal) accounts in New England
and New York will remain at 5 percent for all depository institutions.
2. A new savings certificate with a maturity of
four years or more that will have a ceiling rate tied
to the average four-year yield for U.S. Treasury
securities as determined each month by the Treasury Department. The ceiling for commercial banks
will be 11 /4 percent below the average four-year
yield on Treasury securities, while the ceiling for
thrift institutions will be 1 percent below the yield.
3. Elimination of all minimum-denomination requirements on consumer-type time deposits except
for the $10,000 minimum required for 26-week
money market certificates. Institutio ns may set
their own minimums if they wish.
4. A new early-withdrawal penalty in all time
deposit categories for certificates issued or renewed after July 1. If deposits mature in more than
one year, the minimum penalty will be six months'
loss of interest. If the deposits mature in one year
or less, the minimum penalty will be three months'
loss of interest. The penalty rule requiring reduction of the rate of interest paid on the funds withdrawn to the passbook savings rate, plus a loss
of three months' interest at that rate, will continue
to apply to all certificates issued before July 1.
July 1979/Volce

The regulatory agencies plan to consult at the
end of the year to discuss further adjustments in
interest rate ceilings that might be appropriate.
The ceiling rate for the new certificate will
change on the first calendar day of each month,
based on the average four-year yield on Treasury
securities as determined and announced by the
Treasury Department. This yield will be announced
three business days prior to the first day of the
month and will be the average of the four-year
yields for the preceding five business days. Thus,
the ceiling rate in effect beginning July 1-7.60
percent-was announced by the Treasury on June
27, based on the average of the four-year yields
for June 20 through June 26.
The new variable-rate-ceiling certificate does not
replace the existing fixed-ceiling time deposits with
maturities of four, six, or eight years. Current ceilings on these deposits will remain in effect.
• ELECTRONIC FUND TRANSFER ACT IM·
PLEMENT ATION RULES are being revised by the

Federal Reserve Board. The public comment period
on the proposed revisions expired June 25. The proposal would make written notice of loss or theft
of an EFT card effective when the consumer mails
or otherwise transmits the notice.
This proposal would revise the portion of Regu~
laHan E, published March 21, that prOVided that
written notice of loss or theft of an EIT card would
be effective upon receipt of the notice by the financial institution concerned or upon expiration of
the normal time for delivery, whichever is earlier.
The Board believes that the proposed amendment
would assist consumers who prompUy notify the
financial institution of loss or theft of an EIT card
to receive full benefit of the $50 limit on potential
liability provided by Congress for unauthorized
use of EFT cards. The proposal would help consumers avoid loss of this protection due to delays
in the delivery of mail or other delays in delivery
of written notice. The Electronic Fund Transfer
Act currently provides for a consumer liability
limit of $50 when notice of loss, theft, or unautho2S

rized use of an EFT card is provided to financial
institutions within two business days. Regulation E
states that notice can also be given orally, by
telephone or in person.
Consumer liability for unauthorized use of an
EFT card is limited to $50 if the consumer notifies
the card issuer within two days of learning of the
loss or theft of the card or its unauthorized use.

Potential liability increases to $500 if notification
occurs after two business days. In case the consumer fails to notify the card issuer within 60 days
after transmittal of a periodic statement showing
unauthorized use of the EIT card, the consumer's
liability may be unlimited for transfers made after
the 60 days.
'

Federal Reserve Buk of D.....

Full text of Review (Federal Reserve Bank of Dallas) : July 1979

FRASER