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•
El Paso' Houston ' San Antonio

May 1979
1

Since You Asked:
"Can We Really Control Inflation?"

Currency Choice Under Uncertainty: Some New Evidence

Energy and the Outlook for Agriculture in the Southwest

Consumer Credit Survey Published

Reguletory Briefs

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

1111111711777777111111111111111111111111

SirLce lbu Askt;d
LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL
A fringe bene~t of working at a Federal Reserve Bank
is the frequent invitation 10 speak before various
groups. And speeches inevitably generate questions.
This is a brief response to the question asked mosl
frequently joJ1owing speeches during the past month .

"Can we really control inflation?"
Since you asked, yes, of course, we can control
inflation. But it appears we will not, at least not
very effectively.
First. a definition. Inflation is a rising general
level of prices, up 6.4 percent in 1977, 7.6 percent
in 1978, and probably even more in 1979.
Second, prices rise, overall, because the flow of
total expenditures exceeds the flow of goods and
services in the markets. Expenditures increased
11.6 percent last year; goods and services we re up
4 percent.
We could control inflation, therefore, by
restricting expenditures or increasing production.
But production can't be increased very much or
very fast. Almost everybody willing to work has
a job, and our mines and factorie s generally are
going full blast, or close to it. So, this leaves
expenditures.
Federal, state, and local governments spent $434
billion for goods and services last year, about 21
percen t of total spending and up 10.2 percent from
the year before. The major policies available to
curtail government expenditures are appropriation s
and borrowing authorizations. These are directly
within the control of citizens and their elected
officials. We could curtail government expenditures
if we wanted to.
May 1919/Voice

Consumers accounted for the biggest part of
total expenditures. They laid out $1,340 billion for
personal consumption last year. 64 percent of lotal
expenditures and up 11.1 percent from the year
before.
Policies to curtail personal expenditures must
impact on personal income and credit because
personal income is largely spent, supplemented in
varying degree by consumer credit. About
two-thirds of personal income consists of salaries
and wages. which were up 11.9 percent in 1978.
Hence, policies intended to reslrain growth of
consumer spending must constrain either salary
and wage increases or employment, or both.
Salary and wage increases and employment
would be constrain ed by reducing government
spending. Also, monetary policy could be used
more aggressively 10 these ends. With tighter
monetary policy, the growth of bank loans and
investments would be cut back, and credit
tightness would spread throughout the financial
sector. Interest rates would rise further and credit
for houses. consumer durables, and other uses
would be available to fewer consumers, in smaller
amounts and shorter maturities. This would have
some direct effect on the growth rate of consumer
spending.
1

But to have a substantial effect on inDation,
tighter monetary and credit policy must slow the
rise in salaries and wages, It can do this only by
reducing the demand for labor, which , given the
current structure of the labor markets, would
increase unempl oyment substantially before
having much effect on wage rates,
Businesses spent about $238 billion for new
plant and equipment and additions to inventories
last year, about 11 percent of total spending and
up about 16 percent from the preceding year. This
level of spending to creat e new jobs and increase
productivity is believed to be too low and should
not be cut back by anti-inflation policies. It might
be affected favorab ly by tight er fiscal policy and
proba bly would be affec ted unfavorably by tighter
monetary policy. Inevitably, business spending for
wages , materials, and supplies would have to be
constrained if monetary policy were to affect
inflation. Given the structure of many of these
markets, this would likely reduce production and
employment before affecting prices and wages
very much.

Production and employment would likely
decline because wages and many other prices are
relatively insensitive to curtailment of the growth
of expenditures. If wages and prices were flexible,
curtailment of the growth of expenditures would
not need to reduce production and employment.
So, we need flexible wages and prices in order
to scuttle inflation while maintaining full
employmen t.
But wage and price flexibility is opposed-by
unions, by farmers, by many businesses. and by
many government officiol s and employees. And
that's why we probably won't do a very good job
of knocking off inflation , even though we could
if we would, and especially if we would take
actions to free up wages and prices and promote.
not restrict, competition.

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

Consumer Credit
Film Available
A new film explaining consumer rights under certain credit laws and regulations is available from
the Federal Reserve Bank of Dallas. The IS-minute
film uses case situations to demonstrate consumer
rights in obtaining credit, correcting billing errors,
and rectifying erroneous credit file information.
The film can be booked fo r showing by banks,
schools, and other interested audiences by contacting the Bank and Public Information Department , (214) 651-0261.

Federal ReMrve Bank of DaD..

Currency Choice
Under Uncertainty:
Some New Evidence
By Leroy O. Laney

Large variations in foreign excha nge rates since
the early 1970's have exposed international financial managers to exchange rate risks not experienced since before World War II. And with exports
accounting for an increasing share of total U.S,
production, more and more businessmen have been
exposed to shifts in currency values. Furthennore,
changes in accounting practices-such as the controversial Financial Accounting Standards Board
Statement 8, which has mandated disclosure in
current income statements of "paper" gains and
losses on foreign currency holdings- have highlighted the volatility that exchange rates can impart to reported earnings. This article identifies
various aspects of currency choice under managed
floating exchange rates and reviews recently accumulated data that indicate how international financial managers have adjusted to exchange rate
variability.
Exchange rate gain or loss in a given period can
be much greater than gains or losses attributable
to other international investment decisions, so an
increased interest in currency management is not
surprising. Traditionally, much more attention has
been devoted to some of these other decisions,
such as choice of the type or maturity of financial
May 1919/Volce

instrument, than to the choice of currency in which
an investment is to be held. But given that in relation to the U.S. dollar during 1978 alone the
German mark appreciated by over 14 percent, the
Swiss franc by almost 24 percent, and the Japanese
yen by over 26 percent, it is clear that the currency
denomination of both assets and liabilities may be
the most crucial decision an international portfolio
manager makes. Gains on assets denominated in
these currencies, or losses on liabilities in them,
could easily have overwhelmed interest rate or
capital gains returns over the year. And the decision on whether to denominate a given asset in
yen or marks, for example, could have been at
least as important as whether to acquire a given
equity, bond. or short-term instrument in one of
the currencies only.
One response of the internationally diversified
bank or corporation has been to try to forecast
movements in individual exchange rates vis-a-vis
the home or profit currency. The track records of
some foreign exchange advisory services, consultants. and econometricians are better than others.
But performance in this regard, with the desired
degree of accuracy, has generally been rather poor.
H it were possible to forecast exchange rates
3

Currency Return and Risk
CHART 1.

Average Annualized Percentage Change Versus Volatility
for Ten Major Currencies, March 1973-December 1978

30
MEAN
MONTHLV
CHANGE,
M (PERCENT)

[!} BANKS

Swiss france

• German mark

Netherland s guilder.

Belgia n'ranee

•Japanes e yen

•• French franc
Swedish kron a

NON BANKING FIRMS

o -t-------C"'=·C-r----------:..<--;~C.".~...o."~"."---------_r----------_r----------20

10.

Canadian dollar

-1 0

=-14.23
(I

'R 2
SOURCES:

•

e lta lian li ra

= -4 . 51)

= .84, F(1,8)

50
STANDARD
DEVIATION OF
MONTHLY CHANGE,
S (PERCENT)

.695

=6.96)

= 48.41 ,

STANDARD ERROR = 3.00

Intemalional Monetary Fund.
Federal Res erve Bank of Dallas .

Fede ral Reterve Bank of Dallal

easily, then everyone would do it and the market
would quickly reflect the forecast, so that decisions
would simply depend on predicting the forecast.
Another reaction to exchange rate risk is to try
to minimize it by hedging. By exactly matching
balance sheet assets against liabilities in the same
currency, exchange rate risk in that cu rrency can
be completely eliminated since what is lost on one
is gained on the other, regardless of which direction the currency moves. It is possible to take such
matching a step further by offsetting corresponding
maturities of assets and liabilities exactly, and cash
flow coordination becomes an important element
of the hedging strategy.
The excess of balance shee t assets over liabilities, or vice versa, can be hedged in the forward
market, if forward cover is attainable in the volume desired for the currency in question. If balance sheet assets exceed liabilities, for example,
the sale of a forward controct requiring the seller
to deliver foreign currency at a specified future
date also enters as a 1iability and brings net exposure to zero, guarding against losses should the
currency depreciate. If liabilities exceed assets,
the purchase of a forward contract likewise can
close the net short exposure snd hedge against
losses th at would result if the currency were to
appreciate.
While elimination of risk by exact hedging may
be a more attainable goal than accurate forecasting of exchange rates, it still may be difficult to
achieve. And it is also quite important to recognize that some international managers are not
averse to undertaking some currency risk when
they believe the outcome will be profitable.
The last consideration is crucial because of the
nature of return and risk considerations that enter
into all business and financial decisions, international and purely domestic. Some level of risk is
inherent in almost all economic activity, and those
engaged in such activity are prepared to bear some
risk for the prospect of a profit. From this standpoint, there is nothing to distinguish exchange rate
risk from any other kin d of economic risk. Managers may be judged perhaps not on the basis of
how well they completely avoided foreign currency
exposure but rather on the extent to which they
took advantage of potential profits in the foreign
exchange arena. This is true regardless of the
fact that the primary institutional objective of
such managers is not to "speculate" in foreign
currencies.
May 19'19/Volce

In addition, and from a broader perspective, the
world of managed floating exchange rates is fundamentally different from the fixed rate system that
existed when major foreign currencies were pegged
to the U.S. dollar,! From the standpoint of the
United States, whose currency has served as tbe
major vehicle currency for world trade, denomination of fewer U.S. transactions in dollars increases
exchange rate risk for U.S. firms. Foreigners gen·
erally have always been more aware of the exis·
tence of currencies other than their own. To some
extent, this has derived from the demand in foreign countries for private and official international
liqUidity. Moreover, for many countries it has been
due to less developed domestic financial markets.
But to an increasing extent in the present situation,
it has become necessary for U.S.-based entities
also to consider what currency they are acquiring
as well as what kind of investment they are
making.
A portfolio approach to currency choice
The general principles of portfolio diversification
to reduce risk for a given level of return are familiar to most. Basically there are three elements
to consider: the expected return associated with
each individual asset, the risk that is associated
with that asset, and the relationship of all assets
in the portfolio to each other.
Since exchange rates cannot be predicted accurately, the first element is very uncertain. There
may be somewhat more certainty concerning the
risk involved in holding a given currency. Even
though one cannot predict direction of movement,
something is known about country risk and the
nature and depth of markets in which a given currency is traded, so that the volatility of its fluctuations over time can be projected with a little more
confidence. Still more certainty can be attached
to the third element-the extent to which different
currencies rise and fall together.
Historically, since the beginning of generalized
floating in 1973, there even has been a fairly close
relationship between the first two elements. If
one computes annualized monthly percentage
changes in the U.S. doUar bilateral exchange rates
of major countries from March 1973 through December 1978, then takes the arithmetic mean of
1. See "A Diminished Role for the Dollar as a Reserve
Currency?" Volca 01 the Federal Reserve Bank 01
Dallas, December 1978.

Table 1
CORRELATIONS OF CURRENCY CHANGES
(Computed from monthly percentage changes in exchange rates, March 1973.Qecember 1978)
B"ll'n
'fine

Curt.ney

....

Belgian franc
Canadian dollar
French franc ....
German mark .........
Italian lira ..
Japanese yen ........
Netherlands guilder
Swedish krona
Swiss franc ....
U.K. pound ......

Canadl.n
do!!"

Frflnell
'.ane

G'f!1I,n
ma.k

Ual ian

Jaoane.e

Ii ••

1.00

-.09
.63

.•,
...
.41
.27
.•2
.7.

.35

1.00
-.22

-.09
-.31
-.20
-.07
-.08
-.09
- .16

1.00
.71
.56

.74
.74
.80
.41

1.00
.47
.29
.•7
.80
.70
.31

1.00
.38

.53
.45

1.00
.34
.34
.47

.42

.45

....

Nethe.·

U.K.

I• ...,.

SWedl,h

Swl ••

guild ••

k.ona

'rane

pound

1.00
.66
.37

1.00
.42

1.00

.• 3
.65
.43

SOURCES: In'.m.tiona. Monel.oy FUnd.
Fed ... l R...' .... B.nk 0' DaUn.

these series as some measure of average return
and the standard deviation as an estimate of risk,
a picture such as that in Chart 1 emerges. The
sample includes currencies of the non-U.S . Group
of Ten countries plus Switzerland.
It is clear that the higher average return currencies have also been the riskier ones, judging
at least by the approximations used in the chart.
The statistical fit, as measured by a least squares
linear regression estimate, is presented to indicate
how close the relationship has been . In no sense
does th e regression imply causation running from
risk to return- and no law has been proved, sin ce
for some isolated periods depreciating currencies
also have been quite volatile-but the general
strong positive linkage is apparent. This demonstrates empirically how, when currencies are considered individually vis-a-vis the dollar, it is often
necessary to assume greater risk in order to realize
a higher gain . And the greater risk is one factor
that may have discouraged more diversification
into the stronger currencies over time.
The most volatile currencies have been the
Swiss franc and the German mark, partly because
these currencies often are subject to speculative
short-term capital movements into and out of the
U.S. dollar. A currency such as the Canadian dollar, on the other hand, demonstrates low variability
against the U.S. mone tary unit, partly because
more stable trade-related flows are dominant in
international transactions between Canada and the
United States.
The third aspect of currency portfolio choice,
th e relationship of various currencies to each
other, can be approximated most readily by a cor6

relation matrix of the same currency changes used
to compute the means and standard deviations for
Chart 1 (see Table 1). Such correlation coefficients
can range between +1 and -1. To the extent that
the correlation between any two currencies is
closer to +1, those two currencies behave as one.
Less incentive exists, therefore, to reduce risk by
asset diversifica tion between the two currencies .
But some incentive does exist to hold a net long
(asset) position in one of the currencies and a net
short (liability) position in the other. (In the limit,
of course, this is exactly what happens when assets
and liabilities in the same curren cy are offset
against each other, since any currency's correlation
with its own movements is exactly + 1.) To the extent that the correlation between any two currencies is closer to -1. possibility exists fo r hedging
net long positions in both currencies (or net short
positions in both) against each other.
Several things are noteworthy about the actual
correlations of th e U.S. dollar/foreign currency
rate changes presented in Table 1. First, some of
the cross correlations in the table are relatively
high, suggesting the long-short combination mentioned above as a desirable hedging strategy. Others
are close to zero and some are actually negative,
suggesting that the long-long (or short- short) hedge
would be beneficial in reducing overall risk. Not
many are negative and none are that close to -1,
however, which indicates that th e long-short com·
bination is more effective in risk reduction. And
it is just as natural, if not more so, to be "short"
in currencies as in any other asset market since
all this means is denominating debt in that monetary unit.
Federal Reterve Ba ..k of Dalla'

Both economic relationships and institutional
characteristics, such as pegging arrangements, can
playa role in imparting relative stability to these
correlations over time. When economies are closely
linked, one might expect their currencies to move
together vis-a-vis some third unit, such as the dollar here. More synchronized economic activity and
more closely integrated international trade and
capital flows are important reasons for the higher
observed correlations between many of the European currencies in the table. The Canadian dollar,
on the other hand, demonstrates negative correlations with the European moneys, attributable in
large degree to relationship of the Canadian cur.
rency to the U.S. dollar measuring unit. Close economic linkage between Canada and its southern
neighbor underpins similar movement in their
respective currencies, just as is the case among the
Europeans. One of the lowest correlations in the
table is between the Canadian currency and the
Japanese yen, and generally the yen is not highly
correlated with some European currencies either.
An example of how institutional arrangements
can be important also is evident from the experience of some European countries, such as those
that have participated in the joint float against
the U.S. dollar. But the rather erratic participation
of some countries, and their propensity to withdraw without warning, underlines the fact that
while interrelationships of currencies may be more
predictable than some aspects of currency portfolio choice, they are by no means constant over
time.

Greater certainty in currency portfolio
choice can be attached to relationships
underpinned by behavioral economic
phenomena than to pegging by central
bank intervention, which usually has
elements of political as well 8S economic
motivation.

The newly established European Monetary System, as successor to the European Community
"snake," is also an example of continued evolution
of such monetary arrangements. The future of this
union. as was the case with the snake, depends on
the extent to which member countries can coordinate economic policies and domestic inflation rates.
May 19'9/Voice

The existence of the currency union may be one
factor that encourages such coordination, but it
cannot ensure it.
Although both pegging arrangements and basic
economic relationships can be important in partially linking different currency movements to
each other, it is the latter that is more fundamental
and stable over time. Economic linkages are what
enable currency areas to exist. While monetary
unions may be formed primarily for the purpose of
achieving economic union, they cannot force it
and will fall apart if different inflation and growth
rates in individual participating countries persist.
The Swiss franc. never a member of the snake during the interval covered in Table 1, nevertheless
demonstrates relatively high correlations with the
currencies of most countries that were participating, most notably the German mark. The previously mentioned dominance of portfolio shifts
into both these currencies and out of U.S. dollars,
and vice versa, is a major cause. Greater certainty
in currency portfolio choice can be attached to relationships underpinned by such behavioral economic phenomena than to pegging by central bank
intervention, which usually has elements of political as well as economic motivation.
With respect to these relationships of currencies, it is also important to observe that the choice
of home currency can have a great effect. If data
were taken in terms of German mark/ foreign currency bilateral rates, then correlation between the
U.s. dollar and Canadian dollar would be relatively
high, but correlations between most other European currencies would be lower. The calculations
in Chart 1 and Table 1, computed from U.S. dollar/
foreign currency bilateral rates, are presented with
the assumption that the internationally diversified
institution wishes to raise return and reduce risk
in terms of U.S. dollars. For some multinational
banks or corporations, other currencies represent
the profit unit, and for some such a unit might even
be ambiguous. But the same analysis would be
possible once a yardstick is chosen, be it a single
national monetary unit, a basket of currencies. or
even some index of commodities.
Aclual currency diversification
under floating rates
Paucity of public domain data on foreign currency
positions for individual banks and corporations in
the United States handicaps publication of results
on how given multinational institutions have per-

T.bl.2
AVERAGE NET OPEN POSITIONS
IN EIGHT REPORTED CURRENCIES
(Converted 10 millions 01 U.S. dollars
al end-o'-period exchange rates)
U.S. -bated 1",lIIuUo...'

a.nb
(AWf~es

monthly
dlt •.
Dec. 1175·
Aug . 1878 )

Belgian Irancs ... .
Canadian dollars . . .
French fr ancs
German marks
italian lire ...
Japanese yen
Swiss francs ... .
UK pounds ... .

-$111.5
- 7.4
-71.0
167.2
-2.2
240.9
-40.0
- 15.4

Hcmbln~;"g

lirml

(A"fIlllU

qu.rterly
dati.
OIC. 1975·
Jwnl 1971)

635.3
10,322.7
1,617.8
2,292.2
485.3
1,079.8
- 1.663.6
2.476.3

1. Inclwdlno thll, lo.. /gn b.a"ch.. atld ma(orlty-owned
10'1111" p.. tn .. ~i j:" and ,wb,tdllt1al.
SOUACES; US. T.... ury Deo.n ...."I,
Fed..I' Aes.,,.. e.nk 01 0.11 ••.

formed in the area of currency choice. But since
March 1977 the Treasury Bulletin has published
data collected by the U.S. Treasury. as required
by law. from banks and nonbanking concerns in
the United States plus their foreign branches and
majority-owned foreign partnerships and subsidiaries. These data begin with December 1975 and
include positions in eight foreign currencies: Belgian francs. Canadian dollars, French francs, German marks. Italian lire. Japanese yen, Swiss francs,
and U.K. pounds.
The data present balance sheet assets less liabilities. plus foreign exchange contracts bought and
less foreign exchange contracts sold, to yield a
net open position- long or short-in each of the
currencies. For U.S. banks and their foreign
branches and subsidiaries, the net overall monthly
position in each cUrrency. summed over all maturities. was converted to U.S. dollars and then averaged for December 1975 through August 1978.
(Information is available only with a lag of several
months.) 'these averages are presented in Table 2.
The average open positions for the German mark
and Japanese yen are the only net long ones. Taken
alone, th ese appea r reasonable on the basis of
Chart 1. since both are relatively high average return. if somewhat risky. currencies. AU six of the
other currencies show average net short positions.
For the Canadian dollar. Italian lira. and U.K.
pound. there is again nothing surprising about this
8

on a currency· by-currency basis. since all show
negative average returns and a short position in a
depreciating currency is profitable.
But what of the average net short positions in
the Belgian franc. French franc. and Swiss franc?
Each of these three was a positive average return
currency over the period during which the positions were taken, and the Swiss franc was quite
highly so. Since maintaining long positions in such
a strong currency as the Swiss franc would. on an
individual-currency basis. seem to be the rational
profit-maximizing respon se for any bank that considers the U.S. dollar to be its home currency. are
the reporting banks behaving irrationally with respect to exchange rate factors? Not necessarily. All
three of these positive return currencies that were
held short had relatively high cross correlations
with the German mark over the reporting interval
and in Table 1. If banks conducting business with
Europe or having operations there are long in German marks and are the same ones that are short in
Swiss, Belgian. and French francs. then partial
hedges that reduce overall currency risk are revealed in the data.
The Japanese yen was less correlated positively
with other currencies than the German mark but
showed relatively high positive correlations with
the French franc. Swiss franc, and U.K. pound.
Again. since the last three were held in net short
positions on average. they too may be partial
hedges against the long yen position.
Table 2 also presents average net position data
for the aggregate of reporting U.s. nonbanking
firms and their foreign branches and majority·
owned foreign partnerships and subsidiaries. The
average positions for all currencies are larger than
those of the banks. especially in Canadian dollars.
and all are net long except for the Swiss franc.
Differences in these positions from those of the
banks derive most obviously from the different nature of the institutions. For banking concerns.
which function primarily as financial intermediaries. loan assets in a given currency are more likely
to be offset against deposit liabilities. For internationally diversified corporations. on the other
hand. positions are more probably related to shortterm and long-term trade receivables and payables.
intracompany accounts. inventories. and corporate
debt. (Fixed assets. plant and equipment. and capitalized lease liabiliti es are excluded from the data.)
A more active currency·by·currency hedging strategy is necessary for these institutions if net open
posit ions are to be reduced.
Federal Rtlaerve Bank of naU.a

The noticeably large average long position for
non banks in Canadian dollars, for example, is at·
tributable in large degree to an excess of Canadian
currency·denominated short·term trade receivables
over payabJes and perhaps an excess of other cur·
rent assets, such as inventories, over current Habil·
ities. The average net short Swiss franc position
for nonbanks is more likely related to the denomi·
nation of intermediate· term or longer debt in that
currency. Since Swiss interest rates are relatively
quite low, borrowing in Switzerland may be con·
sidered an attractive proposition by some corpo·
rate treasurers. But even when such low interest
rates are taken into account , the s teep appreciation
of the Swiss currency in recent years would have
made it optimal on a currency-by-currency basis
to be long rather than short in Swiss francs.
The above differences highlight how institutional characteristics can influence currency positions. But even though the average net positions of
nonbanks are different in long-short composition
from those of banks, there are definite aspects of
cross-currency hedging for non banks also. Changes
in the Canadian dollar were negatively correlated
with those for all other chosen currencies over the
relevant interval, and this was the only currency
for which that was the case. The nonbanks' exceptionally large average net long position denominated in Canadian dollars is hedged partially by
long positions in most other currencies, even
though the average return on the Canadian currency was negative over the interval. The Swiss
franc's relatively high positive correlation with
the other European currencies made the average
net short position in it a partial hedge against the
Jong positions in those other European currencies,
even though the average return on the Swiss franc
wus positive.
It is apparent that at least some elements of ra·
tional hedging strategy across currencies are pres·
ent in these aggregate data on net open positions
for banks and non banking firms. One can reduce
these positions to the proportions of a representative portfolio fully invested in foreign currencies,
tantamount here to isolating foreign exchange risk
and return from other considerations. These pro·
portions and the approximations of currencies' return, risk, and relationship to each other over the
relevant interval can be used to compute an equiva·
lent point in the risk-return space of Chart 1. This
point plots the average historical currency portfolio return over the relevant interval against overall currency portfolio risk und can be compared
May 197f1/Volce

with the risk-return point for each individual cur·
rency. This was done for both banks and nonbanking firms, using the average position data in
Table 2.
The banks, while generally undertaking a relatively high level of portfolio risk on their currency
positions, were able to improve substantially the
overall currency return-almost 27 percent, by the
approximations used here-as compared with the
return on even the strongest individual currencies.
Although the currency risk borne by banks may
appear large in the chart, it should be recalled that
only the portfolio return and risk on net foreign
currency positions are measured here. Table 2 in·
dicates these positions are small relative to those
of non banking firms, and they may be quite small
relative to overall operations of the banks involved.

It is apparent that at least some elements of

ralional hedging strategy aeros. currencies
are present in the aggregate data on net
open positions for banks and nonbanking
firms. Both banks and nonbanks appeu to
move toward positions of lower risk and/or
bigher retum than if they beld an
undivenified position in any .ingle
currency.

Nonbanking firms in the aggregate do not appear
to achieve a very high return by this measure, even
though, at slightly below 1 percent, it is still positive. But they do seem to reduce currency portfolio risk to a level a great deal lower than that
for any single currency. Larger net exposed posi·
tions for the non banks may make them more riskconscious at the expense of achieving a lower return. Again, however, these calculations do not
address the size of the foreign currency holdings
relative to total operations.
Both banks and non banks, nevertheless, appear
to move toward positions of lower risk and/or
higher return than if they held an undiversmed position in any single currency. The elements of efficient diversification outlined above underlie this,
since mere diversification per se, if inefficient,
would not necessarily move the institutions to a
more desirable risk-return position.
These measures are only approximations, of
course, and do not address the possibility that the
currency positions of individual banks or corpo·

•

Currency Return and Risk with Addition of Interest Rates
CHART 2. Average Annualized Percentage Change Versus Volatility
for Ten Major Currencies, March 1973-December 1978,
with Addition of Short-Term Interest Rates

00 BANKS

MEAN
MONTHLY
CHANGE,
M (PERCENT)

Swiss Iranee

20
Japanese yen.

eGerman mark

8e lg [an
fran c

French franc.

NONBANKING FIRMS

I<l

.Ualian Ura

Canadian dollar.

017~---.------r------.-----.------~----.
20

10
M= -.98

.51 S

=-.47) (I =7.79)

= .87,

F(1 ,8)

= 60.63,

STANDARD
DEVIATION OF
MONTHLY CHANGE,
S (PERCENT)

STANDARD ERROR = 1.98

SOURCES: Board 01 Governors, Federal Reserve System.
International Monetary Fund.
Organisation for Economic Co-operation and Development.
Federal Reserve Bank of Dallas.

Federal Reserve Bank of Danas

rations may not correspond closely to the aggregate
data. If the institutions that are long in German
marks are not the same ones that are short in Swiss
francs, for example, it is not possible to point to
the existence of any partial hedge between the
two currencies. But even in this case, such a hedge
does exist when U.S.-based institutions are viewed
as a whole, which might be done from a policymaking standpoint if there was concern that such
entities generally were vulnerable to imprudent
foreign exchange exposure.
The possibility also exists that many institutions
currently do no t think in terms of efficient diversification of exchange risk, so that the positions
observed in the da ta are more or less accidental.
In this sense, perhaps it is noteworthy that at
least they tend to behave as if the principles of
efficient diversification were important. And as
time progresses, with experience in a flexible exchange rate environment increasing, these aspects
of portfolio choice as applied to currency positions
are likely to receive more conscious attention. (In
principle, the same tenets of portfolio hedging have
been recognized in other markets, such as equities
or commodities trading, for years. Even when a
grain dealer, for example, sells a wheat futures
contract to hedge against price declines on an inventory of wheat just acquired, he only has a partial hedge since cash prices and the price of the
futures contract do not move together perfectly.
They may move together more closely than any
two currency spot exchange rates analyzed here,
but such a transactor also may not be thinking expliCitly or consciously in terms of the portfoli o
principles set forth here.)
Finally, th ere are many other considerations
impacting on fore ign exchange positions besides
these currency characteristics, so that it is not
surprising if net pos itions in the actual data do
not mesh exactly with those that might be absolutely the most efficient from this standpoint alone.
Institutional and transactional constraints, as well
as other kinds of returns and risks on assets and
liabilities , can be important.
Inclusion of interest rates
Among these other factors that can affect actual
currency positions taken by international institutions, interest yields are perhaps the most obvious
and easily quantified. Inclusion of interest rates
can cancel changes in exchange rates to the extent
that both of these variables reflect actual and
anticipated inflation in the respective countries.
May J979/ Volce

If a higher interest rate in a high-inflation country

sufficiently compensates for losses in the value of
its currency, for example. holders might be indifferent between that currency and an appreciating one
in which interest rates are much lower. Moreover.
to some extent, return on real assets held in a particular country can be proxied by the level of interest rates, since the inDation that is reflected in
interest rates is also that which is reflected in rising prices of the assets and commodities held.
Monthly observations on short-term interest
rates in the respective countries were added to the
annualized monthly percentage changes in exchange rates used for the earlier calculations. (The
nearest equivalent available of a three-month interbank loan rate for the interval was chosen.)
Means and s tandard deviations of the resultant
series are plotted in Chart 2 just as in Chart 1, as
well as points corresponding to aggregate currency
portfolios for banks and nonbanking firms.
While points representing individual currencies
change marginally in relation to each other, the
same general configuration as in Chart 1 is evident.
The aggregate bank and nonbank portfolios also
occupy the same general positions relative to the
individual currencies. The only marked difference
is the higher return on both individual currencies
and the actual portfolios because of the inclusion of
interest rates. Measured volatilities do not change
very much. nor does a computed correlation matrix
measuring correspondence among the changes.
The slope of a regression line fitted to individual
currency points in Chart 2 is lower than the slope
of the corresponding line in Chart 1. indicating
some canceling of exchange rate return by interes t
rates, but a slope that remains positive directs attention to the fact that, on average, exchange rate
changes have not been fun y offset by interest rates.
(Either interest rates did not quite keep up with
international price level changes over the period
or exchange rates generally overcompensated.)
These results at least suggest that from an average
return standpoint, individual currencies are not
equalized when interest rates are included, and the
results demonstrate again the potential importance
of exchange rate factors relative to other sources
of risk and return in international monetary
management.
Conclusion
Currency management can be considered a component of general international portfolio management. Risk is increased by wider fluctuations in
11

exchange rates, but so is the possibility for higher
returns. And internationally diversified institutions
may wish to avail themselves of this situation
rather than attempt to eliminate exchange risk by
exact hedging of long and short positions in the
same currency.

When the relationship among movements
in various currencies is considered an input
to the currency choice decision, it may be
rational economic behavior to maintain a
net short position in an appreciating
currency or a net long position in a
depreciating currency, if this sufficiently
lowers overall currency risk.
A standard portfolio approach to currency management considers not on ly the direction in which
a currency is expected to move but also the aver-

age volatility of the currency and its typical relationship to the movements of other currencies held.
A naive approach might consider only the first, but
one irony of decisions based only on the return
consideration is that it is the most uncertain of
the three,
More certainty can be attached to the last two,
especially the third. When the relationship among
movements in various currencies is considered an
input to the currency choice decision, it may be
rational economic behavior to maintain a net short
position in an appreciating currency or a net long
position in a depreciating currency, if this suffi ciently lowers overall currency risk.
Inspection of available data indicates that elements of rational portfoli o choice are present in
the net positions taken by U,S.-based internationally diversified institutions. Some positions that
alone would appear irrational may not be so when
relationships to other currencies are taken into
account.

New member bank
Salado National Bank, Salado, Texas, a newly organized institution located
in the territory served by the Head Office of the Federal Reserve Bank of
Dallas, opened for business April 9, 1979, as a member of the Federal
Reserve System. The new member bank opened with capital of $375,000
and surplus of $375,000. The officers are: Hugh L, Lackey, President, and
Jim R. Browner, Cashier,

New nonmember bank
Bank of the Mid-South, Bossier City, Louisiana, 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 April 16, 1979.

Fede ral Relerve Bank of DaUas

Ncped Quotes~~
Brief Excerpts from Recent Federal Reserve Speeches, Statements, Publications, Etc.

"Over the past few months the Federal Reserve, the Banking Committees of
Congress and the financial industry have been seeking an accommodation to solve
the various problems associated with monetary control, membership, equity in
reserves, and pricing and access."
"The issues separating the affected groups seem to fall into four primary areas.
"1. Mandatory versus voluntary maintenance of sterile reserves at the
Federal Reserve.
"2. Inclusion of nonbank intermediaries.
"3. Payment of interest on reserves against the Congressional demand for severe
limits on loss of Treasury revenue.
"4, Coverage of time and savings accounts.
"It is within these areas that a compromise must be found or membership withdrawals will accelerate and a crisis precipitated. I do not mean to lead you through a
reappraisal today, but would like to point out a few fundamental facts.
"First, if the banking system wants to equalize its position with the nonbank
intermediaries, a mandatory solution covering all depositary institutions seems most
likely and now is the time to achieve this at least for the deposits where new banktype powers are being offered by thrifts. Also if the reserve base can be enlarged then
the level of reserve requirements can be lowered without significant Treasury loss.
"becc'lld, banks cannot expect other depositaries to be covered unless all banks
are covered. Exemptions for upwards of three quarters of the banks can scarcely be
a demonstration of good faith and commitment to universal reserves.
"Third, either by exemption or by a do-nothing erosion, the banking industry will
be fractionated into the very largest against all others. Such a position will place the
large banks in a 'sitting-duck' role for any new punitive legislative or administrative
limits. Similarly the smaller institutions lose the protection of the lender-of-Iastresort and must again rely upon correspondent bank strength, viability and willingness
to meet emergency needs. Having experienced significant problems with such an
arrangement before I see little reason to reproduce it.
"Finally, one could wonder with some justification whether legislation born of a
crisis would be as acceptable as a law well discussed and negotiated in advance. If
the process of seeking the most acceptable but politically feasible solution were to
break down, then ultimately a crisis would seem likely. I doubt if that is in anyone's
true interest."
"I [am] suggesting a three-part solution: first, required reserves on all depository
transactions accounts differentiated by size of deposits in a manner similar to the
present structure; second, voluntary membership which would still require reserves
on short-term time and savings accounts, but with such reserves serving as clearing
balances and a return offered through implicit pricing; third, requiring nonmembers
to have clearing balances and pay explicit prices for services. Now it is your turn.
1 hope you come up with an even better solution."
Philip E. Coldwell, Member, Board of
Governors of the Federal Reserve System
(At the ABA's Senior Correspondent Banking
Forum, Atlanta, Georgia, March 29, 1979)
May 1919/Volce

"It should be recognized, however, that, while Federal credit programs can help
promote social objectives that have wide public support, these benefits are not
obtained without cost. The lower interest costs paid by groups receiving credit can
in effect be viewed as a form of subsidy provided by the Government. Moreover,
since the supply of credit is not unlimited, when certain groups obtain credit with
Federal assistance, other groups find it more difficult to do so.
"There is general agreement, I believe, that procedures currently being followed
to evaluate, authorize, find, and account for the Federal Government's direct lending
and credit assistance activities are seriously deficient. Because of these deficiencies,
the Congress in its deliberations is able to make only an imperfect assessment of the
relative value of individual credit programs and is unable to consider the impact of
all such programs on the economy's allocation of resources. If 'off-budget' credit
assistance and preferential tax treatment were given the same attention as direct
Federal expenditures, for example, the extent of Federal assistance to particular
sectors would look much different than it does when direct loans are considered
alone. The amount of total assistance to agriculture and housing is approximately
double the volume of direct loans made to these sectors. Moreover, the citizens of
our country are not being properly informed as to the extent of the Government's
involvement in credit allocation.
"The magnitude of Federal credit activities has become quite large in recent years,
and rapid further growth is in prospect. Altogether, loans by fully-owned Federal
agencies and guaranteed loans outstanding amounted to about $315 billion at the end
of the last fiscal year; just 10 years ago the level was only $150 billion. In addition,
loans held by agencies operating under Federal sponsorship totalled $127 billion at
the close of last year, up $100 billion from the level 10 years earlier. These credit
activities, moreover, are expected to continue to grow rapidly, with loans under all
programs projected to increase around $50 billion in fiscal year 1979 and fiscal year
1980. Such activity is expected to account for about one-sixth of the total net funds
raised in credit markets during these periods."
Nancy H. Teeters, Member, Board of
Governors of the Federal Reserve System
{Before the Committee on Banking, Housing
and Urban Affairs, U.S. Senate, March 2,
1979J

"The Board recommends that the Congress consider exempting Federally insured
depositary institutions from anachronistic State usury ceilings on residential
mortgage rates in view of the compelling circumstances which currently prevail. In
14 States, usury ceilings are currently below free-market mortgage yields. If our
institutional lenders are restricted from earning market rates of return on assets,
then they cannot be expected to pay market rates of return on deposit liabilities. This
is the fundamental problem that impedes progress toward unconstrained institutional
competition for small-depositor funds~an outcome that the Board has long supported
and continues to seek."
J. Charles Partee, Member, Board of
Governors of the Federal Reserve System
(Before the Subcommittee on Commerce,
Consumer, and Monetary Affairs, U.S. House
of Representatives, March 22, 1979)
14

Federal ReI.tV. Bank of DaD••

"It is essential that the Federal Reserve maintain adequate control over the
monetary aggregates if the nation is to succeed in its efforts to curb inflation, sustain
economic growth, and maintain the value of the dollar in international exchange
markets. The attrition in deposits subject to reserve requirements set by the Federal
Reserve weakens the linkage between member bank reserves and the monetary
aggregates. As a larger and larger fraction of deposits at banks becomes subject to
the diverse reserve requirements set by the 50 states rather than by the Federal
Reserve, and as more transactions balances reside at thrift institutions, the
relationship between the money supply and reserves controlled by the Federal
Reserve will become less and less predictable, and the instruments of monetary
policy will become less precise in their application."
G. William Miller, Chairman. Board of
Governors of the Federal Reserve System
(Before the Committee on Banking, Housing
and Urban Affairs. U.S. Senate, February 26,
1979)

"Our country is in the midst of an inflation that has already weakened the
confidence of people in government and in our country's future. The inflation is being
fed by widespread and growing expectations that rapid inflation will continue. An
inflationary psychology is now raging in our country. I do not think that our inflation
can be brought under control without changing this psycholQgy. A constitutional
requirement of a balanced budget would indeed be drastic therapy; but this or some
other decisive measure may well be needed to assure the American people that our
governmental bias toward spending and borrowing is being effectively offset and
that they therefore can look forward once again to a dollar of stable purchasing
power."
"My best advice to this Committee is as follows: First. that the Committee
recommend that the Congress go on record as supporting th e principle of a
constitutional requirement of a balanced budget. Second, that you undertake a
thorough study of how the requirement of a balanced budget has worked in practice
in States tha t impose such a constraint in their constitutions. Third. that this
Committee recommend to the Congress a balanced· budget statute that might embody
practical provisions along some such lines as I have suggested in my evaluation of
a constitutional amendment. Fourth, in the event that a balanced·budget bill is
enacted. that this Committee provide for an annual review of experience under such
legislation with a view. say three years from now, of moving that act-or some
modification of it suggested by experience--onto the path of a constitutional
amendment."
Arthur F. Burns. Scholar in Residence.
American Enterprise Institute; former
Chairman. Board of Governors of the
Federal Reserve System
(Before the Subcommittee on Monopolies
and Commercial Law. U.S. House of
Representatives, March 27. 1979)
May ll79/Volce

Energy and the Outlook
for Agriculture in the Southwest
By Larry D. Hauschen

Short supplies and higher prices of energy pose a
major concern for agriculture. This nation's agriculture, once labor-intensive, now uses large
amounts of capital equipment requiring large
amounts of energy to manufacture and operate.
Furthermore, while the land area used in agriculture has remained relatively stable, output per acre

has expanded greatly through increased use of fertilizers, pesticides, and herbicides, the production
of which requires large amounts of petroleum and
natural gas. In fact. in 1974 the production of fertilizers and pesticides alone accounted for more
than 35 percent of all energy used in U.s. agricultural production.
A study at the New York State College of Agriculture and Life Science has estimated that 60 to
60 percent of the increase in corn yields from 1945
to 1970 was directly attributable to greater use of
energy. During those years, average corn yields
in the United States increased from 34 bushels per
acre to 81 bushels, while the labor input decreased
from 23 man-hours per acre to only 9.
Agriculture in the Southwest is especially dependent on energy to pump irrigation water. Increases in agricultural production in this region in
16

recent years have been realized largely through
expansion of irrigation systems and the conversion
of low-yield, low-value dry land to high-yield irrigated land. Today, more than 60 percent of the
value of crops produced in Texas is accounted for
by output from irrigated land. l
The problems encountered by irrigated agriculture as a result of rising energy prices are complicated by the increasing difficulty in some areas of
obtaining sufficient water supplies. The Ogallala
aquifer is the source of irrigation water for High
Plains farmers in Texas, New Mexico, Oklahoma,
Colorado, Kansas, and Nebraska. The heavy demand on this essentially nonrenewing underground body of water has led to the rapid decline
in both the depth at which water can be reached
and the amount of pumpable water. This situation
compounds the problem of rising energy prices
since the greater the distance water has to be
1. R. D. Knutson et al.. AnalySis of Ih e Notionol Energy

plan: The Effec ts on Texas Agric uhure, Texas
Agricultural Experiment Station MP-1331 (College
Station: Texas Agricultural Experiment Station. Texas
Agricultural Extension Service. and Texas Water
Re sources Institute. 1977).
Federel Reserve Bank of Dallas

pumped, the greater the energy required to pump
it and, consequently, the higher the irrigation costs.
Impact on costs
The increase of energy relative to other inputs indicates that farm production costs may be highly
susceptible to changes in prices and availability
of energy. Farm production costs have been
boosted not only by rising prices for gasoline,
diesel fuel, liquefied petroleum gas, natural gas,
and electricity but also by rising prices for fertilizers, pesticides, and equipment.
Although energy price increases boost costs for
all farmers, the impact may vary from region to
region. Most farm products are sold in national or
international markets; therefore, commodity prices
are fairly uniform across regions. Similarly, energy
prices tend to be fairly uniform over large areas.
Cropping patterns, on the other hand, are determined by the interaction of many forces that, in
the final analysis, determine the highest achievable return to the land, labor, and capital in a particular area. Competition between regions leads
farmers to produce the commodities for which a
region's resources are best suited. Interregional
May 1919/Volclll

competition contributes to efficient production by
ensuring that commodities overall are produced at
the lowest possible cost. The ability of a region
to compete depends on its ability to produce something efficiently enough that the returns to land,
labor, and capital in the area are acceptable to
area farmers.
Given the relatively uniform commodity and
energy prices across the country, the impact of
energy price increases on agriculture will vary by
area, depending on the energy intensiveness. This
article explores the impact of energy price increases on winter wheat and grain sorghum productioh in the Eleventh Federal Reserve District.
With the single exception of cotton, Texas farmers plant more acres of both grain sorghum and
winter wheat than any other crops, Furthermore.
in 1977. Texas was the nation's second largest producer of grain sorghum and the third largest
producer of winter wheat.
In Oklahoma, wheat ranks first in acres planted
to crops, and grain sorghum ranks third. The state
ranks second among all states in winter wheat
production and fifth in grain sorghum. New Mexico farmers planted more winter wheat in 1977
than any other crop. and grain sorghum ranked
17

CHART 1
Texas is surpassed only by New Mexico, among the ten leading states,
in energy used per planted acre of grain sorghum
NEW MElOCO

1111111111111111111111

OKLAHOMA

1111111111111111111

TEXAS

111111111111111111111

ARKANSAS

1111111111111111111111111

CALIFORNIA

1111111111111111111111111111111111

COlOflAOO

•

11111111111111

KANSAS

1111111111111111111

MISSOURI

1111111111111111111111

NEBRASKA

11111111111111111111111

SOUTH DAKOTA

DIRECT

11111 INDIRECT

111111

u.s. AVERAGE

111111111111111111111
0

•

MILLION BTU PER PLANTED ACRE

CHART 2
Texas ranks fourth among the ten states in energy
used per bushel of grain sorghum harvested

""""'CO~::::::::~:::
O'''"OM.
111111111111111111111111111111

"'''

11111111111111111111

ARKANSAS

.IIIIIIIIIIIIIIIIIIII

111111111111111111111111

CALIFORN IA

1111111111111111111111

COlORADO

.OIRECT

11111111111111111111111111111111

KANSAS

11111 INDIRECT

111111111111111111

MISSOURI

1111111111111111

NEBRASKA

".,. "0"0"
'".,
"'"'"

11111111111111111111

~;;;I II~IIII~III~~~_-r-_-r---.-----r---r----.----'~

1111111111111111111

100

150

200

250

300

350

400

450

'00

THOUSAND BTU PER BUSHEL HARVESTED '
• Sul<l on '1110-77 .. ,u ge yl,l<11 peer h. ..... ted .Cr. ami PfOl><>l'lIon I 01 pI. nlt<! . e .. . h ...... I.cI,
SOURCE: EM"" ,nd U.S. Ag,k ,,11 .... , Ig74 De't BUI (Flderal Energy Admlnil ira lion . nd U.S. o.p.t1m. nt 01 Agricultu"l.

Federal Re8erve Bank of Dalla8

Table 1
PER ACRE ENERGY USE IN PRODUCTION
OF GRAIN SORGHUM, BY TEN LEADING STATES

,.,
Eleventh District slat.s
New Mexico
Oklahoma . ..
Texas
Other leading states
Arkansas
California
Colorado
Kansas
Missouri
Nebraska
South Dakota

.. ... .....

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

U.S. average

...

(OaI10ns)

(Cubic
le el)

Elec1.lclty
(t(1lowal1.
lIou.s)

13.8
7.9
8.9

11.6
5.8
2.9

9,713.6
2,356.7
3,360.3

263.6
48.3
78.3

5.3
4.6
3.7
5.5
9.5
5.1
4.4

8.6
6.7
4.4
4.7
3.8
7.5
4.9

3.2
.7
1.0
2.6
4.2
2.5
.9

328.6
200.0
750.9
924.1
65.9
97.4
4.4

14.3
468.3
67.9
15.1
13.6
20.0
8.9

7.1

2.9

2,087.2

73.4

Gasoline

(G.l1on~l

Olelll
luet
(Ga l1ol'l')

11.4
5.9
8.8

LiQue tled
petroleum

Natural

NOTE: f lgu.es " 8 .ver.ges c alculated by dividing loC al us e by tota l ac ... and, as s uch, a re not
ind icative or consu mPt io n by a ny p.,li cul.. tormer O. e rn with in s lales . Ratller. Ih ey I.e
ullCul In eslimeUng total energy reqU iremenlJ tor va riou s a creages .
SOURCE: Energy . nd U.S. Agrlcullur.: 197~ Oa t. Base (Federal Energy Administralion and U.S.
Olp. l1menl ot Ag . ic uitu.to).

third in acres planted. New Mexico ranks 8th in
the United States in grain sorghum production
and 19th in winter wheat.
The energy intensiveness of the Eleventh District
states of Texas, Oklahoma, and New Mexico
(Louisiana, the fourth District state, is excluded
because grain sorghum and wheat are relatively
unimportant there) is compared with intensiveness
in other states ranking among the top ten producers
of each commodity. The ten states account for 98
percent of total U,S. production of grain sorghum
and approximately 75 percent of winter wheat.
The fuels used to supply energy in crop production vary from farm to farm and state to state.
Comparison of energy use is hindered since cubic
feet of natural gas cannot be directly compared
with kilowatt-hours of electricity, for example.
However, the energy con lent of different fuels
can be expressed in terms of the British thermal
unit (Btu}- the amount of heat or energy required
to raise the temperature of 1 pound of water 1
degree Fahrenheit- and compared on that basis.
Two indicators of energy intensiveness have
been calculated: Btu use per planted acre and Btu
use per unit of output. The latter takes account of
differences in yield and harvested acreage relative
to planted acreage and, hence, is a better indicator
of the relative impaci of energy price in creases. In
addition, lotal energy use is divided into two categories : direct- used directly in producing the
May 197ft/Voice

crops- and indirect-used in the manufacture of
fertilizers and pesticides that in turn are used in
producing the crops.
Greater use of energy in District
Farmers in New Mexico use nearly 4 times as
much energy per acre of grain sorghum as farmers
in Kansas, the leading state, and 2'/2 times the U.S.
average (Chart 1). Kansas, Nebraska, and Missouri,
which produce 30 percent, 29 percent, and 8 percent, respectively, of the U.S. crop, use approximately equal amounts of energy per planted acre.
Texas , which produces 19 percent of U.S. grain
sorghum, is the second most energy-intensive state,
using nearly double the amounts used in Kansas,
Nebraska, and Missouri. Oklahoma uses slightly
less than California and approximately 1'/! times
the Kansas-Nebraska-Missouri level.
When energy intensiveness is measured by use
per bushel of output rather than use per planted
acre, the results differ somewhat (Chart 2). New
Mexico is still clearly the most energy-intensive
state. Kansas, Nebraska, and Missouri remain approximately equal. Oklahoma, however, which uses
Jess energy per acre of grain sorghum planted than
Texas or California, uses significantly more energy
per bushel harvested than either of these states.
This reflects differences in average yields and proportions of pla nted acres harvested. Similarly, Colorado, which uses less energy per acre than any
19

CHART 3
Texas is also surpassed only by New Mexico
in energy used per planted acre of winter wheat
NEW MEXICO

11 111111111

OKLAHOMA

11111111111111111111111111111

TEXAS

111111 111111111111

IWNOIS

111111111111111111111111111

KANSAS

111 111111111111

MISSOURI
MONTANA

111111111111111

NEBRASKA

11 11111111

DIRECT

11111 INDIRECT

11 11111111111111111111111111111

0"00
WASHINGTON

u.s.

•

111111111111111111111111111111111111

1111111111111111111111111111111

AVERAGE

111 1111111111111111111
2

MILLION BTU PER PLANTED ACRE

•

400

450

500

CHART 4
The three Eleventh District states use much larger amounts of energy
per bushel of winter wheat harvested than do the other leading states
HEW MEXICO

11111111111111

OKLAHOMA

1111111111111111111111111111111

TEXAS

11111111111111111111111

IlliNOIS

111111111111111

IliANSAS

1111111111

MISSOURI

111 1111111111111111111

MONTANA

111111111111

NEBRASKA

DIRECT

1II1I1N01RECT

11111

0"00

11 11111111

WASHINGTON

u.s.

•

111111111111111

AVERAGE

11 11111111111111
0

100

150

200

250

300

350

THOUSAND 8TU PER BUSHEL HARVESTED'

• 1I ...d on 197tH] ""ogo yield, ~t h . .....'..! act. and Pfoporlion. 01 pI.~,..:I o cr.. h art • • I.cI.
SOURCe: E"flgr . "d u.s. AI/,ie u/luf' : 19T~ 0 . ,. Bua (Fed . .. , Ene rgy Admln lst," tlon a nd U.S. Dep. rt ...."! 01 Agriculture).

Federal Raserve Bank 01 Dallas

Table 2
PER ACRE ENERGY USE IN PRODUCTION
OF WINTER WHEAT, BY TEN LEADING STATES
llqU(llied
orne l petroleum
GasoLine
fuel
on
(Gallons ) (Gallon.) fG,llonl)

•••
Eleventh DIstrict states
New Mexico ...
Oklahoma ....
Texas .........
Other teading Slates
illinois
Kansas
Missouri
Montana
Nebraska . .
."
Ohio
Washington

....... .

.. .

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

U.S. average ....

6.6
5.1
6.0

6.3
5.1
4.7

5.7
5.6
5.6
6.5
7.2
6.1
4.4

1.0
3.8
1.1
35
4.3
1.0
32

5.6

3.7

Naruml

£Iee·

(Cubic
feel)

I" Clly
(Kllo.... n·
houfl)

3.2
.7
1.2

2,536.1
155.6
1,520.5

72.3
7.'
38.4

.5
1.0
.4
.5
.3

n.a.
112.6
.7
.4
6.3
n.a .
n.a.

4.'
5.8
5.5
12.4
6.0
5.1
58.6

271.2

24.1

n .•. --HOI available ; lolal consumption In slate Is teas than sao.OOO cubic tee!.
NOTE : Figures a ,e averag e. calcutated by di ";ding Ictat use 1>1 total Dcrn and . .. such. ara
not Indieatlve 0 1 cons umption by any part icula r ,.,mer or area .... ithin s ta tes . Rathe ••
they a,e usa lul In eatlmallno total eneroy requirements 1o. various Dcreages.
SOURCE: f'.nefflY ."d U.S. Aglleultu,.: '914 V.,a Base (Federal Energy Administration and
U.S. Vaplrtm a nt 01 AgriCulture).

leading state except South Dakota, is surpassed
only by New Mexico and Oklahoma in energy
used per bushel harvested. Conversely, California,
which uses only slightly less energy per acre than
Texas but more than any other state except New
Mexico, is relatively energy~efficient in terms of
energy used per bushel harvested. Average yields
in California in 1970-77 were 23 percent higher
than in any other state, and harvested acreage was
a larger proportion of planted acreage than in other
states.
The Eleventh District states show similar results
for winter wheat. New Mexico again uses the most
energy, both per planted acre (Chart 3) and per
bushel harvested (Chart 4). Texas is the second
most energy~ i ntensive and Oklahoma is third, by
both measures. Missouri, Wash ington, and Ohio
arc close behin d in energy used per planted acre.
The energy intensiveness of the District states
is even more pronounced in terms of energy
used per bushel harvested. To illustrate, Wash i ng~
ton uses nearly thre e~fourths as much energy per
acre of wheat planted as Texas but less than
three~tenths as much per bushel harvested. In
Washington, 38 percent of the energy used per
acre was in the form of direct energy; 62 percent
was in fertilizers and pesticides. Texas, on the
other hand, used 71 percent of total energy directly
in the production process. Washington farmers ap~
plied a significantly larger proportion of fertilizer
May 1979/Voh:e

and pesticid e inputs and had higher yields, res ult~
ing in lowe r energy use per bushel harvested.
It is clear from th e data that New Mexico. Texas,
and Oklahoma are significantly more energy~inten~
sive in the production of winter wheat and grain
sorghum than other major producing states. This
flows largely from the region's heavy use of
pumped irrigation water. In Texas, 41 percent of
the total energy (direct plus indirect) consumed in
agricultural production is used in crop irrigation.
New Mexico farmers use 81 percent of total energy and 90 percent of direct energy in irrigation.
Implications for District agriculture
The relatively high level of energy used per bushel
of grain harvested in the District states indicates
that grain sorgh um and wheat farme rs in these
s tates will be affected relatively more by rising
energy prices than those in the other leading states.
Undoubtedly, District farmers will reduce the
amount of water pumped for irrigation by develop~
ing and using more efficient irrigation methods.
Intensive research efforts are under way at uni~
versities and agribusiness firms to develop irrigation technologies that are more efficient in
energy and water use. In addition, wider adoption
of low and minimum tillage practices is likely.
thereby reducing energy requirements for field
operations. Cropping patterns will likely be
changed as less energy-intensive crops are substi21

tuted for more intensive ones. Production of even
the less energy-intensive commodities will tend
to decline if energy prices cause irrigated land to
be shifted to dry land production or removed from
production entirely.
The effects of interregional ad justments could
be severe in areas where farmers are unable to reduce energy consumption sufficiently to preserve
economic viability. Unless offset by nonagricultural expansion, a decline in agricultural production and farm income in an area would reduce
nonfarm income as well.
Several recent studies have examined the impact
of increases in energy prices and irrigation costs.
Knutson et aI., in reference to a study by Taylor/
indicate that an increase in the price of natu ral gas
from $1.09 to $2.50 per thousand cubic feet (Mc£)
will reduce net farm income $67 million annually
in Texas. The price of natural gas, although varied
between localities, has increased from $0.40 per
Mcf to nearly $2.00 since 1974. Another study, directed toward the High Plains, found that given
1971-74 commodity prices, irrigated production
of cotton, grain sorghum, and wheat would completely disappear at a natural gas price of $4.67
per Mcf.! The same study fou nd that an increase
in natural gas prices from $1.25 per Mcf to $2.50
to $3.00 per Mcf would reduce Texas High Plains
irrigated acreage by 1 million acres. net crop income by $79 million, and farm real estate values
by $1.2 billion.
An interregional analysis by Dvoskin and Heady
indicates that high energy prices would cause a
reduction in irrigated cropland and an increase in
dryland acreage! Although these production shifts
would lead to reduced farm supplies and, hence,
higher commodity prices and farm income, th e increased income would flow primarily to the eastern
2. C. Robert Taylor, "The Effects of Rising Natural Gas
Prices on Texas Agriculture" (Unpublished report
submitted to Governor's Energy Advisory Committee],
cited by Knutson et aI., Anolysis of the Notional Energy
Plan: The Effects on Texos Agriculture.
3. Kenneth B. Young, The Impoct of Rising Natural Gas
Prices on Agriculture in the Texas High Plains, Technical
Report no. 77·107. prepared for Governor's Energy
Advisory Council. Forecasting and Policy Analysis
Division [Austin. Tex., 1977).
4. Dan Dvoskin and Earl O. Heady, U.S. Agricultural
Production Under Limited Energy Supplies, High Energy
Prices, and Expanding Agricultural Exports, CARD Report
no. 69 [Ames: Iowa State Unive rsity, Center for
Agricultural and Rural DeVelopment, 1976J.
22

and midwestern states, making them relatively better off but, at the same time, the irrigated western
states relatively worse off.
The accompanying map depicts the estimated
changes in regional income shares. assuming a 10percent energy curtailment and energy prices at
double their 1974 levels. The study concludes: "An
energy crisis in the form of reduced energy or
higher energy prices or both would have a severe
long-run impact on irrigated fa rming in the western
states. Not only do energy costs increase sharply
but an energy reduction might actually prevent
farmers from applying water to their irrigated
crops."
Food supplies and prices
The impact of energy price increases on food prices
is difficult to predict. The effects on price movemen ts of particular commodities will vary. Prices
of energy-intensive commodities would be expected to increase relative to low energy-intensive
ones. The larger the proportion of a commodity
produced by relatively energy-intensive areas, the
greater would be the impact of energy price increases on its supply and price. For example, a
reduction in winter wheat production by New
Mexico farmers alone will not, other things constant, have a Significant effect on wheat prices
since New Mexico supplies only 0.6 percent of
the total U.S. crop. Kansas, on the other hand. supplies nearly a fourth of the crop. Production adjustments in that state could have a major impact.
Likewise, adjustments in production of grain sorghum in Kansas, Texas, and Nebraska could have
a dramatic effect on prices since those th ree states
account for 78 percent of total U.S. output. The
extent to which adjustments in an area are made
will be largely determined by the number and
closeness of alternatives available to farmers in
the area.
At present, adequate supplies of energy to farm ers are essential to adequate world food supplies
because high levels of agricultural output can be
sustained only through concentrated use of energy.
Continued escalation of energy prices will increase
the diversion of presently irrigated cropland to dryland acreage or removal from crop production altogether. Farmers in some areas may continue to
leave agriculture as increasing amounts of land
can no longer be farmed profi tably. New technologies making agriculture more energy-efficient
will help farmers ad just to energy curtailments and
price increases, thereby helping sustain production.
Federal Reserve Blink of Dallill

Changes in Regional Farm Income Shares, Assuming
a 10·Percent Energy Cut and Doubling of 1974 Energy Prices

SOUTHWEST

INCI'IEASEO INCOME SHARE
UNCHANGED INCOME SHARE
DECREASEO INCOME SHAIIE

SOURCE; D... D¥oHln.1Id brl O ..... dy (U.S. Agrkllhw,./I'roducflon Uftd., l/oOlllflf EII,'9' Slippll...
HJtIl E...
Ptle... • 1Id E~".IIdI~ AfI/C=lIlf1/", E~POIf" low. $1.1. Un-.Ity. Cent. lor
AQrkullur.' and Auf •• ~I).

'9'

Nonetheless, the growth of total agricultural output
will probably be constrained if energy prices rise
relative to agricultural commodity prices.
Any reductions in output will tend to boost
prices for agricultural commodities and for food.
Costs to consumers will tend to rise also as higher

May t971/Voice

energy prices boost costs of processing. storing.
and distributing food. The upward pressure on
food prices could be restrained to the extent that
improved technology and conservation measures
can offset the effects of higher energy prices on
agricultural output.

Consumer Credit Survey Published
In an effort to determine the effect and value of
consumer credit laws and regulations, the three
Federal bank regulatory organizations sponsored a
survey of 2,563 households in August and September 1977 to obtain consumers' views on credit.
The results of the survey reveal that consumers generally• Are much more aware of annual percentage
rates than they were about ten years ago
• Detect differences among financial institutions
• Consider Truth in Lending disclosures too
complicated
• Do not shop around for credit
• Have noticed little unfair treatment by creditors
• Are unaware of the Equal Credit Opportunity
Act and the Fair Credit Billing Act
• Have detected few billing errors, and those
that were found were small and usually corrected
satisfactorily by the creditor
• Consider credit insurance a good thing
• Have an overall favorable attitude toward
credit and credit cards
Consumers' awareness of annual percentage
rates (APR's) has increased substantially in recent
years. More than 54 percent of the respondents
were aware of the APR of closed-end credit. This
was up sharply from 38 percent in 1970 and 14
percent in 1969. Awareness was even higher for
open-end credit (65 percent) and bank credit-card
credit (71 percent). However, the respondents were
generally unable to use percentage rates to calculate dollar finance charges.
24

Institutional awareness, or consumers' perception of differences in credit costs among classes of
institutions, is high. More than 88 percent of the
persons surveyed reported they would recommend
banks and credit unions to friends who wanted
to finance a car. Cost was the most important consideration in making the recommendation. By contrast, the respondents said they would caution the
friends about getting a car loan from a finance
company or a dealer, again for cost reasons. When
asked to rank institutions solely by cost, 78 percent answered that banks or credit unions were
least costly.
Evidence was found supporting the view that
Truth in Lending disclosure statements contain too
much information. A large majority (73 percent)
of those interviewed said that Truth in Lending
statements were not read carefully by most people,
and the same percentage found the statements
complicated. Moreover, 59 percent agreed that
some information on Truth in Lending statements
is not very useful.
Despite increased awareness of interest rates
and institutional differences, most of those surveyed do not shop for credit. Only about one
credit user in four engaged in any kind of search
for credit information. However, all consumers
may benefit from the activity of the 25 percent who
do engage in extensive credit shopping.
Of those who did engage in some search for
credit information, about a third mentioned low
cost as the reason for choosing a specific class of
creditor. But the most common reason cited for
Federal RHerve Rank of D.....

choosing a particular creditor was previous experience or familiarity.
Respondents perceived little unfair treatment by
creditors: only about a fourth reported any problems or treatment they considered unfair. The most
common complaint involved credit refusal or limitation. Of those respondents who thought they had
been treated unfairly, 62 percent complained to the
creditor. Very few complained to government officials, and none contacted a Federal regulatory
agency. Of the 622 reported cases of "unfair" transactions, 27 percent were corrected to the consumers' satisfaction. The proportion rises to 37 percent, however, when only those consumers who
look action are considered.
Awareness of the Equal Credit Opportunity Act
and th e Fair Credit Billing Act is very limited. Less
than 20 percent of the respondents were aware that
age and marital status are illegal credit criteria
(under the Equal Credit Opportunity Act), and
only 16 percent were aware that there is a Federal
law dealing with credit-card billing errors.
Most respondents (86 percent) believed that in
credit-granting decisions, creditors considered consumers' fin ancial characteristics to be more important than personal characteristics. Even among
subgroups alleged to have been targets of discrimination, personal characteristics were seldom mentioned as being important to creditors. For example,
only 5 percent of Blacks, Hispanics, and Asians
mentioned race as an important factor to creditors.
When asked what they considered the most important criteria used by creditors in making their
May 19'19/Volce

decisions, the respondents most often mentioned
previous credit experience, income, and length of
time on present job, in that order.
Most people (70 percent) said they save their
credit-card receipts for comparison with billing
statements. Retention is lower among younger consumers and among those with higher incomes and
more education. Almost 70 percent of the respondents believed descriptive hills that do not include
receipts were adequate. The younger, hetter-educated, and higher-income consumers, who generally did not save their receipts, were more likely
to say that descriptive bills were inadequate.
About one cardholder in seven reported some
kind of credit-card hilling error in the previous
year. Almost 50 percent of the errors involved $25
or less, and 77 percent involved $100 or less. Over
60 percent of the respondents who found a hilling
error complained to the creditor, and a satisfactory
resolution was reported in 88 percent of the cases.
Credit insurance was considered to be a "good
thing" by 65 percent of the respondents. Only a
small proportion (11 percent) said it was "bad."
Most respondents, except borrowers at credit
unions, reported that credit insurance was priced
separately, and relatively few (17 percent) thought
that it was expensive in relation to its value. Over
60 percent of the respondents believed credit insurance was not required.
Compared with the 1970 findings, the overall attitudes of consumers toward credit appear to be
more favorab le, with a dramatic shift occuring in
their opinion of credit cards. More than 57 percent
2S

reported that credit cards were a "good idea"up sharply from 38 percent in 1970.
Appropriate reasons for borrowing were mentioned in almost exactly the same order as ten
years earlier, but the proportion of consumers
mentioning each reason increased in every instance. For example, in the case of automobile financing, almost 85 percent said that it was an
appropriate reason to borrow. This was up from
65 percent in 1967.
Most consumers have a favorable attitude toward
creditors and lenders. Almost 80 percent of th e respondents agreed, at least to some extent, with the
statement that "they usually treat their customers
fairly." More than 90 percent agreed with the
statement that "they provide a useful service to
consumers."
About three-quarters of the current credit users
said they were very satisfied with a recent closedend credit transaction. Another 17 percent expressed some satisfaction.
In addition to studying the effe ct and value of
consumer credit laws and regulations, the survey
also updated data on various aspects of consumer
credit, including amount of credit outstanding, use
of credit cards, and financial assets of consumers.
The volume, sophisticated use, and approval of
credit by consumers apparently have increased significantly in recent years.
In late 1977, consumer credit totaled about $216
billion for instalment credit, $44 billion for noninstalment credit, and $650 billion for mortgage
credit. In addition, consumers held almost half a billion accounts, in the form of consumer loans, credit
cards, mortgages, and other extensions of credit.
The volume of consumer nonmortgage credit has
grown to ten times the amount outstanding in 1950.
The majority of survey respondents (63 percent)
had at least one credit card. Retail cards were the
most popular, followed by bank-credit cards, gasoline cards, and travel and entertainment cards. The
proportion of consumers holding each of these was
54 percent, 39 percent, 34 percent, and 9 percent,
respectively.
Almost 60 percent of the families interviewed
use credit cards at least occasionally. This is an
increase of almost 20 percent since 1970. The proportion of credit-card users rises sharply and con-

tinuously as income and education increase, reaching more than 90 percent in the highest brackets.
The proportion of the population using bankcredit cards has more than doubled since 1970, to
35 percent. Other credit-card use experienced much
smaller growth, with the exception of gasoline-card
use, which decreased slightly. Use of travel and
entertainment cards increased, by about 50 percent, to 7 percent of family households, and retailcard use rose from 45 percent in 1971 to 50 percent
in 1977. The proportion of users of gasoline cards
fe ll from 33 percent to 32 percent during the
period.
While the proportion (50 percent) of families in
the United States that had instalment credit outstanding was about the same in 1970 and 1977, the
median debt owed by the families approximately
doubled. This compares with an increase of 56 percent in the consumer price index during the same
period.
However, debt burdens do not appear to be
extremely large for most families. In 1977, only
about 1 family in 14 had commitments to repay
instalment debts equal to 20 percent or more of
monthly family income. Most families with debt
had made commitments in the range of 5 to 19
percent.
The proportion of families owning all types of
financia l assets, except stocks, increased from 1970
to 1977. That year. 77 percent of the families had
savings accounts, compared with 65 percent in
1970. The proportion of families with checking accounts showed a similar trend- 81 percent in 1977
versus 75 percent in 1970. While savings and checking accounts were the most popular financial assets,
the next most likely type of asset to be held was
savings bonds. About 30 percent of the families
included them among their financial assets. Ownership of only one asset had decreased since 1970stocks and mutual funds. This proportion declined
from 26 percent in 1970 to 25 percent in 1977.
Copies of the 1977 Consumer Credit Survey may
be obtained from Publications Services, Division of
Administrative Services, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551.
The price is $2.00 per copy, and remittances should
be made payable to the Board of Governors of the
Federal Reserve System.

Federal Re.erve Bank of n.D••

Gilbreath Elected
to the Board
of Directors
Kent Gilbreath. Professor in the Department of
Economics and Finance at Baylor University. Waco,
Texas, has been elected to the Board of Directors

of the Federal Reserve Bank of Dallas. Gilbreath
was elected in a special election to fill a vacancy
on the Board. He is a Class B director. elected by
member banks with capital and surplus of less
than $1 million.
Gilbreath has been a professor in the Department
of Economics and Finance at Baylor University for
the past six years, where he specializes in Energy
Economics. He is author of a book dealing with
small business development and articles dealing
with world commodity markets, international finance, and tax reform in Texas.

May 18'7'8/Volce

~egulatory G[1riefs
Review of Recent Actions of the Board of Governors of the Federal Reserve System

• THE LIST OF NONBANK ACTIVITIES PERMISSIBLE FOR BANK HOLDING COMPANIES
HAS BEEN EXPANDED to include the sale of
money orders, travelers checks, and U.S. savings
bonds. The amendment to Regulation Y, effective
April 2. 1979, fixes a maximum face value of $1,000
on the money orders so1d at offices of bank holding companies and their subsidiaries. For further
information, contact the Holding Company Supervision Department, (214) 651-6182.
• REGULATION S HAS BEEN RESCINDED by
the Board of Governors. The regulation, which governed the Board's power to regulate and examine
banking services performed for state-chartered
member banks by outsiders. was made unnecessary
by a recent amendment to the Bank Service Corporation Act. Questions may be directed to the
Bank Supervision and Regulations Department.
(214) 651-6274.

• ANSWERS TO A SECOND SET OF QUESTIONS FREQUENTLY ASKED ABOUT THE COMMUNITY REINVESTMENT ACT, its implementing
regulations (Regulation BB for the Federal Reserve), and corresponding examination procedures
have been issued by the four Federal financial
regulators. Copies are available from the Bank
and Public Information Department of this Bank.
{2141 651-6267.

Federal Helerve Bank of Dalla.

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

FRASER