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May 1981




The Federal Reserve and Texas Banks in the Evolving
Financial Structure


Alcohol from Grain: A Transition Fuel


"Fed Quotes"


Regulatory Briefs and Announcements


Now Available from the Federal Reserve

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

The Federal Reserve and
Texas Banks in the Evolving
Financial Structure
An address by

Robert H. Boykin, President
Federal Reserve Bank of Dallas
before the
Texas Bankers Association
97th Annual Convention
EI Paso, Texas
May 1, 1981

With all that is going on in banking and the
financial community today, the selection of topics
that could be discussed is almost limitless. For
example, an obvious choice would be monetary
policy and the economy. After all, our economy, at
least at the national level, still has some rather
severely ingrained problems. And in one sense,
we might be at a crossroads in that the policies
followed in this country over the next year or so
could well set the tone for our economy for many
years to come. So, speaking on the economy and
monetary policy would have been an obvious
But I chose to talk today about something that
is just as important and much closer to home-that
is, the challenges to be faced in the years ahead
by the Federal Reserve System, or more specifically
the Dallas Reserve Bank, and commercial banks.
May 19BI/Voice

It is not news to you that banking is going
through almost unprecedented change at the present time, but do you know that the Federal Reserve
System faces similar change of a near-equal magnitude? It occurred to me that it might interest
you to hear how we intend to conduct business
at the Dallas Fed, particularly with commercial
banks in Texas. And, as my later remarks will
indicate, what happens to banks in Texas is not unrelated to what happens to the national economy.
Let me begin by discussing the Federal Reserve
System. As suggested earlier, you may be surprised to learn that recent developments, such as
the Deregulation and Monetary Control Act, probably have had as much effect, or possibly more,
on the Federal Reserve as on commercial banks.
The Federal Reserve System is, of course, the
central bank of the United States, and, as such,
there are some functions it must perform to discharge this basic responsibility. But over the years,
it has also become more involved in providing a
broader range of financial services than most other
Western central banks. Virtually all central banks
are involved in issuing and destroying currency,
transferring funds, and acting as the final settle-ment agent. But relatively few are as involved in
the payments mechanism as the Federal Reserve
System in the United States.
There are a number of other similarities and
differences between the Federal Reserve System
and other central banks around the world, but the
point to be made is that over the years the Federal Reserve has collected a rather large number
of functions only loosely related to the main function of central banking. Some of these we sought;
some were placed upon us.

As you know, one of the major provisions of the
Monetary Control Act was a mandate to the Federal Reserve System to price its services. While
the Monetary Control Act has influenced the Federal Reserve System in many other ways. no decision is probably more important to the relationship of the Federal Reserve Bank of Dallas with
the banks in the Eleventh District than the pricing
of our services at full cost. This decision has required a substantial amount of soul-searching on
the part of the Federal Reserve System. After all,
pricing is entirely new to us and raises quite legitimate questions. For example, it has precipitated
within the Federal Reserve System rather widespread discussion of our basic function and how
the provision of these services mayor may not be
a necessary and desirable complement to the discharge of that function. Put more simply. should
the Federal Reserve System just price its services
at full cost and then passively accept whatever
changes in volume might take place, or should the
Fed attempt to maintain some predetermined level
of service or at least maintain a presence in the
provision of these financial services?
The answer to this question is not as obvious
as it might first appear. To be quite candid. my
initial reaction was to price our services at cost
and then accept whatever volume might result.
If the private sector could provide these services
more efficiently, then it should. assuming. of
course, that this would not impair the implementation of our basic responsibilities. On reflection.
however. the situation is not quite that simple. It
has been the responsibility of the Federal Reserve
System to assure an efficient payments mechanism
in order to achieve a smoothly functioning economy. There are a number of reasons why a public
entity like the Federal Reserve Bank of Dallas might
maintain a presence in the provision of financial
services. even if it does not supply these services
at the lowest cost in the short run.
First. the presence of a public institution might
impose some competitive discipline in highly concentrated markets. This competition could stimulate innovation and technological improvements in
the provision of the financial services that might
not occur otherwise. In this circumstance, the Federal Reserve would act as a public-interest competitor stimulating competition.
Second, it may be desirable to have a public
presence in these services where the private dis2

tribution of services does not appear to be equitable or uniform. For example. one might feel
there should be some minimum level of service to
all financial institutions. Left to private enterprise.
this might not be achieved if the provision of the
services in some areas were unprofitable. In that
case. it might be deemed to be in the public interest if these services were provided by a public
Third. this might be the case if one entity were
to provide most of the financial services in a
geographic area because of, say, economies of
scale. That is. if there were to be a predominant
supplier of services. some might prefer that supplier to be a public entity rather than a private
one. While most would not like this concept, it
could be argued that society's interests can be better protected by a public body than a private
These are just some of the reasons why a public
institution such as the Federal Reserve might
maintain a presence in the provision of financial
services, even if it does not provide these services
at the lowest cost in the short run. Whether any
of these conditions prevail at the present time is
yet to be determined.
The position of the Federal Reserve Bank of
Dallas in this regard will be neither passive nor
aggressive. That is. we plan to adopt a progressive
posture in the provision of financial services. Initially. we will continue to provide the services we
currently offer, but over time, we will be prepared
to remove ourselves from the provision of those
services where we find we are not an effective
competitor and there are no overriding public considerations for maintaining an operational presence.
We also intend to remain flexible in order to adapt
to the changing needs of the banking industry and.
as necessary, offer modified or new services and
encourage innovation across the full range of
financial services. But regardless of how all this
turns out, be assured that the well-being of the
public and the financial institutions in the Eleventh
Federal Reserve District will be of prime importance to the Dallas Fed.
Now let me turn to some of your problems. I'm
not a commercial banker, but looking in from the
outside. it certainly seems to me that banking has
been exciting in the past few years and appears
likely to remain that way for some time to come.
Certainly, some of the changes now taking place
Federal Reserve Bank of Dallas

in the banking industry are also the immediate
result of the Deregulation and Monetary Control
Act-the new reporting requirements, the changes
with respect to the maintenance of reserves, the
introduction of NOW accounts, the removal of
usury ceilings, and so on. I don't need to detail
this list further, since you are intimately familiar
with these changes as they affect banking.
I would like you to consider the idea that many
of the changes that have taken place in the financial
community in the past few years can be traced to
another, possibly overriding development-the acceleration in the rate of inflation. To be sure, other
important changes have taken place, but I wonder
if we fully realize how pervasive is the influence
of inflation in the financial community.
Inflation affects financial markets in a number
of ways. Most directly, interest rate levels tend to
raise when the rate of inflation rises. Lenders
realize that they are going to be paid back in
cheaper dollars and demand compensation for the
loss of purchasing power of the money they lend.
Borrowers, on the other hand, are quite willing to
pay the higher interest rates. After all, they will
be able to pay back these loans with dollars that
have a lower purchasing power. This results in
the so-called inflation premium in interest rates
to which economists refer.
In addition to raising the level of interest rates,
inflation also increases the volatility of interest
rates. An inflationary environment is a very uncertain one. This uncertainty manifests itself in
heightened speculation as to future developments
in the economy and financial markets, with a
resultant increase in the volatility of interest rates.
This increased volatility of interest rates, of
course, causes financial institutions some obvious
problems. It brings an entirely new meaning to the
term "portfolio management." And a bank's liquidity position, certainly insofar as that position is
reflected in the liquidity of its assets, can change
dramatically in a short period of time as interest
rates fluctuate. Partially as a result of these interest rate gyrations, we have seen a shortening of
the maturity of bank portfolios and even the development of a futures market in Treasury bills.
At the same time, the higher level of interest
rates, increased volatility aside, has also had a
rather dramatic effect on your lives. It is the higher
level of interest rates that has caused much of
the "financial innovation" in recent years. As interMay 1981/Voice

est rates rise, people become aware of the cost
of idle balances-that is, balances that are not earning explicit interest. And as the level of interest
rates rises, it becomes worthwhile to design a
package that will attract funds out of the institutions in which they are held and make a profit
in the process.
Consequently, it is the higher level of interest
rates that has led to tying various financial instruments to market rates of interest. It is the higher
market rates of interest that have led to the pressure for the introduction of NOW accounts nationwide. It is the high level of interest rates that has
led to rapid growth in money market mutual funds.
It is the high level of interest rates that has been
a major catalyst in the push for financial deregulation. Usury ceilings, which once were only
binding occasionally, if at all, became a major
problem as market rates rose in recent years. In
states that still have fairly restrictive usury ceilings, efforts are being made in most legislatures to
remove or substantially raise them. Such an exercise has just been completed in Texas.
And, of course, the higher the level of interest
rates, the greater the competition for funds by
nontraditional lenders. Not being bound by the
regulations and requirements for traditional lenders, these organizations often see a profit rate in
credit that exceeds the average for their basic
industry. All these forces have led to increased
competition for bank funds.
Inflation has caused another problem for banks.
It makes the proper accounting of bank profits
more difficult. It is conventional wisdom that bank
profits were at a record high last year; yet banks
have had trouble raising capital, and their priceearnings ratios are lower than for comparable nonfinancial corporations. If banking is such a lucrative enterprise, why aren't investors more eager
to participate in it? The answer is suggested by the
recommendation of the Financial Accounting Standards Board that bank profits be adjusted to take
account of the effects of inflation. If this is done,
the bank profit picture is not as rosy as it might
first appear. And one can understand why investors
are not rushing to buy bank stocks, at least as
quickly as the unadjusted figures on bank profits
suggest they should. All this is just to say that
inflation not only makes your job harder but also
makes it harder just to figure out what kind of job
you did.

Before I leave the effects of inflation, it should
now be obvious to everyone that inflation was
probably a major catalyst in getting the Deregulation and Monetary Control Act passed. For example, it was inflation and the resultant high interest rates that precipitated the increase in the loss
of member banks from the Federal Reserve System. As interest rates increased, the opportunity
cost of holding idle balances with the Federal Reserve System rose, and attrition picked up. The
effects of inflation are seen throughout that legislation. The conditional removal of usury ceilings, the
introduction of NOW accounts nationwide, the attempt to reduce the average level of reserve
requirements, the earnings credit against services
used at the Fed-all reflect the inflation-induced
higher level of interest rates.
Having enumerated some of the effects of inflation on your industry, let me assure you that we
in the Federal Reserve System consider the reduction of inflation our primary objective. Chairman
Volcker has stated so and has given Congress this
assurance in his statement of monetary objectives.
I have attempted to show that inflation really
has affected all our lives-probably in some ways
that may not have been obvious, or at least in ways
we don't think about very often. We tend to look
at the results of inflation as the cause of our
problems. We might think our problems are caused
by the passage of the Monetary Control Act or by
the volatility or level of interest rates. But it is
instructive to take a step backward and realize


that these developments do not take place in isolation; laws are not passed in a vacuum, and financial markets do not behave as they do for no reason. Many times they reflect ongoing basic developments in the economy, and, in my opinion, that's
what's going on here.
This has some obvious implications for the future. We could all probably make our lives much
easier if we were able to slow the rate of inflation.
Certainly, the resultant reduction in the volatility
of interest rates would have to make our lives
easier. And, as indicated earlier, as long as the
level of interest rates remains high, we have every
reason to believe that the volatility of interest rates
will remain high. Only by reducing the rate of
inflation can we eventually reduce the level of
interest rates and, hence, the volatility of rates.
Furthermore, I have to believe that a reduction
in the level of interest rates associated with the
slowing in the rate of inflation would make it
more difficult for those in less regulated fields to
offer alternatives to the services you offer. That
mayor may not be true, but it does strike me that
more people are interested in getting into the
credit business as the level of interest rates rises.
Let me conclude by saying that whatever the
future holds, we at the Federal Reserve Bank of
Dallas would like to think that we are all in this
together. We feel we are a part of the financial
community in this area and would like to believe
we are all working together toward a common
goal-a stronger economy and financial system.

Federal Reserve Bank of DaUas

Alcohol from Grain:
A Transition Fuel
By Jennifer D. Miles

Oil and natural gas constitute about three-fourths
of U.S. energy consumption. Because the prices of
these fuels have risen rapidly during the past two
years, the United States is attempting to shift from
fossil fuels to alternative sources of energy. Alcohol produced from grain has been advocated as
such an alternative because it can be burned directly, blended with gasoline, and used for industrial purposes.
Greater reliance on alcohol fuel once appeared
attractive, particularly in the short run. Some experts have claimed that over the next five years,
alcohol production from grain and increased conservation of energy will be the most important
factors in reducing petroleum consumption. 1 A
subsidized, corn-based gasohol industry was established by the Energy Security Act of 1980, and
loan guarantees and excise tax reductions have
1. Wallace E. Tyner. "Our Energy Transition: The Next
Twenty Years," and Donald Hertzmark. Silvio Flaim,
Daryll Ray, and Greg Parvin. "Economic Feasibility of
Agricultural Alcohol Production Within a Biomass
System," both in American Journal of Agricultural
Economics, December 1980.

May tl8t/Voice

been provided to encourage development of an
alcohol production capacity of 920 million gallons
per year by the end of 1982 and 4 billion gallons
by 1984.
Recently, however, the weather in many parts
of the world has been unfavorable for crop production, and worldwide demand for grain has
increased. These developments have drastically
reduced the previously abundant grain reserves.
Competition between users of grain for fuel, feed,
and food is likely to be more intense than previously anticipated if the United States produces
alcohol from grain on a large scale. Because of the
significant decline in gasoline consumption during
the past two years and the tight fiscal policy of the
Reagan Administration, the 4-billion-gallon production objective is not likely to be reached until
perhaps the end of this decade. At that time, alternatives to corn as the primary input in alcohol
production, such as cellulose from crop residues
and wood products, should be available. Under
these circumstances, producing alcohol from grain
may not be an efficient means to carry the nation
through the energy transition period.

Alcohol production costs
have risen with corn prices
Cost per gallon of alcohol produced
and the cost of the corn input
rise significantly as corn price rises

1.60 -



1.50 -

1.40 -

1.30 -

1.20 -

1.10 -

1.00 -

.90 -








NOTE: Assumes a plant size 01 40 million gallons per year and
a yield 01 2.6 gallons 01 alcohol per bushel 01 corn,
with Federal and state tax exemptions not considered.
SOURCE: Gasohol: Prospecls and Implicalions (By Ronald
Meekhol, Mohinder Gill, and Wallace Tyner lor the
U.S. Department 01 Agriculture).

The existing commercial technology for transforming biomass into liquid fuel converts corn to ethyl
alcohol-ethanol,2 The initial attraction of ethanol
production came from two major sources. First,
American farmers have often been troubled by
lack of control over production, which has been
characterized by large grain crops, sagging prices,
and declining incomes. Government policy in the
past has tended to focus on supporting grain prices
through the accumulation of reserves and through
programs designed to restrict planted acreage. Still,
the season average price per bushel of corn during
1975-79 hovered at a low range of $2.02 to $2.54,
and carryover stocks of corn averaged 833 million
bushels per year during the 1970-80 period. 3
Ethanol production, therefore, was advocated to
increase the demand for corn, alleviate the periodic
problem of grain surpluses and costly storage of
reserves, and increase farm incomes. Second, the
capacity for producing ethanol from corn could
be expanded fairly rapidly. An ethanol conversion
plant of intermediate size can generally be brought
into production within two years.
The physical and economic situation for alcohol
production from grain has changed rapidly since
the spring of 1980. The monthly average cash price
of No.2 Yellow corn at Chicago rose over 80 cents
per bushel from May 1980 through April 1981.
Since corn can account for as much as 73 percent
of the overall cost of production in a 50-miIliongallon-per-year fermentation plant,4 increases in
the price of the corn feedstock have substantial
impact on the profitability of ethanol production.
Also, if corn prices rise faster than gasoline prices,
gasohol (even with the present Federal and state
tax exemptions) could easily remain more expensive than gasoline.
U.S. crop production in 1980 showed a marked
decline from 1979. Moderate to severe drought over
important agricultural areas in July, August, and
September cut production of a number of major
2. Biomass is considered to be any plant material that
can be used as a possible source of energy through
chemical, bacterial, or enzymic conversion.
3. U.S. Department of Agriculture, Agricultural Statistics,
1980 (Washington, D.C.: Government Printing Office, 1980).
4. "Gasohol: Analysis and Biomass Alternatives,"
Energy, Fall 1980.


Federal Reserve Bank of Dallas

crops, including corn. A report by the U.S. Department of Agriculture has revealed that the April 1,
1981, corn inventory was 4.0 billion bushels, 18
percent below a year earlier. Corn usage during the
first three months of the 1980-81 crop year totaled
2.4 billion bushels, 2 percent more than during the
same period the year before.
The lower than average inventory of corn portends a rise in prices. Average corn prices could
increase 8 to 10 percent annually during the 1980's.
Cattle herd rebuilding and growing demand from
ethanol production can be expected to keep domestic corn demand quite strong for the next few
years. The January 1981 stocks report showed feed
usage of corn down only 2 percent from a year
earlier. This indicates a higher feed usage than
many had expected in view of low feeding profits
during the last quarter of 1980, and it provides
evidence that there is a strong livestock feeding
base for corn, even at current price levels.
Another factor that may tend to keep corn prices
on an uptrend over the next few years is the increasing world demand for grain. The overseas
demand for agricultural products could increase at
a near-record rate of 2.5 to 2.7 percent a year in
the 1980's. However, growth in global agricultural
production is expected to slow to an annual rate
between 2.1 and 2.4 percent. 5 Forecasts for supplies of and demand for specific commodities suggest that the strongest growth in demand will be
for feed grains and oilseeds.
This demand will come from the middle-income
countries, the less affluent developed nations, and
the richer developing countries. The potential for
these countries to expand their feedstuff production fast enough to fill their strong, livestockrelated growth in demand is quite limited. In many
already established markets, import demand is
likely to continue strong, with Western Europe and
Japan remaining the world's largest food and feed
With grain stocks undesirably low, the danger
looms that disappointing harvests worldwide again
this year could lead to widely fluctuating prices
and perhaps serious food shortages in some areas
of the world. The fact that such a prospect is faced
just two years after accumulation of the largest
global stocks of grains in over a decade underscores
5. U.S. Department of Agriculture, A Time to Choose:
Summary Report on the Structure of Agriculture (Washington, D.C.: Government Printing Office, January 1981).

May tl8t/Voice

the continued fragility of the world food situation
and how the balance between too much and too
little food can tilt easily and rapidly from one
direction to the other.
Grain alcohol production
may disrupt soybean markets

Ethanol is currently produced from grain by fermentation or milling. Both processes yield valuable
protein by-products that can be used in livestock
feeds. 6 At present fuel and corn prices, ethanol
producers can cover costs only if they obtain sufficient revenue from sales of these by-products. One
study concludes, however, that an ethanol production rate above 1 billion gallons per year will
substantially reduce the market values of the byproducts. 7 This raises questions about the profitability of a large increase in grain alcohol production unless new markets, perhaps through exports
abroad, are found for the by-products.
Other agricultural markets may also prove to be
sensitive to the development of large-scale production of alcohol from corn. For example, the production of grain alcohol will lead to a reduction
in the supply of soybeans, currently a major source
of protein. Corn and soybeans are grown in rotation
in many parts of the country. Thus, an increase
in corn production to meet the demand from alcohol producers will probably lead to a reduction in
soybean acreage. Estimates suggest that each billion gallons of ethanol produced from corn would
require an additional 2 million acres of land in
corn production, with an average yield of 65
bushels per acre. s As more marginal land is used,
6. Fermentation yields 2.57 gallons of 200-proof ethanol
plus 17.35 pounds of distillers' dried grains per bushel
of corn. Distillers' grains are useful as a protein supplement for beef and dairy cattle, substituting for soybean
meal and other high-protein animal feeds. If the wet
milling process or modified dry milling process is used,
the protein by-products would be gluten feed and gluten
meal (60 percent protein), which are suitable for poultry
and animal feed diets.
7. Donald Hertzmark, Daryl Ray, and Gregory Parvin,
The Agricultural Sector Impacts of Making Ethanol from
Grain. Solar Energy Research Institute Report No.
TR-352-554 (Golden, Colo., 1980).
8. Wallace E. Tyner, The Potential of Using Biomass for
Energy in the United States (West Lafayette, Ind.: Purdue
University, Institute for Interdisciplinary Engineering
Studies, 1980).

(Millions of units)
Ethanol production
(Billions of gallons per year)

Corn required (Bushels) . . . . . . . . . . . . . . . . . . . .
Soybeans displaced (Bushels) . . . . . . . . . . . . . .
Soybean acreage reduction (Acres) . . . . . . . . . .
Corn produced on soybean acres (Bushels) . . .
Additional corn required (Bushels). . . . . . . . . . .
New corn acreage (Acres) . . . . . . . . . . . . . . . . . .













Corn average yield per acre on existing corn-soybean land = 90 bushels.
Soybean average yield per acre on existing corn-soybean land = 30 bushels.
Average corn yield on new corn acreage
65 bushels.
Distillers' dried grain (DOG) yield
6.75 pounds per gallon of ethanol or 17.35 pounds per bushel of corn.
Alcohol yield
2.57 gallons per bushel of corn.
DOG has 27 percent protein and soybean meal has 44 percent protein, and the substitution ratio is 1.63
pounds of DOG for 1 pound of soybean meal.
7. Soybean meal is 80 percent by weight of the soybeans (48 of 60 pounds per bushel).
8. The new corn acreage number represents the acreage addition required, assuming the existing quantity
demanded for protein and starch is satisfied in addition to the alcohol demand for starch.





SOURCE: Wallace E. Tyner (The Potential 01 Using Biomass lor Energy in the United States, Purdue Universily, Instllule for
Inlerdisclplinary Engineering Sludles).

yields on the additional acreage will fall below
the national average. Consequently, soybean acreage is expected to fall a little less than 3 million
acres for each billion gallons of ethanol produced. 9
In another study the impact on corn and soybean
markets was estimated for levels of alcohol production ranging from 1 to 4 billion gallons. 10 Levels
of 1 to 2 billion gallons of alcohol production had
relatively little effect on corn and soybean prices
and quantities. However, levels of 3 to 4 billion
gallons tended to increase corn prices substantially
and to increase price instability for both corn and
soybeans. As more corn comes into production.
displacing soybeans, the supply of protein is diminished because an acre of corn produces less protein than an acre of soybeans. This tends to raise
the overall price of protein. Also, the reduction in
soybean acreage exerts upward pressure on soybean prices, especially in established export markets, at high levels of alcohol production.
Thus, pressure on soybean prices may develop
9. Ibid.
10. Ronald 1. Meekhof, Wallace E. Tyner, and Forrest D.
Holland, "U.S. Agricultural Policy and Gasohol: A Policy
Simulation," American Journal of Agricultural Economics.
August 1980.

from both directions, making the effect of alcohol
production on soybean prices difficult to predict.
The downward pressure on soybean meal prices
caused by production of large quantities of protein
by-products may be opposed by the upward pressure from the reduction in soybean acreage.

Alternative feedstocks are under study
Alcohol can be produced from three main types
of biomass: (1) sugar-bearing materials, such as
sugarcane, which contain carbohydrates in sugar
form; (2) starches, such as corn, which contain
carbohydrates in starch form; and (3) celluloses.
such as wood and crop residues, whose carbohydrate form is more complex. The process of producing ethanol from cellulose involves converting
the cellulose to sugar and then converting the
sugar to ethanol.
Currently, there are no commercial technologies
for the fermentation of celluloses. For these feedstocks, methanol synthesis is a far more likely
route to alcohol fuel than is fermentation with
existing technology.ll However, most authorities
11. Methanol, another form of alcohol, has a lower energy
content than ethanol.

Federal Reserve Bank of Dallas

believe that by the late 1980's, cellulose conversion
technologies will be commercially available to produce ethanol from both crop residues and wood.
Agricultural residues, particularly from corn and
small grains, offer a huge supply of cellulosic biomass that could be collected and utilized. The total
amount of crop residue produced in the United
States each year is about 400 million dry tons. Of
course, not all of this could be collected and used
economically for ethanol production. One study
has estimated that total usable residues amount to
80 million dry tons per year, or only about 20
percent of the total annual residue production. 12
Currently, usable residues, mostly in the form of
stalks and leaves, are usually returned to the soil.
Crop residues play a vital role in agriculture by
controlling soil erosion, preventing rapid water
runoff, maintaining soil organic matter and soil
structure, and providing soil nutrients.
Although the potential supply of crop residue
is large, wood is the most plentiful biomass energy
resource in the United States. Wood resources include both forest residues and conventional wood
harvests, and most of the residues will be used
in the forest products industry. Wood can also be
used to substitute for fuel oil in industrial or utility
boilers or used for home heating. In addition, wood
can be converted to methanol for fluid energy.
A major advantage of growing trees for production of liquid fuels is the option of continuous
year-round operations for both harvesting and
processing. The detrimental factors of long-term
storage and short-term operation that may be associated with grain crops are then eliminated. New
methods of growing trees for this purpose are
very promising. These tree farms will consist of
rapidly growing species, such as the poplar, sycamore, and eucalyptus, planted at close spacings
and harvested at appropriate intervals.
The extent to which forest biomass can be utilized depends on research and development of the
conversion technology necessary for commercial
production. The technology available today for
production of ethanol from cellulosic biomass
utilizes acid hydrolysis to produce sugars that are
then fermented to ethanol. More efficient and less
expensive processes for use with cellulosic biomass are being investigated.
12. Tyner, Potential of Using Biomass for Energy in
United States.

May t98t/Voice



of tons)

of acres)

per acre)

Corn .........
Small grains ...
Sorghum ......
Rice ........••
Sugarcane ..••




Total ....•..





SOURCE: Wallace E. Tyner and J. Carroll BOllum (Agricultural
Energy Production: Economic and Policy Issues,
Purdue University, AgriCUltural Experiment Station).

Future bright for alcohol from cellulose
To date, indications are that U.S. agriculture could
absorb the demand for grain at the 2-billion-gallon
level of alcohol production, plus the continually
increasing domestic and export demands, without
causing serious adverse impact in the agricultural
sector or elsewhere. 13 Alcohol fuel from grain is
not an attractive permanent solution to liquid fuel
shortages, but it might serve as a transition fuel if
access to imported oil is impeded.
The present uncertainty surrounding the economic prospects and Government involvement in
the alcohol fuels industry notwithstanding, ethanol
production using corn as a feedstock could possibly
reach 4 billion gallons per year by the late 1980's.14
Production of this magnitude would have a small
effect on gasoline supplies, stretching them by perhaps 5 percent, but conceivably could have a major
impact on corn prices and some agricultural markets. Possible consequences include higher meat
prices, since most corn is used as cattle feed, and
a reduction in U.S. corn exports at a time when
world demand is increasing.
For the future, cellulose-to-alcohol factories
show great promise. Estimates suggest that if managed properly, U.S. forests and crop residues could

13. Meekhof, Tyner, and Holland, "U.S. Agricultural
Policy and Gasohol."
14. U.S. Department of Agriculture and Council on
Environmental Quality, National Agricultural Lands
Study, Final Report, January 17, 1981 (Washington, D.C.,

provide huge amounts of alcohol-up to 39 billion
gallons annually by the year 2000-far in excess
of alcohol production achievable through the use
of grain,15 The alcohol plants now being built
could be designed and constructed so that later
conversion from grain to cellulose would be facil15. U.S. General Accounting Office, Potential of Ethanol
as a Motor Vehicle Fuel, Report to the Honorable Max
Baueus, U.S. Senate, by the Comptroller General of the
United States, no. EMD-80-73 (Washington, D.C.: General
Accounting Office, 1980).


Hated. Also, plants might be established in areas
where adequate cellulosic feedstocks are available
to run the plants solely on these raw materials.
By following this course, constructing grain alcohol plants today would establish a physical plant
and technical base for future implementation of
the cellulosic processes as they are developed during this decade. Unlike alcohol production from
grain, cellulose conversion to alcohol will not
compete with the world markets for food and feed

Federal Reserve Bank of Dallas

••GF'ed Quotes ~~
Brief Excerpts from Recent Federal Reserve Speeches, Statements, Publications, Etc.

"Monetary restraint does not, unfortunately, work directly on prices. On the
contrary, its initial effects are on real output and employment. As the experience of
the past year and a half indicates, the process of reducing inflation through monetary
restraint is an excruciating one, once inflationary expectations have become deeply
embedded in economic decisions and economic institutions. When monetary restraint
takes hold, it reduces employment and real incomes; pushes interest rates to painfully
high levels; threatens the viability of thrift institutions; imposes enormous losses of
sales and profits on homebuilders, auto dealers and other small businesses; results
in a growing backlog of needs for housing, and even affects adversely the growth of
business capital investment that we so badly need for productivity improvement.
And its effects on inflation occur with agonizing slowness. The economic distress
occasioned by firm monetary restraint since the fall of 1979 has kept inflation from
getting worse, but as yet there are no clear signs that the hard-core rate of inflation
has begun to come down."
"If you ask why the Federal Reserve persists in its policy of restraint in light of
these disappointing results, the answer is that there is no real alternative. Reducing
the rate of expansion in money and credit is an indispensable ingredient of any
anti-inflation program. But there is no reason why our country must, or should,
fight inflation with monetary policy alone.
"We in the Federal Reserve are extremely encouraged by the efforts presently
underway by the new Administration and the Congress to hammer out agreement on
an effective anti-inflationary budgetary policy. It is of fundamental importance, I
believe, that the budget deficit be brought down as rapidly as possible."
Lyle E. Gramley, Member, Board of Governors of the
Federal Reserve System (Before the Boston Economic
Club, Boston, Massachusetts, March 18, 1981)

May 1981/Voice


"To get some perspective on the role, and limitations, of monetary targeting in
the inflation problem, I sometimes find it useful to look at the experience of other
countries-especially the industrial countries most similar to our own. Since inflation
has become a worldwide phenomenon, and since the importance of controlling
monetary growth in controlling inflation is widely recognized, monetary targeting
has also been a prominent feature of the anti-inflation policies of many of these
countries. And, like the U.S., many foreign industrial countries have sought to
moderate inflation by gradually slowing the rate of monetary expansion.
"On the whole, the experience abroad tends to confirm the suspicion that slowing
monetary growth by itself may not be enough to control price inflation within acceptable periods of time and without unacceptable side effects. A good record on achieving
money growth targets has not necessarily ensured a good performance on the inflation
front-and conversely. Over periods of up to three or four years, there seems to be
at best only a rather loose relationship between the growth of the aggregates and price
inflation. Over longer periods, to be sure, the relationship is closer."
Anthony M. Solomon. President. Federal Reserve
Bank of New York (Before the Eleventh Annual
Banking Industry and Bank Stock Symposium of the
Financial Analysts Federation, New York, New
York, March 26, 1981)

New Nonmember Bank

Lone Star Bank, Baytown, Texas. a newly organized nonmember bank
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business April 1, 1981.


Federal Reserve Bank of Dallas

Board Studying Alternatives
to Weekly Reporting
of Money Supply Data

Board Issues
Revised Regulation Z,
New Regulation M

The Federal Reserve Board has requested public
comment on the desirability of continuing to report
money supply data on a weekly basis or whether
another reporting procedure should be used.
Under its present procedure the Board publishes
money supply data each Friday. Although there
is considerable agreement that weekly money
supply statistics are erratic and often poor indicators of underlying trends, the Board has not
concluded that the present procedure should be
changed and will continue to publish money supply
data each Friday.
However, as a result of the concerns about the
reaction to and significance of the weekly figures,
the Federal Reserve has considered possible
revisions of its current publication schedule or of
its method of presentation. The following alternatives to the present procedure are being considered:
• To delay weekly publication an additional
seven days to incorporate more data.
• To publish only data that are not seasonally
• To publish data only monthly-as is now the
case with the broader definitions of money-or use
moving average data.
Comments, which need not be limited to the
options above, should be sent to Thomas D.
Simpson, Chief of the Banking Section, Division of
Research and Statistics, Federal Reserve Board,
Washington, D.C. 20551.

The Board of Governors of the Federal Reserve
System has issued a restructured, shortened, and
simplified version of its Regulation Z to implement
the Truth in Lending Simplification and Reform
Act. The Board expects the simplified rules for
disclosure of the full cost of borrowing to help both
consumers and creditors. Although the new regulation was effective April 1, 1981, creditors have
been given the option of continuing to comply with
the older regulation until March 31, 1982.
The new Regulation Z covers the Truth in
Lending and Fair Credit Billing Acts. The sections
in the previous version that dealt with the
Consumer Leasing Act were removed and have
been issued as a separate regulation, new
Regulation M.
Some 40 percent shorter than its predecessor,
the revised regulation: (1) exempts a number of
transactions covered by the previous regulation;
(2) deletes a substantial amount of detail, such as
specified terminology and specifications for type
size and location of disclosures; (3) gives creditors
more flexibility in making disclosures; and (4)
reduces the burden of compliance for creditors,
which is reflected in costs to consumers.
To make compliance with the new rules easier,
the Board provided in the new regulation a series
of standard disclosure forms. Proper use of the
forms, written in plain nontechnical language, will
assure compliance with the regulation.
The Board will publish in the near future a
commentary on the regulation to provide guidance
on its use. The commentary will address the
material covered by many of the existing staff
interpretations. These interpretations will be
rescinded effective April 1, 1982.



May 19811Voice


NOW Accounts:
Board Proposes Interpretation
of Rules to Clarify
Eligibility of Depositors
The Federal Reserve Board has proposed an interpretation of its rules to clarify which depositors
are eligible to hold interest-bearing checking
accounts at member banks. The proposed interpretation would affect eligibility for negotiable order
of withdrawal (NOW) accounts authorized nationwide by the Consumer Checking Account Equity
Act of 1980.
At present, NOW accounts are available only to
individuals and to organizations operated primarily
for religious, philanthropic, charitable, educational,
fraternal, or other similar purposes and not
operated for profit. The Board's proposed interpretation would permit the following to establish
NOW accounts at member banks:
• Individuals, if the funds are not used primarily for business purposes. These individualsonly-would also be eligible to hold automatic
transfer service (ATS) accounts.
• Nonprofit organizations eligible for tax
exemption under specified sections of the Internal
Revenue Code.
• Governmental units, if the funds are used for
the purposes of schools, colleges, universities,
libraries, or hospitals.
Other governmental units and all businesses
operated for profit-including sole proprietorships,
partnerships, and corporations-would not be
permitted to maintain interest-bearing checking
accounts at member banks.
The interpretation proposed by the Board is
intended to make the eligibility criteria for NOW
accounts more understandable and to preclude the
need for Board review of numerous individual
questions of eligibility.
Issues raised by the proposal on which the Board
would particularly like to receive comment
include: (1) the use of Section 501 (c)(3) through
(13) and (19) of the Internal Revenue Code as the
criteria for determining which nonprofit organizations would be eligible for NOW accounts; (2)
the exclusion of sole proprietorships from NOW
and ATS account eligibility; (3) the prohibition of
NOW accounts for governmental units except

where the funds are used for the purposes of
schools, colleges, universities, hospitals, and
libraries; (4) the phaseout of existing NOW and
ATS accounts that would no longer qualify under
the proposed rules; (5) the potential problems that
could arise in attempting to distinguish whether
funds of an individual are used primarily for
personal rather than business purposes; and (6)
whether the proposed revised rules concerning
NOW and ATS eligibility would be more understandable and easier to administer for member
Comments must be received by June 15, 1981,
and should be addressed to James McAfee,
Assistant Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, N.W., Washington, D.C.
20551, with reference to Docket No. R-0356.

Federal Reserve Bank of DaDas

Recently issued Federal Reserve circulars, speeches, statements to Congress. publications. etc.. may
be obtained by contacting the Department of Communications. Financial and Community Affairs. .
Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222. unless indicated otherwise. Requests
for circulars should specify the circular numbers.


Speeches and Statements

Fee Schedule for Commercial Check Clearing and CoIlection Services. 11 pp. Circular No. 81-64 (April 1, 1981).
U. S. Postal Service Money Orders. 1 p. Circular No. 81-67
(April 6, 1981).
Bulletin 8: "Collection of Cash Items." 19 pp. Circular No.
81-68 (April 7,1981).
Title 12-Chapter XII-Interest on Deposits: Changes in
the Effective Dates of 21/! Year or More SmaIl Saver
Certificates and 26-Week Money Market Certificates;
Proposals to Provide for the Phaseout of Interest Rate
Ceilings. 13 pp. Circular No. 81-70 (April 8, 1981).
Holidays [All Federal Reserve banks and branches]. 1 p.
Circular No. 81-71 (April 8, 1981).
Money Supply Data: Proposals Regarding Reporting Procedures. 5 pp. Circular No. 81-76 (April 14, 1981).
Revised List of OTC Margin Stocks. 20 pp. Circular No.
81-78 (April 15, 1981).
Cross-Zone Presentment of Cash Letters. 1 p. Circular No.
81-79 (April 16, 1981).
Regulation Z-Truth in Lending: Final Revision of Regulation. 243 pp. Circular No. 81-80 (April 21, 1981).
BuIletin 2: "Loans." 2 pp. Circular No. 81-84 (April 27,
Regulation Q [Interest on Deposits]: Eligibility for NOW
Accounts. 10 pp. Circular No. 81-85 (April 24, 1981).
Amendment to Regulation D [Reserve Requirements of
Depository Institutions] (Exempting Certain Kinds of
Time Deposits Representing Funds of Deferred Compensation Plans from Reserve Requirements). 9 pp.
Circular No. 81-87 (April 29, 1981).
Revised Schedule of Operating Hours for the Transfer and
Settlement of Funds Effective May 1, 1981; Revised
Schedule of Operating Hours for Net Settlement Arrangements Effective May 1, 1981. 2 pp. Circular No.
81-88 (April 30, 1981).
Deferral of Reserve Reporting for SmaIl Nonmember Institutions. 1 p. Circular No. 81-90 (April 30, 1981).

Remarks by Henry C. Wallich ("The Limits of Monetary
Control") to the Midwest Economics and Finance Associations, Louisville, Kentucky. 17 pp., including
summary. April 3, 1981.
Remarks by Henry C. Wallich ("Methods of Strengthening
Capital Movements to Developing Countries") at the
International Conference on the Financial Develop'
ment of Latin America and the Caribbean, Caracas,
Venezuela. 15 pp. April 4, 1981.
Remarks by Paul A. Volcker before The Economic Club of
New York, New York City. 13 pp. April 6, 1981.
Statement by Frederick H. Schultz before the Committee
on Small Business, U.S. House of Representatives. 9
pp. April 7, 1981.
Remarks by Lyle E. Gramley at the 1981 NACHA SurePay
Conference, New York City. 14 pp. April 14, 1981.
Remarks by Paul A. Volcker ("Dealing with InBation:
Obstacles and Opportunities") at the Alfred M. Landon
Lecture Series on Public Issues, Kansas State University, Manhattan, Kansas. 14 pp. April 15, 1981.
Statement by Robert H. Boykin before the Joint Economic
Committee Hearing on Housing and the Economy,
Dallas, Texas. 13 pp. April 16, 1981.
Remarks by Lyle E. Gramley ("Financial Innovation and
Public Policy") at the Financial Innovation Conference,
Northwestern University, Evanston, Illinois. 15 pp.
April 22, 1981.
Remarks by Emmett J. Rice ("The Prospects for Interstate
Banking") before The South Carolina Bankers Association, Myrtle Beach, South Carolina. 14 pp. April 25,
Statement by Frederick H. Schultz before the Committee
on Banking, Housing, and Urban Affairs, U.S. Senate.
30 pp., including appendix. April 28, 1981.

Pamphlets, Brochures, and Reports
Annual Report of the Federal Reserve Bank of DaIlas, 1980.
20 pp.

May 1981/Voice


New Member Banks

American Bank of Commerce, N.A., Del Rio, Texas, a newly organized institution located in the territory served by the San Antonio Branch of the
Federal Reserve Bank of Dallas, opened for business April 13, 1981, as a
member of the Federal Reserve System. The new member bank opened with
capital of $1,000,000 and surplus of $1,000,000. The officers are: C. V. Uranga,
Chairman of the Board; Paul G. Arnold, President; and Jerry H. Richter,
Senior Vice President and Cashier.
Alta Mesa National Bank, Fort Worth, 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 15, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000,000. The officers are: Philip E. Norwood,
President, and Jeffrey R. Guy, Vice President and Cashier.
First National Bank of Burleson, Burleson, 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 20, 1981, as a member
of the Federal Reserve System. The new member bank opened with capital
of $750.000 and surplus of $750,000. The officers are: R. G. Boone. Chairman
of the Board; Jim F. Woodard, President and Chief Executive Officer; and
Pat Cogburn, Vice President and Cashier.
Community National Bank, Hondo, Texas, a newly organized institution
located in the territory served by the San Antonio Branch of the Federal
Reserve Bank of Dallas, opened for business April 20, 1981, as a member of
the Federal Reserve System. The new member bank opened with capital of
$800,000 and surplus of $800,000. The officers are: Lloyd E. Hardt, Chairman
of the Board; Herb Fulcher, President; Douglas Bohmfalk, Vice President
and Cashier; and Beverly Brown, Assistant Vice President.
Marble Falls National Bank, Marble Falls, Texas, a newly organized institution located in the territory served by the San Antonio Branch of the
Federal Reserve Bank of Dallas, opened for business April 27, 1981, as a
member of the Federal Reserve System. The new member bank opened with
capital of $750,000 and surplus of $750,000. The officers are: H. G. Counts,
Chairman of the Board; Burrell Dulany, Jr., President; Richard Kanz, Vice
President; and Elizabeth Henderson, Cashier.


Federal Reserve Bank of Dallas