Full text of Review (Federal Reserve Bank of Dallas) : October 1978

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El Paso· Houston· San Antonio

October 1978
1

Finding a Way Home

8

Federal Housing Agencies:
How Effective Are They?

19

Several Actions Taken on Regulation Z

20

Reserve Requirement Eliminated on Foreign Borrowing

21

Migration Changes the Face of Agriculture

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

Finding a Way Home

Notes for speech by
Ernest T. Baughman, President
Federal Reserve Bank of Dallas

at the
West Texas Meeting of the Texas Cbapter
of Robert' Morris Associates
Midland. Texas
September 8, 1978

There is widespread agreement on the economic
goals of the United States-namely, full employment, economic growth, balance in international
payments, and price stability. The economy is
growing. and by some measures we are close to
full employment. But by any measure we are rar
from balance in international payments and price
stability. And unless we can demonstrate greater
Sllccess in balancing OUf international payments
and stabilizing the general level of prices, we probably will lose ground on the employment and
growth fronts.
Normally there are a number of routes "home,"
and this is the case for economic goals as well.
'Tis said there is a long way as well as a short
way; that there is a sure route and a slippery
route and, according to a popular ballad, a high
road and a low road. Finally, there is the "lost
horse" phenomenon, in which one just wanders
October 1975/Voicll

around and by chance may arrive "back home."
We have wandered a long while, and we still are
far from price stability and balance in international
payments although close to home base in other
economic goals.
Depreciating dollar internationally
Since 1975, our trade balance has worsened substantially because of increases in net imports of
both fuel and manufactured goods. The rising net
imports of fuels, from $24 billion in 1975 to $43
billion last year, are largely the result of policies
that have held the price of energy about 25 percent
below the world price, on average, and thus promoted consumption of foreign oil while limiting
the stimulus to domestic production. Economists
estimate that supply and consumption of energy
are responsive enough to prices that decontrol of
domestic prices would make a substantial contribution to reducing our net fuel imports within a
few years. Had we not chosen the price control
road when world prices were boosted sharply, we
would now be much closer to a balanced energy
situation.
The declining net exports of manufactured
goods, from $20 billion in 1975 to $3 billion in
1977, have been largely the result of different
speeds of economic expansion and domestic inflation since the 1974 economic recession for the
United States and its major trading partners.
Studies by Federal Reserve staff economists indicate that if all countries had grown in step, the
u.s. trade deficit would have been $10 billion to
$20 billion less than it actually has been.
1

Our merchandise trade deficit. on the order of
$33 billion this year, has put downward pressure
on the value of the dollar in foreign exchange
markets. Until late last year the dollar's value.
measured in terms of a composite of the currencies
of our trading partners, had remained remarkahly
steady, given our widening trade deficit. Our infla·
tion performance had been better than that of our
trading partners. If investors could be confident
that we would reduce our domestic inflation, they
would expect our trade deficit to decline and
would be willing to hold more dollars at current
exchange rates; and the depreciation of the dollar
would be limited.
During the last six to nine months, however. in·
vestors have found less reason for confidence in
our ability and commitment to manage our econ·
amy effectively and, therefore. in the long-run
stability of the dollar. They have seen U.S. inflation return to double-digit levels earlier this year
while Germany. Japan. and Switzerland have
achieved a slowing of inflation.
Although exchange rates fluctuate widely at
times. movements over the longer term have
tended to offset the effects of differing rates of
domestic inflation on the prices of internationally
traded goods. As long as inflation proceeds at different rates in different countries, exchange rates
between currencies should be allowed to adjust
fairly continuously in order to equalize the purchasing power of various currencies over inter·
nationally traded goods. The current system of
managed floating probably has helped to maintain
and promote relatively free flows of world trade
and investment. The solution to problems associated with depreciating currencies should be
found in policies that affect domestic production
and prices, nol in efforts to freeze exchange rates.
Depreciating dollar domestically
Inflation is our most troublesome economic problem. While inflation is not as high as the 12·percent
rate following the 1973 oil embargo, we again
experienced double-digit rates earlier this year;
and even taking an optimistic view, the inflation
rate appears to be higher now than it was before
the embargo.
Inflation restricts investment in new projects and
thereby reduces the growth in production per manhour and the growth of total production. Since that
which is not produced cannot be consumed. infla·
tion slows. or halts. the rising trend in per capita
2

consumption. Investment is restricted because inflation causes greater uncertainty and increases
risks. Since long-term investment projects become
more uncertain for businessmen, projects that provide better hedges against inflation and projects
with shorter payout periods are favored. House·
holds, in an attempt to hedge against inflation.
place more of their wealth in durable goods.
houses. and other real estate in preference to deposits, bonds, and life insurance, and many bor·
row heavily to acquire tangible assets. This diverts
the flow of savings from usual channels and boosts
demand for existing tangible asse ts instead of ft·
nancing new production capacity.
Inflation also affects investment by generating
inequities in the tax system. Because of the progressive rate structure. taxes rise relative to income without anyone ever having voted for the
increases. Capital gains that may be simply a prod·
uct of inflation are taxed as if they are real, and
the requirement that corporations use historical
cost in computing depreciation for tax purposes
raises the effective tax rate on corporate profits.
The real value- that is. the purchasing power-of
assets held in savings accounts and other normally
conservative and secure forms declines. bringing
hardship to many and tending to promote speculative investment in existing tangible property.
A social malaise characterized by a lack of confidence in both government and private institutions
tends to develop. Such frustration appears to be
an important ingredient in the rising tax revolt at
the state and local government levels and in consideration of Federal income tax reductions.
Some routes home
Given these consequences of inflation, what routes
are available to us in seeking to achieve our economic goals? It is reported the Administration is
undertaking a comprehensive review of all alternative policies to reduce inflation. having concluded
the "jawbone" approach is relatively ineffective.
One of these is wage and price controls. But the
historical record of these policies is not good. In
the first place. they tend to breed spot shortages
because they interfere with the orderly flow of production. Second. if flexible enough to accommodate
changing needs, they are almost certain to be ineffective. Finally. they have minimal long-run
effect on inflation. initially dampening the inflation
rate but with this effect often being offset by a
speedup of inflation after controls are lifted.
Fedefal Rnenre SaDlc of Oan••

Another means to bring the inflation rate down
is to impose much tighter credit conditions and a
sharply reduced rate of monetary growth. This
would soon drive up unemployment. and the resulting slack in the labor market would lead to smaller
increases in money wages, unit labor costs, and
prices. But the cost of such policy in terms of
lost output and employment would be high. Experience has shown that while a slowing of money
growth affects employment and output relatively
quickly, a significant reduction in the rate of inflation occurs only after two to three years. It took
nearly a decade of economic activity in excess
of "full employment" to produce inflation in its
current dimensions. It probably would take as long
for even a substan tial degree of slack in labor
markets to unwind inflation.
Another means to reduce infl ation is to reduce
Federal expenditures and move aggressively toward a balanced budget. This would release additional financial resources, as well as labor, to the
private sector and probably would be associated
with lower interest rates and increased private
investment. More spending decisions would be
made by individuals and fewer by Government officials. This transition, if undertaken. should be
accomplished during a period of economic expansion so as to minimize the risk of recession.
Another alternative is to reduce the various restraints on competition, public and private. that
have cumulated during past years. largely as a
consequence of Government policies designed to
protect certain sectors from the effects of competition. With a more competitive economy, prices
would be more flexible-especially on the downside-so that policies aimed at diminishing inflation through reducing the growth of demand would
have less severe side effects in terms of production
and employment. A policy of reducing the rate of
monetary growth. for example. would have a
larger and more immediate effect on prices, and
less of a short-term impact on output and employment, if the economy were more competitive.
The list of Government regulations that stifle
competition and make it more difficult to reconcile
full employment and price stability is long. The
transportation industries are prime examples. The
agencies that regulate railroads. airlines. and
trucking have resisted competitive pricing of
services for many years. Recently. in the airline
industry an important policy change has been
initiated, and we are now seeing how stifling past
regulation had been. The existing overcapacity in
October 1979/Voice

the industry has brought forth dramatic competitive price declines, and the lower prices are bringing in so much additional business that profits
have increased. In a competitive environment,
stable or rising prices and overcapacity are incompatible.
In agriculture, where there are many firms and
it is difficult to achieve control of prices by regulation, direct Government participation in the
commodity markets is utilized to avoid price declines below specified levels. It is well documented
in this industry that costs, including land costs.
tend to rise to levels determined by commodity
prices.
The Davis-Bacon Act and other Federal legislation are designed to raise or maintain wages paid by
Government contractors even though workers may
be available in certain areas at lower pay scales.
Government contractors must not reduce wages
even in circumstances where unemployed labor
may be abundant.
Further examples of regulatory problems are
manifold. In the financial sector. the Federal Reserve shares with other Government agencies the
responsibility to regulate interest rates on deposits.
In periods of strong credit demand and high interest rates. the effect of these price ceilings is to
distort savings flows, as small investors lend their
money directly to ultimate users via the capital
markets instead of depositing it in their local
banks and other financial institutions. One of the
basic functions of banks is to serve as a credit
intermediary, assembling small liquid deposits
and making credit available for large, less liquid
loans. The price ceiling regulations interfere with
this function. with considerable cost and incon·
venience to small savers.
Why do we have such a regulation? Initially to
constrain competition, and thereby help small
banks. In recent years, to restrain competition and
thereby protect thrift institutions, which have
moved aggressively into accepting very liquid liabilities and acquiring very illiquid assets.
An anti-inflation program
The search for a solution to inflation is encumbered with the urgent desire that it be palatable
and painless. None of the routes home are likely
to be posted with those markers. And the odds
are high that taking the long route in preference
to a direct one may simply permit the problem to
become larger and more intractable before we
come to grips with it.

,

As I see it, the problem has four basic ingredi·
ents. One, too large and too rapid growth of Gov·
ernment spending. Elected officials have attempted
to be responsive to the unlimited demands that
flow from numerous interest groups. In responding
to these demands, officials have raised taxes to
levels that retard saving and investment and committed expenditures far in excess of revenues. The
resulting deficits command large amounts of credit,
which reduces credit available to the private sec·
tor and raises interest rates.
Two, too rapid growth of credit and money as
the Federal Reserve has attempted to provide
enough of both to promote economic growth and
full employment, given the large deficit and structural rigidities in the economy.
Three, too much Government regulation of the
type that restricts competition directly and enables private groups to restrict competition. This
raises costs and prices and reduces efficiency, and
hence reduces the total supply of goods and
services available for consumption. It gives costs
and prices an upward tilt and insulates them from
economic conditions that would cause prices to
decline in response to improved technology, large
supplies, or reduced demand. Prima facie evidence
that these conditions are widespread exists, for
example, in labor markets where we observe sizable boosts in wage rates even when there are
large numbers unemployed and seeking work; in
commodity markets where we observe rising prices
even when there exist substantial excess capacity
and ample availability of materials; in laws that
arbitrarily raise minimum wages even though employers cannot afford to hire available supplies of
inexperienced and unskilled persons at current
wage rates; in professional and crafts organizations and associations that limit entry and proscribe or discourage price competition among their
members; in licensing and chartering procedures
that restrict entry on bases other than minimum
essential competence; and so forth.
Four. too much Government regulation that in·
creases costs of doing business, the objectives or
purposes of which could be achieved better by
policies designed to promote, instead of circum·
scribe, competition.

4

If these are the things that have caused us to
lose our economic bearings, how do we get back
on track and find our way home? As in most
things, diagnosis largely dictates prescription.
One. reduce Government spending. Having
brought Government spending under control and
moved aggressively toward a balanced budget,
reduce taxes so individuals and businesses have
direct control over the spending of more of their
income.
Two, reduce growth rates of credit and money
to rates consistent with full utilization of resources
at a stable general level of prices. Such reduction
should be phased in steadily over two to three
years.
Three, critically review all laws, regulations,
and private organizations for indications that they
unnecessarily restrict competition or promote
price rigidity-and take corrective actions. In my
view, this is the most important part of an antiinflation prescription. The other parts will not do
the job without this part.
Four. review all Government regulations that
make doing business more difficult or costly, with a
view to eliminating those that are nonessential,
simplifying those that are overly complex, and
streamlining and reducing the administrative and
compliance burdens of those retained.
I would emphasize that this prescription is not
basically a call for less Government participation
in and control of economic matters. It is primarily
a plea that we yield unto competitive markets that
which they can do better than Government, and
have resort to Government only in those areas and
for those purposes where the broad, overriding
public interest-as contrasted with narrow, special
interests-requires it. It is a plea, first and foremost, to take positive action to promote competition.
Unless we can substantially reduce "structural
rigidities," our economy will continue to perform
below potential and fall short of our economic
goals, and we will be tempted to move to even
more comprehensive and more detailed Government direction. And this would not augur well
for success in containing inflation, optimizing em~
ployment and growth, or maintaining beneficial
patterns of international trade and investment.

Federal Reserve Bank of Dall••

N aney Teeters
Appointed to the
Board of Governors
Nancy H. Teeters, formerly assistant staff director
and chief economist of the House Budget Committee, has been appointed to the Federal Reserve
Board of Governors, Mrs. Teeters, the first woman
to serve on the seven-member board in its 65 -year
history, will fill the unexpired term of former Federal Reserve Board Chairman Arthur Burns. who
resigned in March. The term runs until January 31,
1984, at which time Mrs. Teeters will be eligible
for appointment to a full H-year term .
Before serving with the House Budget Committee, Mrs. Teeters was a senior specialist with the
Congressional Research Service of the Library of
Congress. She is best known publicly for her work
as a senior fellow at the Brookings Institution,
from 1970 to 1973, on an annual critique of the
Federal budget. Before joining the Brookings Institution, Mrs, Teeters worked for the White House
Office of Management and Budget. From 1957 to
1966 she was an economist for the Federal Reserve
Board. During this period she served a year with
the Council of Economic Advisers.
A native of Indiana, Mrs. Teeters graduated from
Oberlin College in Oberlin, Ohio, and has a master's degree from the University of Michigan. She
is one of four economists on the Board of Governors. The others are Henry Wallich, Philip Coldwell, and J. Charles Partee.

October 1871/Volce

5

•• Ped Quotes ~~
Brief Excerpts from Recent Federal Reserve Speeches, Statements, Publications, Etc.
"It is essential for everyone to understand that monetary policy is not developed
for banks or even the limited number of member hanks, so there appears to he no
good reason for the nation's central bank to operate under the shackles of a
voluntary membership structure. We can debate a specific monetary policy on its
merits, but from any standpoint, I can see no public purpose to be served by
limiting the effectiveness of the central hank. Monetary policy is made for the entire
nation, not a limited sector of the banking community. All depository institutions
are chartered in the public interest and all should be directly supportive of and
participants in the implementation of policy."
Philip E. Coldwell, Member, Board of
Governors of the Federal Reserve System
(Statement before the Committee on Banking,
Finance and Urban Affairs, U.S. House of
Representatives, July 31, 1978)

"The Board believes that simplified Truth in Lending requirements would
better serve the consumer."
"The Truth in Lending Act ... has proven to be difficult to apply to the wide
variety of new credit programs developed over the past ten years.
"The Board and its staff, in trying to be responsive to questions about the
day-to-day application of the act's requirements, have published approximately 1300
informal staff interpretations, 150 official staff interpretations, and 55 Board
interpretations. Nor have we been alone in our efforts to provide gUidance with
regard to Truth in Lending; the courts, too, have issued numerous opinions.
"A large amount of Truth in Lending litigation continues to burden the courts.
Unfortunately, compliance with a specific Truth in Lending requirement oftens means
different things to different courts. Courts in one district may interpret a statutory
requirement differently from those in another .... The consistent, uniform
interpretation of the act has become almost an impossibility."
"Simplification, aside from its desirable focus on the most important aspects of
credit costs, also should result in a savings to consumers. Creditors' costs in
complying with Truth in Lending appear to be substantial and must necessarily be
borne in large measure by the consumer. Significant costs are incurred in the
constant review and redesigning of di sclosure forms in order to incorporate statutory
amendments, Board and staff interpretations, judicial activity, and State law
considerations .... Simplification, in clarifying disclosure responsibilities, should
reduce the possibility of inadvertent violations and aid in reducing creditors'
compliance costs, thus serving to keep consumers' credit costs down."
Philip E. Coldwell, Member, Board of
Governors of the Federal Reserve System
(Statement before the Subcommittee on
Consumer Affairs of the Committee on
Banking, Finance and Urban Affairs, U.S.
House of Representatives, September 6,19781
6

Federel Re •• rve Bank of OeUu

"The Board favors universal reserve requirements for reasons quite apart from
the membership problem. Universal reserves would contribute to improving
monetary management and to ensuring the stability of the payments mechanism. In
doing so, the Board's bill, it should be stressed, does not authorize any supervisory
role for the Federal Reserve System with respect to nonmembers. Indeed, the bill does
not even require nonmember institutions to establish an account relationship
with the Reserve Bank."
"We realize that universal reserve requirements have been proposed before. and
that the proposal raises a number of difficult problems. The Board continues
to believe, however, that they are necessary to help correct the competitive
imbalances in our financial system and to assure an effective monetary policy."
G. William Miller, Chairman, Board of
Governors of the Federal Reserve System
"Proposals on Financial Institution Reserve
Requirements and Related Issues" {Statement
before the Committee on Banking, Finance
and Urban Affairs, U.S. House of
Representatives, July 27, 1978]
"While one would expect strong credit demands as a normal counterpart of a
healthy and growing economy, a significant-and I am afraid expanding- share of
recent credit growth is both the direct and indirect result of inflation."
G. William Miller, Chairman, Board of
Governors of the Federal Reserve System
(Statement before the Committee on the
Budget, U.S. House of Representatives,
July 13, 1976)

"Resources must be freed for private sector use. Fundamental to achieving this
aim is an expansion in the savings available for investment from outside the
business sector. To this end, Government must have a smaller role in the economy
and budget deficits need to be eliminated over time, taking into account the ups
and downs in the economy. The private sector can take up the slack if, over five or
seven years, the Federal Government curtails the growth of its expenditures
until their ratio to GNP, which is now above 22 per cent, is reduced to the 20 per cent
range. This interim goal for Federal expenditures clearly is attainable with a
good measure of fiscal diSCipline coupled with reduced public demands for
government services.
"As spending is brought under control, government will move from its position
as a substantial net borrower of funds in credit markets. Such a change would
moderate demand pressures on credit markets as well as relieve some of the
pressures on prices that arise from passing on high and rising taxes. Resources will
be more readily available to meet needs in the private sector. Easier credit market
conditions, Jess inflation, and greater availability of resources should help
ensure adequate residential construction activity to meet the Nation's housing
needs-needs that are now prey to a boom and bust syndrome that profits no one."
G. William Miner, Chairman. Board of
Governors of the Federal Reserve System
(Statement before the Joint Economic
Committee of the U.S. Congress, June 29,
1976)
October 1978/Voice

7

Federal Housing Agencies:
How Effective Are They?
By Sydney Smith Hicks

Just as the post-World War II baby boom reached
the age when many in the group wanted to buy
houses, the U.S. housing industry experienced in
1973 and 1974 its worst postwar downturn. Housing starts fell to a low of about 1 million units in
the first quarter of 1975, less than half the 2.4 million units in the fourth quarter of 1975. The cyclical variability of housing is not a new phenomenon.
Prior to every postwar business cycle peak, housing starts have peaked and then declined. Thus
over time, concern about the variability of housing
in the United States has risen. This concern has
spawned an array of Government programs designed to reduce the variability of housing, as well
as increase the general availability of housing over
the business cycle.
Besides providing tax incentives and a number
of direct spending programs in support of housing.
the Federal Government has created a number of
agencies to assist in financing the housing industry.
The major purpOse of these agencies is to expand
the flow of credit to housing. At the present time
the Federal housing credit programs directly lend
$72 billion and guarantee mortgage loans of about
$154 billion.
In line with the national desire for more houses,
these housing agencies have experienced dramatic
growth over recent decades. For example, the Federal National Mortgage Association (FNMA) fi-

•

nanced its operations in 1980 with $2.2 billion of
debt. By the first quarter of 1978, FNMA's outstanding debt was $32.6 billion.
In addition to increasing the number of homes,
these agencies also can pursue policies to limit
extreme variations in the number of homes built
over the business cycle. However, the record to
date shows the contrary. Some of the agencies expand their activities when housing starts are strong
and reduce their activities when housing starts are
weak.
The implications of this seemingly perverse behavior are not as serious as might first appear. A
substantial amount of research questions whether
these agencies have any significant impact on
either the number of homes being built or variations in the number. Despite these ambiguous findings, the general public and some economists continue to believe in the positive effects of agency
activity on housing.
To the extent these agencies do assist housing,
and that they do so when the rest of the economy
is approaching full employment, inflationary tendencies will be worsened. Unfortunately, many
housing agencies do expand their activities when
the economy expands. Consequently, they may accentuate the business cycle, exacerbating the problems of inflation and unemployment attendant at
business cycle peaks and troughs, respectively.
Federal Reterve Bank of Dalt..

Owned agencies are Involved primarily in guarantee programs,
while sponsored agencies make direct loans
TABLE 1. Federal and Federally Sponsored Agencies
Active in Housing Credit Programs
(Millions 01 doliars. Amounts outstanding as of March 31, 1978)
Dlrecl
loena

Governmenl-owned credit agencies
Federal Housing Administration (FHA) ........... .
Veterans' Administration (VA) ................. .... .
Farmers Home Administration (FmHA) ............. .
Government National Mortgage Assoc iation (GNMA)
Government-sponsored credit agencies
Federal home loan banks (FHLB's)
Federal Home Loan Mortgage Corporation (FHLMC)
Federal National Mortgage Association (FNMA)

$ 3.259
951
913
3,171

1. A brief s ummary of direct loans and guarantees under
all the Federal credit programs is provided in the

Appendix. The "direct loans" category includes both
loans made to individuals or institutions and purcbases
of assets (like mortgages). The "guarantees" category
includes loans undertaken by individuals. corporations,
or Institutions that are insured against default by
the Government or an agency.
October 1978/Volce

$90.241
35,512
13.354
(')

21.278
'3,121
34,832

1. GNMA.mortlla1l8-ba cked secu,lli e • . l ~cug~ gua ra nleed bv GNMA. aro backed bv
Bnd FHA-{jusf8ntaed mCfl1l8ges. T~e ultimate liabllity is wi th tho V... and FH ....
2. Includea $1.443 million 01 VA-insured and FHA-gyar antoed mcrtgages.
SOURCE: U.S. Trusury Department.

Federal agencies grow dramatically
Federal participation in the mortgage markets is
part of the total picture of Federal credit programs. 1 As of March 31, 1978, direct Federal loans
outstanding totaled approximately $188 billion for
all Federal credit programs, while loan guarantees
totaled another $201 billion. Of these amounts,
approximately $72 billion financed housing-related
direct loan activities, while $154 billion was for
housing-related loan guarantees. Moreover, 94 percent of the housing-related loans and 90 percent of
the housing-related guarantees were made by only
a few Government-owned and Government-sponsored agencies (Table 1).
The major role of the Government-owned agencies is to administer loan guarantee programs; only
a modest amount of direct lending is undertaken
by these agencies. The loan guarantee programs
are intended to enhance the flow of funds to housing by increasing the marketability of mortgages.

Guar-

anleea

o
o
o

V"'~nsufed

Both the Federal Housing Administration and the
Veterans' Administration have standardized the
mortgage instrument and have imposed construction standards for the collateral. (See the accompanying box, "Federal Agency Creation Spans the
Decades.") The loan guarantee programs have
grown steadily over time and have displayed little
cyclical variation.
The Government-sponsored agencies attempt to
stimulate the flow of funds to housing by various
direct loan programs; these agencies are not involved in any guarantee programs. (See the box.)
These agencies generally obtain their funds by
issuing bonds, which are usually sold at interest
rates very close to the rates on Treasury debt. The
market views the agencies' debt as virtually 8S
safe as Treasury debt, in that most of these agencies buy Government-guaranteed assets (and occasionally use the guaranteed assets as collateral) or
lend to strictly regulated institutions or have authorization to borrow from the Treasury if the
need arises.
Since the sponsored agencies' programs to assist
housing are so different, one way to measure the
relative magnitudes of the programs is to compare
the amount of money borrowed to finance the
individual agencies. The sponsored agencies have
experienced dramatic growth (Table 2). For example, over the 20-year period beginning in 1955,

•

Sponsored agency fin ancing has grown rapidly
TABLE 2. No mi na l and Real Goye rnme nt·Sponsored Agency De bt
(Millions of dollars. Averages of monthly data)
Uem

Nomina l debt levels
Federal home loan banks
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Real de bt
Federal
Federal
Federal

leYels'
home loan banks .. . .. . .... ........
Home Loan Morlgage Corporalion
National Mortgage Associallon

""

""

""

1970

191$

1971.01

$427

$1,276

$4,659

$ 9,831

2,170

1,808

13,295

$19,699
1,549
28,573

$19,531
1,768
32,642

1,858

6,267

.

10,759

3,159

2,433

14,536

15,498
1,218
22,455

13,313
1,205
22,251

697

1. Nominal de b' le vel. d ellal ed by !~e Implicit price della!o. lor g'o" national producl (1972 .. lOll).
Ei!her an Inligni ~C8nUy s mall amount or zero.
SOURCES; Board 01 60""""0.'. Fe<le.al Reserve SY51em.
U.S. Oepanment of Commerce.
Feder. , Reserve Bank of O.U ...

nominal debt of the Federal home loan banks
(FHLB's) increased 4,500 percent; adjusted for the
effects of inflation, FHLB debt still grew 2,100
percent.
Not only have the sponsored agencies grown,
but they and the owned agencies have grown
more rapidly than the traditional sources of mortgage funds; consequently, their share of total mortgage funds supplied has increased (Chart 1). The
mortgage holdings of the owned and sponsored
agencies increased from 4 percent in 1949 to 9 percent in 1977. Mortgage pools or trusts. which are
guaranteed by owned and sponsored agencies,
have been increasing their share only since 1970.
That year they held less than 1 percent of the
mortgage deb t ; by 1977 they held 6 percent. From
67 percent of the mortgage market in 1949, financial institutions increased their share to 78 percent
in 1965. Since that time, their proportion has
dropped back to 71 percent. Individuals and oth ers
have experienced a long-run decline in their share
of holdings, from 28 percent in 1949 to 14 percent
in 1977. 2

2. "Others" includes morlgage companies. real estate

investment Irusts, stale and local credit agencies, state
and local reUreme nt fu nds, noninsured pension funds,
credit un ions, and U.S. agencies for which amo unts
are small or separate data are not readily available. Of
course, some of these investors may be buying mortgagebacked securities in the "mortgage pools or
trusts" category.
10

Agency aclivity generally not counter
to the housing cycles
Besides attempting to promote more housing. some
agencies attempt to smooth the cyclical volatility
of housing. Countercyclical housing policy would
imply that agencies increase their mortgage market support when housing is weak and reduce it
when housing is strong. Only the sponsored agencies-FHLB's, the FNMA, and the FHLMC (Federal
Home Loan Mortgage Corporation)-display significant cyclical behavior in their support activities,
as measured by changes in the volume of debt
issued (Charts 2-4). This debt is ad justed for the
effects of inflation and then called real debt. s
In the first three postwar peak-trough periods
in housing starts, support activities of the FHLB's
generally coincided with the housing cycle rather
than displaying sustained movement counter to the
housing cycle (Chart 2). To the extent there was
support, it tended to be early in th e housing downturn. Countercyclical changes in FHLB debt did
occur once; the changes were positive before and
after the trough in housing starts in the fi rst quarter of 1970. However. in the last housing cycle the
FHLB's again reverted to the tendency to be active early in the downturn and to be withdrawing
support while housing was still weak in 1975.

3. The real volume of debt is displayed in the charts

because the fi nancing behlilvior of the three agencies is
compared to housing starts and, s ubsequently, to
real economic activity.
Federal Reserve Ba nk of DaDas

Federal agencies have grown relative to other suppliers of mortgage debt
CHART 1. Market Shares 01 Owners of Mortgage Debt

.o-;~~~~~~~~~~:=~~=:::::::::::::::~----------------

PERCENT OF TOTAL MORTGAGE DEBT

70-

60 -

'0*AND OTHERS
~~INDIVIDUALS
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~

.........

20 -

'0

o

--

-

--------_ ... --------------_...
FEDERAL AGENCIES

_

""""."""""""
,""
I
I I
j
I

I

~

_

'"" ..... _--""
..........
,.. ___ ....

___ .. -

......

MORTGAGE POOLS OR TRUSTS
.... ,,, .. ,,.."
.......
,""' ...... ," ..,. . " ......................... " ............... ,............"..
, n,
_
W
_
_
_
_
W
V
n
I

I

j

I

I,

I

I

,

I

I

,

,

,

~

I

I

I

,

77

SOURCES: Board of Govemor.. Fe~ ral R...rv. S,,,.m.
Fed.r.' Ru ..... Bank 01 Oa'laa .

The volatility of FHLB support increased rather
dramatically in the late 1960's and into the 1970's as
compared with earlier periods. No doubt this was
partly the result of rising market interest rates
and the joint administration of interest rate ce il~
ings on deposits by the Federal Home Loan Bank
Board and the Federal Reserve. Deposit ceilings
were maintained below market rates of interest;
thus, funds flowed out of both commercial banks
and savings and loan associations into money m ar~
ket instruments. Attempts by the savings and loan
associations to rebuild liquidity led to increased
borrowing from the FHLB's and, subsequently.
more debt issue by the FHLB's.'
4. Some economists may argue that current changes in
FHLB debt finance mortgaga commitments made by
savings and loan associations some months prior to the
current period. Thus. current FHLB support (as
measured by changes in debt) actually stimulated
hous ing starts in prior months. If this is so. then FHLB
activity would be even more procyclicsi to housing
than Chart 2 shows.
October 1978/Volce

The sponsored agencies have not always
provided countercyclical housing support, as
is evident when the changes in real debt are
used as indexes of sponsored agency activily
in the housing market.

Compared with the FHLB's, FNMA did mount
more sustained coun tercyclical housing policy in
the late 1950's and early 1960's, but FNMA's ac~
tivity also tended to be early relative to the hous~
ing trough (Chart 3). As with the FHLB·s. FNMA
activity in 1970 was appropriately counter to the
housing cycle.
From the fourth quarter of 1969 to the present,
the changes in real FNMA debt have trended down~
ward, In the early 1970's, housing starts were very
strong. so the smaller increases in FNMA debt
were appropriate. However, after the housing
peak in the last quarter of 1972. starts declined
11

FHLB activities show no consistent pattern counter to the housing cycle ...
CHART 2. Changes in Real FHL8 Debt Versus Housing Starts
STARTS

,., -~---::-----------------------------::-=-----------------==::-.'-'
~"

BILLION OOLL-'RS

tSE-'SOH-'tLY -'DJUSTED)

- 2.4

,.~

2.1-

.l, ',.
! l

1.8 -

,~;.

~

;,.1""

-!

.. .. -

HOUSING STARTS

1"'"

t . ~""..

! 'i \.1

1.5 -

1.2

M'lllOft IIHITS

..
N'
,./

2.4 -

.f \,

\"".~

,t·.."

.',
!
. . .~.
..,.....,..;

'''\

t ·,\t<" ......"~"
..;~i
A

,~.,"

l""

•

\

=

.,.,/~..,

/

,l . I
'\
V

'.

.....

- .'
- .'

., o

CHANGE IN REAL FHLB OEBT

-.6-.9-

-1.2-1.5 -

'4 7
SOURCES,

' 49

_rei

." ." ."

01 Go ...

'n".... f ed• ••,

~ ... ...

' ",

' ,"

'eo

'n

'",

'" ,

."

'n

."

'n

'H

S ,."'m.

U.S . o.~rtm.n1 01 Com ...."' •.
r .d•••1 n. ...... hnk 01 0.11 ...

for nine consecutive quarters. FNMA injected a
mod est amount of funds in the first quarter of
1973. but its support increased beyond that during
only three quarters of the decline in housing,
After housing starts plummeted to less than 1
million units in the first quarter of 1975, changes
in FNMA support vacillated around zero while

5. Some economists may argue that FNMA h as its effect
on housing sta rts when FNMA a uctions its commitments.
Only when these commitments are used will FNMA
need 10 issue debt. T hus, cu rrent chan ges In FNMA debt
would affect housing s larts in prior months. If this is
so, then FNMA activity would be even more procycilcal
to housing t ha n Chart 3 Indicates.
12

housing was still relatively weak. 5
The FHLMC, the newest agency, is much less
significant than FNMA or the FHLB's in terms of
the volume of support it adds (Chart 4). Nevertheless, during the last housing cycle the FHLMC
added funds when housing was strong and withdrew funds when housing was weak, contrary
to "proper" countercyclical housing policy.
In summary, the sponsored agencies have not
always provided countercyclical housing support,
as is evident when the changes in real debt are
used as indexes of sponsored agency activity in
the housing market. Since all the borrowed funds
ultimately affect the mortgage market, the changes
in real debt of the FHLB's, the FNMA, and the
Federal Reaerve Bank of Dallas

... as is also true of activities of the FNMA and the FHLMC
CHART 4. Ch anglls in RIIII FHLMC
Debt Vllrsus Hou sing Starts

CHART 3. Changlls in RIIII FNMA
Dll bt Vllrsus H ousing Starts
" ' , . ___________________________________________________________''-TAATS

uH.~

Mill_ _ _ _ _ _ _ _ _ _ _ _
STAATS
,.,
U

U
OOI.LAAS

MILLION UHITS

iSUSOH ALLV AOJUSTEOI

2.4-

j.~.

2.1-

!'i \
!
\.

,J'"

1.8-

1

HOUSIMG STAATS

•

!

1.5 -

!

_2.4

~1-2 .1
1'1
I '.

\.
~

i

.,I. i

'

\."..

'i ,,/'.1
\ ,

".

.. CHAKGE 1N REAL FNNA DEBT

I

18
,-.
_ 1.5

n..LIOH OOI.LAAS

"'LLION UNITS

(SEo$OflAUY

".,t.,

2.4 -

AI>J\JST~D)

l'i \

2.1_/

\

llV
\ ......,

-

..

"

\','I
.

_ 1.2

1.2 -

.,-

-1.0

~jI

-1.5
-1.2

HOUSIMG STARTS

.. -

-

.9

-.'

CHANGE IN R£AL
FHLMC DEBT

.,-

2.4

.l..i-2.1

1.a I.S-

_

,
-.3 -

' 71

_,.,Ion.

ItOTE: Tile fHMA ...... <0 ... '. H<ond., . ... ,k.,
SOOI!(:U, I\oa,d 01 00_ ....... F_,.I A.H ' .. S ••
u.s. OOpo ...... n' 01 C>mmo,ce.
F.d.,.1 Ito •• , . . 110'* 01 OOW ••.

'.m.

<><II • .

HOTE,

'73

n •• ••• .-01

o di~.1moftt

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

bOHd.,., """ ..... ro'" 01
.ncI.
t"u • •• ,. 1•• Uti ••. HO ..... .. , ...
.... •• ..,....,
... do" .......". ""h...
"'" ...., .. ",iI., 'e> .... ..... diu.' ....
~'1&

"'J~ . ,

5OOACES, a oard of

Govo"""..

~

..., "..••,..

Sy ... m .
u.S. 00 .... - " , 01 C""' .... U .
F ...... , ItoH . ....."" 01 _ ....

FHLMC can be summed to obtain the net sponsored agency effect relative to the housing sector
(Chart 5). In only one case (the first quarter of
1970) did the net sponsored agency effort strengthen as housing starts weakened and weaken as
housing starts strengthened. In general, the activities of the sponsored agencies have not been counter to the housing cycle.

have estimated housing start equations are summarized here (Tabl e 3). Each study's equations
contained different explanatory variables and were
estimated over different sample periods by different authors.s Some studies conclude that federally
sponsored housing agencies do not increase housing starts from what they otherwise would have
been; other studies show agency programs to be

Effects of the agencies uncertain
Although sponsored agency activity is fa r from
countercyclical, this only becomes a problem if,
in fact, agency activity can affect the amount of
housing. Surprising as it may seem, there is some
doubt as to whether all this activity has any
significant effe ct on the number of houses being
built.
Though the literature contains diverse approaches to the study of the impact of housing
agencies on housing, only results of studies th at

6. The majority of the authors use FNMA purchases of
mortgages or FHLB advances. When FNMA purchases a
mo rtgage or the FHLB's give advances (loans) to their
members, these agencies must issue debt or sell equit y;
the major portion of their funds are obtained by debt
issue. For an excellent summary of the empirical fi ndings
on this topic, see Leo Grebler. "An Assess men t 01 the
Performance of the Public Sector in the Residential
Housing Market: 1955-1974," in Capitol Markets and Ihe
Housing Sector: Perspectives on Fimmcioi Reform. ed.
Roberl M. Buckley, John A. Tuccillo, and Kevin E.
Villani [Cambridge, Mass.: Bollinger P ub lishing Co.,
J. B. Lippincott Co., 1977), pp. 311·46.

October 1978/Voice

13

Federal Agency Creation Span. the necade.
Governme nt-ow ned agencies
The Federal Housing Administration (FHA)
was established in 1934. Its primary purpose is
to guarantee. or insure, mo rtgages against default.
thus protecting the lender aga inst loss. To
qualify for the FHA guaran tee, a prope rly mu st
meet certain construction standards. By bringing
some degree of standardization to the collateral
and the mortgage instrument, FHA has helped to
increase the liqui dity of insured mortgages. Only
when a defa ult occurs and the property cannot be
liquidated fo r a value sufficient to cove r the
mortgage will FHA have to issue debt in order
to cover the lender. Relative to the amount of
insured loans (as in Table 1), direct loans
made by the FHA a re ve ry small .
The Ve te rans' Administration (VA) was created
in 1944 to aid ex-servicemen in a variety of
ways, including assistance with housing. The
housin g-related function of the VA is similar to
the fu nction of the FHA. in that its primary role
is in gua ranteei ng, or insu ring. mortgages.
Although the VA is au thorized to lend directly to
borrowers, it hlls made little use of
this authorization.
The Fa rmers Home Administration (FmHA)
operates under initial authorization passed in
1921 and 1949 and is part of the Department of
Agriculture. The pu rpose of the agency is to
assist rural areas by means of direct loa ns and
loan guarantees. Only 34 percent of its direct
loan funds are for housing purposes, while 53
percent of its loan guarantees are hous ingrelated. The FmHA ma kes IOllns with funds
borrowed from the Treasury and from the
Federal Financing Bank.' The agency originates
loans and seils participations in mortgage pools.
The Government National Mortgage
Association (GNMA or "Ginnie Mae") was
created in 1968. The agency iI!:isumed the assets
and liabilities, and operation. of the management
and liquidation functions and the special
assistance funct ions of the Federa l National
Mortgage Association (discussed in the following
section). To this point in time. the mortgages in
GNMA-guara nteed pools and trU!:it!:i have been

was created in 1974 \0
coordinate al!cncy b orrowing and to Incur debt for the
purp ose of lending 10 Government-owned agencies.

1. Th e Federal Finonci nl! Ban k

14

ultimately insured or gua ranteed by the VA and
FHA. Regularly scheduled payments of principal
and interest from a mortgage pool. as well as
any prepayments of principal, are guaranteed to
the security holder by the GNMA; however, the
final mortgage gUllrantee rests with the VA and
FHA. GNMA fi nances its activities by utilizing
both appropriated and borrowed fun ds.
Government-sponsored agencies
The Federal home loan banks [FHLB's) were
created in 1932. All federally chartered savings
and loan associations must pu rchase stock in the
Federal Home LotIO Bank System; statechartered savings and 10iln associations may
join if they so desire. One purpose of this
system is to provide liquidity to the member
ins titu tions through loans. To ob tain funds for
such lending activities. the FHLB's
generally issue debt.
The Fed eral Home Loan Mortgage Corporation
{FHLMC or "Freddie Mac") was created in 1970
and is under the control of the Federal Home
Loan Bank Board. The purpose of the FHLMC
is to buy mortgages during periods of tight
money. It may buy con ventional mortgages,
thus stimulating a secondary marke t for those
instruments. Additionally, it may buy VAinsured or FHA-guara nteed mortgages. thus
increasing the liquidity of those ins truments.
The Federal Natio nal Mortgage Association
[FNMA or " Fan nie Mac ") wus created in 1938 as
a Government-owned agency. In 1968 the
association became a privately owned
Government-sponso red ilgency. The Department
of Housing and Urban Development (HUD)
appoints 5 of the 15 directors of the agency,2
Prior to 1968. FNMA opera ted a secondary
market in mortgages and had management and
liquidation functions. Since 1968, FNMA has only
operated a secondary market in mortgages.!
FNMA auctions commitments to supply mortgage fu nds. If a commi tment is "taken down,"
FNMA issues debt to purchase the mortgage.
2. There has been some oisasrllcment (whil;h now seems
resolvlld) bill ween HUD ~fld FNMA over the extent o f
contro l Hun should have. See "HUD Plans to Unveil
Today Finnl Rules EXllrling More Control Over Fannie
Mae." Wall Street 1ournal. Augnst 14. 1970. II. t o.
3. The manall!!ment ami IiquloRlion [unctions were shifted
to GNMA.

Federal Reserve Bank of DaUal

effective. The empirical results are certainly
mixed,
Researchers who believe agencies increase housing tend to believe that the impact is in the short
run and that the long-run effect of these agencies
is negligible. In the short run, provision of funds
to the mortgage market supposedly forces mortgage rates lower relative to other market interest
rates. However, the provision of funds by an
agency must be financed. When the agency sells
debt, market interest rates on closely substitut-

able debt (for example, Treasury debt) rise.
Subsequently, these higher market rates cause
individuals to divert funds from thrift institutions
in order to take advantage of the higher rates on
bills and bonds. The higher market rates also
cause financial institutions (such as insurance companies, commercial banks. and mutual savings
banks) to shift their funds out of mortgages and
into the bills and bonds with higher rates. Moreover, the higher rates may reduce the demand for
housing as an investment because alternative debt

Empirical findings are mixed regarding agency effects on housing
TABLE 3. Implct 01 Agency Varllbles in Housing Start EquatIons
Aul~or.

period covered

Variable lested

1. Arcelus Ind Meltzer
1915-40; 1948-68

Real government debt

Negative and signilicant.

2. Brady
Third quarter 1960second quarter 1970

FNMA purchases
FHLB advances

FNMA: Negative and inSignificant for total and
conventional housing starts; positive and
significant for VA and FHA starts.
FHlB: Positive and significant for totat and
convenllonat housing starts; negative and
insignilicantlor VA and FHA starts.

3. Duesenberry and Bosworth

FNMA purchases

Short-run positive ellect; long-run zero allect.

4. Huang
Second quarter 1953lourth quarter 1965

FNMA purchases
FHlB advances

FNMA: Positive and significant lor VA housing
starts but not for FHA starts.
FHLB: POSitive and significan t (at 9O-percent
level).

5. J.n.e

FNMA mortgage holdings
FHLB advances

FNMA: Negative and insignilicant.
FHlB: Positive and significant.

6. Jaffee and ROlen
Midsixties-December 1976

FNMA commitments

Positive but weak.

7. Sparh

FNMA net purchases

Positive and significant.

June 19S0-December 1969

1949-64

1. Francisco Arcelus and Allan H. Meltzer, "The Markets for Housing and Housing Services," Journal 01
Money, Credit, and Banking 5 (February 1973): 78-99. The exact composition 01 the "real government debt" variable

2.

3.

4.

5.

6.
7.

was not detailed. However, Arcelus and Meltzer treat FNMA and FHLB debt Uke government debt In interpreting
their results for agencies. For a critique see Craig Swan , "The Markets lor Housing and Housing Services, A
Comment," Journal of Money, Credit, and Banking 5 (November 1973): 960-72.
Eugene A. Brady. "An Econometric Analysis 01 the U.S. Residential Housing Market," in National Housing
Models: Application of Econometric Techniques /0 Problems of Housing Research, ed. R. Bruce Ricks
(lexington, Mass.: D. C. Heath & Co., 1973), pp. 1-47.
James Duesenberry and Barry Bosworth, " POlicy Implications of a FJow-ol-Funds Model," Journal 01 Finance
29 (May 1974): 331-47. Instead 01 housing starts, Duesenberry and Bosworth used residential construction
(simulation period 1969-71 ).
David S. Huang, " Ellect of Dilleren! Credit Poncies on Housing Demand," in Study of the Savings and
Loan Industry, directed by Irwin Friend and submitted to the Federal Home Loan Bank Board, 4 vols.
(Washington, D.C.: Government Printing Office, 1969), 3:1211-39.
Dwight M. Jaltee, "An Econometric Model 01 the Mortgage Market," in Savings Deposits. Mor/gages, and
Housing: Studies for the Federal Reserve-MIT-Penn Economic Model, ed. Edward M. Gramtich and Dwight M.
Jallee (LeJl:ington, Mass.: D. C. Heath & Co., 1972), pp. 139·208.
Dwight M. Ja//ee and Kenneth T. Rosen. "Estimates of the Effecliveness 01 Stabilization Policies lor
the Mortgage and Housing Markets," Journal of Finance 33 (June 1978): 933-46.
Gordon R. Sparks, "An Econometric Analysis of the Role of Financial Intermediaries in Postwar Residential
Building Cycles," in Determinants of Investment Behavior, ed. Robert Ferber, Universities-National Bureau
Conference Series, no. 18 (New York and l ondon: Columbia University Press for National Bureau of Economic
Research. 1967), pp. 301-31. The FNMA variable was part of a joint variable com posed of other sources 01
mortgage funds.

October 1978/Volce

15

With only one exception, aggregate agency activities
have not run counter to the housing cycle
CHART 5. Total Changes in FHlB. FNMA. and FHlMC Real Debt Versus Hous Ing Starts
DEBT

3.3

STAATS

---,----,.------------T.--,,-----.,------- 3.3

BilLION DOLLARS

(SEASOHAU..Y ADJUSTED)

I

MillION UNITS

3.0 -

2.7-

BUSINESS CYCLE
._. PEAK
TROUGH

I

2.4 -

2.1 -

,,
HOUSING
STARTS

1.B -

1.5 -

1.2 -

.• -

'\.

",
j
'4"1' 4

A
a··..•·•
0:
f. • ",..•~.
• t·fiEf \A....
~#-. ~
"
~.
..- ...

!-.........
I

I
I

.0 -

-

3.0

-

2.7

-

2.4

-

2.1

-

1.B

- 1 .5

'J

,,~i
,

- 1 .2

-

.•

- .s

1\

.3 -

-

.3

- .& TOTAL CHANGE IN
REAL FHLB. FNMA,
AND FHLMC DEBT

- .SI-1 .2 -

I

NOTE: P,lo' 10 th . second quart. , 01 1011. th. sa,i as Wal compo •• d 01 FHLB 'FIll FNMA dltbl ani,; l ubsequenll,.
th, .. ,I. . has all(l Included FHlMC debt .
SOURCES: BOII,d 01 Go ... ,nors. Fed,,,1 R,se,ve S,slem.
US. Department 01 Comme rce.
Fad"al A, serve Bank o f Dallal.

FedBral Reserve Bank of Dane.

instruments now yield more than they did initially.'
The net long-run results for the mortgage rate.
the volume of mortgage funds, and housing starts
are theoretically ambiguous. In studies that attribute some short-run positive effects to th e agencies.
the effects on the fina ncia l markets of financing
the agency activities usually are given little weight.
Agencies may accentuate business cycle problems
Even though the evidence is fairly conclusive that
agency activity is not timed to smooth the housing
cycle. the possibility remains that such activity
can affect the amo unt of housing. To the extent it
does. it may also have broader effects on the general business cycle itself.
Most business cycle peaks are characterized bv
relatively high interest rates and high rates of i~­
flation. Among expenditure categories, housing is
one of the most interest-sensitive; consequently,
housing starts tend to decline as interest rates increase and the business cycle peak approaches.
Before each of the six post-1947 business cycle
peaks. ho us ing starts peaked 3 to 13 quarters before the tota l economy. In the two most recent
cycles, housing starts reach ed their peak and declined from three to four quarters before th e peaks
in total economic activity (Chart 5).
According to prior housing start studies. agencies ma y have some short-run positive effect on
th e L,wel of huusing starts. However. the agencies
do not operate in such a way as to have well-d efined activities counter to the housing cycle. To
the exten t any countercyclical hous ing activities
can be identified in the aggrega te, the sponso red
agencies do tend to increase their activity early in
the housing downturn but genera lly do not sustain
that activity throughout the downturn (Chart 5).
Thus. with respect to three out of four business
cycle peaks since 1956, the sponsored agencies
reached relative peaks in their activity at. or within one quarter of. the peaks in total economic
activity.
The financing of age ncy activity initially tends
to alter the s tructure of interest rates by lowering
.,. Some authors htlVe suggested that the agencies may
ultima tely have a negative impact on housing starts,
s ince the aclual slock of houses after the agency activi ty
is larger than the desired stock of houses. See Dwight
M. Jaffee and Kenneth T. Rosen, "Estimates of the
Effectiveness of Stabilh:ation Policies for the Mortgage
and Housing Markets," Journal of Finance
33 (June 19"8) : 936.
October 1918/Voice

Because sponsored agency activity to support
housing has tended to increase as the total
economy approached business cycle peaks and
decrease as it approached troughs. the
in8ationary tendencies of the U.S, economy
have been accentuated.

mortgage interest rates and ralsmg other market
interest rates. Because housing is more interestsensitive than the other categories of spending,
increases in agency activity may stimulate housing
while other expenditures are not substantially reduced. Consequently, total spending at the business cycle peak may increase above the level it
would otherwise have been. Given that resource
bottlenecks usually occur at business cycle peaks.
inflation may be worsened. If the Federal Reserve
responds to the increased inflation by raising the
genera l level of interest rates. the inflation generated by agency activity could be reduced. However, mortgage interest rates would then be higher,
which would depress new housing construction.
Conclusion
Though a significant financial commitment has
been made to the housing agencies, the evidence
regarding the potential effects of the agencies on
the level and cyclical instability of housing starts is
inconclusive. Rather surprisingly. sponsored agency
support often weakened as housing weakened and
strengthened as housing strengthened-j ust the
reverse of countercyclical housing policy.
Obtaining resources for th ese housing agencies
has not been costless. The direct costs of the sponsored agencies' activities are recognizable and
equal the dollar amount of agency bonds issued.
The less visible costs of these programs are their
potential effects on inflation and unemployment at
business cycle peaks and troughs. respectively.
Because sponsored agency activity has tended to
increase as the total economy approached business cycle peaks and decrease as it approached
troughs, th e inflationary tendencies of the U.S.
economy have been accentuated.
In summary, it is not clear that th e sponsored
agencies are increasing the level of housing and/ or
reducing its volatility. Thus, it certainly is not
obvious that maintaining or increasing the level
of resources flowing to these housing agencies will
contribute to the goal of a less volatile housing
industry and/or more housi ng for the nation.
17

Appendix
DIRECT AND GUARANTEED LOANS OUTSTANDING UNDER FEDERAL CREDIT PROGRAMS
(M illions of dollars. Amounts outstanding as 01 March 31 , 1978)
Agency

Guaramen'

Direcl loans'

1. Wholly owned Government enterprise.

pa,.ble In dollar.
DUice of the Presiden t . . . . . . .. . . . ..
Ag r iculture Department .................... , .•. . ..
Commerce Departm ent .. .. . . ......... .. . ..... . .
Defense Departm ent
Health, Education, and Welfare Depar tm ent . .
Housing and Urban Development Department
Interior Department
........... .
Justice Department
. . ... '. ' .
Stale Department
Transportation Deparlment
.. . ...... • .
Treasury Department
Generaf Services Administration
Veterans' Adminis tration
Total
2. Wholly owned Government enlerprl'et
payable in foreign currencies
Office of th e President .
Tr easury Department
U.S. Information Agency
Total
3. Wholly owned Independent agencies
Community Services Adm inistration
Dislrict of Columbia
Export·lmport Bank ..
Federal Home l oan Bank Board: Federal
Savings and loan Insurance Corporation
.... . .. . .
. ... . .. . .
Interstate Commerce Commission .
National Credit Union Admi nistration
Small Business Administration .. . ..............•...
U.S. Railway Association
Ru ra l Elec tr ification Adm inistration . .
Total
4. Privately owned Government·sponsored enterprise,
Banks for coopera tives
........ . . .
Federal intermediate credit banks
Federal land banks . .
Federal home loan banks
Federa t Home loan Mortgage Corpora tio n . .. ...•. . .
Federal National Mortgage Associatio n
Student l oan Marketing Associatio n .. . ............ .
Total

913)

653)
4,400 (
25,094 ( 13,354 )
5,328

5,017
11 ,177 ( 10,605)

7,653
105,853 (104,624)

$ 14,648
16,118
660

$

10

327

113

154
42

401

2,196

3,962

51
2,678 ( 951)
55,245 ( 12,469)

862
35,512 ( 35,512)
187,011 ( 154,143 )

2,002

18
2,021
14
1,289
11,408

48
105
4,300

4,454

28
5
5,700

365
9,985
27,514
6,800
13,588
22,927
2 1,278 (21,278)
3.121 ( 3,121)
34,832 (34,832)

318
102,865 (59,231 )

3,124
13,311

0
0
0
0
0
0
271
271

Summ ary tota15

1. Wholly owned Government enterprises
payable in dollars
. . ...... .. ... . .
2. Wholly owned Government enterp ri ses
payable in loreign CUrrencies .
3. Wholly owned independent agencies ....
4. Privately owned Government·sponsored enterprises
TOTAL

$ 55,245 ( 12,469)
2,021
27,514
102,865 (59,231)
$187,645 (71,700)

$187,011 ( 154,143)

13,311

271
$200,593 (154,143)

1. Amount. In 1>8",nt.he ses COVer hou sing -rel l ted program, only.
DenOI. S r.n In $Og n" ,c antly sm all amoun1. lero. o. an unknown amount
SOURCE: U.S. Trenury Department

18

Federal Reserve Benk of Oene.

Several Actions Taken on Regulation Z

The Board of Governors has recently dealt with
several problem aspects of Regulation Z by amend·
ing and proposing amendments to the complex
Truth in Lending regulation.
One of the amendments, effective August 31,
allows creditors to use more than one page in disclosing payment schedules for transactions where
monthly payments vary in size. Previously, the
regulation required all such disclosures to be made
on one side of a single page.
The Board adopted another Regulation Z amendment, also effective August 31, 1978, to simplify
percentage rate calculations for transactions with
minor irregularities in the repayment schedule.
The change allows creditors making graduatedpayment mortgage loans to count initial payment
periods of up to 62 days as if they were regular.
Moreover, the Board has published for comment
a new Regulation Z interpretation that would require banks to disclose any interest forfeiture on
a time deposit when that deposit is used as security on a loan. The interest reduction is necessary
when the rate charged on loans, required by Federal law to be at least 1 percentage point more
than the rate paid on deposits, exceeds a state's
usury ceiling. In such a case, the rate paid on the
deposit must be reduced.
An amendment that became effective July 26
could establish a new credit source for consumers.
The amendment waives the notice requirement of
October 1978/Volce

Regulation Z for individual transactions under
certain open-end credit plans that are secured by
a borrower's residence. The regulation requires
creditors to notify customers of their right to cancel credit arrangements within three business days
when their homes are used as collateral. This
"right of rescission" requirement has tended to
prevent creditors from offering open-end credit,
such as through credit cards or overdraft checking, that is secured by personal residences. Therefore. the Board has relaxed the regulation and
waived the notice requirement in open-end transactions when the creditor and the seller are not
the same party.
Under the new rules, a creditor is required to
notify customers at least once a year, rather than
each time a credit transaction occurs. of their
"right to rescind." Notifications must also be given
when an open-end credit plan is first opened, the
credit limit is increased, the terms of the account
are changed. and a security interest in a home is
added to an existing open-end credit arrangement.
In connection with this amendment, the Board
issued an interpretation of Regulation Z that provides sample disclosure statements creditors may
use to satisfy the requirements of the new rules.

19

Reserve Requirement Eliminated
on Foreign Borrowing

Large U.S. banks will be able to compete more effe ctively with foreign-owned banks as a result of
the elimination of the 4-percent reserve requirement on foreign borrowings of U.S. banks.
The Federal Reserve Board reduced from 4 percent to zero the reserve requirement on foreign
borrowings of member banks. primarily Eurodollars. from their foreign branches and other foreign
banks. The l-percent reserve ratio on foreign
branch loans to U.S. borrowers was also eliminated. The reduction in reserve requirements was
effective October 5, 1978.
The Board said its action "is intended to encourage member banks to substitute Eurodollar
borrowings for domestic borrowings as a source
of funds. Such increased Eurodollar borrowings
should improve the demand in Euromarkets for
dollar-denominated assets."
The reserve requiremen ts e mbodied in Regulation M, "Foreign Activities of National Banks,"
were imposed in 1969 to discourage bank borrowing abroad because it was being used to circumvent the Federal Reserve's tight money policy.
During the 1960's the Federal Reserve was using
Regulation Q-which at that time applied to all deposits, including large certificates of deposit
(CD's)-to fight inflation by driving market rates

20

above ceiling rates set by the regulation. Since depositors could earn a higher return elsewhere, they
allowed their large CD's to mature, then withdrew
the funds. Faced with this decline in deposits. U.s.
banks entered the Eurodollar market to meet the
credit needs of their customers. Banks borrowed
heavily from their foreign branches, which were
not subject to Regulation Q and could pay
whatever was required to obtain funds. Outstanding CD's dropped dramatically, and Eurodollar
borrowing increased substantially. By June 25,
1969, U.S. bank liabilities to their foreign branches
had risen to $13.6 billion.
To discourage banks from using the Eurodollar
market so heavily, the Federal Reserve imposed
reserve requirements on foreign borrowings of
member banks. Since 1969 the reserve requirements have ranged from 4 percent to 20 percent.
Because U.S. banks have had to maintain these reserves while their foreign-owned counterparts did
not. U.S. banks have been at a competitive disadvantage. With the elimination of reserve requirements on foreign borrowings of member banks.
competitiveness of U.S. banks should improve.

Federal Re..rve Bank of nan..

Migration Changes
the Face of Agriculture
By Don A. Riffe

Last year, only 1 person Qut of 28 was a farm
resident. Farm residents have declined from 30
percent of the total population in 1920 to about
31/2 percent in 1977. In the early seventies, estimates indicated that the rate of decline in the
farm population might be slowing. However,
after a brief period of relative stability, the fa rm
population again appears to be declining rapidly.
There were approximately 12 percent fewer farm
residents in 1977 than in 1975, compared with a
decline of only about 9 percent in the first five
years of this decade,l
The long-term downward trend in the farm
population has traditionally been associated with
the ongoing mechanization of agriculture and increasing pressures for occupational change. More
recently, a pronounced decrease in the number
of farm children may be attributed, at least partially, to a drop in the national birth rate. Over
time, migration and birth patterns have affected

1. Farm population est imates for a single year should be

viewed onl y as rough app;oximalions. These and other
farm population data are based on estimates in
Curren! Population Reports, Series P·27, prepared by the
U.S. Department of Commerce, Bureau of the Census,
in cooperation with the U.S. Department of Agriculture.
October 19'8/Voice

certain segments of the farm population more
than others, so that many characteristics of farm
residents have changed. Agriculture, in general.
has undergone so many changes that farms and
farmers are no longer as easily identifiable as they
once were,
The farm population defined
Discussion of the farm population is of little value
without knowledge of the standard used to determine farm residency. And the problem of determining who should be counted in the farm
population is not as simple as it may seem at first
glance, An individual growing a thousand acres of
grain is obviously a farmer, but should he be
counted in the farm population if his residence is
in town? How large must a vegetable garden become to be called a farm?
To deal with such problems, the Bureau of the
Census and the u.s. Department of Agriculture
use this definition in estimating the farm population : "Farm population consists of all persons living in rural territory on places of 10 or more acres
if as much as $50 worth of agricultural products
were sold from the place in the reporting year. , ..
It also includes those living on places of less than
10 acres if as much as $250 worth of agricultural
21

products were sold from the place in the reporting
year."J With a few minor exceptions, "rural terri·
tory" consis ts of areas other than towns of 2,500
inhabitants or more. The farm population includes
all resid ent members of the farm household.
The definition is designed to include nearly all
agricultural production in the United States. Thus,
farm population estimates include a number of
people operating very small ente rprises that do
not confor m to the traditional "family farm" can·
cept. Since 35 percent of all U.S. farms had total
sales under $2,500 in 1977, it appears that farm
population estimates are heavily influenced by this
group. Under a slightly narrowe r farm definition,
a substantial proportion of the current farm popu·
lalion might be classified as rura l nonfarm
residents.

Mi&ration from U.S. larms has been greatest
lor under·20 age groups
FE .. ... LES. 81' "GE

""=+~.J

zs 10

~1I 76

Fanning dominated by males
One distinctive characteristic of the farm popula·
lion is the ratio of males to females. It is apparent
2. In 1975, a new farm definition was an nounced by tbe
Agriculture Department and the Census Bureau.
Under the new definition, 0. farm is defined u " any
place located In rura l territory from which agricultural
products worth $1,000 o r mo re were sold, or would
normally he ~ old. in the reporting year." However, no
data have been reported ye t under Ihis definition.
22

3.

0,1&0
'.10"

.

U NOEA

3.000

2.000

'.000

•

IHOtJUHOS OM

Trend away from metropolitan areas
The broadly held belief that most farm migrants
move directly to large urban areas may be a mis·
conception in the seventies. Although the farm
population has been declining, the nonmetropolitan
population has not. Reversing a post·Worid War II
trend , nonmetropolitan areas-essentially, counties
without a city of 50,000 inhabitants or more---ex·
perienced a 9·percent in crease in population be·
tween 1970 and 1977. No nmetropolitan growth
since 1970 has undoubtedly created more jobs in
rural areas, and many farm migrants prefer to re·
main rural residents.
Some farm "migrants" may simply be reclassi ·
fied as nonfarm residents when their land is put
to a nonagricultural u se. Others find nonfarm em·
ploymenl in their own communities. A number
of farm famili es are not counted in the farm popu·
lation because they live in small towns rather
than on farms. But no matter where migrants go,
their departure from farms reveals some char·
acteristics common to those who stay.

OVER 6<1

1.000

2.000

3.000

fA~"S

that more women migrate from farms than do men.
There were 109 males on farms for every 100
fema les in 1976, while there were on1y 93 males
per 100 fema les in the nonfarm civilian popula·
tion, In general, it appears that women leave farm s
in relatively large numbers before reaching their
20th birthday. In the group of farm residents under
14 years of age in 1976, there were 110 males for
every 100 females. In the 20·to·24 age group, there
were 128 males on farms per 100 fema les. The
male·female ratios in these age groups were about
the same in 1960.
An explanation offered by the Census Bureau
is that more females migrate from farms because
of the predominantly masculine nature of farm
work. Another view is that opportunities for
women to have more than a subsidiary role in
agricultural enterprises have been limited by fa c·
tors other than the physical demands of farming.
Such factors include limited availability of credit
to women and unfavorable inheritance tax laws.
Another striking feature of the farm population
is the age structure. The number of farm residents
considered to be farm operators in the 1974 Cen·
sus of Agriculture was equal to about a fourth of
the farm population . Forty·four percent of these
farmers were age 55 or over. Only 13 percent were
under age 35, with the average age being 51.7. By
contrast, about 16 percent of the U.S. civilian la·
Federat Reserve Balik o f Da llal

The rate of out-migration is influenced
by the gap between farm and nonfarm income
PER CAPITA OISPOSABlE
PVlSONAL INCOME

MIGIIATION RAlE

6.!l00 - - - - - - - - - - - - - - - "
DOLlARS

P EACOff

6,000 !I,SOO -

NOt4FARM INCOME
fROM ALL SOURCES

5,000 -

4.!IOO FARM INCOME
FROM Al l SOURCES

4,000 -

AVERAGE RAn: OF
NET OUT-MIGRATION

3,000 -

2,!IOO -

1
. -

f

f

-

12
11

-.-.
-.-,

-10

2,000 -

1,!SOO -

-,

-,
o
SOURCES : U.!I . O.pall ....1It 01 Agllcwllu •••
U.S . O.p.<o.lm.nl 01 Com .... ,ce . I .... w 01 til. C.n.w • .

bor force was 55 or over. Forty-seven percent of
the total labor force was under 35.
Migrants have tended to leave the farm before
entering the 20-to-24 age group. In 1960, there were
nearly 5 million farm residents under the age of
14. Sixteen years later. in 1976, the entire 14-to-34
age bracket totaled less than 2.5 million. More
than half of the farm residents under 14 years of
age in 1960 had migrated from farms by 1976-a
number roughl y equal to a third of the entire 1977
farm population.
The number of children on farms has declined
at a much faster rate than the rest of the farm
population. Farm residents under 14 years of age
declined 38 percent from 1970 to 1977. Those 14
or over declined 13 percent during the same period.
Except for the under-14 group, the various age
categories have represented a fairly constant proportion of the farm population since 1960 (all have
declined in numbers).
Oc:loblr 1915/Voicl

Small-scale farm. most Dumerous
U,S, farms average approximately 400 acres in
size, but the diverse nature of farms makes acreage
a relatively useless measure of size. For this reason, farms are commonly grouped according to
the value of annual sales.
Apparently, most farm residents live on farm s
with relatively small annual sales. Roughly 58 percent of all farms had total sales under $10,000 in
1977. A number of these farms are the primary
source of income for the people operating them,
but part-time farmers account for a growing proportion of the farm population. Thus, in many
cases, farm sales may reflect only a portion of the
farm family'S income from all sources,
Farmers who are unable to increase efficiency
through technological improvements and largescale production often find themselves at a competitive disadvantage. Those depending on a relatively inefficient farming operation as the primary
source of income are especially vulnerable to low
or variable commodity prices. Nonwhite minorities, especially blacks, in agriculture have historically been associated with small-scale tenant
farming of tobacco and cotton in the South. The
trend in agricultural production has been toward
large mechanized farm s. which has meant fewer
tenant-operated farms, fewer small farms, and less
total farm labor required. Since minorities have
had a disproportionately large representation in
the smaller-scale farming operations, a disproportionate number have sought employment outside
agriculture. Nonwhite minorities on farms totaled
about 397,000 persons in 1977, down approximately 53 percent from 1970,' Minorities comprised
only about 5 percent of the farm population last
year, compared with almost 9 percent in 1970.

District farmers older, aod
more bave nonfarm occupations
According to the 1974 Census of Agriculture, 48
percent of the farm operators in Eleventh Federal
Reserve District states were engaged in something
other than farming as a principal occupation. This
compared with only 37 percent nationwide, Similar data for farm operators are not available for
1977. but for all farm residents there has been a
trend away from agriculture 85 the primary source

3. In the 1970 census, blacks comprised 87 percent of
the nonwhite farm population.

"

Otf·farm Income allows many farm residents to remain on small tarms
1977 Incoma per ta,m opa ,a to, fa",lty, by l a,,,, sales elnsa.
S(O.OOO

$20.000

$10.000

$5.000

,~.

S...."

"

$39.999

"

$19.999

"

$9.999

"

" ".m

than
$2.500

16'

348

321

311

30'

304

958

$38,310
9.636

$18.502
6,011

$ 9,993

6,956

$ 4,987
9,466

$ 2,696
12,179

$ 1,508
14,559

$ 1.518
15,077

$47.946

$24,513

$16,949

$14,453

$14,875

$16.067

$16,595

.~

110'"
Number 01 farms
(Thousands)

... .

Net farm Income before
Inventory adJustment ... . ..
Off·farm Income .•..
Total Income from farm
and off·farm sources .. •

leu

SI00.000

S2 .~

SOURce: U.s. Copa n",.nl 01 Ag,;cII''''''•.

of employment. The average age of Eleventh Dis·
trict farmers also appears to be higher than the
average for all u.s. farmers, In 1974, almost 49
percent of the District's farmers were age 55 or
over, compared with 44 percent nationally, Only
11 percent were under age 35, compared with 13
percent for the United States.
The rate of net out-migration of the farm population in District states has probably been higher
than the national average rate since 1970, The
West South Central Division (Census Bureau
classification)-consisting of Texas, Oklahoma,
Louisiana, and Arkansas-experienced an annual
net out-migration rate of 5.1 percent between 1970
and 1976, This was exceeded only by the rate of
5.7 percent for the South Atlantic Division.
One apparent reason for the relatively high outmigration is that the District's most populous
state, Texas, has had a fairly low average level of
net income per farm, Also, rapid growth in nonfarm industries has provided alternative opportunities for many farm families. For the period
from 1970 to 1976, average realized net income
per farm in Texas was 36 percent below the U,S.
average. By contrast, in the District's least populous state, New Mexico, average realized net income per farm was 60 percent higher than the
U.S. average.
Farmers earn less from farming
than from other sources
Per capita personal farm income from farming
was $2,341 in 1977, while per capita personal
farm income from nonfarm sources was $3,162.
Only half of the employed farm resident labor
force was primarily engaged in agricultural production. The smaller the farm, in terms of total
24

sales, the higher the probability that the farmer
is employed in a nonfarm occupation. This is evidenced by the fact that total income per farm
operator family in 1977 was greater for farms
with annual sales of less than $2,500 than for
farms with annual sales between $10,000 and
$20,000. The gap between farm and nonfarm income appears to have been a major reason for
net out·migration from agriculture, but it may
also eventually retard out-migration as more and
more farmers acquire substantial income from
nonfarm sources,
Even with outside employment, per capita farm
income from all sources has exceeded income of
nonfarmers only once in the past 40 years. The
income gap widened substantially in the fifties and
sixties, which was a period of heavy out-migration, but began to narrow in the early seventies.
The rate of net out-migration slowed considerably
as farm income remained near nonfarm levels.
When the gap almost doubled in size between
1975 and 1976, net out-migration rates began to
climb. However, the relationship between outmigration and the income gap may not be as strong
as the figures suggest, since other factors also
influence migration decisions.
Nonfarm jobs may slow long~term out~migration
Government programs designed to bolster commodity prices, provide disaster payments, and
guarantee loans to farmers undoubtedly reduce the
economic pressures for immediate movement out
of agriculture. In the fi fties and sixties, however,
farm programs appeared not to reduce long-term
out·migration. In some instances, Government programs may have actually lowered the number
of farmers by creating a barrier to entry, By re·
Federal Reserve BIlIIk of Dallal

ducing some of the risks in farming, Government
programs may have enabled a number of farmers
to specialize and expand through the purchase of
land and other productive inputs. As land prices
have risen, entry of new farmers has become more
difficult. 4
The number of farm residents employed in nonfarm occupations has not declined as rapidly as
the rest of the farm population. Thus, nonfarm
employment may eventually do more to slow the
rate of decline in the total number of farm residents. Farm residents employed in agriculture declined 16 percent from 1970 to 1976. while farm
residents employed in nonagricultural industries
increased about 2 percent.
Although larger, specialized farms may be able
to produce more efficiently, part-time farmers op4. Luther Tweeten, Foundolions of Form Policy (Lincoln:
Unive rsity of Nebraska Press. 1970), p. 326.

erating on a smaller scale are exposed to less total
risk by being diversified between farm and nonfarm activities. Also, it appears that a growing
number of people moving to rural areas-and being
counted as farm residents-farm more as a hobby
than as a business. Thus, as farm residents whose
primary source of income is a relatively inefficient
farming operation diminish in numbers, the rate
of out-migration should become less responsive to
the gap between farm and nonfarm income.
Years of net out-migration from agriculture have
left fewer than 8 million people on farms in the
United States. The decline has disproportionately
affected nonwhite minorities, teenagers, and, to
a lesser extent, women. Following a long-term
trend, technology continues to lower labor requirements in agriculture. However, pressures for
occupational change and out-migration may ease
in the future as a growing proportion of the farm
population comes to depend on nonfarm income.

New Film Available
A new educational film describing the purposes
and functions of the Federal Reserve System has
been distributed to aU Reserve banks. Entitled
"The Fed ... Our Central Bank," the film emphasizes the monetary policy functions of the Federal
Reserve and the services available from the Fed to
commercial banks.
The 20-minute, 16-mm film is available free of
charge to banks, high schools, colleges, and other
audiences. Requests for the film should be sent
to the Bank and Public Information Department of
this Bank, (214) 651-6261.

Octobe r 19781Volce

25

Loans, Deposits, and Net Income Up in 1977
at Eleventh District Member Banks
Member banks in the Eleventh District experienced
sharp growth in loans. deposits, and net income
in 1977, especially in the last half of the year.
Total loans at District member banks rose 14.2
percent last year. Loans to commercial and industrial firms increased $1.5 billion, or 15.6 percent,
and real estate loans increased nearly $1.3 billion,
or 33.2 percent. Consumers continued to borrow
heavily in 1977, and their outstanding debt to
member banks in the District rose $1.0 billion.
Total deposits at member banks in the District
expanded 12.1 percent last year-the fastest rate

since 1972- rlespite a small decline in the first
half of the year.
Net income of the banks rose $79 million, or
1B.9 percent, to reach $499 million in 1977. Total
operating income was up 15.2 percent last year.
somewha t less than the 17.7-percent growth of th e
previous year.
Copies of comparative statements of condition
and income of member banks in the Eleventh District are available from the Bank and Public Information Department of this Bank, (214) 651-6267.

New state member bank
Citizens Bank and Trust Company of Baytown. Texas. Baytown. Texas.
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas. was admitted September 21. 1978. as a member of the Federal Reserve System. Th e bank has a capital structure of $7.891.000. consisting of capital stock of $2.000,000. surplus of $2,000,000. undivided profits
and reserves of $2,891,000. and capital notes of $1,000.000. The officers are:
John C. Echols, Chairman of the Board and Chief Executive Officer; Hazel
C. Echols. Vice Chairman of the Board; Conrad W. Magouirk, President;
Carl Brandon. Vice President; E. Reginald Brewer. Vice President: William
J. Gidley, Vice President and Trust Officer; Ted H. McCall. Vice President:
Lynn McCage, Vice President and Comptroller; Beatrice Horton. Vice President; Ralph H. Kunz, Vice President; Richard D. Scrivner, Vice President:
Jess Taylor. Vice President; Mike Wilson, Auditor; Michael G, Barrow,
Trust Officer; Wynnell Brinkley, Cashier; Mary F. Fayle, Assistant Vice
President; Janet Grigsby, Assistant Vice President; Thelma Hamilton, Assistant Vice President; Carol Harrison, Assistant Vice President; Gayle Guidrey, Assistant Cashier; Shirley Archer, Assistant Cashier; Bobbie Fortenberry, Assistant Trust Officer; and William Ketchum, Assistant Comptroll er.

New nonmember bank
Rose Capital Bank. Tyler, Texas. a newly organized insured nonmember
bank located in the territory served by the Head Office of the Federal Reserve Bank of Dallas. opened for business October 6, 1978,

26

Federal ReeerYe Bank of nanu

Ad Guidelines Issued
for Six-Month Money
Market Certificates
Advertising guidelines for banks and thrift institutions offering the six-month money market savings certificates pegged to the Treasury bill rate
have been issued by the three Federal regulatory
agencies. The guidelines require that advertising
clearly and conspicuously state th at a particular
rate is applicable only to certificates issued during
a specified week.
The new certificates of deposit [CD's), first issued on June 1, have interest rates pegged to the
average auction discount rate payab le on six-month
Treasury bills. When the CD's are issued, their interest rate is determined by the rate on six-month
Treasury bills of the preceding week. Therefore.
the rate on the CD's varies, depending on when
they are issued. This ha s made advertising of the
new certificates difficult. Th e guidelin es offer this
wording as appropriate: "Had you bought this
bank's six·month money market certificate on
Thursday. July 6. 1976. we would now be paying
you 7.44% interest."
The guidelines were issued by the Federal De·
pos it Insurance Corporation. the Federal Reserve
Board. and the Federal Home Loan Dank Board.

October 1978/Voice

"