View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

~ Reserve Bank of Dallas

Business Review
v

.-~

-....,
"

September 1976
Electric PowerUtilities Look to Increased Use
Of Coal and Nuclear Energy

The Payments Mechanism
A Primer on Electronic Funds Transfer
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Electric Power-

Utilities Look to Increased Use
Of Coal and Nuclear Energy
Texas once had the cheapest boiler
fuel of any state, allowing the generation of inexpensive electric
power. Ready supplies of natural
gas that had few alternative
markets provided the state's
electric utilities with their primary
boiler fuel. But natural gas is no
longer a low-cost boiler fuel for
these utilities.
Prices of natural gas escalated
sharply following the Arab oil
embargo in late 1973 to levels that
make it uneconomical as a boiler
fuel. And with a growing demand
for natural gas pressing against a
dwindling supply, the Texas Railroad Commission has ruled that
electric utilities must begin to curtail their consumption by the
1980's. At present, there me three
feasible substitutes for natural gas
as a primary boiler fuel-lignite,
western coal, and nudear energy.

With a growing demand for
natural gas pressing against
a dwindling supply. the Texas
Railroad Commission has
ruled that electric utilities
must begin to curtail their
consumption by the 1980's.
The least expensive fuel in the
state is lignite, a low-ranking form
of coal that is currently being
burned by three utilities. Other
finns, seeing the cost advantages
in burning lignite, are moving to
construct lignite-fired boiler plants
where reserves are available. But
the lignite deposits are not large
enough to meet all the demands
in the state.
Because Texas coal would be
expensive to mine, additional supBuslneu Review I September 1976

plies of coal will be imported from
the vast reserves located in the
western states. But transporting
coal into Texas also presents major
investment decisions. In the near
term, railroad facilities would have
to be expanded in order to haul the
western coal. And in the longer run.
coal slurry pipelines might have to
be built to help meet the needs
of the state's electric utilities.
Nuclear power plants are much
bigger and more costly than coalfired plants. But the advantage of
nuclear energy is that it shows
promise of holding the average
total cost of generating electricity
below the generating cost of coalfired plants.

Natural gas as a boiler fuel
Texas has long been the nation's
leading producer of natural gas.
The ready availability of low-cost
gas led the state's electric utilities
to build gas-fired steam plants to
generate electricity. In fact, natural gas became the most widely
used boiler fuel, accounting for
almost all the fuel consumed by
the state's utilities.
The fixed investment a gas-fired
boiler requires is relatively small,
as natural gas is virtually pollution-free. The only waste products
given off during combustion are
carbon dioxide and water. Because
natural gas is the cleanest buming
fuel, no investment in pollutioncontrol equipment is required. Use
of other fuels, such as coal, entails
not only the basic cost of the boiler
but also sizable investments in
equipment to clean flue gases.
Because gas is so desirable, it
was the basis of much of the longrange planning of electric utilities
in Texas in the late sixties, and

even in the early seventies. But
several factors upset those plans.
Demand for natural gas as a
boiler fuel and for other uses accelerated throughout the sixties.
Total gas consumption in Texas
increased from 5.9 trillion cubic
feet in 1960 to over 8.6 trillion in
1972. By 1974, however, gas consumption dropped to less than 8.2
trillion cubic feet because of limited supplies brought on by a
decline in proved reserves.

Because gas is so desirable,
it was the basis of much of
the long-range planning of
electric utilities in Texas in
the late sixties, and even in
the early seventies. But
several 'actors upset those
plans.
The squeeze forced sharply
higher gas prices on the electric
utility industry. And prices were
pushed even higher after November 1973 as oil prices were quadrupled by the Arab oil cartel. In
1961, for example, gas as a boiler
fuel cost the utilities, on average,
17.3 cents per million Btu (British
thermal units). But by 1974, the
state's electric utilities paid an
average of 44.8 cents.
The market for gas tightened
even further in 1975, as the average
cost to the utility industry rose
to 75.4 cents. And some companies. without prior contracts
with suppliers, were forced to buy
all their gas at $1.90 per million
Btu in the intrastate market.
The rising price of gas in the
unregulated Texas market helped
stimulate new exploration, but
I

the state's reserves continued to
shrink. And on December 17,
1975, the Texas Railroad Commission issued a ruling that large
users of boiler fuel, which include
the electric utilities, must cut
their consumption of gas 10 percent by 1981 and an additional
15 pe<eent by 1985.
Alternative boiler fuels
As the price of gas began rising
in the late sixties, nuclear energy
and lignite showed promise as
substitutes for the primary boiler
fuel. Supplies of these fuels were
readily available, and it was generally believed their prices would
remain well below the price of
natural gas. While the initial fixed
investment in boiler facilities using
lignite or nuclear energy is much
larger than for gas-fired plants, a
high fixed cost amortized over a
long period of time and combined
with a smaller fuel bill can result
in a relatively low average total
cost of producing electricity.
Generating plants have become
even more expensive than antici-

pated just a few years ago. In
1970, a gas-fired plant could be
built for about $75 per kilowatt of
generating capacity. A plant using
lignite or bituminous coal cost
about $125 per kilowatt, and one
using nuclear fuel cost about $240.
But it now requires about $450 per
kilowatt of generating capacity to
build a coal-fired plant-plus $30
to $80 per kilowatt for sulfur
scrubbers-and as much as $900
per kilowatt for a nuclear-fired one.
As the price of gas began rising in the late sixties, nuclear
energy and lignite showed
promise as substitutes for the
primary boiler fuel.

It takes about six years to
license and build a coal-fired plant
and 10 to 12 years for a nuclearfired one. Uncertainty about future
rates of inflation has led suppliers
to the utility industry to "index"
contracts. Suppliers promise to
deliver equipment and materials at

Rising fuel prices paid by electric utilities in Tt'!X8S
have stimulated search for cheaper substitutes
180 CENTS PER MilLION BTU - - - - - - - - - - - - 150 120 -

90 -

o -rl---,Ir---'I----TI----TI----rl---,Ir---'I-1961

1963

1965

SOURCE: Edison Elec:triC: InstitL/le

2

1967

1969

1971

1973

1975

a future date, but the delivery
price is determined by today's
price plus a monthly cost adjustment that ranges, on an annualrate basis, from 6 to 15 percent.
Two nuclear plants are currently under construction in
Texas. The Comanche Peak Station is located near Glen Rose,
and the South Texas Station is
located in Matagorda COWlty.
Lignite was once a widely used
fuel in Texas, with annual production averaging about 1 million tons
from 1914 to 1930. However, with
the development of inexpensive
oil and gas supplies in the state,
the mining of lignite dwindled and
then disappeared in the forties.
But just as lignite production
declined because of falling gas
prices, mining of this low-grade
coal revived when gas prices began
rising rapidly.
Lignite is now the least expensive boiler fuel in the state. It
averaged less than 22 cents per
million Btu in 1971, when the first
of the new lignite-fired generating
stations began operating, and rose
to only 24 cents by 1975. By comparison, the average price per million Btu last year was 75 cents for
natural gas and $1.71 for fuel oil.
Despite the fuel cost advantage,
lignite is not widely available in
Texas. To date, only three utilities
have acquired lignite reserves,
which are fOWld in a narrow band
that stretches from Northeast
Texas to the Rio Grande. Because
it is more expensive to transport
lignite than to transmit electricity
short distances over high-power
lines. the generating plants are
located near the mines.
With current technology, lignite
C8IUlot be counted on to supply
the long-run fuel needs of the
state's electric utilities. The generating plants now operating and
those that are planned will exhaust
shallow·deposit reserves in 30 to
40 years. A bigger reserve of deepbasin lignite is located at depths

of 5,000 feet or more, but these
deposits cannot be economically
tapped at current fuel prices.

Western coal
Because lignite reserves in Texas
are limited, the utilities will have
to rely on coal imported from out
of state as an important source of
fuel. Coal reserves in the United
States contain 2.6 times as much
energy as all known oil reserves
in the world. Most U.S. coal
reserves are located in the West,
and the largest and richest deposits are in Montana and Wyoming.
Besides being plentiful, western
coal has two other distinct advantages, which more than offset the
fact that its heat content averages
a third less than for eastern coal.
It is inexpensive to mine and has
a very low suUur content. While
most eastern coal is mined underground in a relatively labor-intensive operation, western deposits lie
near the earth's surface and are
easily surface-mined with huge
shovels. The smaller labor requirement helps make western coal
much cheaper than deep-mined
eastern coal.
The low sulfur content of western coal helps boiler plants meet
clean air standards. The suUur
content of western coal averages
about 0.7 percent, compared with
2 to 4 percent for eastern coal.
Consequently, federal emission
standards can be met with less
investment in pollution-control
equipment.
Despite the advantages, two
obstacles have to be dealt with
before use of western coal can be
significantly increased. The first
is environmental concerns, and the
second is transportation.
To satisfy environmental standards, land that has been mined
will have to be essentially restored
to its previous state. In areas
that receive little rainfall or are
very hilly or mountainous, this
may be difficult to accomplish
Business Review I September 1976

Construction costs of generating plants have risen sharply
1,000 DOLLARS PER KILOWATT OF GENERATING CAPACITY - - - - - -

800-

600-

400-

200 -

o
1970
1976
COAL AND LIGNITE

1970
1976
NATURAL GAS

because the land, once mined,
would be particularly prone to
erosion. But mining activity could
begin in areas where rainfall and
terrain are such that the land can
be easily restored.

Because lignite reserves in
Texas are limited, the util
ities will have to rely on coal
imported from out of state as
an important source of fuel.
p

The costs of land restoration
will be paid by the mining companies. Land reclamation costs,
however, will likely be a relatively
small share of the total cost of
producing western coal. For
example, even though it may cost
several thousand dollars to rehabilitate an acre of land, that expense
would probably add only a few
cents to the cost of mining a ton
of coal.
Another major obstacle to the
use of western coal as a boiler fuel
in Texas involves transportation.
Electric power plants could be
constructed in the western coal-

1970
1976
NUCLEAR

fields and transmission lines built
to bring the power to Texas. But
this approach is not feasible for
several reasons.
First, operation of a power plant
requires large quantities of water
for generating steam and for cooling, and generating capacity of the
size required by the state could
outrun the water supplies in many
western areas. More important,
the cost of building adequate
transmission lines would be very
high, and power losses over such
long lines would be great, making
energy delivered to Texas cities
very expensive.
Another approach is to transport
western coal to the boiler plants
in Texas. While this will require
huge investments in transportation
equipment, the cost should be
smaller than if the power plants
are constructed in western coalfields. The two principal means of
transportation will be railroads
and slurry pipelines.
Railroads will initially be called
upon to bring western coal into the
state. The first shipment is from
Wyoming and is scheduled to be
delivered to a new coal~fired boiler

•

unit in San Antonio this fall. And
a second coal-fired unit should be
completed there by next summer.
To supply power plants with
western coal will require additional
investment in railroads. Existing
tracks already connect Texas
markets with northeastern New
Mexico, southern Colorado, and
other western fields. And rolling
stock is available. But as more
coal-fired plants are built, the
demand for coal supplies will
mOWlt rapidly.
The planned conversion to western coal by utilities in the state will
take an estimated annual coal supply of 25 million tons by 1985about 70,000 tons per day. Assuming transportation via rail and
that trains were made up of 100
hopper cars of lOO-ton capacity,
seven trainloads a day would be
needed. But because of the distance between the coalfields and
power plants, a train could not

complete a round trip in a day,
and, hence, the amount of rolling
stock and trackage would have to
be boosted substantially.
A number of electric utilities are
planning to shoulder some of the
increased investment in transportation. In fact, some have decided
it will be cheaper to transport the
western coal in their own hopper
cars. Also, some will likely build
their own spur lines connecting the
main lines to the boiler plants. If
so, these investments would add
substantially to a utility's total
capital requirements.
The cost of transporting western
coal will be fairly high. One railroad has contracted to deliver coal
from New Mexico, beginning in
1980, at a base rate of 20.5 cents
per million Btu, with the final payment to be adjusted for inflation.
Nonetheless, the utilities estimate
the average total cost of generating
electricity with western coal will be

Two coal slurry pipelines have been proposed
to transport western coal to Texas

•

.

.._- PROPOSED PIPELINES
LOW·SULFUR
COAL RESERVES

\

\

SOURCES: U.S. Department of the Interior
Federal Reserve Bank 01 Dallas

4

much cheaper than with either
natural gas or fuel oil. I t is likely,
though, to be somewhat higher
than for nuclear generation and
considerably more expensive than
with Texas lignite.
Slurry pipelines
Another possible means of transporting coal is the slurry pipeline.
Mixing powdered coal with water
to a 5O~50 consistency by weight
produces a slurry that can be
pumped through a pipeline from
mines to power plants. A pipeline
already in operation is moving coal
slurry 273 miles from Black Mesa,
Arizona, to a power plant at
Mohave, Nevada.
Several other coal slurry pipelines have been proposed by private companies. The first project
that may be Wldertaken is a
38-inch line running from Gillette,
Wyoming, to White Bluff, Arkansas, and costing an estimated $750
million. Two pipelines are also
being considered for Texas. One
would rWl from near Walsenburg,
Colorado, to Houston via Amarillo
and Temple, and the other would
move coal from Gillette, Wyoming,
to Houston.
The cost of building a new railroad might well nul twice as much
as constructing a new pipeline.
However, in areas where a pipeline
would run parallel to existing rail
lines, improving the rail lines could
be cheaper-costing perhaps half
what a new pipeline would.
The variable cost of operating a
pipeline is lower than for a railroad, largely because less labor is
required. A few workers can monitor the operation of a pipeline, but
moving an equivalent amount of
coal by rail requires a number of
train crews. The labor cost of operating a large pipeline has been
estimated at about 4 percent of
the total operating cost, while the
labor cost of operating a train over
the same route could accoWlt for
nearly half the total cost.

The construction of slurry pipelines is being held up because the
railroads are not allowing pipe1ine
companies rights-of-way across
their tracks. To overcome this
obstacle, pipeline companies are
seeking congressional legislation
that would make them public carriers and grant them the right of
eminent domain. But action on
such legislation apparently will not
take place before next year.

After the railroads reach a
level of operation that fully
utilizes their present capac·
ity, a significant part of any
further expansion of transpor·
tation facilities is likely to be
in the form of slurry pipelines.
Another problem is obtaining
enough water to make the slurry
for the pipelines. Because most
western coal is in arid or semiarid
areas, mixing 200 gallons of water
with each ton of coal mined would
strain water supplies. A large pipeline, for example, could require
up to 6.5 billion gallons of water
a year.
Pipeline companies propose
drilling deep wells to obtain the
necessary water. But environmentalists and the western states tend
to oppose this, believing the water
table in many mining areas would
soon drop significantly. Another
possibility is to pump the water
separated from the slurry at the
power plants back to the mines.
However, only half the water in
the slurry could be recovered, and
building a return pipeline would
add substantially to the fixed cost.
Slurry pipelines will likely provide a longer-term solution to the
coal transportation problem-in
some areas, at least. After the railroads reach a level of operation
that fully utilizes their present
capacity, a significant part of any
further expansion of transportaBwineu Review I September 1976

tion facilities is likely to be in the
form of slurry pipelines. But the
availability of water would likely
constrain the amount of pipeline
capacity that could be built.
A solution to the water problem
would be to find another fluid that
could be used in slurry. Some alternatives have been proposed. One is
methanol, which could be produced
from coal itself. And blowing coal
through pneumatic pipelines is
being studied.
New capacity
Because of the long lead times
required to bring facilities into
operation, plans for new generating
plants between now and 1985 are
already fairly well established. It
is anticipated that 24,416 megawatts of new generating capacity
will be built by the electric utilities
making up the Electric Reliability
Council of Texas.
Gas-tired plants-likely to be the
last ones built in the state-will
account for 11 percent of the
increase in capacity, and as gas
supplies dry up, they can be con-

verted to fuel oil. More than
a third of the new capacity is
expected to be fueled by ligrtite,
and 28 percent by western coal.
Four generating units at the two
nuclear stations will account for
a fifth. The fuel for 900 megawatts
of the planned generating capacity
is still uncertain but could be western coal or lignite.

Because of the long lead
times required to bring facilities into operation, plans
for new generating plants
between now and 1985 are
already fairly well established.
Lignite-fired capacity is scheduled to come into operation every
year beginning in 1977. The first
plant to burn western coal will
start operation this year, and
others will follow except in 1984.
Eight of the 11 coal-fired. plants
will be built to rely on natural gas
or fuel oil as a secondary fuel

generating capacity in Tex as through 1985
to be ba s ed larg e ly on lignit e a nd coa l

New

LIGNITE 3 7 .5 "

N ATUR AL GAS 11 .2 %

COAL 27 .9 %
SOURCE: Electric Renabilll., Council 01 T....

•

should coal supplies be unavailable, and one of the lignite-fired
plants is designed to switch to fuel
oil as a secondary fuel. The two
nuclear generating plants already
under construction will begin
operating in 1980.
The rise in generating costs has
been due to the sharp increase in
the price of natural gas. The fuel
bill can be reduced through substitution of cheaper fuels, which,
however, entails higher fixed-cost
investments in plant and equipment. Despite the large investments, the cost of generating electricity will be lower than if new
gas-fired plants are built. Moreover, the kinds of substitutions
made will depend not only on the
alternative fuels available but also
on projected load requirements.
Load management

Ranked according to cost, Texas
lignite is the least expensive boiler
fuel, followed by nuclear energy,
western coal, and then natural gas
and fuel oil. All the utilities would
like to switch entirely to lignite,
but because of its limited supply,
they have to move to nuclear
energy and western coal. However,
excess capacity in coal or nuclearfired plants can quickly dissipate
any expected saving. Therefore,
plans for new generating plants
must be tailored to projected load
requirements.
Electricity use changes continuously-from hour to hour, day to
day, and month to month. The
peak wad is the biggest demand a
utility expects to meet. It is typically of very short duration and
is followed by a long interval of
slack in overall demand. The
minimum continuous demand a
utility expects to meet is the
base load, which usually makes
up the first 50 to 55 percent of
peak demand. Between base load
and peak load is the secondary
load, which averages 25 to 35 percent of peak demand.
6

To minimize the average total
cost of generating electricity, the
utilities maximize the use of generating plants that have the biggest fixed investment but burn the
cheapest fuel-to carry the base
load. After the base load is met,
the utilities bring into operation
cycling units.-intennediate facilities that have a lower fixed cost
but burn more expensive fuels-to
carry the secondary load. The generating equipment used to meet
the peak. load is idle much of the
time. Therefore, generating costs
are minimized if this equipment
has a relatively low fixed cost but
can burn an expensive fuel for
short intervals.

Plans for new generating
plants must be tailored to
projected load requirements.
For example, utilities with
nuclear, coal, and gas-fired plants
would allocate the nuclear generator to the base load, the coal-fired
facility to the secondary load, and
the gas-fired generator to the peak
load. This schedule allows the
high-fixed-cost nuclear plant to
run continuously with little excess
capacity. At the same time, highcost gas is used sparingly, and the
low-cost gas plant is allowed to be
idle most of the time. The mediumcost coal-fired plant remains idle
some of the time, but this loss is
offset by the fact that its fuel is
not too expensive.
-Edward L. McClelland

The Payments Mechanism-

A Primer on Electronic Funds Transfer
All modem economies have some
sort of system for making payments for goods and services.
And as long as this mechanism
works well, it tends to be taken
for granted, without concern for
changing it or increasing its
efficiency_
In the United States, commercial hanks are the major finns in
the payments mechanism, and the
paper check is the principal means
of making payments. Although the
system of paper checks has become
increasingly automated, many
people in banking and finance are
convinced that it is becoming much
less important. A system that
moves electronically the infonnation now carried on checks could
be more efficient than the present
system in many areas. Developments in electronic funds transfer
have been especially rapid in
recent years.
Electronic funds transfer
promises to bring many

changes in the payments
mechanism-and the institutions providing payments
services.
Electronic funds transfer promises to bring many changes in the
payments mechanism-and the
institutions providing payments
services. Its development carries
implications not only for the way
banks operate internally but also
for relationships between banks,
both large and small. It is also
tying nonbank thrift institutions
to the payments mechanism more
closely and bringing them into
direct competition with commercial banks.
The development of electronic
funds transfer raises many quesBusiness Review I September 1976

tions-questions of regulation of
the new systems, of ownership of
shared facilities, and of how public
interest can best be served. These
questions will be treated in a
future article in the Business
Review. This article surveys the
types of electronic funds transfer
arrangements being developed.

Bank wire systems
Initial attempts at automating the
payments mechanism centered
around expediting the exchange of
funds between individual banks.
The Federal Reserve wire system
and the bank wire system are
examples of limited-access electronic funds transfer systems.
The Federal Reserve wire system was established in 1918 to
allow the Board of Governors in
Washington and the Federal
Reserve banks and their branches
to transmit and receive information among themselves. Information was first sent by Morse
code, but a teletype system was
adopted in 1937. Changing needs
and advanced teclmology fostered
continual improvements in the
Federal Reserve communication
system, and by late 1973, the system had become fully automated.
The Board of Governors, the
Reserve banks and branches, the
U.S. Treasury, and more than 200
member banks are now linked
together through the highly
sophisticated Federal Reserve
communication system. The components of the system are linked
by teletype lines to a central
switch, located in Culpeper, Virginia, and operated by the Federal
Reserve Bank of Riclunond. At
the Culpeper Switch, four communications computers route
messages between Reserve banks.
A major use of the system is for
transfers of reserve account bal-

ances from one member bank. to
another. These transfers may be
for the accounts of the member
banks, such as transactions in the
Federal funds market, or for the
accounts of their customers. All
these money transfers are credit
transfers-that is, a member bank
instructs the Federal Reserve to
transfer funds from its reserve
account to another member bank.

Initial attempts at automating
the payments mechanism
centered around expediting
the exchange of funds
between individual banks.
The system also transfers U.S.
Government and federal agency
securities. These transfers are
facilitated by "book entry" securities-which are evidenced by an
entry on the books of a Federal
Reserve bank. The securities
are transferred electronically by
adjusting the security accounts
of member banks.
In 1950, 14 banks in the major
money market centers of Chicago
and New York set up a communication system similar to the Federal Reserve wire system, whereby
they could send payments messages among themselves. The bank
wire has continued to grow in
tenns of number of members, and
hundreds of banks across the
nation are now able to accommodate payments messages among
themselves through computerized
switching centers located in Chicago and New York.
The automated clearinghouse
A cornerstone of the emerging
electronic funds transfer system is
the automated clearinghouse. Simply stated, its function is to trans7

mit debit and credit items through
the financial system electronically
rather than by paper. An automated clearinghouse is functionally
analogous to a clearinghouse that
processes checks-both organizations clear funds transfers between
banks. With an automated clearinghouse, funds transfers take the
form of electronic impulses on
magnetic computer tapes instead
of a paper instrument.
Where payments are made electronically-as in payroll depositing,
preauthorized billing, or pointof-sale transaction&-settiement
between the financial institutions
involved can he made through an
automated clearinghouse. The economic advantages of an automated
clearinghouse lie in the substitu-

tion of magnetic tapes for the
paper instruments that make
the existing payments system
cumbersome. Economies are particularly evident in the case of
repetitious transfers, such as payroll deposits, mortgage payments,
and insurance premiums.
A cornerstone of the emerging electronic funds transfer
system is the automated
clearinghouse.

Development of the automated
clearinghouse began in 1968. when
a group of California bankers
formed the Special Committee on
Paperless Entries to study the

feasibility of exchanging payments
on magnetic tape. The committee
developed. the computer software,
rules, and legal arrangements for
the operation of an automated
clearinghouse. Its work formed the
basis for establishing automated
clearinghouses in California and
elsewhere. The Atlanta-based
Corrunittee on Paperless Entries
extended the work of the California corrunittee, leading to the
organization of the Georgia Automated Clearing House Association
in 1973.
The National Automated Clearing House Association was formed
in 1974 as an independent corporation to develop the interregional
exchange of paperless entries and
to promote the automated clear-

Pl an for El ectron ic D i rect D eposit of Payro ll

EMPlOYEE
TAPE TO
, - - - - - - - - - - +i 'CLEARING
HOOSE

STANDING
AUTHORIZATION

AUTOMATEO
CLEARINGHOUSE
ENTRIES TO RECEIVING SANKS

MAGI'IETIC
TAPE

0 1'1 US
••••••••••••••••••••.••••••••••••••••••••••••••••••••••• ~
L_~:':::_--'
E"'HUES
QAIG!NATItiG
BANK

SOURCES: L Richard FIscher (CoMvmw Ciedlt 1fT5, PrllCtlstng L..w IrwlhuNo)
Fldelral ReMrve Bank of O.11n

8

0'

PRINTEO
AOVICES

inghouse movement. The com·
puter software owned by the
national association is available
to any member, making the creation of a new automated clearinghouse less costly than it once
was. The association now has 21
operational members processing
more than 925,000 payments per
month. One of these is the South·
western Automated Clearing
House Association, which serves
the Eleventh Federal Reserve
District. Six more members are
expected to begin operation by
the end of this year.
M automated clearinghouses
were organized, Federal Reserve
banks agreed to provide the clearing and settlement facilities for
exchanging payments on magnetic
tape. Several factors prompted
Federal Reserve participation.
The automated clearmghouse is
an extension of the Fed's role in
the existing check collection sys·
tern. Having an automated clearinghouse at the Federal Reserve
capitalizes on the Fed's experience
with check clearing. The Fed is
also experienced in nationwide
data communications, which is
advantageous in linking the
regional automated clearinghouses
to each other. And the Fed has
been willing to invest in the
development of the clearinghouses
to help increase the efficiency of
the payments mechanism.
But just as check clearinghouses
may be operated independently of
the Federal Reserve, so can auto-mated clearinghouses. Currently,
two of them-one in New York and
the other in Chicago-have made
arrangements to process the electronic tapes outside the Federal
Reserve bank.
Direct deposit of payroll
The direct deposit of payrolls has
been done on a limited basis for
many years, but most plans utilized composite checks. In a composite check program, a company
Bwiness Review I September 1976

sends banks a listing of amounts to
be credited to specific employee
accounts, along with one check to
cover the total amount. Such plans
are restrictive because either the
employee is required to bank
at the employer's bank or the
employer has to deal with each
employee's bank separately. While
the number of checks passing
through the banking system is
reduced, composite check arrangements fail to capture the economies of automatic electronic payroll depositing.

Although financial institutions
are the initial beneficiaries,
a direct deposit system offers
benefits to all participants.
With direct deposit of payroll,
using an automated clearinghouse,
a company obtains authorizations
from participating employees to
initiate credit entries to their
accounts. The company prepares
a magnetic tape indicating the
routing number of each employee's financial institution, the
employee's account number, and
the net amount to be deposited in
his account.
Several days before payday, the
company sends the tape to its
bank, which must have access
through a member of an automated clearinghouse. This bank
extracts from the tape the deposits
of employees having accounts with
it and the other financial institutions for which it processes. The
tape, with the remaining names,
is then sent to the automated
clearinghouse.
The automated clearinghouse
sorts out the names by institution
and prepares either a magnetic
tape or a printed advice for each
receiving institution, listing each
employee, account number, and
amount to be deposited. The
actual crediting of accounts and

settlement between institutions
occur on payday. Instead of a
paycheck, a participating employee
receives an accounting record of
pay and deductions.
Although financial institutions
are the initial beneficiaries, a
direct deposit system offers benefits to all participants. It saves
employees time and the trouble of
depositing paychecks, and the
danger of lost or stolen checks is
eliminated. Their funds are deposited. regularly, even during illness
or vacations and trips. For employers, benefits include the elimination
of check processing and reconciliation costs, as well as a reduction
in check printing costs. Against
these benefits, the companies face
a loss of interest earnings or check
float, since the average period for
paycheck deposit and clearing is
reduced by direct deposit plans.
The most obvious benefit to the
financial institutions accrues from
automation in processing payroll
deposits. But substantial benefits
are also realized from a reduction
in peak loads on regular paydays.
By reducing the peak loads associated with payroll checks, banks
and thrifts can reduce overtime
and the use of temporary tellers.
A one-for-one reduction of checks
probably would not occur because
direct deposit of payroll could add
more accounts to the banking system. And consumers may need to
write more che<:ks to obtain currency. But these effects only partially offset the cost savings.
Atlanta Payments Project studies,
from Georgia Institute of Technology, indicate a savings of 8 to
10 cents per item.
The Treasury's direct deposit
program for Social Security payments was paper-based until this
spring, when magnetic tape processing was initiated in Georgia
and Florida. The electronic phase
of the program is being expanded
to the rest of the country in stages
so that by the end of 1976, 39
9

centers will be distributing payments electronically. And acceptance of the direct deposit program by Social Security recipients
has been growing steadily. By
August 1976, about 15 percent of
those eligible-or over 4.6 millionwere participating.
Preauthorized bill payments
Preauthorized bill payment plans
also have been used for some time.
In a paper-based plan, the customer creates a standing authorization with a company and his
bank for making payments on a
regular basis. Using the authorization, the company enters a debit
item into the banking system, and
payment is made out of the customer's account through regular
check-clearing chrumels.
The flow of funds and information is changed only slightly with
electronic funds transfers. To pro-

cess preauthorized electronic payments, the company creates a
tape, listing a routing number and
account number for each participating customer, along with the
amount owed and the date it is
due. The company sends the tape
to its bank, which processes and
then distributes output tapes to
receiving institutions via an automated clearinghouse in essentially
the same way as for payroll tapes
under the direct deposit plan.
Although a preauthorized debit
system offers the customer convenience and savings by eliminating check writing and mailings,
only a small percentage of customers have taken advantage of it.
The advantages are evidently offset by a perceived loss of control
and perhaps a fear of overdrafts.
But for companies and financial
institutions, the bill payment plans
offer a large potential for reducing

costs. Eliminating check handling reduces bill-processing costs
directly and also accelerates the
availability of funds for companies.
And financial institutions can
replace paper processing with relatively less expensive electronic
processing.
The Bill Check system was
developed by the Atlanta Payments Project to overcome some
of the customer resistance to preauthorized payments. An agreement authorizing payment is
printed on the bill a company
sends a customer and may be
signed and returned in lieu of
other forms of payment. The Bill
Check authorization is for a single
payment only, and the customer
can indicate the exact amount he
wishes to pay.
By giving the customer complete control over the amount and
timing of the payment, the Bill

Plan for Electronic Preaulhorized Bill Payments

TAPE TO

ENTRIE S TO RECEIVIN G BANK S

MAGNETIC

PRINTED

TAPEWrTH
DEBIT
ENTRIES

AOVICeS

LO_R_'G~.~NN~':~'_NG_~· · · · · · · · · · ·E~R~:S·· · ·.......:>-:II=~':·~~~:~~N:G::::J~_--l.~[~S~T:T~'E~':''~. ;N~TJ
SOURCES: L Richard FI,c"'r (Consumer Credit 1975, Pracll,lng Llw
Fed.,.al Ra ..,.,. Bs" 01 Oal""

10

In.tltu~1

Check apparently is more palat·
able to customers than other
preauthorized debit systems. It is
especially suitable for payments
that vary greatly from month to
month and in cases where less
than the full amount is to be paid.
Also, the format of the Bill Check
allows the customer to pay by
cash or check.
From the company's point of
view, the Bill Check is a simple
system to install and does not
require major changes in billing
systems. The system eliminates
most check handling and, along
with it, the need to reconcile
checks with bill stubs. Once a Bill
Check entry is created on the com·
puter tape, processing a company's
deposits is cheaper.
Check truncation
By reducing the number of physi·
cal handlings per check, check
truncation lowers the expense of
clearing checks. Checks are writ·
ten as usual. But at some point
after a check enters the banking
system, the data on it are captured electronically. The check
itself is retained at the point of
interception, while the data are
transmitted through the financial
system via electronic means. Canceled checks are replaced by
entries on a customer's descriptive
bank statement. However, provision must be made for retrieving
checks requested by the customer.
Although checks can be inter·
cepted at almost any point of
processing, most truncation
schemes involve interception at
the bank at which the check is
first deposited and processed or,
alternatively, the bank at which
the check is last processed. The
earlier the check is captured, the
greater is the displacement of pres·
ent check-clearing costs. But at
the same time, early interception
necessitates higher transmission
costs and the participation of a
greater number of banks.
Business Review I September 1976

The Atlanta Payments Project
study suggests that the most
viable form of check truncation is
a local point-of-entry scheme.
Such a scheme is limited to banks
in a single geographic area. Any
check drawn on a bank in the
area-and participating in the system-is truncated at the first participating bank to receive the
check. Because the scope of the
system is limited, retrieval and
security problems and transmission costs are less than under a
lull bank-of-first-deposit system.
The success of check truncation
systems will depend largely on
acceptance by bank customers.
Depositors appear unwilling to
give up their canceled checks for
just a listing of check numbers and
coded numbers corresponding to
payees but appear willing to accept
fully descriptive statements. Thus,
an acceptable type of truncation
requires converting the image of
a check or a portion of it to a form
that can be transmitted and stored
electronically and then reproduced
in facsimile on the regular bank
statement.
Widespread implementation of
check truncation seems unlikely
anytime soon. Although the system would reduce the costs of
processing checks and, thus, benefit both banks and their customers,
the advantages evidently appear
relatively minor to most cus·
tomers. But a transactor such as
the U.S. Government could significantly benefit from a check
truncation system. In fact, a check
truncation system is now being
tested in a joint program between
the Treasury and the Federal
Reserve Bank of Dallas. The system is designed both to speed the
delivery of check data to the Treasury and to make check reconciliation more efficient.
For this project, the Treasury
magnetically encodes certain
bookkeeping information on test
checks. This information, plus the

amount of each check, is electronically recorded on magnetic tape
when a test check reaches the Federal Reserve bank. In addition,
each check is recorded on microfilm. The magnetic tape and
microfilm are sent to the Treasury
in place of the checks themselves.
The reconciliation of accounts by
the Treasury is speeded up since
the records stored on magnetic
tape are processed by computer.
Furthermore, the delivery of check
data from the Fed to the Treasury
is speeded up so that the Treasury
can respond more quickly to
inquiries about lost checks or nonpayment of checks.
The pilot project at the Federal
Reserve Bank of Dallas is scheduled to run through September
1976. A separate project to be initiated at the Federal Reserve Bank
of Riclunond in February 1977
will test the procedure on different
equipment. If these projects prove
the feasibility of truncation procedures, full-scale implementation
will begin in late 1977.
Automated teller machines
In the early 1970's, a sizable number of conunercial banks and thrift
institutions began offering customers more convenient service
through the use of automated
teller machines. The automated
teller machine can be remotely
located or connected to the prem·
ises. Placement of these terminals
off the premises has resulted in
debate as to whether they should
be considered branches. The issue
is currently being considered by
the courts.
Most institutions that have
off-premises automated teller
machines have continued to operate their machines, pending the
decision of the courts, and several
thrift institutions and banks that
are not limited by state branching
laws now have several hundred in
operation. By early 1976, about
1,300 U.S. financial institutions
11

Plan for Electronic Point -of-Sale System

SECRET

COOE

OR
DESCAIPTIVE

,
AUTH ORIZATION
SY STEM

SOURCES: L Richard FiKMt {CoNu"..,. Credn 1'75, Practl"ng Law tn.cttut.}

Fedlera' ........ Bank of Dalla.

12

had installed a total of over 4,000
cash automated teller machines.
The automated teller machine
usually offers the customer most
of the services available at the
standard teller window in a banking or other thrift institution.
Although the capabilities of systems vary from one institution to
another, a customer generally may
use the automated teller machine
to make cash deposits to or cash
withdrawals from his account,
make credit-card cash withdrawals, or make payments on account.
In systems operated by some commercial banks, the customer also
may transfer funds between his
checking and savings accounts.
Obtaining account balances is
another important feature in
many systems.
In the early 1970's, a sizable
number of commercial banks
and thrift institutions began
offering customers more
convenient service through
the use of automated teller
machines.
Use of the automated teller
machines increases the time available to the customer for routine
financial transactions. A freestanding terminal can operate on
a 24-hour, seven-day basis. While
this feature benefits customers
that find it inconvenient to make
transactions during normal business hours, other advantages are
evident as well. Travel to and
from the depository institution is
replaced by a shorter trip to the
nearest remote terminal, and customer waiting lines, even on highvolume days, are much shorter.
The customer activates an
automated teller machine by
inserting a plastic card. Systems
may use standard credit cards,
magnetically encoded with additional data, or special cards. The

special cards are generally referred
to as bank cards, asset cards, or
debit cards.
A major concern with automated
teller machines is unauthorized
access to customer accounts. In
most systems, this problem is
handled by requiring the customer
to enter a personal identification
number after activating the
machine with the plastic card. If
the correct personal identification
number is not entered in the
machine, no transaction can be
completed. In addition, the
machine may retain the card on
the assumption that lack of the
correct number means unauthorized use of the card.
Automated teller machine systems have met with varying success. One of the more successful
systems was instituted by the
First National Bank of Atlanta.
After considerable research, the
bank installed its first automated
teller machines in April 1974 and
embarked on an extensive marketing program. The bank. has
indicated that transactiolUl completed on its automated teller
machines cost about 40 percent
less than those completed by an
ordinary teller.
Point.of-sale systems
Of all the alternative electronic
funds transfer systems, point-ofsale systems offer the most significant and potentially the most
beneficial change. By entering
transaction data into the electronic payments network at the
time and place of sale, the systems accommodate the paperless
transfer of funds in ordinary transactions between customers and
businesses.
A point-of-sale system allows
the customer to pay for goods and
services at the merchant location
by having funds transferred from
his checking or credit-card account
to the merchant's account--either
immediately or at the end of the
B .....inesa Review I September 1976

month. It also enables the merchant to verify the availability of
funds in a customer's account
before accepting his check or initiating a funds transfer.
From the customer's point of
view, the key to the point-of-sale
system is a magnetically encoded.
plastic card issued by his depository institution. As with the
automated teller machine, unauthorized access to his account
may be guarded against by the
required use of a personal identification number known only to the
customer. To enable him to check
the accuracy of a transaction and
maintain his records, the customer
receives a printed receipt.
Of all the alternative electronic funds transfer systems,
point-of-sale systems offer
the most Significant and
potentially the most beneficial change.
The complexity of a point-ofsale system depends on the number of services offered and whether
funds will be transferred between
two or more financial institutions.
The merchant may select a system
that offers any or all of the principal services available-check
verification and authorization,
complete processing of payments
by direct funds transfer, and complete processing of payments by
bank credit card.
Point-of-sale processing is much
simplified if both the merchant
and customer have accounts at the
same institution, and most of the
point-of-sale experiments have
been of this type. For the complete
processing of funds transfers
between numerous depository
institutions, a point-of-sale system requires a switching and processing center. The center is
electronically linked to the merchant terminals and the computer

systems of participating depository institutions. It receives and
verifies data transmitted from the
point of sale, routes data to the
customer's bank for authorization,
receives oonfinnation of the transaction's validity from his bank,
and transmits the confirmation
back to the point of sale.
Although technology for hnmediate transfer of funds is available,
the oost of a system that transfers
funds as each transaction occurs
is considerably higher than for a
system using a batch-processing
method. With the batch method,
at the end of each day, the switching and processing center forwards
data posted during the day to
an automated clearinghouse. The
automated clearinghouse sorts and
transmits the data to the appropriate depository institutions.
Point-of-sale terminals are
being installed by the thousands
in various areas of the country.
In many places, nonbank thrift
institutions have led commercial
banks in installing complete systems. This can be attributed, at
least in part, to the less restrictive
legal and regulatory environment
in which the thrift institutions are
operating. The Federal Home
Loan Bank Board adopted temporary regulations in January
1974 that pennit federal savings
and loan associations to experiment with the use of the terminals.
These regulations have recently
been extended through 1977.
An example is the operation
developed by the First Federal
Savings and Loan Association in
Lincoln, Nebraska. In 1974, First
Federal set up point-of-sale terminals at convenience counters
in several Hinky Dinky supermarkets. The terminal allows the
customer to make cash deposita
to or cash withdrawals from his
account at First Federal
To make a cash deposit of, say,
$100 to his savings account, a
customer presents his magneti13

cally encoded card at the terminal, which is linked directly to
the computer at First Federal.
The computer transfers $100 from
the supermarket's account at
First Federal to the customer's
account at First Federal, and
the supermarket takes $100 from
the customer.
In the case of a cash withdrawal,
the procedure is reversed. The customer's account is debited, the
supermarket's account is credited,
and the customer receives $100
from the store. But if the customer
then purchases $100 of merchandise, the supermarket has the
same amoWlt of cash as before. In
effect, payment has been made by
the transfer of funds between
accounts at First Federal.
Other thrifts have begun to
install similar systems. A Califomia savings and loan association
is operating a system with one
slight refinement. Several terminals are installed, on-line to the
institution's computer center, at
checkout counters in stores. These
terminals can be used for direct
debiting and crediting of accounts
for purchases of merchandise,
thereby eliminating currency from
the transactions. The terminals
can also be used to make cash
deposits and withdrawals.
The regulatory environment for
the commercial banks with pointof-sale terminals is much less certain. Currently, the crucial matter
to be resolved is whether point-ofsale terminals constitute bank.
branches if deposits and withdrawals are made.
A number of banks have been
actively installing and expanding
point-of-sale terminals, most of
which are limited to check verification. Citibank, for instance, has
several thousand check verification
terminals in place around New
York City. The bank is franchising
the plastic card that accesses the
terminals to banks in other trading areas. Wells Fargo Bank in
14

California has installed several
hundred tenninals to be used for
both check verification and creditcard authorization.
The expansion of the point-ofsale systems of commercial banks
depends on rulings of the courts
and state legislatures as to their
status as bank branches. Thus,
implementation of a point-of-sale
system in a five-state midwestern
area was postponed recently when
the Missouri legislature failed to
pass enabling legislation to allow
Missouri banks to participate.
Currently, attention is focused
on a court case involving point-ofsale terminals and automated
teller machines operated by Continental lllinois National Bank
and Trust Company of Chicago
and First National Bank of Chicago. The U.S. circuit court of
appeals upheld the ruling of a lower
court that the terminals operated
by the banks constitute illegal
branching under state and federal
statutes. The banks have peti·
tioned the Supreme Court to overturn the ruling.
-MIllY G. Grandstaff
Chari.. J. SmaistrIa

New member banks

Bank of Las Cruces, National Association, Las Cruces, New Mexico, a newly
organized institution located in the territory served by the El Paso Branch of
the Federal Reserve Bank of Dallas, opened for business August 9, 1976, as a
member of the Federal Reserve System. The new member bank opened with
capital of $500,000, surplus of $250,000, and undivided profits of $250,000. The
officers are: Wm. Byron Darden, Chainnan of the Board; R. D. Heckler,
President; and Gary N. Andersen, Cashier.
Chemical National Bank, Clute, Texas, a newly organized institution located in
the territory served by the Houston Branch of the Federal Reserve Bank of
Dallas, opened for business August 16, 1976, as a member of the Federal Reserve
System. The new member bank opened with capital of $200,000, surplus of
$200,000, and undivided profits of $200,000. The officers are: V. A. Thorpe,
Chairman of the Board; Ralph E. David, President; Brian W. Garrison,
Executive Vice President; and Shirley F. Burwell, Vice President and Cashier.
New par banks

Citizens Bank, Bryan, Texas, a newly organized insured nonmember bank
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business August 5, 1976, remitting at par. The officers
are: Dr. Mackin L. Jones, Chairman of the Board; Stanley Sommers, President;
and Robert L. Ayres, Vice President and Cashier.
Gibsland Bank & Trust Company, Gibsland, Louisiana, an insured nonmember
bank located in the territory served by the Head Office of the Federal Reserve
Bank. of Dallas, began remitting at par August 9, 1976. The officers are:
Enoch T. Nix, Chainnan of the Board; J. R. Johnson, President; D. E. Cole,
Vice President; H. R. Newman, Jr., Assistant Vice President; and Mrs. Fred F.
Sutton, Jr., Cashier.
Empire Bank, Dallas, 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 August 18, 1976, remitting at par. The officers
are: Bert A. Nelson, Chainnan of the Board; Robert E. Edgmon, President;
Larry Crenshaw, Vice President and Cashier; and Gary Hutchison, M.D., Vice
President (Inactive).

Bualneu Review I September 1976

15

Federal Reserve Bank of Dallas

September 1976

Eleventh District Business Highlights
RETIREMENT PLANS ATTRACT
MORE INTEREST
Individual Retirement and Keogh

Accounts are becoming a popular
method for qualified individuals to
increase their income when their
working years are ended. Banks in
this District and across the nation
are actively vying with other financial intitution8 for these funds.
The Keogh Act of 1961 permits
self-employed business and professional people to defer payment of
Federal income tax on a limited
portion of their income by setting
up a special individual retirement
account. The flow of funds to these
accounts, however, has been minimal, as the number of people
covered by the Act has been relatively small and many have invested their funds in ways thought
to be more rewarding.
In 1974, a new pension law was
enacted to extend a similar tax
advantage to all individuals who
are full-time employees but are not
covered by an employer's formal
retirement plan. Under the 1974
Act, these individuals are able to

defer payment of Federal income
tax on 15 percent of their annual
wages and salaries-up to a limit of
$1,500 a year-if the funds are
placed in a Qualified Individual
Retirement Account. The same Act
also raised the amount ofthe
annual tax deduction on Keogh
Account contributions from 10 percent of income to 15 percent-up to
a limit of $7,500 a year. In addition
to the tax deduction for contributions t o these accounts, taxes on
interest income on both t ypes of
accounts also are deferred.
At the end of March 1976, 60 percent of the commercial banks in the
Eleventh District held deposits in
these retirement-type accounts. In
fact, Individual Retirement and
Keogh Accounts totaled $33.1 million, with an average size of $1,478
for Individual Retirement Accounts
and an average size of $2,233 for
Keogh Accounts. These deposits
represent a minimal proportion
of total deposits at these banks.
However, as the size of the average
account increases with time and as
an increasing number of people

PERCENT DISTRIBUTION OF INDIVIDUAL RETIREMENT FUND DEPOSITS
AT ELEVENTH DISTRICT COMMERCIAL BANKS, MARCH 31, 1976

o
!'2iI

SOURCE :

KEOGH
ACCOUNTS

Bo ard of Gove rnor s, f e deral Rese rve System

30-DAY TO 4-YEAR
TIME DEPOSITS

D

INDIVIDUAL
RETIREMENT
ACCOUNTS

SAVINGS DEPOSITS

4-YEAR TO 6-YEAR
TIME DEPOSITS

•

6-YEAR AND OVER
TIME DEPOSITS

participate in these plans, it is possible that deposits in these retirement accounts may become an
important source of bank funds.
The 1974 Act apparently is being
received with more enthusiasm
than the earlier Keogh Act covering
only self-employed people. By the
end of last March, the number of
Keogh and Individual Retirement
Accounts at commercial banks in
the District totaled 21,482. Almost
92 percent of these accounts were
Individual Retirement Accounts.
The number of employees not
covered by formal employer pension
plans is much greater than the selfemployed population. And, the
average wage earner is usually
financially less able to seek out
alternative investments to provide
for his retirement.
Commercial banks are permitted
to pay up to 71.4 percent interest on
individual retirement funds deposits if the funds are placed in time
deposits with a maturity of four
years. However, such hanks may
pay up to 71h percent for funds
placed in time deposits of at least
six years maturity, and the largest
portion of Individual Retirement
Account deposits at commercial
banks are being placed in the longer
maturities to acquire the best interest return. Keogh Account deposits,
however, are more concentrated in
shorter-term savings accounts.
DRILLING RECOVERY
UNDERWAY
A number of local oil booms-oil
men call them "plays"-areadding
to the recovery in rig activity from
the decline it suffered in the first
half of this year. In Texas, interest
in the Austin Chalk formation has
spurred drilling from East Texas to

(Continued on back page)

INDUSTRIAL PRODUCTION
(SEASONALLY ADJUSTED)

-

TOTAL PRODUCTION-

140 (1967=100)

-

-MINING-

MANUFACTURING -

140 (1967=100)

120 (1967=100) - - - - - - - , / I ......... (135.0)

'30
120

(130.4)
'" (121.6)

130

TEXA ~.I:-:

l r "\,/ \ \"(-' ~//

120 _

-\!. .... ..~.~

V

U.S .

....

U.S.

V ......./ ./ \ \

110 _

\

.....

(130.4)

~

U S·

,. . ." ..

. , _ _

110

- .....'.
'.

\.

'~" "

1

100 -

~""'" (118.4)
LOUISIANA

V

~ ( I '2 .8)

\/

\
!
:

:

r·o.

..,

\

1974

1975

1976

\.\
: : (87.5)

.,'

'00 '""7.,.","4:-''''9'',''5,r-,,''.'',''6--'-

80-r~---r-----r~~'-

1974

EMPLOYMENT AND UNEMPLOYMENT

270 (1967=100)

-,

9 .0 MILLION - - - - - - - - - - - PERCENT 8
UNEMPLOYMENT RA TE
8 .9 .... \
•• •• ( RIGHT SCALE )

240

8 .8 -

i

'80

/./ \. . ""\. . ./ \".(6.3 -,
)
-6

8.78 .6 -

-5

8 .5 -

\

2'0

.....

__ " , CROPS

,"

,

/~

_..., __ ... J '

(110)

150

LIVESTOCK AND
LIVESTOCK PROOUCTS
'20 -,-~=-~--"!=:"":;"-"""'==-..-1974
1975
I
1976

SOURCE: U.S. Departme nt of Agriculture

-,---=:-:---r---:-=---.--=:::----;, 3
1974
1975
1976

1. Arbo na, Louisi ana, New Mexico, Oklaho ma, andTe us
SOURCE: State .mployment a gencl ..

SAVINGS AND LOAN ASSOCIATION ACTIVITY
AND HOME BUILDING IN TEXAS
(SEASONALLY ADJUSTED. BY FR8)

900 MILLION OOLLARS

800-

CONSUMER PRICES

700 -

---.-H:~~:~:::.~... . _

180 (1967=100) - - - - - - - - - - - . " . " " ; : ,.. (171.4)

'50

----

,

( 250 )

I

-4

8.4-

'60

1976

PRICES RECEIVED BY TEXAS FARMERS

FIVE SOUTHWESTERN STATES'
( SEAS ONALLY ADJUSTED. BY FRB)

170

1975

·Comparable beck data from the 1916
revision ar. not yet a .. a llablo.

SOURCES: Soard 01 Go..ernors. Fe de ral Reser .. e System
federal Res . r ... Bank 01 Dall ..

8 .3

U.S.

1\ / ',
' I"

600 -

-------:= PERCENT 100
1.91)1

WITHDRAWALS·TO ·
S AVINGS RATIO
I
\ .. (RIGHT SCALE) "

I'

" ....., '. I', ,

,

,

I

500-

I
I
I

90
80
( 583.5)

400 - ~"\.~~

50

SAVINGS (lEFT SCALE)

(111.1)

300

I

1974

1975

1976

,. .......

.,.-:......... D ALLAS

-,--~~--~--~~~----~--~
1974
1975
1976

SOURCE: U.s. Burea u 01 Le bor Statl.tiu

'0
60

'40

'30

( 106.4)

:'.

0 ..\

LOUISIANA \.
...... (103.3)
'OO-r-~-'---~--,-

"

T EXAS \ I
\'

LOUI~IAN~"J

90 -

110 -

. ~

... - ...

SOURCES: Burea u 01 Bu.inen R....lc"" Unl..ersity 0 1 Tell ..
Fed er. ' Hom e Lo.n B,nk of LI"Ie Rock

40

CONDITION STATISTICS OF ALL MEMBER BANKS

RESERVE POSITION OF MEMBER BANKS

ELEVENnI FEDERAL RESERVE DISTRICT
(CUMULATIVE CHANGES)

ELEVENTH FEDERAL RESERVE DISTRICT
(MONTHLY AVERAGES OF WEEKLY DATA )

2.0 BILLlON·DOUAR C H A N G E - - - - - - - -

1.5 1.0 -

.•

LOANS
H. 7 4....... .
.......................
................... " ..
/ 1976 :
~ .....
.....
.•...
•• -,-'1975

;> ....

......

-~
.

~

----,,-----

'"

0 ,

ii

-'

I

i

I

250 MILLION DOLLARS - - - - - - - - - - 200 150 _

BORROWINGS
FROM FRB
AEXC ESS RESERVES

: :

'00-

'0-

i

o

2.5 BILLlON·DOLLAR CHANGE - - - - - - - 2.0 1.5 1.0

INVESTMENTS

-~_ - - - - - - __

197;,.
- ...

1

\.,.f'' '\\....J\;. .,~,.

-50-100-

-150

-'--:'=.:;'4'--'-""""'""'-'--;;""';:;.:--'-

.... - - - -

1974 ••••.
. 5-~ ...........................·

o

,

,. =
£

i

i

,

,

2.5 BILLK>N·DOLLAR CHANGE - - - - - - - -

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

2.0

TIME DEPOSITS

o

t

1974 .....

~:},.:..;;.'-;

:.:>-

LOANS AT WEEKLY REPORTING BANKS
ELEVENTH FEDERAL RESERVE DISTRICT
(CUMULATIVE CHANGES )

800 MILlION·DOUAR CHANGE - - - - - - - BUSINESS LOANS

i

.5 -

O

1975 ....-'''

.........

...

................" .......,
1
974

~

1976

""

J

F

M

A

t

M

I

J

,

J

,

A

--

',----

__ ~97~/.-

- 200 --T==T=-.~~~~~~,-..-..-~
100 MILLION-DOLLAR CHANGE - - - - - - - -

...... -

~--""

-.5 -

- 1.0

-,-,-,"

DEMAND DEPOSITS

1.0 -

~___ ...

o

2.0 BILLION-DOLLAR CHANGE - - - - - - - - 1.5 -

1974 ••.·'······,·
...................... ,..

400-

....

,
, , , o
S o
N

50 -

o

-50 -

1976

.._____..•..••.•·..

··;·974....·....·..

~...
~.c.::::.-==:
CONSUMER
LOANS

...... - _ _________ ...

-'si'7;

-,OO---r,::~'::~'-T'-T'-T'-T-T'-!'-!'-T'-!'' A SON 0
J
F M
A M
J
J

BUILDING CONTRACTS
FIVE SOUTHweSTERN STATES'
(SEASONALLY ADJUSTED, BY FRB )

FOREIGN TRADE

1.6 BILLION DOLLARS - - - - - - - - - - -

HOUSTON CUSTOMS REGION
( SEASOHALL Y ADJU STEO, BY FRB )

1.4 BilLION OOLl A R S - - - - - - - - - - -

1.2 -

1.2 -

TOTAL

.8 -

"""J 'fof'
NONRESIDENTIAL

,..,..~

(839)

, (1.153.2)

.

1.0 -

/\

.B (441 )

.6 .4 _

o

/

f"
,,

, ..'

,\
'

" . . ,...... "!
~

'_""

1\ I

I

,'

(1.0 5 5 .3)

"
1
"

'"

IMPORTS" "

. 2 -r--~~-,--~~--r_~~--~

1974

1. Ari zon • • Loui si.n•• New Mu ico. Ok lah oma, and Texas
SOURCE: F. w . Dodge, McGraw· Hill, Inc.

,..

1975

SOURCE: U.S. Departme nt 01 Comm er ce

1976

the Rio Grande River, with most of
the activity concentrated in South
Texas. Estimates are that drillersmainly independents-have leased
a million acres in the last few
months. Louisiana and Eastern
New Mexico are also enjoying some
increased activity and, in Oklahoma, a play in the Binger Area has
oil men excited. In addition, there
has been continued strong exploration for gas in South Texas and
also in the Anadarko Basin in
Oklahoma.
Higher prices for interstate gas
will further the pickup in rig activity. Louisiana, which is a principal source of natural gas in the
United States, should benefit
greatly and the higher prices should
lead to increased exploration off
the Louisiana coast. Furthennore,
increased prices will also benefit
those states whose weak intrastate
markets have proved a poor alternative to outside markets.
The decline in rig activity in the
first half of the year hit some states
harder than others. From peak activity at the beginning of the year
to its lowest level, the rig count
declined by more than half in New
Mexico, by about a quarter in Oklahoma, and by about 15 percent in
Texas and Louisiana. But states
that suffered the greatest decline
are expected to see the greatest
buildup in activity over the rest of
the year.
Some areas will, however, still
continue depressed. Some exploration areas shared by Texas and New
Mexico are very deep and, hence,
too expensive to explore even given
the higher prices of gas.
In spite of the slowing in rotary
rig activity during the first half of
this year, the Texas Railroad Commission reports Texas oil and gas
well completions up nearly 18 percent over the same period last year,
with discoveries of oil up nearly 30
percent and gas up over 20 percent.
The difference between the higher
number of well completions and the
decline in rig activity is at least
partly explained by increased drill-

ing in softer, shallower formations.
Such discoveries, as characterize
the Austin Chalk formation are
easily made but are usually relatively small finds. These wells have
only recently become profitable
with higher oil and gas prices and
new technology to fracture the relatively imporous rocks.
OTHER HIGHLIGHTS:

• Preliminary data show the Texas
industrial production index rose at
an 8.3·percent seasonally adjusted
annual rate in July. The rise
reflected a significant increase in
the manufacture of durable goods.
Although production of primary
metals, electrical and nonelectrical
machinery, and other durable goods
was up appreciably, production of
furniture and fixtures and transportation equipment was down.
The manufacture of nondurable
goods was up overall, with the largest advances in petroleum refining,
apparel, and printing and publishing. Declines in nondurable goods
production were centered in textiles, paper, and chemicals.
Mining output was down, with
weaknesses in the production of
metal and stone and crude petroleum. Utility production has
remained virtually unchanged during the May-July period.
• The unemployment rate for the
five southwestern states increased
to 6.3 percent in July from 6.1 percent a month earlier. A small rise
in the civilian labor force and a
small decline in total employment
accounted for the increase in the
jobless rate.
Employment declined in construction and government. The
strongest employment gains appeared in nondurable goods manufacturing and mining.
• Total loans at large commercial
banks in the District rose moderately in July. Loans to businesses
and to consumers increased for the
third consecutive month, while
agricultural loans advanced for the
fourth straight month. An increase
in time and savings deposits was

not sufficient to offset a moderate
net outflow of demand deposits.
Consequently, to accommodate the
pickup in loan demand, these banks
liquidated a portion of thea U.S.
Government security holdings in
July. This reduction represented
only the second monthly decline in
holdings of these securities since
October 1974.
• Total construction activity in the
five southwestern states weakened
in July. A decline in nonbuilding
construction offset modest gains in
nonresidential and residential
building, During July, construction
employment in the southwestern
states continued its drop. Housing
starts in Texas fell during July,
breaking a trend of three consecutive months of advance.
• The ratio of withdrawals to savings inflows at Texas savings and
loan associations increased again in
June, reaching its highest level
since February 1970. Withdrawals
rose 14.7 percent and savings fell
15.7 percent from May levels.