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FEDERAL RESERVE BANK
OF ST. L O U IS
JANUARY 1979
SIS
CONTENTS
ST.1
LITTLE R O C K
Vol. 61
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The "D a n g e r" From Foreign
Ownership of U.S. Farmland .............
2
Disintermediation: An O ld Disorder
With A New Remedy .......................
10
Operations of the Federal Reserve
Bank of St. Louis — 1978 ..................
16
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........
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The “ Danger” From Foreign Ownership
of U.S. Farm land
CLIFTON B. LU TTR ELL
H E R E has been renewed concern in recent months
about purchases by foreign citizens of farmland in
the United States. In addition to numerous newspaper
and magazine articles on such purchases, the U.S.
Congress and a number of state legislatures have be
come concerned with the subject.1 Foreign owner
ship of farmland has been restricted in 20 states,
and more recently the U.S. Congress approved legis
lation that would require foreign investors to report
all purchases or long-term leases of American farm
land to the Secretary of Agriculture.
tant economic implications, are in themselves difficult
to analyze. This article examines some of the under
lying implications of the objections, demonstrates
the conflict between economic forces and the widely
held utopian view of agriculture that farms should
be largely owned by the operator, and analyzes some
important economic factors implicit in the arguments
against foreign ownership.
Most of the objections to alien ownership are based
on emotional factors, which, although having impor
Despite the great amount of discussion of the topic,
the quantity of farmland in the United States owned
by foreigners is relatively small — well less than one
percent of the total acreage. On the basis of a survey
by the U.S. Department of Commerce at the end of
1974, only about 4.9 million acres of land in the U.S.
were owned by groups in which the foreign-owned
equity accounted for 10 percent or more of the
total (Table I). While some small tracts of land were
1Examples of such articles include: Jerome P. Curry, “ Banks
Shield Alien Owners of Farm Land,” St. Louis Post-Dispatch,
May 3, 1978, and “Foreign Investors Making Purchases of
Illinois Farm Land,” St. Louis Post-Dispatch, April 30, 1978;
E . W. Kieckhefer, “ Middle-Size Operation Aid Urged,” Mem
phis Commercial Appeal, May 14, 1978 and “Foreign Owner
ship of Farmland Topic of D ebate,” Memphis Commercial
Appeal, June 25, 1978; Wendell Cochran, “ Limit Urged on
Foreign-Owned State Land,” Kansas City Times, January 14,
1978; Jody Cox, “Foreign Buyers May Be Shut Off from
Farmland, ’ Columbia Missourian, January 21, 1978; and
“ Senate, House Split on Farm Land Ownership Bill,” Colum
bia Missourian, February 8, 1978; “Alien Land Issue Okayed,”
Daily Capital News, March 1, 1978; “ Farmland Issue Put
Off,” Daily Capital News, February 21, 1978; Jam es F. Wolfe,
“Capitol Commentary,” Joplin Globe, March 20, 1978; Don
Keough, “Capitol Comment,” Columbia Tribune, February 19,
1978; “ Farmland Bill Approved,” Daily Capital News, April
13, 1978; Jody Cox, “Assembly OKs Bill Limiting ForeignOwned Farmland,” Columbia Missourian, April 14, 1978;
Ellen F. Harris, “A Threat to Missouri,” St. Louis GlobeDemocrat, February 6, 1978; and Vincent Coppola with
Pamela Ellis Simms, “ Farming: Pastaville, 111.,” Newsweek
(M ay 22, 1978), pp. 55-6.
Digitized forPage
FRASER
2
Foreign Ownership Relatively Small
Legislative action has been taken in several states limiting
or prohibiting the ownership of farmland by citizens of foreign
countries. In late 1975 such restrictions were summarized as
follows: General prohibition of alien ownership — 6 states;
substantial restrictions on such ownership — 6 states; minor
restrictions — 8 states; and no restriction — 30 states. It is
not certain that any of these laws are constitutional; some may
be in violation of United States treaty obligations, and in
other instances the restrictions may be avoided by the use of
fiduciaries. Nevertheless, legislative activity designed to re
strict foreign ownership of farmland has continued in a num
ber of states where no restrictions exist or the restrictions are
minimal.
FEDERAL RESERVE BANK OF ST. LOUIS
not reported, these data nevertheless greatly over
state the extent of foreign ownership in farmland
since much of the land owned by foreign-affiliated
groups consists of forest land, land holdings for petro
leum production, and land for other industrial pur
poses. Ownership of farmland by foreign-affiliated
groups at that time was estimated to be only one
million acres or about 0.1 percent of the total U.S.
farmland.2 Foreign purchases may have increased
since this survey was made, but if doubled, such
holdings would total no more than 0.2 percent of the
total.
Reasons for Opposition Varied
Reasons given for the opposition to foreign owner
ship of farmland have varied over the years. During
the first wave of anti-foreign ownership legislation in
the 1880s, especially during the debates on the Alien
Land Act of 1887, a major objection was the fear
that American farmers would become “servants of
distant masters uncomprehending the rights and needs
of Americans.”3 Objections to alien ownership tended
to wane in the 1890s, but with the rising Japanese
investment in land on the West Coast, a second wave
of restrictions began in California in 1913 with racial
prejudice playing a major role.
The California law, which prohibited land owner
ship by aliens ineligible for citizenship, became the
model for anti-Japanese legislation throughout the
West and as far east as Delaware. Interest in such
restrictions slackened during the Great Depression
and World War II, and most of the restrictions were
declared unconstitutional in a 1948 Supreme Court
decision which struck down the “eligibility for citizen
ship” test.4
The Illinois House Agricultural Committee, in April 1978,
voted to recommend passage of a bill which would prohibit
the purchase of Illinois land by nonresident aliens and big
business organizations after June 1979. In mid-April of 1978,
following a relatively long debate, the Missouri General As
sembly enacted a bill which essentially banned foreign owner
ship of farmland in the state. See Alice Bonner, “ Disclosure
of Foreign Farm Holdings Booked,” Washington Post, Au
gust 9, 1978; and “House Votes to Require Aliens to List
Farmland,” The Wall Street Journal, September 26, 1978;
U.S. Department of Commerce, Report to Congress: Foreign
Direct Investment in the United States, Vol. 2: Appendices,
October 1975, pp. X I 12, 13, and XI 30-43; “Foreign In
vestors Making Purchases of Illinois Farm Land,” St. Louis
Post-Dispatch; and “Assembly OKs Bill Limiting ForeignOwned Farmland,” Columbia Missourian.
2U.S. Department of Commerce, Report to the Congress: For
eign Direct Investment in the United States, Vol. 1, p. 184.
3Terry L. Anderson, “A Survey of Alien Land Investment in
the United States, Colonial Times to Present,” U.S. Depart
ment of Commerce, Report to the Congress: Foreign Direct
Investment in the United States, Vol. 8, p. L 14.
*Ibid., pp. L 13-18.
JANUARY
1979
T a b le I
Land O w ned in the U.S. by Affiliated Foreign G roups
A cre s O w n e d
b y F o re ign G r o u p s '
( 1 , 0 0 0 A c re s)
Percent o f Total
L and A re a
Far W e sf
1 ,541
0 .2 4 %
So u th e a st
1 ,2 9 0
0 .3 8
Rocky M o u n t a in s
473
0 .1 4
Sou th w e st
356
0.10
P la ins
182
0 .0 6
O th e rs2
1 ,0 5 4
0 .3 9
Total
4 ,8 9 6
0 . 22%
Uncludes all holdings as of December 31, 1974 in which foreignownerl equity either directly or indirectly accounts for ten percent
o f the total. Excluded from the survey were tracts o f less than
200 acres and enterprises with assets and total revenues o f less
than $100,000.
2New England, Mideast, and Great Lakes.
Source: U.S. Department o f Commerce, S ta tistical A b stract o f the
U nited S tate s, 1977 ; and R eport to the C on gress: F oreign
Direct Investm ent in the U .S., Volume 2
The reasons given for opposing such ownership
during the recent wave of restrictive legislation may
be summarized as follows:
1.
F e a r for the loss o f lo cal control an d concern for
the su rvival o f farm in g com m unities
2.
T h e p ossib ility o f a feu d al-ty p e system o f ab sen tee
lan d h oldin gs arising from such ow nership
3.
In vestm ent from ab ro a d in U .S . farm lan d cau sin g
lan d p rices to rise bey o n d the h old in g poten tial
of lo cal farm op erators an d thereby threatening
the traditional fam ily-type farm
4.
T h e possib ility o f foreign ow nership cau sin g
higher rents, red u cin g U .S . soil fertility an d food
su p plies, an d im pedin g the effectiveness o f the
nation’s fo o d p rodu ction p o lic ie s5
Objections Largely Emotional
Included among the emotional objections to foreign
ownership of farmland are the fear of the loss of
local control of rural communities, a feudal-like sys
tem of land control, a system of absentee landlords,
and the demise of the family farm. While people’s
fear of these assumed impacts is an important factor
affecting legislation, an analysis of historic trends
indicates that there is little basis for most of the
fear expressed.
“Craig Currie, Michael Boehlje, Neil Harl, and Duane Harris,
“ Foreign Investment in Iowa Farmland,” Report to Congress,
Vol. 8, pp. L 31, 45, and 47; Curry, “Foreign Investors Mak
ing Purchases of Illinois Farm Lan d;” Harris, “A Threat to
Missouri;” Cochran, “ Limit Urged on Foreign-Owned State
Lan d;” and Bonner, “ Disclosure of Foreign Farm Holdings
Booked.”
Page 3
FEDERAL RESERVE BANK OF ST. LOUIS
For example, based on experience in recent years,
there is little chance of most communities losing
local control of public offices or other local affairs as a
result of foreign land purchases. The quantity of
farmland placed on the market in any community in
any one year is a relatively small proportion of the
total. Hence, the possibility of a large number of
purchases by foreigners in any one community within
a year or two is quite remote. Also, only a small
percent of aliens who purchase land are likely to
emigrate to the rural communities. In those cases of
recent purchases, the land continues to be operated
by American farmers and the land-use pattern re
mains unchanged; consequently, there is little likeli
hood of a change in local control as a result of alien
land purchases.6
Similarly, the return of a feudal-like system of landholding is remote. The feudal system of landholding
was a system in which a legal monopoly was main
tained on the land and the peasantry by hereditary
landlords. Ownership of these monopoly rights
could be maintained only in the absence of a market
for land and labor. Once commercial enterprise and
urban labor markets were developed, the serfs ob
tained freedom from their landlord masters in W est
ern Europe, and a yeoman class of landholders
evolved. Free labor and land markets are thus the
antithesis of the feudal system. With such markets
each worker has numerous opportunities to choose
alternative occupations and employers. Hence, there
is no necessity for a worker to become subservient
to a landlord master.
The association of the demise of the family farm
with foreign investment in farmland is likewise
largely emotional. The family-farm concept repre
sents a long-standing utopian view of the idealized
structure of agriculture. The proponents of the fam
ily-farm concept envisage a nation of owner-operated
farms in which each fledgling farmer eventually owns
his farm free of debt.7 An objection to foreign owner 6See Currie, et. al., “Foreign Investment in Iowa Farmland,”
p. L 47.
7This simple concept of agriculture has been a dominant fea
ture of farm policy research and farm policy. Professor Schickele stated, “From the days of Jefferson to the present, the
ideal of our farm lands being owned and operated by inde
pendent, prosperous farm families has dominated people’s
thinking and found expression in a rather consistent series of
land-settlement and tenure programs.” See Rainer Schickele,
Agricultural Policy: Farm Programs and National Welfare
(N ew York: McGraw-Hill Book Company, Inc., 1954), p. 326.
In 1923 the Department of Agriculture reported, “ . . . farm
ownership by the farmer has come to be regarded as normal
and tenancy (renting of farmland) abnormal. See U.S. D e
partment of Agriculture, “ Farm Ownership and Tenancy,”
Agricultural Yearbook, 1923, p. 507. The “evils” of farm
Page 4
JANUARY
1979
ship associated with the family-farm ideal is the fear
that foreign investments in land will drive the prices
up beyond the bidding potential of local people.
Hence, the fear that the family-farm structure of
agriculture will be weakened by foreigners bidding
up land prices is a major factor in the objections to
their ownership of farmland.
Family-farm proponents are not opposed to some
outside ownership of farmland, but such ownership
was expected to be of a transitory nature. The extent
of outside ownership desired was depicted in the socalled “agricultural ladder” which shows the indi
vidual climbing rungs from boy apprentice to hired
hand, to tenant farmer, to mortgaged owner, to
owner free of debt, and ultimately to the independ
ent position of a retired landlord.8 Some tenancy and
landlordship was recognized as an essential feature
in the progress of the fledgling farmer toward owneroperator status. However, the “predatory instincts” of
capitalists were to be held in check.9 The mainte
nance of relatively low farmland prices so as to ease
the climb up the ladder from tenant to self-employed
proprietor was a key factor in the perpetuation of
the family-farm structure.10
tenancy are often alleged but seldom discussed in agricultural
research publications. A. H. Benton in his study on land
rental practices stated, “ No effort is made to go into the de
tails of the evils of tenancy, to discuss its causes, or to sug
gest a remedy.” See Leonard A. Salter, Jr., A Critical Review
of Research in Land Economics (M inneapolis: The Univer
sity of Minnesota Press, 1948), p. 181.
The family farm was strongly endorsed by the Secretary of
Agriculture in 1951. He reported: “The family farm system
leads to agricultural progress and good community life. It
builds in the family members attitudes of self-reliance, social
responsibility, individual initiative, tolerance, and self-govern
ment -— the attitudes that make for a sound democracy and
the human qualities that have done so much to make our
Nation great.” See U.S. Department of Agriculture, Charles
F. Brannan, Secretary of Agriculture, “Preserving the Family
Farm ,” Family Farm Policy Review, 1951, p. 1.
8Henry C. and Anne Dewees Taylor, The Story of Agricultural
Economics in the United States 1840-1932 (A m es: The Iowa
State College Press, 1952), pp. 820-29.
9Professor Wehrwein argued that American land policy should
be “ . . . not to go beyond a normal percentage of tenant
farming.” Probably this percentage would be that amount of
tenancy needed to provide the proper step toward ownership
for the tenant and to bridge the gap for the retreating (re
tiring) farmer between active work on his farm and complete
retirement. See G. S. Wehrwein, “ Place of Tenancy in a Sys
tem of Farmland Tenure,” Journal of Lan d and Public Utility
Economics, January 1925, as reported in Taylor, The Story
of Agricultural Economics in the United States, pp. 828-29.
10Professor Spillman in discussing the ladder in 1918 stated:
“ In helping tenants to buy farms, it would be legitimate to
limit the purchase price, say to a specified number of years’
rent. This would tend to prevent farm land from rising to
such prices that men can not hope to pay for their farms
during their working life.” See W. J. Spillman, “The Agri
cultural Ladder,” The American Economic Review: Supple
ment (M arch 1919), pp. 170-79, as reported in Taylor, The
Story of Agricultural Economics in the United States, p. 824.
FEDERAL RESERVE BANK OF ST. LOUIS
Family-Farm Objective Undermined by
Domestic Economic Forces, Not Foreign
Investments
JANUARY
T a b le II
Farm Real Estate Buyers b y T y p e —
The forces contributing to a changed structure of
agriculture are the result of new technologies in farm
production. Improved machinery, equipment, seed,
power, fertilizer and other chemicals have resulted
in a sharp increase in output per farm worker, a
rapid decline in the number of farm workers, an
increase in the average size of farms, a decline in
the number of farms and a major increase in capital
ization per farm.
The North-Central Regional Committee on Land Tenure
Research in 1944 proposed a number of public policies con
sistent with the agricultural ladder approach to family farm
ing, and relatively low farmland prices. Included among its
recommendations were: ( 1 ) appropriate measures be taken
to discourage corporations from purchasing land for farming
purposes; ( 2 ) that land taken in satisfaction for debt be
returned to farm family ownership as promptly as prac
ticable; ( 3 ) consideration be given to levying graduated
land taxes to discourage large-scale absentee ownership of
farms; ( 4 ) make an active effort to hold more Midwest
farms under continuous ownership and operation by succeed
ing generations of the same family; and (5 ) take appropri
ate measures to discourage the inflation of land prices in
cluding persuading prospective farm owners to postpone
buying farms where land prices have risen unduly, inducing
both farmers and nonfarmers to use their increased wartime
earnings to purchase government bonds, levying a progres
sive tax on the profits from the resale of real estate, and
urging farm mortgage lenders to make loans on the basis
of long-time earning capacity rather than on the basis of
temporary prices. See Improving Farm Tenure in the Mid
west, University of Illinois Agricultural Experiment Station,
Bulletin 502, 1944, pp. 143-54.
The structure of agriculture approached the family farm
ideal in the 1800s when land was relatively cheap and farm
ing was largely self-sufficient. In 1910 more than half of the
nation’s farms and 52.9 percent of the land in farms was
operated by owners. Farm debt was relatively low, indicat
ing that a large portion of the owner-operators may have
been free of debt. Total real estate farm debt, for example,
was $3.2 billion, only about three-fourths the total net in
come to farm operators. In contrast, by 1964 only 28.7 per
cent of the farmland in the nation was operated by owneroperators, and farm real estate debt was double the net
income to operators. In 1977 farm real estate debt totaled
$56.0 billion or three times the net income to operators.
1977
P erce ntage D istrib ution
o f A cre s P urchased
T yp e o f B uyer
The major threat to the family farm as idealized
by much of the public is domestic economic forces
rather than foreign land investments. Because of the
greatly increased efficiency in production, fanners
can now manage and farm more acres than formerly.
Based on data of the U.S. Department of Agriculture,
local people within the county purchased 78 percent
of farmland acreage sold in the nation in 1977 (Table
II). Hence, it is usually the farmer next door seeking
more land to enlarge his farm or others in the com
munity looking for a good investment who purchase
the farmland.
1979
Local Farm ers
66 %
Local N o n fa rm e rs
12
O th e rs
22
100 %
T otal
Source: USDA, Farm Real Estate Market Developments, July 1977
Some measures of these changes during the current
century are shown in Tables III and IV. Farm pro
duction per man-hour has increased more than ten
fold since 1910 and the rate of increase has acceler
ated since 1940. For example, during each of the
decades, 1950-60 and 1960-70, production per manhour almost doubled. The overall number of manhours used in farm work in 1976 was 5.1 billion, or
less than one-fourth the amount used in 1910. During
the same period the number of farm workers declined
from 13.6 million to 4.4 million. The average size
of farms has more than doubled since 1910-14, rising
from 140 acres to 397 acres; and as indicated in
Table V the more profitable farms are well above
average size. During the same period the number
of farms declined from 6.4 million to 2.7 million.
The incentive for larger farms is the consequence
of a sizable shift in the costs of farming. Prior to the
development of labor-saving machinery and other
cost-reducing technology, costs per unit of output
for the average farm bottomed out at relatively low
levels of output per year. With the advent of the
T a b le III
Farm O utput Per W orker, Hours W o rk e d
and Num ber of W orkers
Year
Real
O u tp u t
Per W o rk e r
Total H ours
W o rk e d on
Farm s
( b illio n s )
N u m b e r of
Farm W o rk e
(m illio n s)
1910
13
1920
14
2 4 .0
1 3 .4
1930
16
2 2 .9
1 2 .5
1940
20
2 0 .5
1 1 .0
1950
34
15.1
9.9
2 2 .5
1 3 .6
1960
65
9 .8
7.1
1970
112
6 .0
4 .5
1976
152
5.1
4 .4
Source: USDA, Changes in Farm Production and. Efficiency, No
vember 1977; and Agricultural Statistics, 1962, 1972, and
1977
Page 5
FEDERAL RESERVE BANK OF ST. LOUIS
JANUARY
1979
T a b le IV
Num ber of Farms and Acreage, V a lu e o f Land and Buildings and Income Ratios Per Farm
R e a lize d N et Inco m e a s ia Percent of:3
N u m b e r of
Farm s
(th o u sa n d s)1
1 9 1 0 -1 4
6 ,4 2 9
A cres per
Farm *
140
V a lu e of L a n d a n d
B u ild in g s per
Farm
$
G ro s s
Incom e
5 ,7 8 0
5 5 .1 %
Real Estate
A sse ts
N o n re a l
Estate
A sse ts
1 1 .3 0 %
—
1 9 2 0 -2 4
6 ,5 0 0
147
8 ,7 8 0
4 5 .3
9 .9 4
—
1 9 3 0 -3 4
6 ,6 7 2
156
5 ,7 8 0
4 0 .8
8 .9 3
—
1940
6 ,3 5 0
174
5 ,3 0 0
4 2 .4
1 3 .9 5
4 3 .2 %
1950
5 ,6 4 8
215
1 3 ,9 0 0
4 3 .4
1 8 .0 6
4 2 .9
1960
3 ,9 6 3
311
3 6 ,2 0 0
3 1 .5
8 .8 5
2 6 .6
1970
2 ,9 4 9
389
7 5 ,8 0 0
2 7 .7
7 .5 3
2 4 .4
1977
2 ,7 0 6
397
1 8 0 ,3 4 0
22.1
4 .9 3
1 9 .3
1USDA, Farm Income Statistics, July 1978
2USDA, Farm Real Estate Historical Series Data: 1850-1970, June 1973 ; Farm Numbers, December 1977 ; and Farm Real E state Market De
velopments, July 1977
3Ibid, and Farm Income Statistics, July 1978 ; and Balance Sheet of the Farm ing Sector 1978. Nonreal estate assets include livestock and
poultry, machinery and motor vehicles, and crops stored on and off farms. Net income includes net rent to nonoperator landlords.
larger machines, average short-run and long-run farm
cost curves shifted downward and to the right, re
sulting in lower per unit costs for larger farms. This
shift provided great incentive for each farm operator
to obtain additional assets, including farmland, in
order to further reduce cost of production.
price level, but much of it reflects the rising pro
ductivity of larger farms. The general price level rose
about 6 times from the 1910-14 average to 1976 com
pared with the 30-fold increase in value of real estate
assets per farm.
The decline in the net farm income to farm asset
ratios indicate that it is increasingly difficult for a
farmer to own a farm free of debt during his life
time. As indicated in Table IV, realized net income
to farm operators in 1977 was only 4.9 percent of the
value of farm real estate assets.11 Such income was
only 3.6 percent of the value of all farm assets. In
contrast, realized net income averaged about 10
The larger farms and the rising use of farm m a
chinery have led to a major increase in farm capital
ization. The increased acreage and the larger quantity
of machinery have both been factors in the rising
capital requirements for profitable farming. The
average value of land and buildings per farm has
risen to more than 30 times its 1910-14 value. The
average value of real estate per farm rose from less
than $6,000 during the pre-World War I period to
more than $180,000 in 1977.
But this is not the whole story. As
shown in Table V, the average value of
all assets per farm on farms with annual
sales of $100,000 and over, which sold
53 percent of all farm products in 1976,
was $1.2 million. The average value of
assets on farms with sales of $40,000 and
over, which sold 78 percent of all farm
products, was $667,000. At this level of
capitalization and at current income and
estate tax rates, an efficient-sized farm
can neither be inherited nor acquired
debt-free through earnings by most
farm families as envisioned in the
family-farm concept.
^R ealized net income to farm operators is the return to opera
tors for their labor, management, and equity in the farm
assets prior to an adjustment for inventory change.
T a b le V
Net Income and Assets Per Farm b y Size G ro u p 1
Farm s with S a le s
$ 1 0 0 , 0 0 0 a n d over
$ 4 0 , 0 0 0 to $ 9 9 , 9 9 9
Percent
D istrib ution
N um ber of
Farm s2
5 .8 %
1 2 .6
Percent
D istrib ution
Farm
C a sh
Receipts
N et Incom e
Per Farm
A sse ts
Per Farm 2
5 2 .6 %
$ 3 8 ,3 1 0
$ 1 ,1 5 5 ,2 8 7
2 5 .6
1 8 ,5 0 2
4 6 6 ,3 5 9
2 3 2 ,9 9 5
1 0 6 ,1 1 2
$ 1 0 , 0 0 0 to $ 3 9 , 9 9 9
2 3 .4
1 6 .5
7 ,5 3 0
Less th a n $ 1 0 , 0 0 0
5 8 .2
5 .3
1 ,7 4 4
A ll Farm s
1 0 0 .0 %
1 0 0 .0 %
$ 7 ,4 3 9
$
2 4 1 ,9 7 5
>1977 data.
aData as o f January 1, 1977, based on number of farms implied in the Balance Sheet.
Part of the increase in nominal capi
talization reflects a rise in the general
Digitized forPage
FRASER
6
Source: USDA, Balance Sheet of the Farm ing Sector 1978: and Farm Income Statistics ,
1978
JANUARY
FEDERAL RESERVE BANK OF ST. LOUIS
percent of the value of real estate assets during the
period from 1910 to 1950, and in 1950 exceeded 18
percent of the value of farm real estate. Since then
the capitalization of farms has risen rapidly in abso
lute amounts and relative to net income. Net returns
to farm operators for their labor and management,
thus, have declined sharply relative to the value of
such assets. Hence, the difficulty of one family own
ing an efficient farm debt-free has increased sharply
since 1950.
The tenure pattern outlined in Table VI indicates
the trend away from full owner-opcrators as envis
aged in the family-farm concept. Land in farms
operated by full owners as a percent of all farmland
has generally declined since the turn of the century.
The land in such farms exceeded 51 percent of the
total in 1900. It rebounded slightly with the extremely
favorable farm commodity prices in the late 1940s,
but by 1959 the acreage in farms operated by full
owners had declined to 31 percent of the total. The
rate of decline has slowed since 1959, but since the
recent data are not comparable the extent of the
slowing is unknown.
The family-farm structure of agriculture is thus
being slowly transformed not by foreign purchases
of farmland but by domestic forces which contribute
to the greater efficiency of larger-sized farms than the
average farm family desires to acquire in a lifetime.
Restrictions on Foreign Investment in
Farmland Have Little Impact on
Land Prices
The major economic objective of the restrictive
farm ownership legislation — lower land prices — is
not likely to be achieved. The capital markets of the
nation are well developed and work in a pervasive
manner. Injections of new capital tend to permeate
all sectors of the market regardless of where the
investments are made. How does this come about?
The price of any capital good is determined by the
stream of net earnings expected from the good. The
present value of the capital (V) may be written as
E
V = — , where E is the permanent annual net earn
ings and i the interest rate. Hence, after allowance
for risks and transactions costs, two capital assets
each of which is expected to produce annual receipts
in perpetuity totaling $5,000 will, for example, have
about the same price (capital value) in the same
market. Also, asset prices will move in the same
direction in response to changing supply and demand
forces in capital markets.
1979
T a b le V I
Percent o f Total U.S. Farm land Farmed by:
Full O w n e r s
Part O w n e r s
O th e rs
1900
5 1 .3 %
1 4 .9 %
3 3 .8 %
1925
4 5 .4
2 1 .3
3 3 .3
1940
3 5 .9
2 8 .2
3 5 .9
1959
3 1 .0
4 4 .3
2 4 .7
1974*
3 5 .3
5 2 .6
12.1
*1974 data not comparable with earlier data.
Those operators formerly classified as managers now counted as
full owners, part owners, or others depending on whether land
was owned or rented.
Source: U.S. Department of Commerce, 197k Census of Agriculture
Given the tendency for capital asset values to move
in response to changing supply and demand condi
tions, investment decisions by owners of wealth affect
farmland values in the following manner. Assuming
no change in the expected earnings on farmland, if
foreigners bid up farmland prices in the United
States, the higher prices will not be maintained very
long. The higher land values will reduce the rate of
return on land and some owners will observe that
their rate is less than the expected rate on other
similar forms of wealth. Hence, they will sell land
and purchase other assets. This process will continue
until the expected rates of return on all similar forms
of wealth are again equal.
Similarly, if foreigners increase their investment
in General Motors or other U.S. corporate stock and
thereby bid up the price, other owners of such stock
will find that their expected rate of return is below
the expected rate for other similar assets. After allow
ance for risks and transactions costs, they will thus
find it profitable to sell such stocks and invest in other
assets, including farmland, where the expected rates
of return are higher.
As a consequence of this incentive of all wealth
owners to maximize returns, and for the rate of return
on all assets having similar risks to move toward
equality, foreign investments in the United States
will have about the same impact on farmland prices
regardless of where such investments are made. Other
owners of wealth will tend to offset the imbalances
caused by foreign investments in any one sector
through the substitution of assets. Hence, it is futile
to attempt to restrain land values by restricting for
eign investments in land.12
12As indicated earlier, this analysis assumes that expected
earnings on all assets are similar, i.e., have been adjusted
for liquidity, transactions costs, and risks.
Page 7
FEDERAL RESERVE BANK OF ST. LOUIS
Impact On Farming Operations Also
Minimal
The argument that foreign ownership of farmland
has an unfavorable impact in terms of higher rents
to tenants, higher food prices, lower soil fertility, and
disruption of U.S. food producing policies also fails
to meet the test of economic analysis. Because all
individuals attempt to maximize returns from their
wealth, including returns to their own labor, foreign
owners of land will have the same incentive to maxi
mize returns on their farmland as domestic land
owners. Given similar incentives, cropping rental
agreements and land use patterns are not likely to
differ much between foreign and domestic owners.
If the domestic owner of a tract of land, for example,
finds that he can maximize returns by farming the
tract in cash crops, the foreign owner will likely
reach the same conclusion. This was the case in
studies of foreign ownership which have been made
to date.13
Similarly, foreign owners of farmland have the
same incentive to preserve the productivity of the
soil as domestic owners. Both have an incentive to
maximize the income stream from land holdings
into perpetuity, and will have equal incentive to
preserve its productivity in order that the income
stream will remain intact. Thus, given the same in
centives to maximize the earnings stream over time,
it is not likely that any major change in the land
use or farm production pattern will occur as a result
of foreign ownership of farmland.
Even if a major international problem occurred
which indicated that U.S. farmland owned by for
eigners was being operated for the benefit of another
government rather than that of the private owner,
this nation has the power to protect its interest with
out legislation restricting foreign ownership. If nec
essary, this nation could follow the example of a
number of other less-developed nations and confis
cate land. However, this should be a last resort as
nations which follow such practices are generally
considered high-risk investment areas and suffer from
a lack of capital. Another means for protecting our
nation is to hold such property in trust until the
emergency is over.
13See, for example, Craig Currie, et. al., “ Foreign Investment
in Iowa Farmland,” p. L 47 and Lloyd C. Irland, “Foreign
Ownership and Control of U.S. Timberland and Forest In
dustry,” in Report to the Congress, p. L 69. In the latter
study it was found foreign ownership improved the produc
tivity of forests in Alaska.
Page 8
JANUARY
1979
Foreign Investment Increases U.S. Wealth
In contrast to policies which restrain foreign in
vestment in the United States, such investment should
be encouraged. Just as domestic investment adds to
the nation’s stock of wealth, a major factor in deter
mining the level of production of goods and services,
so also does foreign investment in the United States.
While foreign investment in the United States in
volves interest payment commitments abroad, the
new capital adds to production an amount sufficient
to more than offset the additional interest cost. Sales
of land to foreigners may not show a direct gain in
the nation’s wealth, but the sales will ultimately lead
to an increase in real assets, such as buildings, m a
chinery, land improvements, cars, houses, and bettertrained people. Such investments occur as wealth
owners substitute one form of wealth for another.
All of these investments generate utility and thereby
increase the nation’s production. Hence, rather than
being suspicious of foreign-owned capital for fear
that such investors will gain control of important
industries, foreign investment should be welcomed.
Foreign Investment Increases Foreign
Exchange Value of the Dollar
Another feature of foreign investments in the
United States is that it results in an increase in the
value of the dollar in foreign exchange markets. When
this nation imports petroleum and other products, it
pays for the goods with dollars. The dollars acquired
by foreigners are in- turn used to purchase either
capital assets or goods from the United States. If this
nation restricts their purchases of capital assets, their
demand for dollars will decline relative to the supply,
causing the value of the dollar to decline relative to
their own currencies. In contrast, with the privilege
of investing in relatively attractive United States
assets, foreigners have greater demand for dollars,
and the dollar will rise in value relative to their own
currencies.
Furthermore, the balance available to foreigners to
purchase U.S. capital assets is limited without reduc
ing the value of their currencies. During the five
years, 1973-77 inclusive, such balances were nega
tive; hence, any purchases of U.S. farmland could
only be made as a result of liquidations of other
foreign assets in the United States or as an offset to
U.S. investments abroad. The largest foreign surplus
in this account, $15.3 billion in 1977, was still well
below the $18.4 billion surplus for the United States
FEDERAL RESERVE BANK OF ST. LOUIS
in 1975. Even if the foreign surplus averaged $5 bil
lion per year over a ten-year period and the total
were invested in U.S. farmland, only about one per
cent of U.S. farmland could be purchased by for
eigners each year.
SUMMARY
Foreigners own a relatively small amount of farm
land, less than one percent of the total. Nevertheless,
such ownership has been of major concern in the
past year. Legislative action has been taken in a
number of states prohibiting or limiting such owner
ship, and the U.S. Congress has approved legislation
which requires reporting of such purchases.
Based on the reported objections, much of the
opposition to foreign ownership of land is the result
of emotional factors rather than economic forces.
The objections are imbedded in utopian views with
respect to the structure of agriculture. These views
envision U.S. agriculture as consisting almost en
tirely of small owner-operated family farms. R ela
tively low farmland prices are necessary for
maintaining this ownership pattern. Consequently,
family-farm proponents are likewise proponents of a
number of public policies designed to reduce farm
land prices.
However, trying to keep farmland “cheap” by
restrictive legislation is inconsistent with efficient
capital markets and modern commercial farming.
Expected returns to similar investments tend to be
equalized throughout the economy through the cap
italization of anticipated returns. As a result, farm
land values tend to rise and fall with expected re
turns on farmland and the rate of capitalization of
all forms of capital. Efforts to reduce farmland values
through exclusion of foreign purchases are thus not
likely to succeed given our well-developed capital
markets.
Efforts to limit farm size are also inconsistent with
profit motives. Farm technology has resulted in
JANUARY
1979
greatly reduced costs for the larger farm units. There
fore, adjustments in farm size quickly occur in re
sponse to the profit incentive despite the idealistic
views as to desired ownership patterns.
The original family-farm structure of agriculture
is declining and will likely continue to decline with
or without restrictions on foreign purchases of land.
The size of land holdings necessary to farm efficiently
is already larger than most farm families can acquire
in a lifetime through saving alone. Consequently,
there is little chance that most farm operators in the
next half-century can obtain an efficient-sized farm
free of debt within their lifetime. The capital re
quirements for efficient farming operations are be
coming too large for the one-family ownership
structure, and such requirements are not appreciably
altered by foreign investments in land.
The objection that alien owners will have an un
favorable impact on the type of rental agreement,
farming patterns, and food prices is not compatible
with basic human incentives. Such owners have the
same desire as domestic owners to maximize returns
and will tend to carry on farming operations, includ
ing tenant relationships, in about the same manner
as domestic owners.
In addition, any reduction in foreign investment
in the United States will tend to reduce the nation’s
stock of wealth and its well-being. Our stock of wealth
is a major factor in determining our level of produc
tion of goods and services. Also, any reduction in
foreign investment in the United States reduces the
value of the dollar in world trade and increases the
price of imported goods for domestic consumers.
Furthermore, there is little chance of foreign in
terests obtaining control of a large percent of U.S.
farmland. The exchange balances available abroad
for total investment in the United States are not
sufficient to purchase enough farmland to control
more than a small percent of U.S. agriculture within
the next decade. Also it is most unlikely that the
total will be invested in agriculture.
Page 9
Disintermediation: An Old Disorder With
A New Remedy
R. ALTON G ILBERT and JEAN M. LOVATI
I n the summer of 1977, yields on short-term U.S.
Treasury bills rose above the maximum interest rates
that commercial banks and most thrift institutions are
legally permitted to pay on passbook savings de
posits.1 By the end of that year, interest rates on U.S.
Treasury securities had risen above ceiling interest
rates on time deposits with longer maturities. In the
past, when market interest rates have risen above legal
ceiling rates on time and savings deposits by similar
margins, the growth of these deposits has slowed
sharply. This is called disintermediation.
Thrift institutions provide a major source of resi
dential construction and mortgage credit, and thus,
disintermediation tends to reduce the supply of credit
available to the housing market. Since residential con
struction is a major industry, and since the stabiliza
tion of housing construction has a high priority in
public policy, disintermediation at thrift institutions
is of special concern to policymakers.
In an attempt to reduce the extent of disintermedia
tion, Federal regulators of depository institutions au
thorized a new category of six-month time deposits
called money market certificates (M M C s), which
commercial banks, savings and loan associations, and
'Thrift institutions are savings and loan associations, mutual
savings banks, and credit unions. The maximum interest rates
which federally-regulated credit unions are allowed to offer
on time and savings deposits are slightly higher than the
ceiling rates at commercial banks, savings and loan associa
tions, and mutual savings banks.
Page
10
mutual savings banks were permitted to offer after
June 1, 1978. This paper analyzes the role of MMCs
in preventing disintermediation and the implications
of continued growth of deposits through M M Cs for
expansion of mortgage lending and residential con
struction activity.
CHARACTERISTICS AND GROWTH
OF MMCs
The ceiling rate on M MCs at commercial banks is
equal to the current discount yield on six-month
Treasury bills; at thrift institutions, the ceiling rate is
one-quarter of a percentage point higher.2 The
rate for new MMCs is adjusted weekly to the yield
on six-month bills at the most recent bill auction. For
previously issued MMCs, the ceiling rate remains
unchanged until maturity. The minimum denomina
tion in which MMCs are issued is $10,000, the same
as that for Treasury bills.
Around 11,700 commercial banks — approximately
79 percent of all insured commercial banks — are
estimated to have been offering M M Cs at the end
of last year (Table I). These banks recorded an out
2A Treasury bill has a face value which is payable by the U.S.
Treasury at maturity. Investors pay various fractions of the
face value of Treasury bills, the fractions reflecting maturity
and discount yield of the bills. To illustrate the calculation of
discount yield, consider a one-year bill for which an investor
pays 90 percent of face value. The discount yield on that bill
is 10 percent. For a discussion of how discount yields may be
converted to a bond equivalent basis, see footnote 4.
FEDERAL RESERVE BANK OF ST. LOUIS
JANUARY
1979
Table I
Growth of M o n e y M arket Certificates
Interest Rate
on 6 -m on th
T re asu ry
B ills’
C om m ercial B a n k s '
N u m b e r of
O ffe rin g
Institutions
M u tu a l S a v in g s B a n k s 3
Am ount
O u t s ta n d in g
( $ m illio n s)
$
N u m b e r of
O ffe rin g
Institutions
Am ount
O u t s ta n d in g
($ m illio n s)
Ju n e 7
7 .1 6 %
6 ,4 5 5
774
224
J u n e 28
7 .2 3
7 ,9 6 3
2 ,0 5 5
258
1 ,5 9 6
$
847
S a v in g s
& Loan
A ss o c ia t io n s 4
Am ount
O u t s ta n d in g
{ $ m illion s)
$
—
5 ,4 0 0
Ju ly 2 6
7 .5 0
8 ,9 6 1
5 ,4 7 0
273
3 ,5 0 4
11 ,7 9 0
A ugust 3 0
7 .4 7
9 ,8 2 5
7 ,7 9 2
331
5 ,0 0 9
1 5 ,0 8 0
Sep tem b er 2 7
7 .9 8
9 ,8 8 6
9 ,6 7 9
364
6 ,1 3 6
1 9 ,3 3 8
O c to b e r 2 5
8 .5 6
1 0 ,5 5 2
1 3 ,8 5 8
319
8 ,9 0 8
2 6 ,6 6 0 =
Novem ber 29
9 .0 0
1 1 ,0 6 5
19 ,7 2 9
349
1 0 ,8 4 1
3 4 ,6 3 0 5
D ecem ber 2 7
9 .5 2
1 1 ,6 5 8
2 2 ,9 5 6
431
1 2 ,8 2 2
not
a v a ila b le
‘ New issue rate, for week ending Saturday four days earlier than date shown.
2Based on a sample o f 527 commercial banks.
3Based on a sample o f 95 mutual savings banks.
4Data for end o f month.
5Estimated figures ; FSLIC - insured associations.
SOURCE: Federal Reserve releases G.13, H.6 and Federal Home Loan Bank Board New s.
standing balance in M MCs of $23 billion in Decem
ber, representing 4.5 percent of their net time and
savings deposits (not seasonally adjusted).3
Thrifts have experienced even larger growth in
MMCs. Mutual savings banks are estimated to have
had about $12.8 billion of these certificates outstand
ing at the end of the year. At the end of November,
MMCs represented 7.7 percent of total mutual sav
ings bank deposits. Total MMCs outstanding at in
sured savings and loan associations is estimated to
have been about $34.6 billion in late November, or
8.3 percent of savings capital.
Growth of MMCs has had a substantial effect on
deposit growth at commercial banks and thrift insti
tutions and, thus, has enabled the institutions to avert
major disintermediation. Conditions for disintermedi
ation began to develop in 1977 when the interest rate
on three-month Treasury bills (bond equivalent yield)
rose above the ceiling rate on savings deposits at com
mercial banks in May, and above the ceiling rate on
savings deposits at savings and loan associations and
mutual savings banks in July (see Chart I ).4 By the
end of 1977, market interest rates on U.S. Treasury
3Net time and savings deposits of commercial banks exclude
large ($100,000 and over) negotiable certificates of deposit
at large commercial banks.
4Yields on Treasury bills must be converted to a bond equiv
alent basis in order to compare them to interest rates on
deposits. To illustrate the difference between discount and
bond equivalent yields, consider a one-year Treasury bill with
a face value of $10,000 which is sold at a discount yield of
securities were above ceiling rates on time deposits
of all maturity classes at commercial banks and thrifts,
and in 1978, market interest rates rose even higher
relative to ceiling rates.
As a result of increases in interest rates, growth of
net time and savings deposits at commercial banks
slowed gradually from July 1977 through May 1978
(Table II). In contrast, growth of net time and sav
ings deposits at commercial banks began to accelerate
in June 1978, the month that MMCs became avail
able. Deposits at thrift institutions have followed a
similar pattern, with growth rates slowing from
August 1977 through May 1978 and accelerating
thereafter.
COMPARISON TO PAST PERIODS
OF DISINTERMEDIATION
Comparison of the growth rates of deposits before
and after June 1978 underestimates the full effect of
MMCs in preventing disintermediation. Market in
terest rates have risen substantially since June 1978,
8 percent. The buyer would pay $9,200 for the bill and
receive $10,000 at maturity one year later. The bill is sold on
a discount basis, meaning that the buyer pays less than the
face amount, and the discount yield is determined by calcu
lating the difference between the purchase price and the face
amount as a percentage of the face amount (i.e., $800 as a
percentage of $10,000). Converting the discount yield to a
bond equivalent yield involves calculating the difference be
tween the purchase price and the face amount as a percentage
of the purchase price. For the Treasury bill described above,
the bond equivalent yield is 8.70 percent ($800 as a percent
age of $9,200).
Page 11
JANUARY
FEDERAL RESERVE BANK OF ST. LOUIS
1979
T a b le II
C h a rt I
A n n u al Rates of Deposit Grow th
M o n th
N et Time a n d
S a v in g s D e p osits
at C om m ercial B a n k s
D e p o sits at N o n b a n k
Thrift Institutio ns
1 9 7 7 Jan.
13 . 4 %
1 6 .1 %
Feb.
M a r.
1 2 .6
1 3 .7
1 1 .6
1 2 .2
A p r.
8.8
11.8
M ay
8 .7
1 2 .5
Ju ne
1 1 .0
13.1
JJy
1 6 .0
15.8
Aug.
8.8
1 9 .0
Sept.
9 .3
1 8 .4
Oct.
9 .2
1 5 .6
N ov.
1 0 .0
1 1 .8
Dec.
4 .7
1 1 .0
1 9 7 8 Jan.
8 .7
9 .0
Feb.
7 .9
7.2
M a r.
6 .2
8 .0
A p r.
5 .4
7 .5
May
6 .9
7 .5
Ju ne
8.5
9 .6
Ju ly
10.8
11.8
Aug.
12.1
1 4 .8
Sept.
1 2 .5
1 7 .2
Oct.
9 .5
1 4 .5
Nov.
1 1 .0
1 0 .4
Dec.
2 .4
9 .7
and thus the differentials between market interest
rates and fixed ceiling rates on time and savings
deposits have widened in recent months. Therefore,
without authorization of MMCs, and with all other
ceiling rates unchanged, deposit growth would have
been expected to slow substantially after June 1978.
The appropriate method of analyzing the role of
MMCs in preventing disintermediation is to compare
the rates of deposit growth in recent months to those
of past periods when the differentials between market
interest rates and fixed ceiling rates on time and sav
ing deposits were comparable to current differentials.
The historical patterns of differentials between ceiling
interest rates on three categories of time and savings
deposits at thrifts and market interest rates on U.S.
Treasury securities of comparable maturities are pre
sented in Charts I and II. These differentials during
recent months have been similar to the prevailing dif
ferentials during parts of 1969, 1973, and 1974, when
the three-month Treasury bill rate rose to more than
3 percentage points above the ceiling rate on pass
book savings accounts at thrift institutions, and yields
Page
12
Ceiling Interest Rates on Deposits a t Thrift
Institutions Less M a rk e t Interest Rates,
an d G ro w th of Time an d Savings Deposits
P erc ent
D ep o sits at Thrill In stitutions
1973
1974
1975
1976
1977
1978
□_ C e i l i n g ra t e o n 4 - to 6 - Y e a r T im e D e p o s it s l e s s y i e ld o n 3 - to 5 - Y e a r U .S. T r e a s u r y
Se c u r it ie s.
[2 C e i l i n g ra t e o n 1- to 2 - Y e a r T im e D e p o s it s le s s b o n d e q u i v a l e n t y i e l d o n 1- Y e a r T r e a s u ry
B ills.
[3 C e i l i n g ra te o n S a v i n g s D e p o s it s l e s s b o n d e q u iv a le n t y i e ld o n 3 - M o n t h T r e a s u r y B ills.
P e r c e n t a g e s a r e a n n u a l ra t e s o f c h a n g e fo r p e r io d s in d ic a te d .
L a t e s t d a t a p lo t t e d : D e c e m b e r
on one-year Treasury bills rose to about 2.50 per
centage points above the ceiling rate on one- to twoyear time deposits.
Disintermediation in 1969
Economic activity during 1969 is comparable in
several ways to economic activity in 1978. The econ
omy had been expanding for several years prior to
1969, and real disposable personal income rose
throughout that year. Therefore, to the extent that
deposit growth slowed as market interest rates rose
above ceiling rates on time and savings deposits, de
positors reacted to relative yields, and not to a decline
in personal savings.
By early 1969 the differentials between market rates
and ceiling rates were having a marked impact on
deposit growth. Net time and savings deposits at com-
JANUARY
FEDERAL RESERVE BANK OF ST. LOUIS
C h a r t II
Ceiling Interest Rates on Deposits a t Thrift
Institutions Less M a rk e t Interest Rates,
an d G ro w th of Time an d Savings Deposits
Perc eH t
Per cen t
1979
sonal income rising throughout the year. However,
interest ceiling rates were changed during several
months in 1973, having a significant effect on growth
of deposits. The ceiling rates on time deposits of
$1,000 or more with maturities of at least four years
were suspended in July 1973, thus permitting com
mercial banks and thrift institutions to offer compet
itive rates of interest on these deposits (commonly
called “wild card” deposits). The ceiling rates were
reinstated in November 1973.
Commercial banks were able to maintain rapid
growth of net time and savings deposits during 1973
because of the significant growth in long-term time
deposits, even though market interest rates were sub
stantially above ceiling rates on savings deposits and
time deposits with maturities of less than four years.
Thrift institutions experienced relatively slow deposit
growth for four months in 1973, possibly as a result
of competition with commercial banks for “wild card”
deposits. Deposits of thrifts grew at a 6 percent rate
from June through October 1973, compared to a 14
percent increase in the previous year.
Disintermediation in 1974
12 C e i l i n g ra t e o n 1- to 2 - Y e a r T im e D e p o s it s le s s b o n d e q u i v a l e n t y i e ld o n 1 - Y e a r T r e a s u r y
Bills.
P e r c e n t a g e s a r e a n n u a l r a t e s o f c h a n g e fo r p e r i o d s i n d i c a t e d .
L a t e s t d a t a p lo t t e d : D e c e m b e r
mercial banks were essentially unchanged from F eb
ruary 1969 to February 1970, compared to a 10
percent increase in the previous year. However, as
short-term interest rates declined in 1970, net time and
savings deposits resumed rapid growth.
Growth of deposits at thrift institutions also was
affected by the rise of short-term market interest rates
relative to ceiling rates. From February 1969 to April
1970, deposits at nonbank thrift institutions rose at a
3 percent rate. As market interest rates declined in
1970, growth of deposits at thrifts increased, rising
at a 12 percent rate from April to December 1970.
It is difficult to compare the influence of deposit
interest ceilings on growth of deposits in 1978 to that
in 1974 because some of the factors which influence
deposit growth were different in the two years. For
example, growth of personal savings, an important
determinant of deposit growth at financial institu
tions, was slowed by the recession in 1974.5 Never
theless, deposit interest rate ceilings also appear to
have influenced the pattern of deposit growth during
1974. This effect was more pronounced at thrifts than
at commercial banks.
Deposits at thrifts grew at a 4 percent rate from
March through September 1974, compared to an 8.6
percent rate of increase in the previous five months.
Market interest rates began declining sharply in the
fall of 1974, and deposit growth increased at a
10.9 percent rate from September 1974 through March
1975, the trough month of the past recession. Thus,
the rate of deposit growth increased as market in
terest rates declined relative to ceiling rates on time
and savings deposits, even though economic activity
was still declining. This observation indicates that the
slow deposit growth at thrifts during the six months
Disintermediation in 1973
Economic activity in 1978 also was similar to that in
1973. The economy again had been expanding for
several years prior to 1973, with real disposable per
5For a survey of empirical studies on the determinants of
deposits at financial institutions, see Edw ard F. McKelvey,
Interest Rate Ceilings and Disintermediation, Staff Economic
Studies, Board of Governors of the Federal Reserve System
(April 1978).
Page 13
FEDERAL. RESERVE BANK OF ST. LOUIS
ending in September 1974 was influenced not only by
the effects of the recession on personal savings, but
also significantly by the ceilings on deposit interest
rates.
JANUARY
1979
C h a r t III
N e w P riv a te ly O w n e d Housing Units Started
Ratio S a le s
Ratio Sales
Q u a r t e r ly T o ta ls a t A n n u a l R a te s
Comparison to 1978
In contrast to past experience, deposit growth at
commercial banks and thrifts has accelerated in recent
months, even though the margins between market
interest rates and ceiling rates on categories of time
and saving deposits other than M M Cs have been
about the same as during past periods of disinter
mediation. The differences between growth rates of
deposits in recent months and in other periods an
alyzed above indicate that M MCs have had a signifi
cant role in preventing disintermediation.
SIGNIFICANCE OF MMCs FOR THE
HOUSING MARKET
The availability of credit from thrift institutions is
essential for financing residential construction. Since
thrift institutions provide a major portion of both
residential construction credit and residential mort
gages, a reduction in deposit growth at thrifts limits
the credit available to the housing market, and sub
stantially reduces residential construction activity.
1965
66
67
68
69
70
71
72
73
74
75
76
77
197 8
S o u rc e : U .S. D e p a r t m e n t of C o m m e r c e
S h a d e d a r e a s in d ic a t e p e r i o d s w h e n b o n d e q u i v a l e n t y i e ld o n T h r e e -M o n t h
T r e a s u r y B ills is g r e a t e r t h a n thrift in stitu tio n p a s s b o o k ra t e b y 1 0 0 o r m o r e b a s i s
p o in ts.
L a t e s t d a t a p lo tte d : 4 th q u a r t e r
Authorization of MMCs has enabled thrift institu
tions to remain competitive for deposits during a
period when market interest rates have been above
ceiling rates on other categories of time and savings
deposits. Thus, permission to offer M MCs has allowed
thrift institutions to remain potential suppliers of
mortgage credit, and thrifts have increased their res
idential mortgages substantially. During the year end
ing October 1978, residential mortgages held by sav
ings and loan associations increased 14.4 percent, and
mutual savings banks increased their residential
m ortgages 8.2 percent.
The significance of MMCs to the continuing high
rate of housing starts in the current expansion can be
analyzed by examining Chart III. The shaded areas
represent periods when yields on three-month Treas
ury bills were 100 basis points or more above ceiling
rates on savings deposits at thrift institutions. In
1969-70 and 1973-74, the shaded areas correspond
closely to periods of declining housing starts. In con
trast, yields on three-month Treasury bills have been
100 basis points or more above the ceiling rate on
Page
14
savings deposits since the fall of 1977, yet the pace of
residential construction activity remains relatively
strong.
Housing starts have averaged an annual rate of
about 2.1 million units in recent months, just below
the highest rate of housing starts in the current ex
pansion. This relatively high level of housing starts
continues after almost four years into the current
expansion. For comparison, housing starts in early
1969 peaked after a little over two years of expand
ing residential construction, and similarly, housing
starts in late 1972 peaked two years after the previous
recession trough.
However, permission for thrifts to offer MMCs
does not assure a continued flow of mortgage credit.
The ceiling interest rate on M MCs at thrifts is cur
rently about 9.75 percent which, under daily com
pounding, is adjusted to about 10.25 percent. That
rate is at or above the usury ceilings on residential
mortgages in several states. Even in states with no
usury ceilings or with usury ceilings above prevail
FEDERAL RESERVE BANK OF ST. LOUIS
JANUARY
1979
ing interest rates, the spread between rates being
paid on new M M Cs and the yields on new residential
m ortgages is relatively narrow.
increased their holdings of mortgages at about the
same rate as the increase in their deposits.7
With the yields on MMCs approximately the same
as mortgage yields, thrifts which increase their mort
gages outstanding by issuing additional M MCs may
eventually experience losses on such transactions if
interest rates continue to rise. Most residential mort
gages remain outstanding for several years and have
fixed interest rates. Deposits attracted by issuing
M M Cs must be reissued at prevailing interest rates
every six months as they mature to avoid deposit out
flows. Thrifts which make additional mortgage loans
face the risk that the interest rates on their deposit
liabilities will continue to rise while the yields on
their assets remain fixed. Therefore, thrifts cannot
determine the profitability of increasing their resi
dential mortgages solely by comparing the yields on
mortgages to current interest rates on MMCs. They
must consider, in addition, the possibility that interest
rates will continue to rise.
CONCLUSIONS
Thrifts which attract additional deposits through
MMCs may find investments other than residential
mortgages more profitable. Although thrifts keep a
relatively high proportion of their assets in residential
mortgages to maintain special tax benefits, they have
some margin within which they can change the mix
of their assets without altering their tax status. Some
thrift institutions reportedly are issuing MMCs and
using those funds to buy large short-term certificates
of deposit of commercial banks.6 A shift of invest
ments by thrifts from residential mortgages to short
term securities, however, is not yet indicated by ag
gregate information. In recent months, thrifts have
6“A Surprisingly Simple C D Rollover,” Business Week, Decem
ber 4, 1978, pp. 84-85, and “ Money Market Certificates Are
Selling Well, But Most Proceeds Aren’t Going to M ortgages,”
Wall Street Journal, December 7, 1978.
Deposit growth at commercial banks and thrift
institutions has slowed in past periods when market
interest rates rose above ceiling interest rates on time
and savings deposits, a reaction called disintermedia
tion. During the current phase of rising interest rates,
Federal regulators have dealt with the threat of
disintermediation by permitting commercial banks
and thrift institutions to offer money market certifi
cates, with ceiling interest rates which change weekly
in line with discount yields on six-month Treasury
bills. Growth rates of net time and savings deposits
at commercial banks and deposits at thrifts have in
creased substantially since this new category of time
deposits was authorized.
Growth of deposits at thrift institutions in recent
months has facilitated the rapid expansion of mort
gage lending, and residential construction activity
has remained at a relatively high level, especially for
a period with such high interest rates. However, the
continued expansion of mortgage lending and resi
dential construction is not assured by permission for
thrifts to offer MMCs. Even if thrift institutions con
tinue to have rapid deposit growth, they will not
necessarily invest these funds in residential mortgages,
since other types of investment may be more
profitable.
7From May 1978 (the month before MMCs were authorized)
to November, the rate of increase in mortgages outstanding at
savings and loan associations was slightly higher than the rate
of increase in their deposits ( a 6.8 percent increase in mort
gages and a 5.8 percent increase in deposits). Mortgages held
by mutual savings banks ( M S B s) increased 3.9 percent from
May to November 1978 (the latest month for which data are
available), while deposits of M SBs rose 2.8 percent.
Page 15
Operations of the Federal Reserve Bank
of St. Louis —1978
A. CLIFFO RD SAXTON, JR.
A s the central bank of the United States, the F ed
eral Reserve System performs a number of key
functions within the nation’s financial community,
conducting monetary policy, supervising and regu
lating member banks, and providing various services
to the public, the Treasury, and commercial banks.
These functions are performed by the Federal Re
serve System’s Board of Governors in Washington,
the 12 regional Reserve Banks — located in Boston,
New York, Philadelphia, Cleveland, Richmond, At
lanta, Chicago, St. Louis, Minneapolis, Kansas City,
Dallas, and San Francisco — and the 25 branches of
the regional Reserve Banks.
The Eighth Federal Reserve District is served by
the Federal Reserve Bank of St. Louis, headquartered
in St. Louis with branches in Little Rock, Louisville,
and Memphis. The district encompasses Arkansas and
portions of Illinois, Indiana, Kentucky, Mississippi,
Missouri, and Tennessee.
This report reviews the operations of the Federal
Reserve Bank of St. Louis during calendar year 1978.
Bank Supervision and Regulation
The Federal Reserve Bank of St. Louis, together
with state banking authorities, has responsibility for
the supervision of 71 state-chartered banks in the
Eighth District which have elected to become mem
bers of the Federal Reserve System. The Bank makes
annual examinations of state member banks in order to
evaluate their assets, liabilities, capital accounts, li
quidity, operations, and management. Attention also
is focused on compliance with applicable laws and
regulations.
Banking authorities use the information gathered
through such examinations to direct attention to po
tential problems or unsatisfactory conditions at the
banks. Supervision seeks to foster an effective bank
ing system in which the public interest is safeguarded.
Page
16
Although they have authority to examine all mem
ber banks, Federal Reserve Banks generally do not
examine national banks, all of which are required to
be members of the Federal Reserve System. Primary
responsibility for examination of the 336 national
banks in the Eighth District lies with the office of the
Comptroller of the Currency. The Federal Deposit
Insurance Corporation (F D IC ) and respective state
banking authorities examine state nonmember banks
that are insured by the FD IC , while noninsured
banks are examined only by state authorities.
Federal Reserve Banks also are responsible for
supervision and regulation of bank holding com
panies. At the end of 1978, the Federal Reserve Bank
of St. Louis had jurisdiction over 20 multibank and
97 one-bank holding companies, compared to 20 and
88, respectively, at the end of 1977. Prior approval
must be obtained from the Federal Reserve System
for bank holding company formations, acquisitions of
additional banks and nonbank subsidiaries, and de
novo expansions of existing subsidiaries. Applications
for such bank holding company activities are analyzed
by the Bank Supervision and Regulation Department,
as well as the Bank’s L egal and Research D epart
ments. These departments consider the history, finan
cial condition, and future prospects of the institutions
involved and evaluate the quality of management.
They also assess the legal aspects of any proposal
and its likely effect on banking and nonbanking com
petition. During 1978, the Federal Reserve Bank of
St. Louis received 20 applications to form bank hold
ing companies and 25 applications from holding com
panies to acquire additional subsidiaries, engage de
novo in nonbank activities, or establish new locations.
An additional 15 applications were received for in
formal review.
After formation, bank holding companies must
register and file annual reports with Federal Reserve
Banks. These annual reports are analyzed by the
staff of the Bank Holding Companies Division to
FEDERAL RESERVE BANK OF ST. LOUIS
JANUARY
verify accuracy and completeness, to ascertain the
current financial condition of the holding company
and its subsidiaries, and to determine compliance
with applicable laws and regulations. Examination
reports prepared by the primary Federal supervisory
agency of the respective bank subsidiaries also are
analyzed to determine the overall condition of such
subsidiaries. In addition, on-site inspections of bank
holding companies and their nonbank subsidiaries
are conducted by Division personnel. The purpose
of these inspections is similar to that of examinations
of banks.
1979
Reserve District since 1972 continue to facilitate the
overnight collection of items drawn on banks in the
RCPC area, thereby permitting prompt credit and
payment for these checks.
Electronic Transfer of Funds
“Electronic funds transfers” — or “wire transfers”
— have been used for many years to facilitate trans
fers of balances between banks. The Federal Reserve
and its member banks utilize a computer network for
transferring funds nationwide. Using this system,
many member banks render more efficient service
to their customers and effect payment for the pur
chase and sale of F ed funds. Nonmember banks bene
fit from this service indirectly through correspondent
member banks.
Check Collection
The service of collecting and clearing checks drawn
on member and nonmember banks is a major activity
of this Bank. Payment for the items cleared is ac
complished on the day of presentment by a charge to
the reserve account of the member bank or to the
reserve account of a member correspondent. Checks
drawn on nonmember banks also are paid for on the
day of presentment by a charge to the account of a
specified member correspondent.
Settlement for such transfers is made by debits and
credits to reserve accounts. Generally, transfers
through this network are for large amounts, with no
charge levied for transfers of $1,000 or more. Mem
ber banks also utilize these facilities to transfer mar
ketable government securities. All four Federal Re
serve offices and 23 commercial banks in the Eighth
District with a significant volume of transfers are
currently participating in this network. Several other
banks are considering the installation of terminals to
take advantage of the service, whose reliability and
speed permit major efficiencies in comparison to the
standard procedure of shipping checks. Nearly 400
member banks nationwide have installed on-line ter
minals connected to their Federal Reserve District
computers. Member banks not having on-line ter
minals may telephone their transfers to their local
Federal Reserve office where transfers are entered into
the wire transfer system over Federal Reserve Bank
terminals.
During 1978, the four Federal Reserve Bank of St.
Louis offices cleared 744 million checks totaling $317
billion. This reflects increases of more than 7 percent
in the number of checks cleared and 11 percent in
dollar value when compared with 1977 check clear
ing activity.
A major goal of the Federal Reserve System is to
provide a speedy check payments mechanism. To this
end, a Regional Check Processing Center (R C PC )
program was implemented during the early 1970s to
increase the speed of the check payment process and
to facilitate return of dishonored items. The RCPCs
that have been in operation in the Eighth Federal
T a b le I
Volume of O peration s1
D o lla r A m o u n t
(m illio n s)
Num ber
t»hou.ond.i
1978
C he cks
h a n d l e d * * ...................................................
7 4 3 ,6 6 1
T ra n sfe rs of f u n d s ...................................................
1 ,4 7 6
C u rre n cy received a n d c o u n t e d ..............................
3 1 1 ,4 3 9
G o ve rn m e n t securities issu ed , serviced, a n d redeem ed
1 3 ,9 0 2
U.S. G o ve rn m en t c o u p o n s p a i d ...........................................3 1 3 3
Food stam p s received a n d c o u n t e d ..........................
1 2 2 ,9 2 6
Percent
1977
Change
1977
1978
$
Percent
C hange
2 8 5 ,8 6 8
11.0 %
1 ,0 3 5 ,0 0 0
1 1 .5 %
6 9 2 ,7 2 3
7 .4 %
1 ,141
2 9 .4 %
3 1 8 ,0 0 0
—2 . 1 %
2 ,8 3 6
2 ,9 0 0
1 3 ,3 0 0
4 .5 %
9 7 ,0 1 8
3 6 ,3 8 8
1 6 6 .6 %
400
—2 1 . 8 %
185
-5 7 .8 %
1 2 0 ,0 0 0
2 .4 %
$
3 1 7 ,4 3 7
1 ,1 5 3 ,7 0 8
783
504
- 2 .2 %
504
‘ Total for the St. Louis. Little Rock, Louisville, and Memphis offices.
2Excludes U.S. Government checks and postal money orders.
3Reflects conversion to book entry in handling o f definitive coupons.
Page 17
FEDERAL RESERVE BANK OF ST. LOUIS
Terminal installations at the banks are connected
to the computer at the St. Louis Federal Reserve
office, which is the switching center for the Eighth
District. Operators of the terminals in the commercial
banks can initiate transfers directly from their banks,
at which time the transfers are processed automatically
through the computer at the St. Louis office and di
rected through a central switching computer at Cul
peper, Virginia, to another Federal Reserve District
for the account of the receiving commercial bank.
Transfers of funds may also be made between mem
ber banks in the same District. If the receiving bank
is on-line, transfers are switched automatically to that
bank’s terminals through its Federal Reserve District
computer.
By transferring funds electronically, all necessary
information for completing the transfer is obtained.
Third-party information may be entered to identify
the originator and/or the recipient of the funds. Mem
ber bank reserve accounts are debited and credited
automatically, and banks with on-line terminals re
ceive an immediate record of each transaction at its
conclusion. The use of electronic equipment for trans
fers of funds has reduced the time required for com
pletion of a typical transaction from almost an hour
to a matter of minutes.
With the installation of on-line terminals at the
23 District commercial banks, about 4,200 transactions
per day are sent and received electronically and
thus do not require manual processing by Eighth
District personnel. This represents 71 percent of total
transfers processed.
Volume and dollar amounts of transfers processed
by the Eighth District continue to increase. During
1978, nearly 1.5 million transfers amounting to $1,154
billion were completed by the Federal Reserve Bank
of St. Louis and its branches. This is a 29.4 percent
increase in number and an 11.5 percent increase in
value over the previous year. More on-line banks are
expected to be added to the system in 1979.
Federal Recurring Payments
The Federal Reserve computer systems, on a recur
ring basis, process electronic data representing U.S.
Government payments. Payments are received on
magnetic tape from Government disbursing centers,
processed, and distributed to financial organizations.
The Eighth District has processed such payments
since August 1975, when the Federal Reserve System
Page 18
JANUARY
1979
began handling the payroll for the Air Force. In 1978,
these operations were expanded to include payments
to Navy retirees.
The electronic funds transfer system (E F T S ) cur
rently is used in the Eighth District for the settlement
of a variety of Federal recurring payments. Social
Security payments constitute the largest category, with
a monthly volume of 387,000 payments. Monthly
volumes also include 19,000 Civil Service Annuity
payments, 14,000 railroad retirement payments, 32,000
Veterans Administration payments, 44,000 Air Force
payments, 14 CIA retirement payments, and 3,000
Navy retirement payments. In addition, 2,000 revenuesharing payments are processed on a quarterly basis.
Automated Clearing Houses
An automated clearing house (A C H ) provides for
the exchange of payments on magnetic tape, in con
trast to traditional clearing houses which provide for
such payment exchanges with batches of paper checks.
The St. Louis Reserve Bank and each of its branches
operate automated clearing houses and, since late 1978,
are linked to a coast-to-coast network of financial
institutions automatically handling pre-authorized
payments via electronic communications and using
Federal Reserve System facilities. The interregional
network consists of 32 automated clearing house asso
ciations. It links approximately 9,400 banks and 1,500
thrift institutions which are members of these associ
ations w ith 6,000 cu stom er corp oratio n s.
Within the Eighth District, the Kentuckiana Auto
mated Clearing House, operated by the Louisville
Branch, began operating in April 1976. The Mid-Amer
ica Payments Exchange, operated by the Bank’s head
office in St. Louis, has been operational since July
1976. In February 1977, the Mid-South Automated
Clearing House, operated by the Memphis Branch,
began operations, followed in October 1977, by the
Arkansas Automated Clearing House, operated by
the Little Rock Branch.
Collectively, the District’s four ACH facilities proc
ess approximately 42,000 commercial debits and 20,000
credit items each month.
Coin and Currency
Coin and currency, approximately 26.4 percent of
the money stock, are used more widely than demand
deposits in consummating small transactions, pri
FEDERAL RESERVE BANK OF ST. LOUIS
marily because of convenience. Personal checks gen
erally are used for transactions of larger amounts.
The Federal Reserve Banks supply virtually all of the
coin and currency in circulation through the commer
cial banking system, and excess coin and currency are
returned to Federal Reserve Banks through this
system.
Approximately 311 million pieces of currency valued
at $2.8 billion were received and verified at the four
Federal Reserve offices in the Eighth District during
1978. This was a decrease of about 2 percent in num
ber of pieces and a 2 percent decline in dollar volume
from 1977. The number and value of coins received
and verified showed a decline from 1977 levels. Com
bined sorting, counting, and wrapping of coin and
currency at the four Eighth District offices averaged
almost 5.6 million pieces per working day in 1978,
slightly less than in 1977.
Currency which is
from circulation and
Federal Reserve Bank
verified and destroyed
no longer usable is removed
destroyed. During 1978, the
of St. Louis and its branches
currency totaling $761 million.
Lending
Three types of credit are available to member
banks in the Eighth Federal Reserve District: short
term adjustment, seasonal, and emergency credit.
Member banks may make temporary adjustments in
their reserve positions due to deposit losses, unex
pected or unusual requests for loans, or other changes
they encounter. Member banks which have highly
seasonal loan demands may apply to this Bank for
seasonal credit. Such loan demands are due primarily
to a recurring pattern of change in deposits and loans.
Under seasonal credit, member banks may maintain
a portion of their liquid assets in the form of Federal
funds (loans of excess reserves to other banks), as
long as such holdings conform to the bank’s normal
operating experience. Arrangements for this type of
credit should be made in advance. Credit for longer
periods also is available to member banks to meet
emergency conditions which may result from unusual
local, regional, or national financial situations, or
adverse circumstances where member banks are
involved.
The discount rate is the rate of interest charged
by the Federal Reserve Bank on loans to member
banks. The level of the discount rate, in relation to
other short-term market rates, has an influence on the
volume of credit extended by the Federal Reserve
JANUARY
1979
Bank. When the discount rate is higher than other
market interest rates, member banks usually choose
to obtain funds from other sources to make temporary
reserve adjustments. When the discount rate is low in
relation to other market rates, member banks tend
to rely more heavily on the Federal Reserve for funds.
At the beginning of 1978, the discount rate stood
at 6 percent. The rate was increased seven times dur
ing the year and, at year’s end, was 9V2 percent, the
highest since the Eighth District began operations in
1914. Throughout virtually all of 1978, however, the
discount rate was below other short-term interest
rates. As a result of this difference between rates,
member bank borrowings in the Eighth District were
relatively high, with daily average outstanding loans
amounting to $57.8 million in 1978, more than twice
the $23.7 million figure of 1977. There were 2,440
loans totaling $10.5 billion made to 119 Eighth D is
trict member banks by the Federal Reserve Bank of
St. Louis during 1978. This is a substantial increase
over 1977, when 860 loans amounting to $5 billion
were made to 63 member banks.
Fiscal Agent
As a fiscal agent of the Federal Government, the
Federal Reserve Bank performs many services. The
U.S. Treasury makes payments for various types of
Government spending through accounts maintained
in the System. Funds received by the Treasury are
deposited into its account at the Federal Reserve
Banks or into tax and loan accounts at designated
commercial banks. These funds mainly represent
receipts from payment of taxes and collections from
the sale of Government securities to the public. Bal
ances in the tax and loan accounts are transferred
upon call to the account of the Treasury of the United
States at Federal Reserve Banks in order for the
Treasury Department to have use of the funds.
The Federal Reserve Banks also act on behalf of
the Government in marketing Treasury securities.
When the Treasury offers new securities, the Reserve
Banks prepare and distribute applications and official
offering circulars, receive subscriptions from those
wishing to buy, allot the securities among the sub
scribers according to the terms of the offering, collect
payment, and make delivery to the purchasers. With
funds from the Treasury’s account, Federal Reserve
Banks pay interest on securities and redeem them at
maturity. Reserve Banks also pay interest on and
redeem securities of most Government-sponsored
corporations.
Page 19
As of January 24, 1979
DIRECTORS
St. Louis
Chairman of the Board and Federal Reserve Agent
A r m a n d C. S t a l n a k e r , Chairman and President
General American Life Insurance Company, S t. Louis, Missouri
V ir g in ia M. B a i l e y , Owner. Eldo Properties, Little Rock,
G e o r g e M. R y r i e , President, First National Bank & Trust
Arkansas
Company, Alton, Illinois
R a l p h C. B a in . Vice President, Wabash Plastics. Inc.,
T o m K . S m i t h , J r ., Senior Vice President, Monsanto
Evansville. Indiana
Company, S t . Louis, Missouri
D o n a l d N. B r a n d in , Chairman of the Board and Chief
W il l i a m H. S t r o u b e , Associate Dean of Faculty Pro
Executive Officer, The Boatmen’s National Bank of
grams, Western Kentucky University, Bowling Green,
St. Louis. St. Louis, Missouri
Kentucky
R a y m o n d C. B u r r o u g h s , President and Chief Executive
Officer, The City National Bank of Murphysboro,
W i l l i a m B. W a l t o n . Vice Chairman of the Board, Hol
Murphysboro, Illinois
iday Inns, Inc., Memphis, Tennessee
Little Rock Branch
W. B a i l e y , Executive Vice President and General
Manager, Producers Rice Mill, Inc., Stuttgart,
Arkansas
R o nald
E. H a y s , J r ., President and Chief Executive
Officer, T h e First National Bank of Hope, Hope,
Arkansas
T hom as
G.
e l l e y , President, Pickens-Bond Construction
Co., Little Rock, Arkansas
L arry K
E. R ay K e m p , J r ., Vice Chairman of the Board and Chief
A dm inistrative Officer, D illard Departm ent Stores,
Inc., Little Rock, A rkansas
G ordon E. P a r k e r , President, The First National Bank
o f El Dorado, El Dorado, A rkansas
S h ir l e y J . P in e , Speech Communication, U niversity of
A rkansas at Little Rock, Little Rock, A rkansas
B. F in l e y V inson , Vice Chairman o f the Board, The F irst
National Bank in Little Rock, Little Rock, A rkansas
Louisville Branch
Chairman of the Board
J a m e s F. T h o m p s o n , Professor of Economics
Murray State University Murray, Kentucky
H o w a r d B r e n n e r , Vice Chairman of the Board, Tell
J . D avid G r isso m , Chairm an and Chief Executive Offi
City National Bank, Tell City, Indiana
cer, Citizens Fidelity Bank and Trust Company,
Louisville, Kentucky
R ic h a r d 0 . D o n e g a n , Vice President and Group Execu
tive, Major Appliance Business Group, General Elec
F red B. O n e y , President, The F irst N ational Bank of
tric Company, Louisville, Kentucky
Carrollton, Carrollton, Kentucky
S i s t e r E i l e e n M. E g a n , President, Spalding College,
W e n d e l l G. R ayburn , Dean of University College, U ni
Louisville, Kentucky
versity of Louisville, Louisville, Kentucky
Memphis Branch
Chairman of the Board
F r a n k A. J o n e s , J r ., President
Cook Industries, Inc., Memphis, Tennessee
E. C a m p b e l l , J r ., Chairman of the Board and
President, National Bank of Commerce, Memphis,
Tennessee
S t a l l i n g s L i p f o r d , President, First-Citizens National
Bank o f Dyersburg, Dyersburg, Tennessee
E a r l L. M c C a r r o l l , President, The Farmers Bank &
Trust Co., Blytheville, Arkansas
B ruce
President, Tyrone Hydraulics, Inc.,
Corinth, Mississippi
W a l t e r L . W a l k e r , President, LeMoyne-Owen College,
Memphis, Tennessee
C h a r l e s S. Y o u n g b l o o d , President and C h ie f Executive
Officer, First Columbus National Bank, Columbus,
Mississippi
B e n ja m in
P.
P ie r c e ,
Member, Federal Advisory Council
C la ren ce C. B a rk sd a le , Chairm an of the Board and Chief Executive Officer
F irst National Bank in St. Louis, St. Louis, M issouri
Page 20
OFFICERS
St. Louis
L aw rence
D o nald
R o o s,
M o r ia r t y , J r .,
P. G a r b a r i n i , Senior Vice President
& Controller
o seph
President
First Vice President
F.
Senior Vice President
A natol B. B a lba ch ,
J
W.
K.
Senior Vice President,
General Counsel, and Secretary
G a r l a n d R u s s e l l , J r .,
Senior Vice President
H arold E . U t h o f f ,
R u th A . B ryant,
Vice President
R o bert E. M a tth ew s,
A . M e l v in C a r r ,
Vice President
J ohn
C arol B. Cla ypo o l,
Vice President
Vice President
D e n is S . K a r n o sk y ,
Vice President
J am es R. K en n ed y ,
E.
A lbert
B urger,
J oan
P. C r o n in , Assistant Counsel & Assistant
Secretary
C l if t o n
B.
L uttrell,
A rthur L. Oertel,
R o bert W . T h o m a s,
Vice President
F.
Orf,
Special Adviser
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Pa u l S alzm a n ,
Assistant Vice President
F.
E dw ard
Assistant Vice President
Vice President
H arry L . R ea,
L e s l ie
Assistant Vice President
C h a rles R . H a lbro o k,
Vice President
M a r t h a L . P e r in e ,
Assistant Vice President
J o h n W . D r u e l in g e r ,
W arren T . S no ver,
E ugene
Assistant Vice President
K e it h M . C a r l so n ,
Vice President
O t t in g ,
D e l m e r D . W e is z ,
Assistant Vice President
N o r m a n N . B o v v sh e r ,
F.
General Auditor
R.
S c h m e d in g ,
S chott,
Assistant Vice President
Assistant Vice President
W il l ia m J . S n e e d ,
Assistant Vice President
A lan C. W h e e l e r ,
Assistant Vice President
Little Rock Branch
J
M ic h a e l
T.
ohn
F . B r e e n , Vice P resid en t a n d M an ag er
M o r ia r t y ,
D a v id
T.
Assistant Vice President and Assistant Manager
R e n n ie ,
Assistant Vice President
Louisville Branch
D o nald L . H e n r y ,
J am es
G eo rge
E.
R e i t e r , J r .,
E.
C o nrad,
Senior Vice President and Manager
Assistant Vice President and Assistant Manager
Assistant Vice President
T h o m a s J . W il s o n ,
Assistant Vice President
Memphis Branch
L . T erry B r it t ,
Paul
I.
B l a c k , J r .,
Vice President and Manager
Assistant Vice President and Assistant Manager
A n t h o n y C . C r e m e r i u s , J r .,
Assistant Vice President
Page 21
FEDERAL RESERVE BANK OF ST. LOUIS
The Federal Reserve Banks, as fiscal agents, will
hold in safekeeping securities pledged to secure
Government deposits in tax and loan accounts at
commercial banks. Federal Reseive Banks also will
hold securities of member banks in safekeeping. U.S.
Treasury and most Government agency securities are
held in book-entry form by the Reserve Banks.
Securities of the U.S. Government and various
Government agencies are issued, serviced, and re
deemed by Federal Reserve Banks. In 1978, the F ed
eral Reserve Bank of St. Louis and its branches
processed 38,526 original-issue transactions, 113,160
servicing transactions, and 30,503 redemption transac
tions on behalf of the Treasury and various agencies,
handling 13.9 million securities with a value of $97
billion. Also during 1978, 313,000 redemption transac
tions involving coupons of U.S. Treasury and agency
securities were processed by the Eighth District of
fices, amounting to $78 million.
U.S. Government food stamps
by Federal Reserve Banks. A total
stamps amounting to $504 million
counted by the Federal Reserve
and its branch offices in 1978.
also are redeemed
of 123 million food
were received and
Bank of St. Louis
The Federal Reserve Banks also act as issuing and
redemption agents for United States Savings Bonds.
In this capacity in 1978, the Eighth District offices
processed 13,597,669 Savings Bonds on original issue
and redemption as well as reissue and replacement
transactions.
JANUARY
T a b le
Com bined Com parative Statement of Condition
(in th o u sa n d s o f d o lla r s)
ASSETS
The Federal Reserve System, working closely with
other policymaking agencies in the Government, has
the primary responsibility of formulating and imple
menting monetary policy. Through representation on
the Federal Open Market Committee (FO M C ), F ed
eral Reserve Banks play an important role in formu
lating System policy.1 The President of this Bank uses
the information gathered in policy discussions at
meetings of the FOM C. In addition, the 12 regional
Federal Reserve Banks contribute to System aware
ness of local and regional business conditions through
the collection of business, monetary, and financial
data.
'T h e Federal Open Market Committee consists of the seven
members of the Federal Reserve’s Board of Governors and the
President of the Federal Reserve Bank of New York as perma
nent members, with four of the remaining 11 Reserve Bank
Presidents serving on a rotating basis. The FOM C directs the
purchase and sale of Treasury and Government agency securi
ties on the open market.
Digitized forPage
FRASER
22
Decem ber
31, 1978
Decem ber
31, 19 7 7
$ 1 ,7 2 1 ,5 4 9
$ 1 ,7 6 3 ,6 6 7
2 ,2 4 0 ,0 0 2
2 ,1 4 8 ,0 2 1
5 0 8 ,9 9 9
3 7 0 ,9 3 0
U.S. G o ve rn m e n t Securities:
B i l l s .........................................
.
C e r t i f ic a t e s ..............................
.
_
T O T A L U.S. G O V E R N M E N T
S E C U R I T I E S ....................
G o ld Certificate Reserves .
.
.
$ 4 ,2 8 2 ,6 1 8
.
.
$
4 6 6 ,0 2 5
S p e cia l D ra w in g R igh ts Certificate
A c c o u n t ....................................
$
4 6 8 ,9 1 4
5 5 ,0 0 0
5 3 ,0 0 0
2 1 ,6 6 6
1 9 ,8 6 9
D iscou nts a n d A d v a n c e s Secured b y
U.S. G o ve rn m e n t a n d A g e n c y
O b l i g a t i o n s ...............................
3 1 ,7 0 5
6 ,6 0 0
O th e r D iscounts a n d A d v a n c e s .
2 9 ,8 5 5
___
Loa n s a n d Securities:
Federal A g e n c y O b lig a t io n s
B o u g h t O u t r i g h t ..........................
3 2 2 ,4 1 5
3 3 9 ,6 5 4
C a sh
5 8 2 ,8 9 2
56 5 ,3 9 1
Item s in Process of Collection
.
B a n k Prem ises ( n e t ) .........................
1 2 ,8 6 5
1 2 ,8 3 3
O th e r A s s e t s ...................................
1 5 5 ,1 0 1
7 5 ,2 9 2
Interdistrict Settlem ent A ccou nt .
—
6 8 ,5 8 9
T O T A L A S S E T S .........................
$ 6 ,2 1 6 ,6 6 3
$ 5 ,8 2 4 ,1 7 1
$
$
L IA B IL IT IE S
D ep osits;
M em ber Bank —
Reserve A ccou nts .
U.S. T re asu rer —
G e n e ra l A ccou nt .
8 8 8 ,2 0 3
2 4 6 ,4 6 5
O th e r D e p o s i t s ..............................
(N e t )
D eferred A v a ila b ilit y C a sh
.
.
8 1 7 ,4 4 7
4 7 4 ,3 3 1
6 ,2 8 4
9 ,0 9 8
2 2 ,4 3 1
2 2 ,2 6 0
T O T A L D E P O S I T S ....................
Federal Reserve N o te s
Research
1979
$ 1 ,3 2 3 ,1 3 6
.
$ 4 ,5 3 9 ,9 7 5
$ 3 ,9 1 2 ,1 2 6
3 8 0 ,2 5 4
3 6 2 ,6 3 2
Item s .
—
Interdistrict Settlem ent A ccou nt .
1 1 4 ,5 4 5
O th e r L i a b i l i t i e s ..............................
6 6 ,1 1 1
4 7 ,4 5 8
T O T A L L I A B I L I T I E S ....................
$ 6 ,1 4 9 ,7 2 3
$ 5 ,7 5 9 ,8 9 7
C A P IT A L A C C O U N T S
C a p ita l P a id I n
.............................. $
3 3 ,4 7 0
$
3 3 ,4 7 0
T O T A L C A P IT A L A C C O U N T S .
.
$
T O T A L L IA B IL IT IE S A N D
C A P IT A L A C C O U N T S
.
$ 6 ,2 1 6 ,6 6 3
.
.
6 6 ,9 4 0
3 2 ,1 3 7
3 2 ,1 3 7
$
6 4 ,2 7 4
$ 5 ,8 2 4 ,1 7 1
The public also has access to data and information
relating to economic developments through regular
publications of the St. Louis Research Department.
Comprehensive analysis of economic problems and
conditions provides the basis for articles appearing in
the Review, published monthly by this department.
The Review has a circulation of about 42,000 copies
and is distributed both nationally and internationally.
The Research Department also assists in the bank
regulatory function by reviewing the impact of bank
JANUARY
FEDERAL RESERVE BANK OF ST. LOUIS
1979
taining contact with schools and colleges in this
District.
T a b le Ml
Com parative Profit and Loss Statement
(in th o u sa n d s of d o lla rs)
1978
1977
Percent
Change
T otal E a r n i n g s ....................
$ 3 4 7 ,0 1 8
$ 2 8 4 ,8 8 8
2 1 .8 %
N e t E x p e n s e s .........................
33 ,7 5 9
3 3 ,6 1 9
$ 3 1 3 ,2 5 9
$ 2 5 1 ,2 6 9
-2 1 ,0 6 5
-5 ,8 2 9
-1 ,6 6 7
-1 ,5 6 3
6 .7 %
$ 2 9 0 ,5 2 7
$ 2 4 3 ,8 7 7
1 9 .1 %
1 ,9 7 5
1 ,9 6 3
.6 %
2 8 7 ,2 1 9
2 4 2 ,3 2 9
1 ,3 3 3
-4 1 5
C urrent N e t E a rn in g s .
N e t A d d itio n s ( + )
o r D ed uction s ( - )
A sse ssm e n ts fo r E xp e n se s of
B o a rd of G o v e rn o rs .
N et E a rn in g s b efore Paym ents
to U.S. T re a su ry .
.4
2 4 .7 %
2 6 1 .4
D istrib ution o f N e t E a rn in g s:
D i v i d e n d s .........................
Interest on Federal
Reserve N o te s .
T ra n sferred to S u rp lu s
T O T A L .........................
$ 2 9 0 ,5 2 7
$ 2 4 3 ,8 7 7
18.5
—
1 9 .1 %
mergers and holding company acquisitions on the
communities to be served.
Bank Relations and Public Information
The Bank Relations and Public Information Depart
ment establishes and maintains personal contact with
all banks located in the Eighth Federal Reserve D is
trict through a structured bank call program and at
tendance at various banking functions. An effort also
is made to increase public understanding of the func
tions, responsibilities, and policies of the Federal
Reserve System by distributing films and publications,
providing in-house tours, delivering speeches, and
conducting seminars. Emphasis is placed on main
The Functional Cost Analysis Program offered to
member banks is administered by this Department.
This program provides participating member banks
with bank operating costs by function and permits
comparison with banks of similar size. Technical
assistance is furnished during the first year to banks
desiring to take part in the program. Last year, 46
Eighth District member banks participated in the
activity.
In maintaining contact with the banking industry
and the general public during 1978, the officers and
staff members of the Federal Reserve Bank of St.
Louis and its branches delivered 423 addresses before
bankers, business groups, and educators. The Bank
was represented at 161 banker, 89 professional, and
285 miscellaneous meetings. Under the bank call
program, 836 banks in the District were visited. Dur
ing 1978, 987 groups requested films from the Bank
Relations film library, and 6,554 visitors toured the
four Federal Reserve offices in the Eighth District.
Financial Statements
The net expenses of the Federal Reserve Bank of
St. Louis in 1978 were .4 percent higher than net
expenses for 1977. Although the increase in expenses
was small, the Bank’s payments to the Treasury in
creased by 18.5 percent — from $242 million in 1977
to $287 million in 1978.
The $287 million paid to the Treasury was 82.8
percent of total earnings. In 1977, by comparison,
85.1 percent of total earnings was paid to the
Treasury.
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