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1980 Economic Commentaries

  • The Pricing of Float and an Efficient Payments Mechanism


    Jim Winner

    Abstract

    Most checks are deposited in a bank other than the one on which they are drawn. In such instances, the bank in which the check is deposited (the payee bank) must collect the funds from the bank on which the check is drawn (the payor bank). In the United States, check collection services are provided by both private and public institutions. The private sector collects checks via local clearinghouses, bank service corporations, and an extensive network of correspondent banks; the public sector is represented by the Federal Reserve System, which, until this year, provided check collection services, free of charge, to its member banks. Read More

  • How Should Banking Markets Be Delineated?


    Paul Watro

    Abstract

    The Bank Merger Act and Bank Holding Company Act require regulatory agencies to assess the competitive impact of a proposed merger or acquisition of a bank or a bank holding company. Any merger or acquisition that would tend to lessen competition substantially or create a monopoly in any section of the country must be denied by these agencies. The delineation of a geographic banking market is usually an important factor in the assessment of competition. Yet, it is often a very difficult task to determine the extent of a geographic market area, as indicated by a recent statement of Governor Henry C. Wallich of the Federal Reserve Board: "In this case an array of alternative market delineations has been presented for the Board's consideration. Each of them, with the exception of Applicant's ten-county market, has some merit, reflecting recognized economic and competitive relationships, but no one of them is entirely satisfactory." Read More

  • Municipal Finance in Ohio


    Robert Schnorbus

    Abstract

    The financial condition of state and local governments has been strained in recent years by inflation, a growing demand for public services, and a generally unresponsive tax structure. With prudent management, Ohio's state and local governments generally have struggled through these problems yet signs of financial strain have begun to surface. Within the last two years, schools have closed from lack of funds, cities have been threatened with default, and the rating accorded to the state of Ohio's general-obligation bonds has been downgraded from AAA to AA. Viewed against this background, the current budget problems, though not really a surprise, have become quite painful. The recession has seriously eroded state and local government revenues. The state's 1979-81 biennial budget is now threatened with a large potential deficit. Recent estimates suggest that state income has fallen more than $300 million below projections, and payments to welfare recipients have risen by more than $100 million above previously budgeted levels. The state imposed a 3 percent spending cut in June 1980, and further outlay cutbacks and a tax hike are being considered. Read More

  • Repricing Payments and Incentives for the Development of Electronic Funds Transfer


    Edward Stevens

    Abstract

    Although technological change has permeated the payments industry of the United States, the dominant means of effecting payments has not changed appreciably since the turn of the century. Sophisticated electronic funds transfer systems have been developed and, in fact, dominate in large-value transactions where avoidance of lost earnings on delayed receipt of funds can justify the cost of rapid clearing and settlement. Most payments, however, are still made by cash and paper checks distributed through extensive networks of financial institution branch-teller units linked by surface and air transportation. The collapse of this payments system under a mountain of paper was being predicted long before rising energy prices increased the relative costs of branches and transportation. Electronic funds transfer (EFT) is widely regarded as the technology that could replace paper and assure a more efficient payments industry. Read More

  • The Productivity Slowdown: Is Oil the Culprit?


    Steven Plaut

    Abstract

    One of the most controversial topics debated in the United States today is the dramatic fall in productivity growth in recent years. This slowdown has been held accountable for falling personal incomes, higher inflation and unemployment rates, and a falling dollar. Slower productivity growth seems to be the disease for which advocates of the "reindustrialization" panacea have been searching. Hardly a single major news publication has failed to give cover space to the issue. Increasing attention is being devoted to the importance of correcting the productivity problem, yet no consensus has been reached as to the reason for the slowdown in productivity. It will be the contention here that most of the productivity slowdown in the mid-1970s was due to the quintupling of oil prices in 1973-75. As such, this Commentary is in basic agreement with the work done by researchers at the Federal Reserve Bank of St. Louis. This is in contrast to the views of most other authors Read More

  • State and Local Budgets during Business Contractions


    Owen F. Humpage

    Abstract

    The steepness of the second-quarter decline in real economic activity and the prospects for a slow recovery from the current recession with little relief from inflation have raised concerns about the financial health of state and local governments. Read More

  • The Consumer Price Index: Concepts, Construction, and Controversy


    Michael Bryan

    Abstract

    The Consumer Price Index (CPI) is commonly referred to as "the rate of inflation" or as "the cost of living in the United States." The Consumer Price Index is not, however, nor was it ever intended to be, either a definitive or an ideal measure of cost-of-living changes in the United States. Indeed, as a practical matter, such an ideal measure is probably impossible to construct. By its broadest definition, the CPI is a price guide for goods and services purchased by families living in the urban centers of the United States. More specifically, it is a price index for a "fixed basket" of goods and services generally purchased by moderate-income urban families and single persons during 1972-73. To imply that the CPI is a measure of price changes for all goods or for all consumers exaggerates the value of the index as an inflation barometer. Read More

  • Shifts in the Composition of Fixed Investment In the 1970s


    Roger Hinderliter

    Abstract

    In recent years, a relatively low rate of growth of real business investment has troubled U.S. economic performance. Since the last trough in economic activity in 1975, real investment has grown at an average rate of about 6.5 percent a year, compared with about 8 percent a year for the average of five previous business expansions. Although real GNP growth also was somewhat slower than in past expansions, some slippage in the share of output devoted to increasing and replacing productive facilities occurred over the past five years. Moreover, increases in employment (about 4 percent a year since 1975) have been stronger than past experience, suggesting a movement toward more labor-intensive operations in the business community. Read More

  • Competition Between and Banks Thrift Institutions In Ohio


    Paul Watro

    Abstract

    Technological, regulatory, and economic changes each have contributed to more intense competition between thrift institutions and commercial banks. During the past decade, thrift institutions have increasingly expanded their services, and in particular they have become more involved with third-party payment services. Today, credit unions (CUs) are providing share drafts, while savings and loan associations (S&Ls) are offering negotiable order of withdrawal (NOW) accounts in several states Read More

  • Industrial Structure and Recession In Ohio


    Steven Monzel

    Abstract

    The regional impact of a recession is determined largely by the industrial structure of the regional economy. National business cycles, which differ in their degree of severity, are transmitted through the region's industrial structure to the overall regional economy. A region in which the industrial structure is weighted toward more cyclically sensitive industries usually experiences more severe recessions than the nation as a whole. (In general, manufacturing industries are more cyclically sensitive than service industries; durable-goods industries, more than non-durable goods; and producer-goods industries, more than consumer-goods.) Regional business cycles, however, are more than simply the local manifestations of cyclical changes in industries at the national level. Factors unique to each region, such as differences in costs and other aspects of competitive advantage, influence the regional pattern of a recession, contributing additional structural drag (or downward pull) to regional employment. Read More

  • Interest - Rate Futures


    Judy Menich

    Abstract

    The rapid growth of the interest-rate futures market has attracted widespread attention in the financial industry. Increasingly, banks, thrift institutions, government securities dealers, and other institutional money managers are utiliz1ng interest-rate futures to hedge against interest-rate risk. Read More

  • Turnabout in U.S. Merchandise Trade


    Gerald Anderson

    Abstract

    The United States accomplished a massive $21·billion improvement in its non-oil trade balance in 1979. More rapid growth of foreign economies compared with the U.S. economy was a major cause of improvement in non-oil trade. In addition, depreciation of the dollar prior to 1979 hel ped to improve the trade balance in 1979. Gold sales by the U.S. Treasury also made a significant contribution to improving the trade balance. Unfortunately, most of th is improvement was offset by increased spending on oil imports, as petroleum prices rose sharply. Read More

  • Market Share Gainers and Losers


    Paul Watro

    Abstract

    Regulatory changes and financial innovations in recent years have fostered increased competition within the banking industry and, indeed, among all financial institutions. New payments powers extended to some thrift institutions permit third-party payment services, which formerly were the exclusive domain of commercial banks. Savings and loans, mutual savings banks, and credit unions compete directly or indirectly with commercial banks for transaction accounts through new services, such as negotiable order of withdrawal (NOW) accounts, share drafts, and remote service units. This more competitive environment has altered the rate at which deposits grow at individual financial institutions. Read More

  • After Silver and Gold: Some Sober Thoughts on Speculative Bubbles


    Steven Plaut

    Abstract

    Recent months have witnessed a seeming madness in many of the world's financial markets. Following the crises in Iran and Afghanistan, investors appeared to be moving out of dollar assets and into precious metals. The prices of silver and gold soared. Gold had been selling for less than $200 per ounce in the beginning of 1979, yet its price climbed to over $800 per ounce one year later. On January 21,1980, gold peaked at a closing price in London of $850 per ounce; two mornings later, it "crashed" to $650 per ounce. The downward trend continued until gold reached its 1980 low point of $480 per ounce on March 17; the price of gold has since hovered close to $520. Read More

  • Reappraising the Economic Outlook for 1980


    Abstract

    A rapid chain of events since late January has added uncertainties to an already uncertain economic outlook for 1980. Among these developments are the stronger than expected pace of economic activity at the beginning of the year, the acceleration in consumer and producer prices, and the administration's proposed budget that originally showed sizable deficits for fiscal years 1980 and 1981. The perception in domestic financial markets that fiscal policies are incompatible with an anti-inflation objective has crippled equity and bond markets, and has helped boost short-term interest rates 200 to 400 basis points between mid-February and mid-March. The effects of the rapid run up in interest rates on spending decisions are unknown, as are the effects of the latest set of anti-inflation measures announced in mid- March. Read More

  • Inflation and Cost-of-Living Adjustment Clauses


    Mark Sniderman

    Abstract

    Wage-rate increases among unionized employees have generally been larger in the past few years than increases among non-unionized employees. As measured by the Employment Cost Index, for example, wage rates of union workers increased 40.1 percent between September 1975 and December 1979, while nonunion wage rates rose 34.9 percent. Effective wage-rate adjustments in major collective bargaining units averaged 8.1 percent per year during the 1972-1979 period, whereas average hourly earnings in the private non-farm economy (excluding overtime in manufacturing) rose 7.6 percent per year. Read More

  • The New Aggregates, Economic Activity, and Monetary Policy


    John Carlson

    Abstract

    For a number of decades, economists have questioned traditional distinctions between money and other liquid assets and between commercial banks and other financial intermediaries. Over time these distinctions have become increasingly blurred. Yet there are fundamental differences in regulatory treatment of commercial banks and other financial intermediaries. Read More

  • Fiscal 1981 Budget Recommendations


    Owen F. Humpage

    Abstract

    The president sent his budget recommendations for fiscal year (FY) 1981 to Congress on January 29, 1980. Outlays are expected to equal $615.8 billion in FY 1981, up from $563.6 billion in the current fiscal year. The budget includes some spending initiatives, most notably for defense and energy. Receipts are expected to total $523.8 in FY 1980 and $600.0 billion in FY 1981. Scheduled increases in social security taxes and the proposed windfall profits tax would contribute significantly to this hefty increase in receipts. The deficit is expected to narrow to $15.8 billion in FY 1981, after expanding in the current fiscal year to $39.8 billion. These figures are naturally sensitive to uncertainties in the economic and political outlooks; however, the estimates are useful in forming a base from which to analyze budget alternatives. Read More

  • Sector Contributions to Recession


    Roger Hinderliter

    Abstract

    Through the fall of 1979, a surprisingly resilient economy time-and-again forestalled an announcement that a recession was upon us. While a large number of economic forecasts fixed the fourth quarter of 1979 as the initial period of recession, preliminary information indicates that the economy, after adjusting for inflation, continued to expand, albeit at a lower rate than in the third quarter. As in previous quarters, the strength exhibited in the fourth quarter was due primarily to unanticipated growth in the consumer sector. Real (inflation-adjusted) consumer spending rose in the fourth quarter of 1979 (offsetting declines in business investment and housing), as personal savings as a percent of disposable income fell to 3.3%, the lowest quarterly savings rate since 1950. Read More

  • The Surge in Gold Prices


    Gerald Anderson

    Abstract

    Gold prices have more than quadrupled since July 1978, in contrast to the substantial stability they have exhibited for over a century. The price of gold was $20.67 per ounce during most of the period from 1834 to 1933; in 1934 it was raised to $35.00 per ounce." The price remained at $35.00 until 1968, when the governments of the United States and several other nations terminated their efforts to peg the price. Gold prices then rose slowly, first reaching $100 in May 1973 and $200 in July 1978. Since then the price rise has accelerated, reaching $300 in July 1979, $400 in October 1979, $500 in December 1979, and $800 in January 1980. On January 18, 1980, gold sold in the London market for $835 per ounce. Read More