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Arthur F. Burns Papers
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The original documents are located in Box C2, folder "Brimmer, Andrew, Oct. 1969 - April
1971 (1)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
OF
BOARD OF GOVERNORS
JO.BOARD
OF THE
FEDERAL RESERVE SYSTEM
THE
SYSTEM
WASHINGTON, D.C. 20551
FEDERAL
RESERVE
ANDREW F. BRIMMER
October 20, 1969
MEMBER OF THE BOARD
The Honorable Arthur F. Burns
Counsellor to the President
Executive Office Building
Washington, D. C. 20500
Dear Arthur:
I simply wanted to send you a note of
congratulations upon your prospective appointment
as a member and Chairman of the Board of Governors
of the Federal Reserve System upon the expiration
of Chairman Martin's term as a member of the Board.
Since you know this System as well as any-
one who has not actually served in it -- and since
all of us know you at least to some degree -- I am
certain that we can look forward to working together
in an hospitable environment.
Again, I simply wanted to say welcome.
Sincerely yours,
Called
andy
FORD is LIBRARY GERALD
OF
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
OF
THE
SYSTEM
WASHINGTON, D. C. 20551
FEDERAL
RESERVE
ANDREW F. BRIMMER
MEMBER OF THE BOARD
January 26, 1970.
TO: The Honorable Arthur F. Burns
SUBJECT: Improving Interagency Coordination of International
Monetary and Financial Policy through the NAC.
As I indicated in our luncheon discussion, I think that it is
important that steps be taken to improve the coordination of policy for-
mulation and implementation through the National Advisory Council on
International Monetary and Financial Policy (NAC).
As you may recall, the NAC was originally created by legisla-
tion to meet the need for inter-agency coordination in the international
financial field. It is chaired by the Secretary of the Treasury. Other
members are the Secretaries of State and Commerce, the President of the
Export-Import Bank, and the Chairman of the Federal Reserve Board. Each
of the members of the Council has an alternate, and most of the day-to-
day decisions are now made by the alternates rather than by the principals.
The Alternates for Treasury, State and Commerce are Assistant Secretaries,
and for Ex-Im Bank and the Federal Reserve they are Board Members. As I
mentioned, I am the Alternate for the Federal Reserve.
Other agencies that regularly or occasionally participate in
NAC meetings are Defense, Agriculture, Bureau of the Budget and the
Council of Economic Advisers.
The NAC has a staff committee which meets every week. Each
member Agency has a representative on this committee. The secretariat
for the NAC is maintained by the Treasury Department.
The NAC has advisory responsibility for U. S. policy with
respect to foreign lending by U. S. agencies and the lending activities
of the IMF, the World Bank Group, the Inter-American Development Bank
and the Asian Development Bank. It is the formal link which enables
the Federal Reserve to participate in policy and lending decisions which
may be of great importance to us from the point of view of the balance-
of-payments.
FORD i LIBRARY 938800
BOARD
GOVERNORS OF THE FEDERAL RESERVE
STEM
The Honorable Arthur F. Burns
-2-
Unfortunately, the NAC sometimes is unable to perform its
intended function of giving all interested agencies an opportunity to
contribute to the formulation of policies in which they have an interest.
For example, last month an NAC alternates' meeting was called to discuss
the U. S. policy with respect to replenishment of the resources of the
International Development Association. We discussed the position that
the U. S. would take at a meeting of the donor countries to be convened
in Paris a few days later. But it was apparent that the United States'
position had already been agreed upon by Treasury and State without any
staff work or consultation involving the other NAC agencies. The NAC
alternates were expected merely to ratify what had already been decided.
Yet, this is a question that has obvious balance-of-payments implications
and is therefore of interest to the Federal Reserve. Also, when and if
a recommendation is made to Congress that it appropriate funds for the
replenishment, each NAC principal will be asked personally to sign a
report to Congress recommending whatever the NAC agrees upon. It would
seem appropriate, therefore, that each of the other NAC agencies should
have had a voice in formulating the policy.
Another example of short-circuiting is the decision to untie
U. S. aid to Latin America. In this case, the decision was made without
either consultation with all the NAC agencies or any formal ratification
of the policy change by them. Without going into the merits of the deci-
sion, I believe the problem should have been assigned to the NAC for
study with a view to taking advantage of the experience and judgment of
the NAC agencies.
A third example relates to U. S. policy on rescheduling debts
owed to the United States by Latin American countries. A specific
technique to deal with this problem was proposed in Governor Rockefeller's
Latin American report, and the President endorsed it publicly at a press
conference. Subsequently the NAC was asked to study this technical
proposal with a view to adopting it in appropriate cases. But before
the NAC could complete this task, a broader plan, also growing out of
the Rockefeller report, calling for extensive use of debt rescheduling
as a way of giving foreign aid, was formulated at high levels and was
submitted to the President without having received the benefit of NAC
advice. The NAC staff has had considerable experience with debt resche-
duling, and its advice on this subject undoubtedly would have been of
some value in formulating the broad plan as well as in reaching the
decision to endorse the Rockefeller technical proposal.
The NAC can draw on the best expertise to be found in the
Government in the international financial field in carrying out its
advisory and coordinating functions. There is no reason why this
expertise should be lost to the Government. Clearly the Secretary of
FORD & GERALD LIBRARY
BOARD
GOVERNORS OF THE FEDERAL RESERVE
STEM
The Honorable Arthur F. Burns
-3-
the Treasury-- and certainly the President--need not follow the advice of
the NAC, but they should have the advantage of it. If it were made clear
that the NAC is expected to function at a high level, there is no doubt
that the NAC agencies would respond.
I realize, of course, that most of the agencies-- and the White
House- have fairly new staffs. Thus, it might be desirable to familiar-
ize these staffs with the NAC machinery and to devise ways in which they
might make better use of it. It might also be advisable to re-examine
the way in which the NAC itself operates to determine how it might
improve its contributions to the decision-making process in the area
of international monetary and financial affairs.
Sincerely,
Andrew F. Brimmer,
Alternate Member,
National Advisory Council
BERALD R. FORD LIBRARY
ARD OF GOVERNORS
OF THE
FEDERAL reserve system
For Release on Delivery
Friday, February 6, 1970
12:00 Noon, E.S.T.
SPECIAL
Chairman Burns
MONETARY POLICY, INTEREST RATE CEILINGS, AND THE
ACCESS OF STATE AND LOCAL GOVERNMENTS TO THE
CAPITAL MARKETS
Remarks
By
Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System
Before the Mid-Year Meeting
of the
Maryland State Bar Association
Lord Baltimore Hotel
Baltimore, Maryland
February 6, 1970
GERALD R. FORD LIBRABA
MONETARY POLICY, INTEREST RATE CEILINGS, AND THE ACCESS OF
STATE AND LOCAL GOVERNMENTS TO THE CAPITAL MARKETS
By
Andrew F. Brimmer*
In 1969, for the first time in a decade, a significant decline
occurred in the volume of long-term borrowing by State and local govern-
ments. On the basis of preliminary data, such borrowing may have totaled
just under $12 billion last year. This level represents a drop of $4-1/2
billion from the $16.4 billion recorded in 1968. In 1960, about $7.2 bil-
lion of long-term municipal bonds were sold; and in all except one year
of the decade, the volume rose steadily. While an interruption in the
uptrend occurred in 1966, the decrease in that year was only 5 per cent --
compared with a drop of over one-quarter last year.
The relative decline in the participation of State and local
governments in the capital market last year can also be traced in the
Federal Reserve Board's flow of funds statistics. According to our
preliminary estimates, the net volume of funds raised by all nonfinancial
sectors in 1969 amounted to about $85.6 billion, a decrease of $11.8 billion
*Member, Board of Governors of the Federal Reserve System. I am
grateful to several persons on the Board's staff for assistance in
the preparation of these remarks. Miss Eleanor Pruitt coordinated
the collection and analysis of data on statutory interest rate
ceilings and borrowing experiences of State and local governments.
Mr. Darwin Beck did the preliminary analysis of member bank hold-
ings of State and local securities in selected States. Mr. Peter J.
Feddor designed and carried out the computer programming which
permitted this analysis of the banks' holdings. In each Federal
Reserve Bank, at least one staff member made an informal survey of
the most important local governments to obtain information on
statutory interest rate ceilings and recent borrowing experience.
GERALD R. FORD LIBRAPY
-2-
(or 12 per cent) from the level in the previous year. However, this
decline in the total was more than accounted for by the change in the
position of the Federal Government. In calendar year 1969, the latter
made net repayments of $5.4 billion -- compared with net borrowings of
$13.4 billion in the previous year. So the year-to-year change was a
decrease of $18.8 billion.
Allowing for the experience of the Federal Government, total
funds raised by other nonfinancial sectors in 1969 amounted to $91.0 bil-
lion, representing an expansion of $6.9 billion (or 8 per cent) over the
level raised in 1968. However, the net amount of funds raised by State
and local governments in 1969 shrank by $1.1 billion, (or by 11 per cent).
In contrast, net funds raised by them rose by $2.2 billion (or by 28 per
cent) in 1968. Moreover, the decrease of $1.1 billion in net funds
raised by State and local units last year represented more than four-
fifths of the decline of $1.3 billion in net debt financing in the
capital markets. In fact, State and local government securities were
the only issues among the three principal types of capital market instru-
ments to register a significant decline in 1969. Despite the extreme
tightness in the mortgage market, total mortgage debt showed a small
gain (of $200 million) to $27.2 billion. Mortgages on residential
properties rose by $1.2 billion (to $19.9 billion), with the gain divided
between $300 million on one-to-four family homes and $900 million on other
types of residences. Net funds raised through sales of corporate and
LIBRARY GERALD R. FORD
-3-
foreign bonds showed a modest decline of $100 million in 1969. However,
this decline centered entirely in the issues of domestic corporations,
where net funds raised through corporate bonds alone declined by $200
million to $12.7 billion.
In terms of the relative access to credit facilities, the
share of State and local governments in net funds raised by all non-
financial sectors (excluding the Federal Government) declined to about
10 per cent in 1969 from about 12 per cent in the previous year. Their
relative position in the capital markets, however, was not sustained
quite as well; their share of net funds raised through capital market
instruments shrank from just under 20 per cent in 1968 to just over
16 per cent last year.
Thus, whether measured by flow of funds data or by the volume
of long-term bond sales, the access of State and local governments to
the capital markets weakened considerably in 1969. This weakening can
be attributed to a number of factors. Undoubtedly, the decrease (to
38 per cent) in the proportion of borrowing proposals approved by voters
and the record level of borrowing costs were both contributing develop-
ments. However, statutory interest rate ceilings appear to have been
of particular importance. As municipal bond yields rose to an average
of 5.72 per cent last year -- from an average of 4.45 per cent in 1968 --
these rate limitations became operative for the first time in many
widely scattered areas of the country. Although a number of these
jurisdictions took steps to modify applicable ceilings, the moves
LIBRARY GERALD R. FORD
-4-
generally came too late to have much impact on their ability to
borrow.
Of course, the experience of State and local governments in
the capital markets last year is not at all surprising. Given the
need on the part of the Federal Reserve System to pursue a policy of
substantial restraint as part of the fight against inflation, a
shrinkage in the general availability of credit -- in the face of a
continuing strong demand for credit -- would obviously lead to a
significant rise in the level of market interest rates. Under these
circumstances, it was to be expected that State and local governments,
along with other borrowers, would encounter difficulties in their
efforts to raise funds. But these difficulties were clearly aggravated
because of the rigidities imposed by statutory limitations on the rates
of interest many of them could pay on long-term debt.
The detrimental effects of these rate ceilings can be traced
in several ways:
-
The leading commercial banks (which normally
provide a major outlet) turned away to a
significant degree from the municipal bond
market last year. This was especially true
in those States with the lowest ceilings.
-
The displacement of State and local issues
reached a record level, and here also the
impact was proportionately greater among States
under the strongest rate limitations.
-
State and local governments had to search vigor-
ously for alternative sources of funds: short-
term borrowing jumped sharply and a number of
R.
FORD
GERALD
LIBRARY
-5-
borrowers relied more heavily on revenue bonds
or other sources where rate ceilings did not
apply in particular cases.
-
In some instances, special steps (or special
persuasion) were undertaken to induce buyers
(particularly commercial banks) to purchase
newly issued obligations.
-
But, despite these diverse efforts, it appears
that some jurisdictions may have curtailed
current expenditures, and total capital spend-
ing by State and local units seems to have
moderated in 1969.
In light of these developments -- and given the prospect of
a continued strong demand for funds by State and local governments --
the need to eliminate the existing statutory ceiling on interest rates
remains as pressing as ever. This need assumes even greater urgency
when the expanding demand for funds is set against the decline in the
relative attractiveness of tax-exempt securities to commercial banks.
Before examining more closely the behavior of State and local
governments in the capital market last year, it would be helpful to
analyze the configuration of interest rate ceilings.
Structure of Statutory Interest Rate Ceilings
At the beginning of this year, the 50 States were almost
evenly divided with respect to the presence or absence of statutory
limitations on the rates of interest they could pay on long-term debt.
However, the situation was quite different a year ago: not only did
a sizable majority of States have such ceilings but the average level
of maximum rates payable was also considerably lower. During the
&
FORD
GERALD
-6-
course of 1969, about a dozen States either removed, suspended or
raised the existing ceilings, and at the end of last month another
half-dozen States had legislation pending or were planning steps to
relax these constraints. In a number of instances, changes were also
made last year in the ceilings applicable to obligations of local
government units.
To obtain a better appreciation of the structure of interest
rate ceilings and their effects on borrowing at the local level, the
Federal Reserve Banks were asked in January to make an informal survey
of the situation in their Districts. The results of that canvass,
when combined with information published by the Daily Bond Buyer,
provide a fairly good description of the status of statutory interest
rate ceilings at the beginning of this year. The information is shown
in some detail in Table 1, attached. The Table distinguishes between
ceilings applicable to State governments and those applicable to local
units; it also distinguishes among general obligations, revenue bonds
and agency issues. The States are listed according to the level of
the ceiling applicable to the State's general obligations. As a
rule, the local ceilings prevail throughout the State, but in some
cases large cities have special ceilings. A few of these are also
shown separately.
For convenient reference, the details in Table 1 can be
summarized as follows:
LIBRARY GERALD R. FORD
-7-
State Governments
Local Governments
Level of Ceiling
General
Revenue
State
General
Revenue Local
(January, 1970)
Obligations
Bonds
Agency
Obligations
Bonds
Agency
No Ceiling
24
23
22
19
21
19
7 per cent and over
9
7
7
14
13
14
6 to 7 per cent
11
11
11
15
13
11
Under 6 per cent
4
4
3
2
0
1
Varies
1
1
3
0
1
1
Not issued
1
4
3
0
1
2
Not authorized
0
0
1
0
1
2
-
-
-
-
-
-
Total
50
50
50
50
50
50
This summary points up several striking features: while almost
half the States have no ceilings on general obligations, almost one-third
of them have ceilings below 7 per cent -- and in four of the latter the
limit is below 6 per cent. As far as States are concerned, the situation
appears to be approximately the same with respect to the range of ceil-
ings on all three types of obligations. But among local governments,
somewhat more variety is evident. A slightly larger number of States
have established maximum interest rate ceilings on the main types of
long-term debt issued by local jurisdictions. On the other hand, the
average level of the ceilings appears to be somewhat higher.
GERALD R. FORD LIBRARY
-8-
Impact of Interest Rate Ceilings
If we look behind the summary, however, we can begin to see
the influence of the rate limitations on the capital market behavior
of State and local governments. The experience of three of the four
States with ceilings of less than 6 per cent on general obligations
is especially instructive. California -- with a 5 per cent limit --
is the most dramatic example of a State that has suffered because of
a low ceiling. It topped the list of States in the volume of bonds
displaced in 1969, and one banker estimates that California was able
to sell only one-tenth of the bonds needed to finance public projects
in that year. In Arkansas, where the rate varies between 5 and 6 per
cent and where securities must be sold at par, it is reported that
virtually no buyers can be found for city, county and other governmental
agency bonds. In fact, it is reported that -- for all practical
purposes -- these local units in Arkansas have been out of the capital
improvement business for some time. In Kansas, with a 5-1/2 per cent
ceiling, the number and dollar volume of issues are both reported to
have declined significantly in 1969 compared with the levels reached
in the preceding year. It is also reported that both California and
Kansas are planning to revise their interest rate ceilings in the near
future.
The most striking fact about the eleven States with ceilings
on general obligations between 6 and 7 per cent is that about half of
them (Colorado, Illinois, Oklahoma, Utah and Virginia) have legislation
FORD & GERALD LIBRARY
-9-
pending to raise the limit. In the meantime, the adverse effects of
the existing ceilings have been substantial. For example, it is
reported that Mississippi is finding it almost impossible to sell
bonds at the 6 per cent ceiling. Apparently some dealers in the State
will take the issues at that rate -- if the government will agree to
let them have the use of the funds for a specified amount of time. In
Alabama, the city of Birmingham is said to be relying heavily on
revenue bonds which do not have a ceiling. In Illinois, the city of
Chicago has found the interest rate ceilings particularly disruptive.
Until recently, the 6 per cent limit was suspended until July 1,
1971, and during this period the City can try to sell issues at
7 per cent. Even so, Chicago is reported to be having considerable
difficulty selling its obligations to the banks. The Chicago school
system has been hit particularly hard.
About half of the States which now have ceilings of 7 per
cent or more on general obligations only recently raised their limits
to this level. Included in this group are Michigan, Missouri, Oregon
and Pennsylvania. Moreover, Michigan and Pennsylvania have only
temporary authorization for the higher ceilings. Undoubtedly, some
borrowers which do not have high-grade ratings find it difficult to
borrow even at these limits -- unless they are willing to limit them-
selves to relatively short maturities. For instance, it was reported
that local governments in Kentucky are having trouble selling bonds
LIBRARY GERALD FORD
-10-
at 7 per cent and are relying heavily on one-year bond anticipation
notes.
Finally, for a number of State and local governments with
no official ceilings, the situation is not as firm as it may seem.
For example, in both New York and New Jersey, the ceiling was suspended
for about one year, and by mid-1970 the ceilings are scheduled to
return to the previous levels of 5 per cent and 6 per cent, respec-
tively. Moreover, in some States which may or may not have official
ceilings, the State usury laws ordinarily apply. Thus, in some cases
even where no specific ceiling is set, there actually may be an effec-
tive legal limit to interest rates that can be paid on municipals.
Consequently, if market yields were to continue to rise as they did
over the last year, a fairly large number of States would have to
rewrite their usury laws as well.
Before closing this part of the discussion, we should pause
briefly to take note of the State of Maryland's experience -- although
the facts are widely known. It will be recalled that until last
December the ceiling on the State's general obligations was 5 per cent.
However, since its issues were rated Aaa, Maryland had experienced no
difficulty in selling bonds until it attempted to market $40 million
of construction bonds in late November of last year. At that time,
high-grade municipal bond yields were rapidly approaching 6-1/2 per
cent. Maryland was faced with the alternatives of halting construction,
borrowing from the current operating surplus (a short-run solution at
FORD & 07V839 LIBRARY
-11-
best), or changing the ceiling. As it happened, a special session of
the legislature was called which -- among other actions -- removed the
5 per cent ceiling altogether. But before that action could be taken,
the State had to face an extremely difficult situation -- and (as
mentioned below) some of the temporary moves which were made in the
interval are prime examples of the real burdens imposed by interest
rate ceilings.
The conclusions which can be drawn with respect to the
structure and impact of statutory interest rate ceilings on State
and local government debt can be stated succinctly: while the
existence of ceilings remains rather widespread, a large number of
States raised or suspended such limitations during the last year or
are now considering such increases. In fact, in some cases, States
which lifted their rate ceilings last year may well have to do so
again if bond flotations remain heavy. With the exception of
California (which must submit a proposed rate change to the voters in
a general election), every major borrower raised or suspended ceilings
last year. If they had not taken these steps, they would have been
unable to sell bonds under the market conditions prevailing during
most of the last twelve months -- and many of them (especially
California) are still encountering obstacles.
Decline in Commercial Banks' Demand for State and Local
Government Debt
As is widely known, the commercial banks have traditionally
provided the principal outlet for municipal issues. This strong
QERALD R. FORD LIBRARY
-12-
demand undoubtedly reflected the advantage of tax-exempt income to the
banks. In addition, however, many banks also seemed to have accepted
an obligation to assist their own State and local governments with
their financing problems, and this willingness to assist was frequently
enhanced by the deposit of public funds. But in 1969, a conjuncture
of adverse circumstances -- including reduced bank resources, low
interest rate ceilings, and uncertainties over Federal income tax
reform -- brought about a sharp decline in commercial banks' participa-
tion in the municipal bond market.
Last year, net purchases of State and local government issues
by commercial banks amounted to only $1.2 billion -- in contrast to
$8.7 billion in 1968 and $9.0 billion in 1967. The decline was even
more dramatic when the changes in commercial banks' holdings are
compared with the net funds raised by these governments. Last year,
the banks' share represented only 14 per cent of the total. In 1967,
the banks expanded their holdings by an amount greater than the total
rise in liabilities of State and local governments: the total rose by
$7.7 billion and bank holdings by $9.0 billion. In 1968, the banks
absorbed nearly 90 per cent of the total increase.
Of course, as indicated above, some part of the commercial
banks' lessened demand for municipal issues can be attributed to the
generally reduced availability of credit at these institutions last
year. But this is by no means the entire story. There certainly was
BERALD R. FORD LIBRAPY
-13-
a sharp decline in 1969 in the volume of funds advanced by commercial
banks to all borrowers. Last year, this total was about $9.6 billion,
compared with $39.3 billion in 1968 and $36.5 billion in 1967. Even
so, State and local governments got a substantially reduced share in
1969 -- only 12-1/2 per cent of the total, compared with 25 per cent
in 1967 and 22 per cent in 1968.
As I stressed above, I believe a good part of the lessened
taste of commercial banks for municipal obligations reflects the
adverse effects of the low limits on interest rates which many State
and local jurisdictions can pay. To test this conclusion, we have
made a special analysis of the year-to-year changes in State and local
government securities held by weekly reporting member banks in a dozen
States during the three years 1966-1969. For the most part, these
States (on the average) have been the leading borrowers through the
issuance of long-term securities over the last five years. The details
of the analysis are shown in Tables 2 and 3, attached.
Among the twelve States, there were four (California, Maryland,
New York and North Carolina) which had interest rate ceilings of 5 per
cent or less on general obligations through much of 1969. As indicated
in Table 2, the actual holdings of State and local securities by banks
in these four States declined from the end of 1968 to the end of 1969.
The average decline for this group was about 10 per cent. For all
weekly reporting member banks, holdings of municipal obligations also
declined -- but by only 7 per cent. Banks in all of the other States
is
BERALD FORD LIBRAPT
-14-
shown (except those in Pennsylvania) recorded moderate increases over
this period. The decline in holdings by Pennsylvania banks may be
explained by the fact that the rating of Philadelphia bonds was
reduced sharply by private rating agencies in late 1967,
Table 3 shows ratios of member banks' holdings of State and
local obligations to total securities held. Again, it is clear that
banks in those States subject to low interest rate ceilings have
adjusted their investments in a way that is in sharp contrast to the
experience of banks in States not under interest rate limitations.
In general, the ratio of State and local obligations to total secu-
rities has been rising for all banks from the end of 1966 to the end
of 1969. However, from the end of 1968 to the end of 1969, the
increase in the ratio at banks in States not subject to low interest
rate limitations has been much greater than in those States where
such interest rate limitations apply. In fact, the ratio for this
latter group has been about unchanged. For example, the change in
this ratio for banks in the four States which were subject to a 5 per
cent interest rate limitation ranged from -2.2 to 2.9 with a mean of
0.5 from the end of 1968 to the end of 1969. The range in this ratio
for banks in those States, in our sample, not subject to such limita-
tions was 3.4 to 7.9 with a mean of 6.1, or more than ten times greater
than the ratio for the low interest rate States. (This comparison
excludes banks in Pennsylvania for the reasons stated above. However,
inclusion of these data would not change the result significantly.)
GERALD FORD LIBRART
-15-
It is hazardous to infer too much from these data since the number of
banks reporting from each State varies appreciably. Nevertheless, the
pattern seems too closely correlated not to reflect some common port-
folio adjustment by banks in States where low interest rate limitations
are in effect.
All of the rough calculations presented above show banks in
States with low interest rate ceilings holding relatively fewer State
and local obligations than do banks in States where no such constraint
exists. In addition, it can be inferred from the data that the market
for State and local obligations, at least so far as the banking system
is concerned, is segmented, and in large part such securities are not
readily traded on an interstate basis. If these securities were more
easily traded, one would expect to see more uniform movement in the
portfolio adjustments of banks as the obligations of some States come
under interest rate contraints. That is, banks in States with low
interest rate ceilings would substitute obligations from their home
State for the securities of States with higher rates. On the basis
of the data available, such substitution does not appear to take place
in a significant volume.
The holdings of State and local securities by banks located
in the State of Maryland appear to follow the general pattern of banks
located in States with low interest rate ceilings. (The change in the
Maryland law came too late in the year to have much effect on the hold-
ings of banks in the State.) Holdings of such securities by Maryland
BERALD FORD LIBRARY
-16-
banks declined almost 11 per cent from the end of 1968 to the end of
1969, about in line with the experience of other banks in States
where low interest rate ceilings were in effect. The ratios of State
and local securities to total securities at Maryland banks reinforces
the above pattern. This ratio was about unchanged from the end of
1968 to the end of 1969, increasing only 0.6 per cent, compared to the
average increase of 6.1 for banks in States with higher interest rate
ceilings.
In summary, the data for weekly reporting member banks show
that from the end of 1968 to the end of 1969 large banks seem to have
followed a consistent pattern of reducing the importance of State and
local obligations in their portfolios. The data also show that at
banks in States where interest rate ceilings permitted on general
obligation securities are out of line with market rates of interest
the portfolio adjustment was much more drastic than in those States
where such ceilings did not apply.
Market Displacements and the Search for Alternative Sources of Funds
With the traditional commercial bank market for State and
local government issues falling away, these jurisdictions have been
forced to search vigorously for other means of adjusting to stringent
capital market conditions. In many instances, these alternatives have
been unwieldy and often more expensive than public market borrowing
based on the full faith and credit of the issuing agency.
FORD & GERALD LIBRARY
-17-
In the first place, though, many would-be borrowers simply
had to stand aside from the market at the time they originally planned
to sell bonds. A rough indication of the extent of this interruption
in plans is given by the volume of displacements as reported by the
Bond Buyer. In this series, displacements include issues which were
postponed, on which no bid was received, or on which all bids were
rejected. At the beginning of January, 1970, the cumulative total
of municipal displacements (cumulative from September 3, 1968, when
the series was started) was $2,836 million. Although this is a large
backlog of displacements, one should be cautious in interpreting its
meaning, since it probably underestimates the actual volume of issues
put aside -- at least temporarily. Moreover, the series cannot
capture those issues which were never initiated because local officials
knew it would be useless and costly to advertise bonds, given the
prevailing level of yields.
State and local officials -- faced with restricted access
to the long-term capital markets because of ceilings on general
obligations -- have relied more heavily on revenue bonds, short-term
borrowing, increased taxes or curtailment of expenditures. In 1969,
a substantial number of government units resorted to one or more of
these measures. Revenue bonds or issues of special authorities
often have more liberal interest rate ceilings than those on State
general obligation bonds. Therefore, a number of governments use
LIBRARY GERALD ? FORD
-18-
special building authorities which can issue revenue bonds and then
lease the facilities back to the school or library official which
cannot market their own bonds. This is not a new device, of course,
but it is reported that a number of jurisdictions (particularly school
districts) relied on such special authorities much more frequently in
1969.
Short-term borrowing by State and local governments increased
sharply last year. Preliminary estimates suggest that the total may
have reached about $11.9 billion, a rise of $3.2 billion over the
amount recorded in 1968. At this level, short-term borrowing would
represent more than half of the $23.4 billion of total new issues
offered in 1969. This was a record proportion by a large margin. The
1968 share of short-term issues in the total (just over one-third) was
about the average for the decade of the 1960's. In many cases, how-
ever, there are legal limitations on refunding short-term obligations,
so this means can provide only a temporary solution to the financing
problems of most units.
A number of State and local governments have also found it
necessary to take special steps (or to engage in special persuasion)
to induce buyers -- particularly commercial banks -- to purchase newly
issued obligations. A good example of this is reported from Chicago.
The leading banks in that city agreed to take $45 million of a
proposed $145 million tax anticipation borrowing after the State of
FORD & GERALD LIBRARY
-19-
Illinois agreed to place $15 million in non-interest bearing deposits
with those banks. Another example of banks' response to special
appeals is found in the State of Maryland. Late last year, when
difficulties in selling bonds arose because of the then existing
5 per cent rate ceiling, the State Treasurer negotiated with six
large Maryland banks and obtained commitments from them to lend $12
million to the State for a few months until the Legislature could act
at its regular session in February. The banks agreed to lend the
money at 5 per cent, well below the prime rate. In passing, it
should be noted that at least some of these banks held a sizable
amount of public deposits -- which undoubtedly was a factor in their
consideration of the appeal to participate in the loan pool for the
State.
Still other examples of the alternatives on which State
and local governments have depended to raise funds could be cited.
However, they all tell the same story: low interest rate ceilings
greatly limited the access of many of these units to the capital
market in the last year of sharply rising market yields.
Effects on State and Local Government Expenditures
Because we have only incomplete data on capital outlays by
State and local units, it is difficult to assess the impact of these
borrowing problems on their level of spending. Surveys conducted by
the Federal Reserve System in 1966 (a year in which long-term
LIBRARY GERALD ? FORD
-20-
borrowings by these governments were $1.4 billion lower than original
plans) did not show a significant decline in capital spending as a
result of the reduced availability of credit. However, there was no
long period of ready availability of funds between the credit stringency
of 1966 and the end of 1968 which would have permitted these govern-
ments time to build up their liquid assets and increase the borrowing
flexibility. Moreover, the short-fall between planned and actual
long-term borrowing in 1969 was undoubtedly much greater than the
$1.4 billion estimated for 1966. While we have no direct measure of
this gap for last year, the decline of over $4 billion in long-term bond
sales in 1969 compared with the volume in the previous year certainly
does suggest that it was quite large.
Therefore, it is expected that the impact on construction
spending in 1969 was more severe than in the earlier period. The
latest State and local government construction figures available (for
the third quarter of 1969) suggest that an adverse impact of reduced
municipal long-term borrowing was already appearing by the end of
last summer. In the twelve months ending last September, State and
local outlays for new construction rose by 7 per cent; in the same
period a year earlier, the rise was close to 9 per cent. Moreover,
in the most recent period, expenditures on educational facilities
showed no change, whereas in the previous year such outlays rose by
3 per cent.
FORD is GERALD LIBRARY
-21-
Local governments, which finance almost two-thirds of their
capital outlays by means of long-term borrowing, will probably be
affected more severely in this respect than State governments, which
rely on long-term bonds to finance about half of their construction
expenditures. Given the present emphasis on control of the Federal
budget, it is unlikely that Federal grants to the States and subdivisions
will expand enough to take up the slack.
Thus, if these governmental units are to find relief -- and
if their capital investment is not to be hampered continuously -- they
must have greater access to the capital markets. Removal of low interest
rate ceilings on their debt is one necessary step in the right direction.
Outlook for State and Local Government Borrowing
Trying to assess the outlook for State and local governments
in the capital market is obviously very difficult. Furthermore, this
difficulty is compounded by the need on my part to avoid making any
suggestion about the probable future course of monetary policy. Never-
theless, a number of elements underlying such an outlook can be marshalled.
In 1969, long-term offerings of securities by State and local
governments averaged between $800 million and $900 million per month,
and the monthly average was smaller in the second half than it was in
the first half of the year. In January, it is estimated that the volume
was about $1.3 billion. The sale of these issues was facilitated by a
decline in municipal yields through mid-month, and the lower interest
rates also induced the reoffering of several issues previously
&
FORD
GERALD
LIBRARY
-22-
postponed. The improved market conditions in the first part of
January were in turn helped by a strengthened dealer inventory
position, and a large percentage of the January offerings was of
a high quality with shorter-term maturities. In recent weeks, how-
ever, the calendar of anticipated long-term financing has built up
to a sizable volume, while purchases have been concentrated relatively
more on shorter maturities. The result has been a rebound in long-
term tax-exempt yields.
Given the steadily expanding backlog of displacements and
the continued buildup in the forward calendar, the volume of municipal
flotations may remain very large for a number of months. Over the
longer run, the need to finance a high -- and even rising -- level of
capital formation in State and local jurisdictions will almost certainly
become more -- rather than less -- pressing.
Against this prospect, it would seem impractical for public
officials to put off the removal of outdated interest rate ceilings
in the hope that market rates will soon decline to levels comfortably
within present ceilings. In addition to the expected volume of newly
generated issues, the supply of municipal securities has been
artificially suppressed, and is potentially anywhere from the $2.8
billion recorded in the Bond Buyer's displacement series to the
estimated $4 - $5 billion shortfall in planned borrowings in 1969.
Certainly no one would argue that the need for schools, housing,
FORD & GERALD LIBRARY
-23-
utilities, transportation, and other public facilities will be any
less.
In the meantime, the major element of uncertainty in the
interest rate picture is the demand for tax-exempt securities. The
reduced purchases by commercial banks and the challenge to the tax-
exempt market among individuals which was raised by tax reform
legislation last year both depressed demand for municipal securities
so much that even the sharp fall in volume in 1969 could only be
absorbed at the cost of sharply rising market yields.
Individual buying will undoubtedly pick up again if there
are no further moves by Congress to eliminate the tax exemption
privilege. Commercial bank purchases obviously will depend on general
credit market conditions, but it would seem unlikely that there would
be sufficient demand by banks to absorb the potential supply which
would come to market if municipal rates were to ease significantly.
This implies that, even if municipal yields decline somewhat from
their present high levels, they probably will not return to pre-1966
levels in the near future. While flow of funds data suggest that
corporations increased their holdings of municipals substantially
during 1969, it appears that most of their purchases were of short-
term securities. Thus, it would be extremely unwise for State and
local governments to count on these firms as a lasting outlet for
their obligations.
LIBRARY GERALD R. FORD
-24-
Instead, they should really set to work trying to improve
their access to the long-term capital market. While this effort must
go forward on a number of fronts, the removal of outdated statutory
limits on the interest rates they can pay on long-term debt is a
necessary move -- which ought to be made without further delay.
GERALD R. FORD LIBRABY
Table 1. Statutory Interest Rate Ceilings on State and Local
Government Securities, by State and Type of Obligation,
January, 1970
State Governments
Local Governments
General
Revenue
State
General
Revenue
Local
Area and Level of Ceiling
Obligations
Bonds
Agency
Obligations
Bonds
Agency
Comments
Under 6 per cent
(On General Obligations )
Arizona
5
5
5
6
6
None
Arkansas
Varies
Not issued
Varies
6
6
6
State: Usually 5 per cent.
California
5
Varies
5
5
Varies
7
State: Some agencies have 7 per
cent ceiling.
Kansas
5-1/2
6
5-1/2
5-1/2
6
5-1/2
Montana
5-1/2
5-1/2
6
6
6
6
Between 6 and 7 per cent
(On General Obligations)
Alabama
6
6
Varies
None
None
None
Local: 8 per cent usury limit
applies.
Birmingham
6-1/2
None
Varies
Alaska
6
6
6
None
None
None
Hawaii
6
None
Not auth.
7
6
Not auth.
Illinois
6
6
6
6
6
6
Chicago
7
None
None
Local: Chicago limit suspended
until July 1, 1971
Iowa
6
7
Not issued
7
7
6
Kentucky
FORDO is GERALD LIBRARY
6-1/2
6-1/2
6-1/2
7
7
7
2
State Governments
Local Governments
General
Revenue
State
General
Revenue
Local
Obligations
Bonds
Agency
Obligations
Bonds
Agency
Comments
Between 6 and 7 per cent
(On General Obligations)
(continued)
Mississippi
6
6
6
6
6
6
New Mexico
6
4
6
6
None
6
North Dakota
Not issued
6-1/2
Not issued
6
6
Not auth.
Oklahoma
6
5
Varies
6
Not auth.
None
Utah
6
6
6
None
None
None
Virginia
6
6
6
6
6
6
7 per cent and over
(On General Obligations)
Colorado
7
None
None
6
6
6
Florida
7
7
7
7-1/2
7-1/2
7-1/2
Michigan
8
8
8
8
8
8
Missouri
8
8
8
8
8
8
Nevada
7
Not issued
7
7
7
7
Oregon
7
Not issued Not issued
7
7
7
Portland
6
Not issued Not issued
Local: Portland ceiling in
City Charter.
Pennsylvania
7
7
7
7
7
7
From 6 during July 1, 1969 to
Philadelphia
None
None
None
July 1, 1970
FORD & 07V830 LIBRARY
Exception: 6 on port,
transit and street bonds.
3
State Governments
Local Governments
General
Revenue
State
General
Revenue
Local
Obligations
Bonds
Agency
Obligations
Bonds
Agency
Comments
7 per cent and over (cont'd)
South Carolina
7
7
7
7
7
7
Tennessee
10
10
10
10
10
10
No ceilings
(On General Obligations)
Connecticut
None
None
None
None
None
Not issued
Delaware
None
6
6
6
6
6
Georgia
None
None
None
None
7
7
Idaho
None
None
None
None
None
None
Indiana
None
None
None
None
None
None
Louisiana
None
None
None
None
None
None
New Orleans
None
6
6
Maine
None
None
None
None
None
Varies
Maryland
None
None
None
None
None
None
Massachusetts
None
None
None
None
None
None
Minnesota
None
None
None
None
None
None
Nebraska
None
None
None
None
None
None
Local: 9 per cent usury limit
applies.
New Hampshire
None
GERALD R. FORD LIBRARY None None
None
None
None
None
New Jersey
None
None
None
None
None
Limit suspended, July 1, 1969
to June 30, 1970
4
State Governments
Local Governments
General
Revenue
State
General
Revenue
Local
Obligations
Bonds
Agency
Obligations
Bonds
Agency
Comments
No ceilings (cont'd)
(On General Obligations)
New York
None
None
None
None
None
None
Limit suspended, April 15, 1969
to April 15, 1970.
North Carolina
None
None
None
None
None
None
Ohio
None
None
None
8
8
8
Rhode Island
None
None
None
6
Not auth.
6
South Dakota
None
Not issued
6
6
Not issued
6
Texas
None
None
None
None
None
None
Local: 10 per cent usury
limit applies.
Vermont
None
None
None
6
6
Not issued
Washington
None
None
None
8
8
8
West Virginia
None
6
6
6
6
6
Wisconsin
None
None
None
8
8
8
Wyoming
None
None
None
None
None
None
SEALD R.
TRUST FORD
Table 2. State and Local Government Securities Held by
Weekly Reporting Member Banks in Selected States
(Amounts in millions of dollars)
Mary-1/
New
North
Mich-
New
All
Seclected Dates
1/
Calif.
York
/
Carolina
Fla.
Illinois
igan
Jersey
Ohio
Pa.
Texas
Va.
Weekly
Reporters
December 28, 1966
3,759
183
6,571
433
217
1,590
1,265
584
1,473
1,342
907
297
23,410
December 27, 1967
4,740
284
8,202
511
221
1,673
1,563
728
1,930
1,950
1,043
362
29,407
December 31, 1968
5,376
280
9,448
620
310
2,111
1,821
825
2,127
2,434
1,286
424
34,500
December 31, 1969
4,880
250
8,319
560
315
2,153
1,901
856
2,134
2,087
1,206
428
31,974
Changes: (per cent)
1966 - 1967
26.1
55.2
24.8
18.0
1.8
5.2
23.6
24.7
31.0
45.3
15.0
21.9
25.6
1967 - 1968
13.4
-1.4
15.2
10.7
40.3
26.2
16.5
13.3
10.2
24.8
23.3
17.1
17.3
1968 - 1969
-9.2
-10.7
-11.9
-9.7
1.6
2.0
4.4
3.8
0.3
-14.3
1.5
0.9
-7.3
(1) States with interest rate ceilings of 5 per cent or less on general obligations
through most of 1969.
(2) The rating of Philadelphia bonds was reduced sharply by private rating
agencies in late 1968, and this may have had an adverse effect on bank
holdings of these securities.
BERALD
FORD
Table 3. Ratio of State and Local Government to Total Securities Held by
Weekly Reporting Member Banks in Selected States (Per cent)
All
Mary-
New
North
Mich-
New
Weekly
Selected Dates
Calif
1/
land
/
York
/
Carolina
1/
Fla.
Ill.
igan
Jersey
Ohio
Pa
2/
Texas
Va.
Reporters
December 28, 1966
44.9
40.9
48.0
55.5
39.8
44.6
43.1
53.0
46.2
47.7
43.8
50.3
45.5
December 27, 1967
51.3
49.9
50.5
56.5
35.4
41.4
45.4
55.3
48.0
51.3
44.6
51.3
47.6
December 31, 1968
49.6
48.4
52.7
59.9
43.8
44.6
46.4
54.7
51.4
57.9
47.6
54.6
50.5
December 31, 1969
52.5
49.0
53.4
57.7
51.7
50.2
52.6
61.1
57.3
59.8
55.0
58.0
53.6
Changes in Ratio
(Percentage Points)
1966 - 1967
6.4
9.0
2.5
1.0
-4.4
-3.2
2.3
2.3
1.8
3.6
0.8
1.0
2.1
1967
-
1968
-1.7
-1.5
2.5
3.4
8.4
3.2
1.0
-0.6
3.4
6.6
3.0
-3.3
2.9
1968 - 1969
2.9
0.6
0.7
-2.2
7.9
5.6
6.2
6.4
5.9
1.9
7.4
3.4
3.1
1/
Same as Table 2.
2/
Same as Table 2.
FORD is LIBRARY 936839
CHAIRMAN BURNS
For Information Only
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 18, 1970,
To
Board of Governors
Subject: Processing of foreign banking
From
Governor Brimmer ask
applications.
For Information Only
This memorandum is by way of a brief report on the efforts
being made to improve and expedite the processing of applications
submitted to the Board in the foreign banking area.
As a first step in this effort, a meeting was held recently
between members of the Board's staff and staff members of the New
York Reserve Bank to identify the reasons for and the points at which
delays have occurred in the processing of applications. During that
meeting, an extensive review was conducted of Reserve Bank problems
associated with deficient applications, internal clearances with the
Legal Department and others, and procedures followed in processing
different classes of applications.
As an outgrowth of that meeting and subsequent discussions,
the staff has developed an information checklist indicating the types
of information applications in this area will be expected to contain
if they are to be accepted as filed within the System. Too large
a number have been submitted where the Reserve Bank has had to request
additional information before being in a positionto comment on and
provide recommendations on the applications. Meanwhile, the application
has been considered as filed with the System. The information check-
list and the requirement that adequate information be furnished before
the application is considered as filed should help to avoid these
situations in the future.
GERALD FORD TIRRARY
To: Board of Governors
-2-
A further result was to review the procedures to be followed
at the Reserve Banks in processing these applications and forwarding
them to the Board. A revised and stricter set of guidelines to be
followed by the Reserve Banks has been developed.
The information checklist and the revised procedural guide-
lines have now been distributed to all the Reserve Banks, under cover
of a letter from Mr. Solomon addressed to the Vice Presidents in Charge
of Examinations. Copies of this material are attached for the informa-
tion of Board members.
These measures were foreseen in Mr. Solomon's memorandum to
the Board dated January 22, 1970. Others are in process. At the
Federal Reserve Bank of New York, measures have been taken to simplify
and expedite the clearances of applications with the bank's Legal
Department. Here at the Board an internal reporting program on the
status of applications in this area is now fully operative, enabling
a better guide of processing performance. Additional manpower has
been obtained on a temporary basis and further efforts to recruit a
permanent addition to this function are continuing.
Attachments.
GERALD R. FORD
BOARD OF GOVERNORS
OF THE
OF
DISOARD
FEDERAL RESERVE SYSTEM
SR-61
OF
WASHINGTON, D. c. 20551
THE
SYSTEM
DIVISION OF SUPERVISION
AND REGULATION
FEDERAL
RESERVE
March 18, 1970.
TO THE VICE PRESIDENTS IN CHARGE OF EXAMINATIONS
AT ALL FEDERAL RESERVE BANKS
Dear Sir:
As you know, the Board has for some time been concerned
with the processing time required in connection with applications
dealing with foreign banking matters and filed under Regulations K
and M. A further review has been conducted of the processing pro-
cedures followed at the Board and within the System as a whole. The
purpose of this review has been to examine again whether improvements
might be made to facilitate and expedite the processing of these appli-
cations. As part of this effort, procedures at the Board are being
streamlined and consideration is being given to further delegations of
the Board's authority to approve such applications.
As a further part of this effort, a checklist has been devel-
oped of the types of information which applications filed under these
Regulations are expected to contain. A copy of the checklist is en-
closed. This checklist is being made available to all Reserve Banks
for further distribution to applicants (present and future) under these
Regulations. As noted in the instructions to the checklist, applica-
tions which do not reasonably fulfill the specified information re-
quirements are not to be considered as filed until the lacking infor-
mation is furnished. It is hoped that this procedure will relieve
applicants of uncertainty about the information required in these
applications and will also relieve the Reserve Banks from the possible
necessity of repeatedly going back to applicants for additional in-
formation in the preparation of the Reserve Banks' own memoranda and
recommendations to the Board on the applications.
Also enclosed with this letter is a set of guidelines on
the procedures to be followed at the Reserve Banks in accepting and
processing applications under these Regulations. It is believed that
these guidelines will help simplify the processing of these applica-
tions without detracting from due consideration being given to those
applications involving questions of law and regulatory policy.
Frederic Solomon
Frederic Solomon,
Director.
R.
FORD
GERALD
LIBRARY
R.
Guideline Procedures for Processing Applications
GERALO
FORD
under Regulations K and M
(1) Review all applications for sufficiency of information in accordance
with the checklist.
a. If information is sufficient, forward applications to the Board
and process in accordance with the procedures described below.
b. If information is not sufficient, inform the applicant in what
respects the application is deficient and that the application
will not be considered as filed until such necessary additional
information is furnished. If necessary, return the application
for resubmission by applicant. Deficient applications need not
be forwarded to the Board, but Reserve Banks are to inform the
Board by letter of any applications received that have been
determined as "not filed."
(2) Determine whether the filed applications are of a routine or nonroutine
nature. In most cases, applications of a routine nature would include:
amendments to Articles of Association of Corporations; borrowing author-
ity under Section 211.4 of Regulation K; additional investments in
companies in which stock is already held and the investment will not
result in control or otherwise significantly alter the ownership interest
of the applicant; new investments that would qualify under the General
Consent provisions of Regulation K except for the dollar amount limita-
tion; and minor investments such as nominee companies.
(3) Recommendations regarding routine applications should be contained in
the letters transmitting such applications to the Board. No separate
memorandum or analysis is required. Such applications should be trans-
mitted to the Board within two or three days after receipt.
(4) Applications of a nonroutine nature should immediately be forwarded to
the Board. Subsequently, the Reserve Bank should prepare a memorandum
which should include at the outset a summary of the issues involved,
followed by a discussion that contains: (a) a summary of the proposal
and the reasons therefor; (b) an analysis of any issues of law and
regulatory policy involved; (c) an assessment of the condition of the
applicant; (d) in the case of applications for a bank's first foreign
branch or Corporation, information on the applicant's foreign business,
its character and size, and on the background and experience in inter-
national operations of officers involved in the proposed activity;
(e) anticompetitive effects, if any; (f) a synopsis of experience with
the applicant under the Foreign Credit Restraint Program and the current
position under the Program; (g) recommendations of the Reserve Bank as
to whether or not the application should be approved.
-2-
(5) Reserve Bank memoranda and recommendations on nonroutine applications
should be forwarded to the Board within two weeks following receipt of
the application. If that time schedule cannot be met, please inform
the Board as early as possible, indicating the reasons for the need for
additional time and the date by which the material will be forwarded.
Only in very exceptional circumstances should the time for Reserve Bank
processing of applications exceed four weeks.
FORD & 933470 LIBRARY
APPLICATIONS SUBMITTED TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
UNDER REGULATIONS K AND M
The following material has been prepared to assist member
banks and Edge and Agreement Corporations in the preparation and
filing of applications relating to international operations under
the Board's Regulations K and M. Checklists are provided of the
types of information that will normally be expected to be furnished
in applications for establishment of foreign branches, establishment
of Edge Corporations, and investments in stocks. In certain instances,
some of the items indicated may not be applicable. However, applica-
tions, which in the judgment of the Reserve Bank do not contain sub-
stantially the types of information specified in the checklists, will
not be considered as filed and may be returned to the applicant for
resubmission. In the event of questions, consultations with the
Reserve Bank are advised.
Applications should be addressed to the Board of Governors
of the Federal Reserve System and are to be submitted, in duplicate,
through the Federal Reserve Bank of the District in which the member
bank or Corporation is located. Applications may be in letter form,
or by letter accompanied by memoranda containing details of the pro-
posed establishment or investment. The latter may be more convenient
where supplemental information is being furnished to assist in the
Board's consideration of the application.
In general, prior consultations with the Reserve Bank or,
if necessary, the Board's staff are suggested in the case of the pro-
posed establishment of Edge Corporations and of proposed investments
with unusual characteristics. The consultations can help assure that
applications are properly filed and facilitate processing when filed.
8.
FORD
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LIBRARY
INFORMATION CHECKLIST
Foreign Branches: Initial branch in a foreign country.
1. Name and capital of applying member bank.
2. Location (city and country) of proposed branch, including address
(if decided upon).
3. Reasons for the proposed branch, including the ways in which it
is believed the branch would further the development of the
applying bank's international or foreign business.
4. Type of business to be conducted and types of services to be
offered by the proposed branch.
5. Details as to the competitive situation in the foreign country.
6. Management of the proposed branch.
7. Estimated start-up costs, and projections of income, expenses,
and profitability.
8. Foreign government approvals, if any. (In the case of State
member banks, status of any State approval required.)
9. In the case of member banks applying for their first overseas
branch, a summary of the bank's experience in international
banking operations, including the volume and character of the
bank's present international business, and a description of
the bank's foreign or international department, the number of
its staff, and background of its officers, unless such informa-
tion has been previously furnished in connection with the
establishment of an Edge Corporation, or otherwise.
LIBRARY GERALD R. FORD
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10. Status of applying bank under the Foreign Credit Restraint
Program, and ability of bank to establish the branch within
2.
GERALD
FORD
the guidelines of the Program.
Additional branches in a country.
As provided in Regulation M, member banks may upon 30 days'
notice to the Board establish additional branches in a foreign country
in which they already operate a branch. Notification of intent to
establish such branch is to be made by letter, which is to specify the
city in which the branch is to be located (also the address, if decided
upon), the status of any government approvals required, and any invest-
ment to be made by the applying bank in the additional branch.
Edge Corporations.
1. The proposed articles of association and an executed organization
certificate, as prescribed by Section 25(a) of the Federal Reserve
Act and Section 211.3(a) (including footnote) of Regulation K.
2. Purposes for which the Corporation is to be established and the
activities contemplated for the Corporation.
3. In the case of a member bank seeking for the first time to estab-
lish a Corporation, a summary of the bank's experience in inter-
national banking operations, including the volume and character
of the bank's present international business; a description of
the bank's foreign or international department, the number of
its staff, and background of its officers, unless such informa-
tion has been previously furnished in connection with a foreign
branch, or otherwise.
-3-
4. Management of proposed Corporation, including a short
biographical sketch of each of the proposed directors and
officers.
5. Any other information that may help in processing the application.
Investments in shares.
1. Proposed investment.
a. Name and location of company.
b. Number and type of shares to be acquired.
C. Par value.
d. Percentage of total number of shares outstanding.
e. Cost in local currency and in U.S. dollars (showing exchange
rate used). Amount of premium being paid, if any, and basis
for computation. (Board approvals of acquisitions of sub-
sidiaries require a write-off of any excess paid over the
net tangible asset value of the shares acquired.)
2. Description of company in which investment is proposed.
a. Type of business.
b. Historical background.
c. Ownership of company: list all shareholders holding 10 per
cent or more of any class of stock of the company, the amount
or per cent of stock held by each such shareholder, and appro-
priate comments on such shareholders and their relationship
to the company.
LIBRARY GERALD R. FORD
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Investments in shares. (continued)
2.
d. List of directors and senior officers of company or bank
in which the investment is to be made, with the addresses
and principal affiliations of each.
e. List offices, subsidiaries, and affiliates, and provide
information on the activities conducted by each.
f. Details of any business conducted, directly or indirectly,
by the company in the United States.
3. Financial and related information.
a. Latest available balance sheet and income statement, with
an explanation of any unusual items.
b. Listing of all equity holdings, including percentage of shares
held.
C. Capital stock. Number and classes of shares outstanding,
and the rights and privileges of each class of stock.
(If proposed investment is in shares of a limited liability
partnership, furnish details as to liabilities of such shares.)
4. Purpose of investment and relationship of applicant to company.
a. Describe objectives or indicate reasons for making the pro-
posed investment.
b. Indicate extent to which credit or other services are presently
extended to company in which investment is proposed. Also,
FORD is 936670 LIBRARY
other existing relationships with company or its principal
shareholders.
C. Provide details on relationship with company after investment
is made, including degree of representation on Board of
- -5-
Investment in shares. (continued)
C. Directors and participation in management. Indicate whether
applicant will control the company or where effective con-
trol will lie.
d. Details on any loan or credit transaction to be entered
into in connection with proposed investment or subsequent
thereto.
5. Miscellaneous.
a. Articles of association and by-laws of company in which
investment is to be made, if available.
b. Information as to whether or not approval of foreign government
agencies is necessary and, if so, the status of such approval.
C. Status of applicant under Foreign Credit Restraint Program
and ability to make the investment with the guidelines of
the Program.
d. Any other information that may help in processing the appli-
cation.
GERALD R. FORD LIBRANA
BOARD OF GOVERNORS
OF ToTal
FEDERAL RESERVE system
For Release in AM'S
Sunday, March 22, 1970
SPECIAL
Chairman Burns
ECONOMIC PROGRESS OF NEGROES IN THE UNITED STATES
The Deepening Schism
Remarks by
Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System
At the
Founders' Day Convocation
Tuskegee Institute
Tuskegee, Alabama
March 22, 1970
is
FORD
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ECONOMIC PROGRESS OF NEGROES IN THE UNITED STATES
The Deepening Schism
By
Andrew F. Brimmer*
To be asked to address this Founder's Day Celebration in
honor of the memory of Booker T. Washington is really a way of honor-
ing the one receiving the invitation. Not only on this campus, or in
this community, but in the country at large anyone with even the most
modest sense of history knows that the memory of Booker T. Washington
is honored every day by the simple fact that Tuskegee Institute is
here. That memory is embossed and embellished each time that this
institution can render another day of service to the Negro community,
to its region and to the nation through its commitment to higher
education.
Yet, it is also good to pause at least once each year to
reflect explicitly on the founding of this institution in rural Alabama
in 1881. Since 1917, Tuskegee has found the time for such reflection,
and the roster of speakers testifies to the high regard for Tuskegee
in this country and in the world. This annual celebration has drawn
to this campus a President of the United States, the Head of a foreign
government, a Chief Justice of the Supreme Court, members of the
President's Cabinet, other leading representatives of the Federal and
State governments -- as well as eminent scholars and educators and
* Member, Board of Governors of the Federal Reserve System.
I am grateful to Mr. Henry S. Terrell and Miss Harriett Harper
of the Board's staff for assistance in the preparation of these
remarks.
FORD & 07V839 LIBRARY
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outstanding figures in the private sector. However, in coming here,
they came as much to encourage the work of a growing Tuskegee as to
honor the memory of its founder. So I am flattered to be a part of
this tradition.
Having accepted the invitation to speak before this assembly,
I decided that you really did not want me to dwell on the obstacles
which Booker T. Washington had to overcome in the creation of a viable
institution; nor did you expect me simply to extol the record of
Tuskegee's achievements during the last 89 years. Rather, given the
nature of my own responsibilities, I assumed that I was invited
because you thought I might have something to say with a bearing on
some of the central economic issues which we face today -- especially
those issues of immediate relevance to the Negro community.
On that assumption, I decided that it might be helpful to
focus on a question that has generated a considerable amount of debate
in the last few weeks: did Negroes make such extraordinary progress
during the 1960's that the best course for public policy over the
years ahead is one of "benign neglect"? Obviously this is not a
trivial question. While the exact meaning of this proposition is far
from clear, it has been advanced in a context whose potential impact
on public policy in the area of race relations can be considerable.
Thus, it is crucial that all of us have a clear understanding of the
extent of economic progress which Negroes have made -- and we must also
FORD & GERALD LIBRARY
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have a full appreciation of the extent to which important segments
within the Negro community have failed to share in this progress.
To help provide such an understanding, I have pulled
together a considerable amount of statistical information relating
to the economic experiences of Negroes during the last decade. From
an examination of this evidence, I am convinced that it would be a
serious mistake to conclude that the black community has been SO
blessed with the benefits of economic advancement that public policy --
which played such a vital role in the 1960's -- need no longer treat
poverty and deprivation among such a large segment of society as a
matter of national concern. To accept such a view would certainly
amount to neglect -- but it would also be far from benign.
The evidence underlying my assessment is presented in some
detail in the rest of these remarks, but the salient conclusions can
be summarized briefly:
- During the 1960's, Negroes as a group did
make significant economic progress. This
can be seen in terms of higher employment
and occupational upgrading as well as in
lower unemployment and a narrowing of the
income gap between Negroes and whites.
- However, beneath these overall improvements,
another -- and disturbing -- trend is also
evident: within the Negro community, there
appears to be a deepening schism between the
able and the less able, between the well-
prepared and those with few skills.
- This deepening schism can be traced in a
number of ways, including the substantial
FORD & LIBRARY 07V300
rise in the proportion of Negroes employed
-4-
in professional and technical jobs -- while
the proportion in low-skilled occupations
also edges upward; in the sizable decline in
unemployment -- while the share of Negroes
among the long-term unemployed rises; in the
persistence of inequality in income distribu-
tion within the black community -- while a
trend toward greater equality is evident among
white families; above all in the dramatic dete-
rioration in the position of Negro families
headed by females.
- In my judgment, this deepening schism within the
black community should interest us as much as
the real progress that has been made by Negroes
as a group.
Before concluding these remarks, I would also like to comment
briefly on the new program of family assistance, recommended by the
President and now being considered by the Congress. It is my impres-
sion that this program is a source of much discussion -- and some
apprehension -- within the Negro community. In my personal judgment,
there is more reason to support it than to campaign against its
enactment.
Let us now turn to a closer examination of each of these
main points.
Employment and Occupational Upgrading
The economic progress of Negroes can be traced in the trends
of the labor force, employment and occupational advancement during the
last decade. In 1969, there were just under 9 million nonwhites in
the labor force -- meaning that they were holding jobs or seeking work.
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(Well over 90 per cent of nonwhites are Negroes.) This was a rise of
16 per cent since 1960, a rate of increase virtually the same as for
whites and for the total labor force. However, employment of non-
whites rose more rapidly than it did for whites (by 21 per cent to
8.4 million for the former compared with 18 per cent to 69.5 million
for the latter). Expressed differently, while nonwhites represented
about 11 per cent of the total labor force in both 1960 and 1969, their
share of the gains in employment during the decade was somewhat larger:
they accounted for 12 per cent of the employment growth, although they
held just over 10 per cent of the jobs at the beginning of the period.
Advancement in the range of jobs held by Negroes in the last
decade was also noticeable. This was particularly true of the improve-
ments in the highest paying occupations. Between 1960 and 1969, the
number of nonwhites in professional and technical positions increased
by 109 per cent (to 692 thousand) while the increase for whites was
only 41 per cent (to 10,031 thousand). By last year, nonwhites had
progressed to the point where they accounted for 6-1/2 per cent of the
total employment in these top categories in the occupational structure
(compared with less than 4-1/2 per cent in 1960), and they got about
11 per cent of the net increase in such jobs over the decade. During
this same period, the number of nonwhite managers, officials and
proprietors (the second highest paying category) increased by 43 per
cent (to 254 thousand) compared to an expansion of only 12 per cent
FORD & 038470 LIBRARY
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(to 7,721 thousand) for whites. In the 1960's, nonwhite workers left
low-paying jobs in agriculture and household service at a rate two to
three times faster than did white workers. The number of nonwhite
farmers and farm workers dropped by 56 per cent (to 366 thousand) in
contrast to a decline of 31 per cent (to just under 3 million) for
whites in the same category. In fact, by 1969, nonwhites accounted
for the same proportion (11 per cent) of employment in agriculture as
their share in the total labor force; in 1960, the proportion for non-
whites (at 16-1/2 per cent) was more than 1-1/2 times their share in
the total labor force. The exit of nonwhites from private household
employment was even more striking. During the last decade, the number
of nonwhites so employed fell by 28 per cent (to 712 thousand); the
corresponding drop for white workers was only 9 per cent (to 900
thousand). Although roughly half of all household workers were non-
white in 1960, the ratio had declined to just over two-fifths by 1969.
The number of nonfarm laborers also fell (by 8 per cent to 876 thousand)
over the last decade while the number of white laborers rose by the
same percentage (to 2,809 thousand).
Nevertheless, as already indicated, the accelerated movement
of nonwhites out of the positions at the bottom of the occupational
pyramid did not carry through the entire occupational structure. For
example, nonwhites in 1969 still held about 1.5 million of the service
jobs outside private households -- most of which require only modest
skills. This represented one-fifth of the total -- approximately the
FORD & 933870 LIBRARY
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same proportion as in 1960. Moreover, the number of nonwhites hold-
ing semi-skilled operative jobs (mainly in factories) rose by 41 per
cent (to about 2 million) during the decade, compared with an expan-
sion of only 17 per cent (to 12.4 million) for whites. The result
was that nonwhites' share of the total climbed from 12 per cent to
14 per cent. Taken together, these two categories of low-skilled jobs
chiefly in factories or in nonhousehold services accounted for a larger
share (42 per cent) of total nonwhite employment in 1969 than they did
in 1960 -- when their share was 38 per cent. In contrast, among whites
the proportion was virtually unchanged -- 26 per cent at the beginning
of the decade and 27 per cent at its close.
While nonwhites made substantial progress during the 1960's
in obtaining clerical and sales jobs -- and also registered noticeable
gains as craftsmen -- their occupational center of gravity remained
anchored in those positions requiring little skill and offering few
opportunities for further advancement. At the same time, it is also
clear from the above analysis that those nonwhites who are well-prepared
to compete for the higher-paying positions in the upper reaches of the
occupation structure have made measurable gains. These contrasting
experiences should be borne in mind because they point clearly to the
deepening schism within the black community.
Trends in Unemployment
LIBRARY GERALD R. FORD
Over the 1960's, unemployment among Negroes declined sub-
stantially. In 1960, about 787 thousand nonwhites were unemployed,
-8-
representing 10.2 per cent of the nonwhite labor force. Among
whites in the same year, about 3.1 million were without jobs, and
the unemployment rate was 4.9 per cent. By 1969, unemployment had
dropped by 28 per cent (to 570 thousand) for nonwhites and by 26 per
cent (to 2.3 million) for whites. Their unemployment rates had fallen
to 6.4 per cent and 3.1 per cent, respectively.
The incidence of joblessness among nonwhites continued to be
about twice that for whites during the 1960's. Even in those categories
where the most favorable experience was registered, nonwhite unemploy-
ment rates remained significantly higher than those for whites. For
instance, among married nonwhite males aged 20 years and over, the
unemployment rate in 1969 stood at 2.5 per cent, compared with 1.4 per
cent for white men in the same circumstances. Nevertheless, one should
not lose sight of the fact that -- taken as a group -- Negroes made
real strides in escaping idleness in the 1960's.
But, here again, we should not stop with this over-view.
On closer examination, one quickly observes that a sizable proportion
of the remaining unemployment among Negroes appears to be of the long-
term variety. For example, in 1969, just under 20 per cent of the
unemployed nonwhites on the average had been without jobs for 15 weeks
or longer; among whites the proportion was only 12-1/2 per cent. More-
over, those out of work for more than half a year represented 7 per
cent of the joblessness among nonwhites compared with 4 per cent for
whites. In 1961, when unemployment rose substantially under the
impact of the 1960-61 recession, nonwhites accounted for about 21 per
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-9-
cent of total unemployment and for roughly 24 per cent of those with-
out jobs for at least 3-1/2 consecutive months. However, by 1969,
nonwhites made up 27 per cent of the pool of long-term joblessness --
although their share of total unemployment had declined slightly to
18 per cent. So, while a significant number of Negroes did find --
and keep -- jobs during the last decade, a sizable number of others
were stuck in idleness for fairly long periods of time.
Still other evidence can be cited which underlines the
contrasts within the Negro community. During the first eleven months
of 1969, the unemployment rate among nonwhites living in the central
cities of the 20 largest metropolitan areas averaged 6.3 per cent; it
was a full percentage point less among those living in the suburban
sections of these areas. Among nonwhite teenagers (those members of
the labor force 16 to 19 years old), the unemployment rate averaged
27 per cent. During the same period of 1969, there was very little
difference in unemployment rates between whites living in central
cities (3.1 per cent) and those living in suburbs (2.9 per cent), and
for white teenagers, the rate was 10 per cent.
So, judged by the differential impact of unemployment -- as
well as by the trend of employment and occupational upgrading -- some
Negroes have experienced commendable improvement while others have
lingered behind in relative stagnation.
&
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Trends in Income: A Reexamination
Undoubtedly, income statistics are probably the most closely
watched indicators of economic progress. This is true for Negroes as
well as for whites. These figures also demonstrate that the Negro
community recorded significant gains during the last decade. In 1961,
aggregate money income of families in the United States totaled $306.6
billion, of which whites received $290.4 billion and nonwhites received
$16.2 billion. Thus, the nonwhites' share was 5.3 per cent. By 1968,
the total had risen to $488.4 billion -- with $454.5 billion going to
whites and $33.9 billion going to nonwhites. In that year, the non-
whites' share had risen to 6.9 per cent.
In terms of median family income, the same indication of
progress is evident. In 1959, the median income of nonwhite families
amounted to $3,164, or 54 per cent of that for whites -- which amounted
to $5,893. By 1968, the figure had risen to $8,936 for whites and to
$5,590 for nonwhites, thus raising the nonwhite/white ratio to 63 per
cent.
These relative family income data are a useful concept for
some purposes, but they must be interpreted carefully. Otherwise they
yield a misleading picture of the comparative economic status of the
nonwhite population. A principal source of error is the failure of
data on median family income to account for the fact that nonwhite
families on average tend to be substantially larger than white families.
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Data on median family income adjusted to a per capita basis
to account for much larger minority families are presented in Table 1.
(Attached.) When further adjustments are made to differentiate among
types of families, several important conclusions result. The first
and most important of these is that, for all types of families, non-
white per capita family income is substantially lower in relation to
that for white families than was suggested by the unadjusted figures.
It appears that in 1967 the median income data unadjusted for differences
in family size may have overstated the relative economic status of non-
white families by something on the order of 11 per cent.
The information in Table 1 permits a further analysis of
growth trends in per capita family income compared to growth trends
in relative median family incomes for different types of households.
For all families and for husband and wife families, the relative gains
on a per capita basis were only slightly less than the relative gains
on a total family income basis. The picture for female headed families,
however, is completely different. The latter have the lowest median
family income in general, and nonwhite families headed by females have
the lowest median income compared to their white counterparts. What is perhaps
even more disturbing, however, is that -- because of the much larger size
of nonwhite female headed households¹/ -- the per capita differences
1/ In 1967, the average Negro husband-wife family was .76
members larger than its white counterpart, but the average
Negro female headed family was 1.26 members larger.
&
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in family income are substantially wider than the differences in
median family income. In 1967, the ratio of family income per capita
of female headed nonwhite families (at 44 per cent) was 18 percentage
points lower than the ratio of Negro to white median family income.
The data in Table 1 appear to indicate that the gap between white and
Negro per capita family income has not been narrowing as rapidly as
suggested by the most widely cited income figures.
The conclusion reached by expressing median family income
in per capita terms is that the usually observed ratios convey an
unrealistic picture of family well-being because they fail to account
for the larger absolute size of nonwhite families.
Another indication of the widening gap within the Negro
community is provided by the distribution of income among families
and individuals at different levels of income. Data showing these
trends, by race and broad groupings of income classes, are presented
in Table 2.
In examining these data, the first thing to note is that the
distribution of income is by no means equal in either the white or non-
white community. If it were, each fifth of the families would receive
20 per cent of the aggregate income in each year. In reality, however,
only those families around and just above the middle of the distribution
come close to receiving approximately this proportion of the total income.
The families constituting the lowest fifth receive between 3-1/2 per
cent and 6 per cent of the income, while those in the highest fifth
GERALD R. FORD LIBRARY
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receive over 40 per cent of the total. This general pattern of income
distribution holds for both white and nonwhite families.
But looking beyond these overall characteristics, it will
also be observed that, within the nonwhite community, the distribution
of income is considerably more unequal. Among nonwhites, from the
lowest through the middle fifth, for each of the years shown, the
proportion of aggregate money income received by the families in each
category is below that for the white community. The opposite is true
for nonwhite families above the middle fifth; their share is greater
than that received by white families in the same category. The same
tendency is evident when the top 5 per cent of the families with the
highest incomes in both groups are compared.
Moreover, in the last few years, the distribution of incomes
within the nonwhite community has apparently run counter to the trend
among white families. In both the 1961-65 period and the 1965-68
period, the income distribution for white families became more equal.
For nonwhite families, the same trend toward greater equality was
evident in the first half of the decade. However, it remained roughly
constant in the 1965-68 years. And the share received by the top 5 per
cent particularly showed no further tendency to decline.
Again, these figures seem to underline a conviction held by
an increasing number of observers: a basic schism has developed in
the black community, and it may be widening year-by-year.
GERALD R. FORD
*
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Poverty in the Negro Community
Poverty is a difficult concept to define in any meaningful
sense. Yet, quantitative estimates are necessary if policymakers are
to have reliable information on which to make decisions. Since 1965,
the United States Government has relied on the estimates developed by
the Social Security Administration which, for whatever their defects,
appear to be the most reliable data available. The poverty concept
developed by the Social Security Administration classifies a family
as poor if its income is not roughly three times as great as the cost
of an economy food plan for a family of that particular size and farm
or nonfarm residence. In 1968, a nonfarm family of four was assumed
to be living in poverty if its total money income was less than $3,553.
The income deficit of a family is that amount required to raise its
income to the poverty threshold.
Table 3 reviews the 1959-68 record of the escape of individ-
uals from poverty. These data demonstrate quite clearly that the rate
of decline of poverty for whites has been substantially faster than
the rate of decline for nonwhites. Between 1959 and 1968, poverty
among whites declined by 39 per cent while poverty among nonwhites
declined by 27 per cent. Thus, in 1968 nonwhites made up a greater
proportion of the total poor population than they did in 1959 -- the
fraction increasing from 27.9 per cent to 31.5 per cent. This much
more rapid rate of exodus by whites from poverty is explained by the
fact that in 1959 the average poor white family was not nearly as
GERALD R. FORD LIBRARY
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deeply in poverty as the average poor nonwhite family. In 1959, the
median income deficit for white families was only $868 while for non-
whites it was $1,280, or 47.5 per cent higher. Clearly, it took less
economic achievement to lift the average white family out of poverty.
It should be further noted that in 1968 the median income deficit for
poor nonwhite families was $1,260 while for white families it was only
$907, a difference of 38.9 per cent. Thus, these figures suggest that
the future will continue to witness a more rapid rate of escape from
poverty by whites than by nonwhites.
The data in Table 3 are of further interest because they
permit an analysis of changes in poverty status by type of family.
Disaggregating the poverty data into male and female headed families
highlights several important points. Between 1959 and 1968, the rate
of decline in poverty among individuals in male headed families of
whites and nonwhites was roughly equal and also rather rapid. In 1968,
the number of individuals classified as poor in male headed households
for both races was roughly half the number in 1959.
Distressingly, however, for female headed families, the
pattern was quite different. For the white population, the rate of
decline among poor individuals in female headed families was substan-
tially below the rate for individuals in male headed families. By
1968, there were only 16 per cent fewer poor individuals in white
female headed households compared with 1959. For nonwhites, the data
LIBRARY GERALD R. FORD
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on changes in poverty among individuals in female headed families
are extremely disturbing. Between 1959 and 1968, the number of non-
whites in poor female headed families increased by 24 per cent, and
the number of nonwhite family members under 18 rose by an alarming
35 per cent. Between 1959 and 1968, there was an absolute increase
of 609 thousand nonwhite family members 18 or less classified as poor
living in a female headed family. So while the 22 million Negroes
constituted only 11 per cent of the country's total population in 1968,
the 2.3 million poor children in nonwhite families headed by females
represented 52 per cent of all such children.
The data on the rate of escape from poverty for different
types of families also emphasize the development of a serious schism
within the Negro community. Negroes in stable male headed families
appear able to take advantage of economic growth and are leaving
poverty at roughly the same rates as whites. The opposite appears
true for families headed by a female, who appear unable to earn a
sufficient income to escape poverty. The rapid increase in the number
of poor nonwhites in female headed families -- and particularly the
very rapid rise of children 18 and under in their families -- suggests
that the problem of poverty in the black community has by no means
disappeared.
Having discussed recent changes in the overall poverty
population, it is important to examine briefly the rural experience.
For farm families the record is much more encouraging with a decline
GERALD R. FORD LIBRARY
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of almost three-fourths in the number of poor individuals in nine
years. Moreover, the rate of decline was roughly equal for whites
and nonwhites. These results may in part reflect a growing prosperity
in agriculture, but in large part they are due to a migration of the
poor of both races from rural to urban settings.
The conclusions from this section are that nonwhite poverty
in general has not declined as rapidly as white poverty, primarily
because nonwhites classified as poor tended to be substantially poorer
than whites classified as poor. This section has also shown that in
the last decade there has been an alarming rise in the number of poor
nonwhite children under 18 living in female headed families.
Prosperity in the Negro Community: The Importance of Education
The above discussion has obviously reflected a rather
pessimistic assessment of several aspects of economic developments
in the Negro community -- focusing as it did on nonwhite poverty and
the fact that actual white-nonwhite income discrepancies are wider
than commonly observed statistics would suggest. To stop here, however,
would present a somewhat unbalanced view of Negro economic progress.
To present a more balanced picture, it is important to consider the
source of some of the recent gains within the Negro community. In
particular, it is important to discuss the role of education.
Recent data suggest that Negroes are making considerable
gains in both secondary and higher education. Between 1960 and 1969,
GERALD R. FORD LIBRABA
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the per cent of Negro males aged 25 to 29 who had completed 4 years
of high school or more increased from 36 per cent to 60 per cent while
the white fraction increased from 63 per cent to 78 per cent. Thus,
in 1960 the gap had been 27 percentage points, and in nine years this
gap had narrowed to only 18 percentage points. In 1968, for the first
time a greater percentage of Negro males aged 25-29 completed high
school than Negro females.
In the case of higher education, the gains also have been
impressive. Table 4 presents data on trends in Negro college enroll-
ment between 1964 and 1968. In these four years, the number of Negroes
in college rose by 85 per cent. What is more striking, however, is the
fact that during this period, 82 per cent of this enrollment growth
occurred in institutions other than the predominantly Negro colleges.
Thus, in only four years, the per cent of Negro college students
enrolled outside predominantly Negro colleges increased from 49 per
cent to 64 per cent. This fact suggests that the larger institutions are
becoming increasingly aware of minority problems and are making a
concerted effort to assist minority group students. In four years the
number of Negro students at these institutions has more than doubled.
The importance of higher education in the economic achieve-
ments of whites and Negroes is underlined by the data in Table 5. It
is clear that median incomes for men of both races increase dramatically
with increasing amounts of education. What is even more important, the
ratio of Negroes' income to that of whites rises as the level of education
LIBRARY GERALD ? FORD
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climbs. Stated in a slightly different fashion, the relative gaps
within the Negro community between those with higher education and
those with lower education are wider than for whites. In 1968 a Negro
man, aged 25-54, with a high school education had an income 29 per
cent above that for a Negro man with only an 8th grade education,
while for whites this gap was 26 per cent.
The case of a Negro with some higher education is of partic-
ular interest. This is a man with the highest absolute income and the
highest income relative to whites. Unfortunately, due to the unavail-
ability of more data, the figures in Table 5 probably seriously under-
state the contribution of higher education to Negro income. The last
line in Table 5 shows the income of whites and Negroes with 1 or more
years of college. This category is really a composite of the categories
1 to 3 years of college and 4 or more years of college. Of all Negro
men 25 years of age or over in 1967 reporting one or more years of
college, 60 per cent were concentrated in the 1-3 year category. For
all white men reporting more than 1 year of college, there was a much
greater tendency to have four or more years of college, with only
42 per cent concentrated in the 1-3 year class. If a more complete
breakdown of the data in Table 5 were available, they would probably
indicate a higher return to Negro higher education.
A second reason why the data in Table 5 may understate the
returns to higher education for Negroes is that they fail to account
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for the age distribution of those achieving higher education. Since
major education gains among Negroes have been a rather recent occurrence
the better educated Negro man will be substantially younger than his
white counterpart. Table 6 documents this point by comparing educational
achievements of whites and Negroes at similar age levels. These data
show conclusively that the differences in educational achievements are
in large part a function of age with the widest gaps among the older
segments of the population. It is clear that the best educated within
the Negro community are much more highly concentrated in the younger
age brackets. Since income increases directly with age, when education
is held constant, due to factors of experience and promotions based
on length of service, the failure of the data in Table 5 to account
for the relatively younger age distribution of the better educated
Negro population seriously underestimates the returns to education for
Negro males. The figure for white males with higher education refers
to an older population and thus, in part, reflects returns to age and
experience as well as returns to education. Unfortunately, we will
have to wait until the processing of the 1970 Census has been completed
to get more complete data.
The conclusions from this discussion of education then are
much more encouraging than the results reached above. Younger Negroes
1/ In 1967, the median income of all males aged 25-34, with
four years of college, was $8,716, for those with the same
education, aged 45-54, it was $12,267, or 40.7 per cent higher.
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are making substantial progress in achieving secondary and higher
education, and this increased education is associated with higher
absolute income and income relative to whites.
Negroes and the Family Assistance Program
As I indicated above, I would like to comment briefly on the
proposal to change significantly the principal means through which the
Federal Government provides assistance to needy families. In recent
years, these programs have become an important source of income for many
Negro families headed by females in which a sizable number of children
are found. Thus, one can readily understand why the President's recom-
mendation to change them submitted to Congress in August, 1969, has
generated so much discussion (and some apprehension) in the Negro
community.
It will be recalled that, in broad outline, the proposed
family assistance program would have the Federal Government pay a
basic income to all families who could not provide for themselves --
whether they are employed or unemployed. It would be geared to dependent
families with children. It would replace entirely the largest of the
Federally supported public assistance programs (i.e., aid to families
with dependent children). Under the proposal, persons (except mothers
with preschool children) who accept assistance would be required to
register for work or training. It is estimated that in the first year
of the program, over half of the families covered would have one member
employed or undergoing training.
GERALD R. FORD LIBRABY
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As recommended to Congress, the family assistance program
would work in the following fashion: A family's basic allowance would
consist of $500 for the first two members and $300 per member for each
additional member. Thus, for a family of four, the allowance would
be $1,600 per year.
Cash payments to families would be computed by adjusting the
basic allowance to account for the earnings of the family. The first
$720 of family income would not affect the payments because it is
assumed that there are basic costs of transportation, lunches, clothing,
etc., associated with taking a job. Cash payments to families would
then be reduced by 50 cents for each additional dollar of earnings
above the $720 minimum.
A simple numerical example will illustrate the program's
operation. Assume a family of four has a cash income of $2,000. The
first $720 of this income would be disregarded, leaving a balance of
$1,280. A family's cash payment would then be reduced by half this
amount, or by $640. Since the family's basic allowance was $1,600, its
cash payment after earnings would be $960.
So far only a rough idea can be provided with respect to the
probable coverage of the family assistance program. The projections
available are shown in Table 7, as prepared by the Department of Health,
Education and Welfare in February of this year. According to these
estimates, in 1971, about 3.3 million families would be covered; of
these 2 million (three-fifths) would be white, and 1.3 million
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(two-fifths) would be nonwhites. These families would include close
to 18 million persons -- of whom 44 per cent would be nonwhites. Gross
payments would approximate $3.5 billion, and nonwhites would receive
about $1.5 billion -- or 43 per cent. These annual payments would
average around $1,060 for all families, about $1,000 for white families,
and about $1,154 for nonwhites. However, since nonwhite families are
expected to be somewhat larger (averaging 6.0 members vs. 5.1 members
for whites and 5.4 members for all families), payments per capita would
be about the same: $196 for all families, $198 for whites, and $192 for
nonwhites.
It is difficult to compare the differential impact of the
proposed program on particular groups of families compared with the
existing program. However, it appears that a somewhat greater propor-
tion of the families covered by the new program would be white compared
with those covered by aid to families with dependent children (AFDC).
In 1968, there were 1.5 million families participating in AFDC, involv-
ing 6.1 million persons, of whom 4.6 million were children. Outlays
under the Federally aided programs amounted to $3.4 billion, and the
average monthly payment per family was $168 (just over $2,000 per year).
In 1967, according to an HEW survey conducted in 1968, about
51.3 per cent of the families covered by AFDC were white, 46 per cent
were Negro, and 2.7 per cent were other nonwhites. In 1961, whites
constituted 51.8 per cent of the total, Negroes 43.1 per cent, and
GERALD R. FORD LIBRERA
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other nonwhites made up the remaining 5 per cent. So during the
decade of the 1960's, Negroes as a proportion of total AFDC coverage
increased while the proportion for all other groups was declining.
On balance, it appears that the new family assistance program
would represent a considerable improvement -- compared with the existing
AFDC program -- in about 20 States. Of these, 14 are Southern States
(with a heavy concentration of Negroes), and most of the remainder are
Western States (with a sizable proportion of Indians and Mexican-
Americans among their populations). In 1968, the average annual payment
under AFDC in the 14 Southern States was approximately $1,116. However,
the average payment varies greatly among these States, and in some it
is much below $1,000. Thus, given an annual payment of $1,600 for a
family of four, there would be an increase of roughly $480 (or well
over 40 per cent) compared with the amounts received by the average
AFDC family in this region. While the exact status of families under
the old and new programs cannot be determined, there appears to be no
doubt whatsoever that the new proposal would result in a real improvement.
In 30 States there would also be an opportunity to make further
improvements. However, in these cases, the outcome would depend on
whether the States and local governments maintained their existing
programs at substantially the same level. If these outlays were held
at no less than 90 per cent of the 1968 level, assisted families would
be better off in virtually every instance. Under the existing AFDC
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program, the average annual payment in these States in 1968 was $2,195 (of
which $1,044 represented non-Federal payments). Under the new program
(and assuming the 90 per cent maintenance factor), the average payment
per family would rise to about $2,536. Thus, the new arrangement would
imply an increase of roughly $340, or 15 per cent. The 30 States
include primarily the heavily populated northern industrial States plus
California. Most of these have a sizable concentration of low-income
nonwhites in urban areas.
So, while these estimates of the probable improvement which
might accrue under the new program of family assistance are obviously
crude, they are suggestive. They imply that Negroes -- and particularly
the poverty-stricken families headed by females -- would benefit sub-
stantially. And above all, it would create a promising basis for
checking the increased dependence on public welfare of a growing
segment of the population.
Concluding Observations
The analysis presented here has sketched a rather mixed
picture of economic progress among Negroes in the United States. While
not meaning to deny or demean the recent impressive economic gains by
Negroes, we must be careful that no one is lulled into believing (falsely)
that the economic problems of Negroes have been solved. In this regard,
the commonly observed income statistics, when accepted at face value,
GERALD R. FORD LIBREST
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convey an unwarranted sense of greater economic parity between whites
and Negroes than actually exists.
It was also noted that a closer analysis of the available
data shows clearly that a definite economic schism has arisen within
the Negro community. Individuals in male headed households appear
able to share fairly well in economic advances, while those in female
headed households are sinking backwards into poverty. Those individuals
who have prepared themselves for challenging careers by seeking and
obtaining higher education are registering relatively large improvements
in incomes, while those without such training are' falling further behind.
Clearly, the economic condition of those who currently are lagging should
be made a matter of serious national concern.
For this reason, the proposed family assistance program is
pointing in the right direction, and -- despite reservations many might
have about some of its components -- it should be viewed with greater
receptivity within the Negro community.
FORD & GERALD LIBRARY
Table 1
Family Income Adjusted to Per Capita Basis, by Type of Family, by Race
of Head, 1959 and 1967
All Families
Husband-wife Families
Female-Headed Families
1959
1967
1959
1967 1/
1959
1967 1/
Median Family
Income
White
5893
8274
6089
8269
3538
4879
Nonwhite
3164
5141
3663
5854
1734
3015
Ratio
.54
.62
.60
.71
.49
.62
Persons Per Family
White
3.58
3.59
3.66
3.66
2.93
3.03
Nonwhite
4.31
4.35
4.42
4.42
4.04
4.29
Per Capita Family
Income
White
1646
2305
1664
2358
1208
1610
Nonwhite
733
1182
829
1324
429
703
Ratio
.45
.51
.50
.56
.36
.44
1/ Data for 1967 refer exclusively to Negroes.
Source: U.S. Department of Commerce, Bureau of the Census, Income in 1967 of Families in
the United States, Series P-60, No. 59, April 18, 1969, and, U.S. Census of
Population: 1960, Vol. 1, Characteristics of the Population. Part 1, United
States Summary, 1964
FORD i LIBRARY GERALD
Table 2. Trends in the Income of Families
in the United States: 1950 to 1968
INCOME RANK
1968
1967
1965
1961
1950
FAMILIES
TOTAL - ALL RACES
PER CENT
100.0
100.0
100.0
100.0
100.0
LOWEST FIFTH
5.7
5.4
5.3
4.8
4.5
SECOND FIFTH
12.4
12.2
12.1
11.7
12.0
MIDDLE FIFTH
17.7
17.5
17.7
17.4
17.4
FOURTH FIFTH
23.7
23.7
23.7
23.6
23.5
HIGHEST FIFTH
40.6
41.2
41.3
42.6
42.6
TOP 5 PER CENT
14.0
15.3
15.8
17.1
17.0
WHITE
PER CENT
100.0
100.0
100.0
100.0
100.0
LOWEST FIFTH
6.0
5.8
5.6
5.2
4.8
SECOND FIFTH
12.7
12.5
12.5
12.1
12.2
MIDDLE FIFTH
17.7
17.5
17.7
17.3
17.3
FOURTH FIFTH
23.4
23.5
23.4
23.2
23.1
HIGHEST FIFTH
40.3
40.7
40.8
42.2
42.5
TOP 5 PER CENT
14.0
14.9
15.5
17.3
17.6
NEGRO AND OTHER RACES
PER CENT
100.0
100.0
100.0
100.0
100.0
LOWEST FIFTH
4.8
4.4
4.6
4.0
3.5
SECOND FIFTH
10.5
10.4
10.7
9.7
10.2
MIDDLE FIFTH
16.5
16.4
16.5
15.9
17.6
FOURTH FIFTH
24.6
24.1
24.7
24.3
25.2
HIGHEST FIFTH
43.6
44.7
43.5
46.0
43.5
TOP 5 PER CENT
16.1
17.5
15.5
17.4
16.6
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Table 3
Persons Below Poverty Level in 1959 and 1968,
by Family Status and Sex and Race of Head
(Numbers in Thousands)
Percentage
1959
1968
Change
White, Total
28,484
17,395
-38.9
In Families with Male Head, Total
20,211
9,995
-50.5
Head
4,952
2,595
-47.6
Family Members under 18
8,966
4,298
-52.1
Other Family Members
6,293
3,102
-50.7
In Families with Female Head, Total
4,232
3,551
-16.1
Head
1,233
1,021
-17.2
Family Members under 18
2,420
2,075
-14.3
Other Family Members
579
455
-21.4
Unrelated Individuals
4,041
3,849
- 4.8
Negro and Other Races, Total
11,006
7,994
-27.4
In Families with Male Head, Total
7,337
3,710
-49.4
Head
1,452
697
-52.0
Family Members under 18
4,097
2,032
-50.4
Other Family Members
1,788
981
-45.1
In Families with Female Head, Total
2,782
3,439
+23.6
Head
683
734
+ 7.5
Family Members under 18
1,725
2,334
+35.3
Other Family Members
374
371
- 0.8
Unrelated Individuals
887
845
- 4.7
Source: U.S. Department of Commerce, Bureau of the Census, Poverty in the United
States 1959 to 1968, Series P-60, No. 68, December 31, 1969.
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Table 4
Negro College Students Enrolled in 1964 and 1968,
by Type of Institution
(Numbers in thousands)
1964
1968
Change, 1964-68
(Fall)
(Fall)
Number
Percent
Total Enrollment
4,643
6,801
2,158
46
Total Negro Enrollment
234
434
200
85
Percent total enrollment
5
6
(X)
(X)
Enrollment in predominantly
Negro colleges
120
156
36
30
Percent of all Negroes in
college
51
36
(X)
(X)
Enrollment in other colleges
114
278
164
144
Percent of all Negroes in
college
49
64
(X)
(X)
(X)
Not applicable.
Source: U.S. Department of Labor, Bureau of Labor Statistics; U. S.
Department of Commerce, Bureau of the Census; U. S. Department
of Health, Education and Welfare, Office of Education
GERALD R. FORD
Table 5
Median Income of Men 25 to 54 Years Old, by
Educational Attainment, 1968
Median income, 1968
Negro income
as a percent
Negro
White
of white
Elementary: Total
$3,900
$5,844
67
Less than 8 years
3,558
5,131
69
8 years
4,499
6,452
70
High School: Total
5,580
7,852
71
1 to 3 years
5,255
7,229
73
4 years
5,801
8,154
71
College:
1 or more years
7,481
10,149
74
Source: U.S. Department of Commerce, Bureau of the Census
FORD & GERALD LIBRARY
Table 6
Median Years of School Completed for Persons 20 years
of Age and Over, by Age, 1969
Age
White
Negro
Difference
20 - 21 years old
12.8
12.2
.6
22 - 24 years old
12.7
12.2
.5
25 - 29 years old
12.6
12.1
.5
30 - 34 years old
12.5
12.0
.5
35 - - 44 years old
12.4
10.6
1.8
45 - 54 years old
12.2
9.1
3.1
55 - 64 years old
10.9
7.6
3.3
65 - 74 years old
8.9
6.1
2.8
75 years old and over
8.5
5.2
3.3
Source: U.S. Department of Commerce, Bureau of the Census
is
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Table 7
Racial Distribution of Recipients
Under the Proposed Family Assistance Program:
1971 Projection
(Numbers in millions; amounts in billions of dollars)
Families Covered
Persons Covered
Gross Payments
Race
Number
Per Cent
Number Per Cent
Amount Per Cent
White
2.0
60.6
10.1
56.4
2.0
57.1
Nonwhite
1.3
39.4
7.8
43.6
1.5
42.9
Total
3.3
100.0
17.9
100.0
3.5 100.0
Source: Department of Health Education and Welfare,
"Selected Characteristics of Families Eligible for Family
Assistance Plan: 1971 Projection," February 2, 1970.
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